Financial Markets

The Next Financial Crisis Might Be in Your Driveway

Bloomberg: “Lured by low interest rates, low gas prices, and a crop of seductive vehicles that are faster, smarter, and more efficient than ever before, American drivers are increasingly riding in style. Don’t be fooled by the curb appeal, though—those swanky machines are heavily leveraged.”

“The country’s auto debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York, when a rush of year-end car shopping pushed vehicle loans to a dubious peak of $1.16 trillion. The combination of new car smell and new credit woes stretches from Subarus in Maine to Teslas in San Francisco.”

“Another way to look at: Every licensed driver in the U.S., on average, owes about $6,100 in car payments.”

Just 14 Stocks Have Created 20% of All Stock Market Gains Since 1924

Yahoo Finance: “In what truly is one of the most amazing statistics to ever come across our desks here at 24/7 Wall St., we recently saw a chart that showed that just 14 stocks have created 20% of all stock market gains in dollars since 1924. That is a phenomenal figure, considering the sheer number of companies that have come and gone in that time, and the overall wealth created in the stock market in the past 93 years.”

“In a remarkable and striking similarity, all the companies on the list are still incredibly relevant and are still outstanding investment ideas, depending on your risk tolerance.”

Stability Is Good for Business. Trump’s Whims Threaten It.

Matt Levine: “This is a widespread pattern. Many people in the business and financial and technology communities listened to what Trump said and cheerily assumed he’d do something completely different. Sure, he talked about restricting trade and banning Muslim immigrants, but what they heard was that he’d enact ‘sensible immigration policy’ and pro-growth trade agreements, reduce taxes, cut back regulation, and generally improve conditions for business. In the runup to the presidential election, billionaire Peter Thiel and other Trump supporters said the candidate should be taken ‘seriously but not literally.’ As I wrote in my Bloomberg View column, taking Trump literally means believing that he’ll do what he says; taking him seriously means believing that he’ll do what you want.”

“The reason the U.S. is a good place to do business is that, for the past two centuries, it’s built a firm foundation on the rule of law. President Trump almost undid that in a weekend. That’s bad for business.”

Democrats Can’t Win Until They Recognize How Bad Obama’s Financial Policies Were

“…the past eight years of policymaking have damaged Democrats at all levels. Recovering Democratic strength will require the party’s leaders to come to terms with what it has become — and the role Obama played in bringing it to this point,” Matt Stoller argues in The Washington Post.

“Two key elements characterized the kind of domestic political economy the administration pursued: The first was the foreclosure crisis and the subsequent bank bailouts. The resulting policy framework of Tim Geithner’s Treasury Department was, in effect, a wholesale attack on the American home (the main store of middle-class wealth) in favor of concentrated financial power. The second was the administration’s pro-monopoly policies, which crushed the rural areas that in 2016 lost voter turnout and swung to Donald Trump.”

The Major Potential Impact of a Corporate Tax Overhaul

Neil Irwin: “The current corporate income tax manages the weird trick of both taxing companies at a higher statutory rate than other advanced countries while collecting less money, as a percentage of the overall economy, than most of them. It is infinitely complicated and it gives companies incentives to borrow too much money and move operations to countries with lower tax rates.”

“Now, the moment for trying to fix all of that appears to have arrived. With the House, Senate and presidency all soon to be in Republican hands and with all agreeing that a major tax bill is a top priority, some kind of change appears likely to happen. And it may turn out to be a very big deal, particularly if a tax plan that House Republicans proposed last summer becomes the core of new legislation.”

A Framework for Stopping Short Termism in Business 

The Atlantic: “A growing group of business leaders is worried that companies are too concerned with short-term profits, focused only on making money for shareholders. As a result, they’re not investing in their workers, in research, or in technology—short-term costs that would reduce profits temporarily. And this, the business leaders say, may be creating long-term problems for the nation.”

“The Aspen Institute and its signatories have come out with a framework that they hope will discourage this kind of short-term thinking. Short-term thinking is bad for America, they say, because the country’s economic health depends on long-term investments that will pay out over time. What’s more, they argue, short-term thinking shouldn’t be paramount for the majority of investors; most equity is held by pension funds and other institutional investors who need their assets to perform well over the long haul.”

Almost 70% of Goldman Sachs Employees Are Millennials

Quartz: “The baby boom generation—people now aged between 52 and 70—is being gradually pushed out of the workforce by layoffs, buyouts, and forced early retirements even as they try to work longer to make up for retirement losses during the financial crisis. But is any employer getting rid of them faster than the world’s premier investment bank?”

“Goldman Sachs and its rival Wall Street firms are known for chewing up young folks fast and spitting them out, but to observers of a certain age (say, 40 and up) the relative youth at Goldman is stunning. In a LinkedIn post on Dec. 21, the company’s global head of human capital management—a title that itself tells us a lot about how Goldman thinks about people—writes that ‘our workforce is nearly 70% millennial—even our latest partner class is composed of 11% millennials, and of course, that number will only increase as the years go by.'”

Investing in a Closed-Border World

Christopher Smart: “As a tumultuous year comes to a close, giddy global markets continue to set new records. But investors should not become distracted. In 2017, they will need to reappraise how the global economy works, and recalibrate accordingly their assessment of every stock or bond on sale, because even if some market fundamentals remain the same, many others have clearly changed.”

“Taken together, these political outcomes – and the anti-establishment forces on the march ahead of next year’s French and German elections – will halt further global economic and political integration, at least in the near term. For now, countries will avoid grand trade deals and make only half-hearted efforts to align their regulations. Companies operating internationally will soon face higher costs, as it becomes harder to move goods across state borders and employ foreign workers; their investors, meanwhile, can expect lower returns.”

“Savvy investors will look for companies that can withstand the current populist revolt against globalization and take advantage of incipient economic and technological trends. Theirs will be a more complicated analysis for more complicated times. Like a good astronomer or anthropologist, however, successful investors will find reliable patterns in a sea of crosscutting evidence.”

The Stock Market Looks Awfully Expensive Since the Trump Rally

Neil Irwin: “A new president won’t take office for another month, but the financial markets’ early verdict on the Donald J. Trump era is in, and it is straightforward.”

“They are saying the Trump administration will be good for corporate profits, and hence the stock market is way up. (The Standard & Poor’s 500 is up 6 percent since Election Day). It will also mean higher interest rates and inflation over time. (The yield on 10-year Treasury bonds has risen to 2.6 percent from 1.85 percent in the same span.)”

“But the result of those two shifts should make anyone thinking of investing in the stock market nervous. You’d be counting on the profit-boosting elements of the Trump agenda being enacted and the profit-hampering possibilities not materializing. Another way to think about it: Putting money into the stock market right now means accepting less compensation for taking on risk than was available before Election Day.”

Traders Scheme to Cash in on Trump Tweets

Politico: “President-elect Donald Trump issued a single tweet blasting defense contractor Lockheed Martin Corp. at 8:30 a.m. on Monday. By lunchtime, he had wiped $4 billion off the company’s market value.”

“With his 17 million Twitter followers and upcoming inauguration to the most powerful job in the world, Trump presents challenges and opportunities that Wall Street has never seen before. Traders not only have to monitor the president-elect’s every word; they also have to follow his Twitter feed. Some are already crafting strategies to cash in on the president-elect’s penchant for bashing individual companies.”

“On Wall Street, a person who can move a stock is called an ‘axe.’ Trump, with his itchy Twitter finger, is quickly emerging as the biggest axe there is. Move quickly after a Trump tweet and there are potentially millions to be made. Miss out on one, or misjudge its impact, and your portfolio could take a surprise hit.”

Why More Mass Deportations Would Be Bad News for the Housing Market

Emily Badger: “Right around the time foreclosures were starting to pile up in the housing crash, on their way to affecting nearly one in five homeowning Hispanic households, the very same communities took a second blow.”

“The federal government’s Immigration and Customs Enforcement agency, in partnership with local law enforcement, was increasing deportations of undocumented immigrants: more than three million in all between 2005 and 2013. About 85 percent of them were working Latin American men.”

“New research now suggests that the deportations helped exacerbate foreclosures. Counties that collaborated with ICE in what became a large-scale deportation sweep experienced a surge in foreclosures of homes owned by Hispanics, according to a study by Jacob Rugh and Matthew Hall published Thursday in the journal Sociological Science. They argue that the roundups help explain why Hispanics faced the highest foreclosure rates during the housing crash — even among households with legal residents and American citizens.”

Want to Rev Up the Economy? Don’t Worry About the Trade Deficit 

N. Gregory Mankiw: “In recent years, American imports have exceeded exports by about $500 billion a year. Mr. Navarro and Mr. Ross argue that if better policies eliminated this ‘trade deficit drag,’ gross domestic product would be higher and more people would be employed.”

“But a fuller look at the macroeconomic effects of trade deficits suggests that things aren’t so simple.”

“…many of the policies proposed by Mr. Trump will increase the trade deficit rather than reduce it. He has proposed scaling back both burdensome business regulations and taxes on corporate and other business income. His tax cuts and infrastructure spending will most likely increase the government’s budget deficit, which tends to increase interest rates. These changes should attract even more international capital into the United States, leading to an even stronger dollar and larger trade deficits.”

“Rather than reflecting the failure of American economic policy, the trade deficit may be better viewed as a sign of success. The relative vibrancy and safety of the American economy is why so many investors around the world want to move their assets here. (And similarly, it is why so many workers want to immigrate here.)”