Five years ago, on Black Friday 2008, quantitative easing (QE) was born. In its quest to battle the deflationary effects of the financial panic, the Fed launched the “extraordinary” policy of buying long-term assets from banks. In exchange, the Fed credited banks’ reserve accounts, believing the banks would lend off these reserves many times over—a big money supply increase to boost growth.
To date, through multiple rounds of (now infinite) QE, the monetary base (M0) has swelled by nearly $3 trillion. Yet this economic expansion has been the slowest in post-war history.
Exhibit 1: Cumulative GDP Growth
Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
|By Fisher Investments Research Staff, 11/26/2013|
With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.
MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).
To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).
When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.
The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.
Exhibit 1: Emerging Markets Foreign Equity Inflows
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|By A. Gary Shilling, Bloomberg, 09/02/2015|
MarketMinder's View: The thesis for oil causing the next recession is that low oil prices may result in deflation, causing consumers to spend less as they perpetually await even lower prices. But inflation below 0% doesn’t mean prices for all things are down, just things whose costs are oil-dependent, like gasoline. Even if prices do broadly fall, the notion of a deflationary spiral is a myth. Spain spent all last year proving that, as retail sales jumped while prices fell. Deflation sometimes accompanies recessions, but it doesn’t cause them. It simply reflects a pullback in broad money supply or velocity. But with bank lending expanding and a growing money supply, this is not the case right now.
|By Staff, Reuters, 09/02/2015|
MarketMinder's View: Yes, but it only fell from 31.88 million barrels per day in July to 31.71 mbpd in August, a drop in the bucket compared to the total global supply glut. Until the gap between production and demand starts closing, oil prices will likely remain low. Not good for Energy companies and oil-reliant nations, but good for the rest of the economy and oil importers.
|By Oliver Renick, Bloomberg, 09/02/2015|
MarketMinder's View: In a correction, when sentiment drives trading, there is no such thing as a “magic bullet.” Doesn’t matter whether stock demand comes from companies buying back their own stock or bargain-hunting individual investors. That just isn’t how markets work. The notion buybacks cushioned the decline and are this bull market’s primary driver also misses how markets work. The market doesn’t need a magic bullet to avoid further declines—continued economic growth and guarded investor sentiment provides enough fundamental support to keep the bull market alive, no matter where demand comes from.
|By Walter Updegrave, CNN Money, 09/02/2015|
MarketMinder's View: As this piece points out, risk and return are two sides of the same coin—to achieve higher returns you must accept the risk your investments may decline in the near term, and if you want low risk, you have to accept lower returns. But for investors in retirement, a healthy allocation to stocks is not necessarily all that risky. Stocks may rise or fall over short periods, but over longer periods—consistent with most retirees’ investment time horizons—stocks almost always grow. We would quibble, though, with the assertion your tolerance for short-term market declines should dictate your portfolio’s long term asset allocation. It’s an important consideration, but selecting an allocation that maximizes the chances your portfolio provides for your long-term needs is equally, if not more important.
Market Wrap-Up, Tuesday September 1, 2015
Below is a market summary as of market close Tuesday, 9/1/2015:
Global Equities: MSCI World (-2.7%)
US Equities: S&P 500 (-3.0%)
UK Equities: MSCI UK (-3.4%)
Best Country: New Zealand (-0.3%)
Worst Country: United Kingdom (-3.4%)
Best Sector: Consumer Staples (-2.1%)
Worst Sector: Energy (-3.3%)
Bond Yields: 10-year US Treasury yields fell -0.06 percentage point to 2.16%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.