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 Mike Dorning, Bloomberg, 08/28/2015|
MarketMinder's View: While we have another 14-plus months to go before 2016’s election, campaigning is heating up, and occasionally candidates wade into issues that could impact markets. As always, our analysis is non-partisan and intended to interpret events solely for potential market impact, regardless of personality, ideology or party creed. So here is our non-partisan analysis of the fact that candidates from both parties have talked tough on China lately, even threatening new trade barriers, which we suspect markets wouldn’t much like (stocks generally hate protectionism and prefer free trade). While this is a risk to watch, as this piece documents, past Presidents have threatened Chinese trade barriers on the campaign trail before, only to moderate significantly once in office.
|By Robert J. Shiller, The New York Times, 08/28/2015|
MarketMinder's View: We’re sort of ambivalent about this one. The half discussing how bubbles are events of mass psychology is interesting and worth a read, and we largely enjoyed the debunking of momentum as a reliable investment strategy. The trend is always your friend until it isn’t. However, this good discussion is sandwiched between an odd discussion of valuations—chiefly the oddly calculated, bizarrely inflation-adjusted cyclically adjusted P/E ratio, also known as CAPE or the Shiller PE—and a noncommittal exploration of whether recent volatility is a correction or bear market, also based on CAPE. As we wrote here and here, CAPE’s alleged predictive powers are myth and are based largely on coincidence and three data points. We award a point to this for acknowledging one of CAPE’s false signals, mid-1998, but we’d be remiss not to point out another: December 1996, when former Fed head Alan Greenspan—inspired by above-average CAPE—suggested investors might be irrationally exuberant. They weren’t, and the bull lasted another three-plus years.
|By Jason Zweig, The Wall Street Journal, 08/28/2015|
MarketMinder's View: At the risk of sounding dismissive, which isn’t our intent, there is a lot of overthinking in this piece, which discusses “sequence risk” (the risk the market’s ups and downs don’t coincide wonderfully with when you need to add and withdraw money) and its impact on retirees when markets are volatile. Look, we agree it is best not to have to sell stocks to fund cash flows when markets are down, if you can help it. But instead of fiddling with annuities and reverse mortgages, which introduce new risks (and costs!), investors with high cash flow needs can guard against the risk of forced-selling when markets are down by keeping several months’ worth of distributions in cash. But also, this is primarily an issue during bear markets—deeper, longer, fundamentally driven declines of 20% or worse. Presently, we’re in a correction—shorter, shallower declines of -10% to around -20%. Also, as we type, stocks are just 6% below their most recent high. Stocks can move fast. So we suggest simplifying your life, thinking longer-term and considering your long-term needs (and time horizon) first, without overthinking volatility. If your goals require stock exposure, own stocks, invest when it’s time to contribute, remember the time value of money, and keep a cash cushion if need be. It isn’t necessary to get finicky with purchase-timing.
|By Szu Ping Chan, The Telegraph, 08/28/2015|
MarketMinder's View: So much for the strong pound choking UK trade: Exports jumped 3.9% q/q. Consumer spending held steady at 0.7% q/q, and business investment sped to 2.9% q/q. Some suspect the strong pound will take its toll in the coming months, but we’re skeptical. Sterling began strengthening a year ago and remains lower than levels seen throughout the late-1990s, a fairly robust time for UK exporters. If it was going to be a problem, we suspect we’d have seen tangible evidence by now. More likely, sentiment is just taking a while to catch up with reality—fairly typical. For now, expectations remain low, extending the wall of worry for UK stocks.
Market Wrap-Up, Thursday August 27, 2015
Below is a market summary as of market close Thursday, 8/27/2015:
Global Equities: MSCI World (+2.1%)
US Equities: S&P 500 (+2.4%)
UK Equities: MSCI UK (+2.5%)
Best Country: Canada (+3.4%)
Worst Country: Japan (+0.2%)
Best Sector: Energy (+4.8%)
Worst Sector: Consumer Staples (+1.3%)
Bond Yields: 10-year US Treasury yields rose 0.01 percentage point to 2.19%.
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.