(Washington)

President Trump threw out an idea for a tax cut this week, then immediately backtracked by calling it unnecessary. The idea, however, appears sound. Trump proposed a payroll tax cut that would primarily help middle and lower class workers (in addition to a capital gains tax cut via indexing to inflation). That would make a lot of sense right now, as it would increase the spending power of the masses, increasing consumption and inflation, and lowering un-utilized manufacturing capacity.

FINSUM: We really like this idea of a payroll tax cut because it would help reverse some of the adverse affects of the wealth inequality that has built up since the Crisis. The more capital is concentrated in a small pool the less of it gets spent (i.e. a single person can only spend so much), which slows the economy. If you increase the spending power of the majority of Americans a lot more will get spent, boosting the economy.

(New York)

Is it a huge deal or not? No one seems to be able to decide. The issue at hand is that the new SEC Best Interest rule explicitly requires brokers to consider costs when recommending products to clients. That is potentially a very big change. However, some say brokers have already been doing this as part of suitability rules, so it may not change practices much. It is important to note that brokers do not need to recommend the cheapest product to clients, but they must take cost into consideration.

FINSUM: Considered in a vacuum, taking cost into consideration has long been a no-brainer. The bigger question is how the SEC decides to enforce this standard. Hindsight will always be 20-20 in an investigation and this could be a big disadvantage to brokers.

(San Francisco)

A few weeks ago there was a great deal of press, and some investor anxiety, about simultaneous anti-trust probes being launched from the FTC and DOJ into America’s biggest tech companies. Before those efforts seem to have even gotten off the ground, the investigation seems to be backtracking. The head of the FTC said this week that the integration of Facebook and Instagram and WhatsApp will likely stymie any effort to break up the social media giant. The TFC chief also acknowledged it would be hard to get the courts to reverse a merger that the FTC itself had already approved, which is the case with Facebook and its acquisitions of Instagram and WhatsApp.

FINSUM: This seems like a pretty notable surrender after only a few weeks of work. We wonder why the FTC is changing its tone so strongly?

(New York)

We guarantee that we have a great recession signal in hand that you have not been paying attention to: RV sales. Yes, you read that right, RV (recreation vehicle) sales. Elkhart, Indiana is the epicenter of motorhome production, and their product has proven to be a reliable recession indicator. “The RV industry is better at calling recessions than economists are”, says one economics professor at Ball State University. The big worry is that shipments of RVs are down 20% this year, a big drop.

FINSUM: This seems like a classic consumer discretionary spending leading indicator. And it is not looking good right now.

(New York)

Anyone who has even glanced at WeWork’s disclosures prior to its forthcoming IPO should be worried. The company’s obfuscation and highly suspect share and governance structure look worrying. But here is an even more tangible reason to stay away—the company is overvalued by about 20x. Unlike other big tech IPOs recently, WeWork has existing publicly traded competitors, so there are comparables. Check out IWG (formerly known as Regus which is likely a more familiar name). It has $1.6 bn of revenue and $64m of profit. Its market cap is $4.45 bn. The company went public in 2000 and was called a disruptor back then. The company struggled during the recession and its US unit filed for bankruptcy.

FINSUM: There is not much new about WeWork other than branding and hype. The prospects for this IPO and WeWork’s future returns are dimming.

(New York)

There are a handful of safe haven stock sectors that investors tend to rely on during market downturns. Healthcare, utilities, and REITs come to mind. Lately, some have been saying bank shares may also prove a good defense. However, investors should be very wary of two of those just mentioned: healthcare and banks. While on the surface healthcare stocks look very good for a recession—it is not as if people stop getting sick—the reality is that there has never been more regulatory pressure on the sector (from both sides of the aisle), which means it is far from safe. Additionally, the idea that banks have become safe, utility-like dividend machines is flawed, as bank earnings are very exposed to the economic cycle, and thus will likely see big moves in both price and yield.

FINSUM: We agree with this assessment entirely. Healthcare is more vulnerable than it has been in memory and banks are a long way from being dependable utilities (excellent PR job by Wall Street though!).

(New York)

Annuities have come a long way in the last few years, with industry standards and selling behavior becoming much cleaner. However, annuities sales are still a challenge because it is often hard to get an individual to trade a large, liquid lump sum for payments that can often be far in the future. With that said, TIAA has an annuity it debuted last year that might prove quite helpful. The provider’s Income Test Drive program allows buyers of annuities to opt out of their income agreements within two years without any penalty. The program is part of a wider trend in annuities, according a product manager in the space, saying “They used to have one product try to be everything to everybody, and the costs outweighed the benefits. Now there are more streamlined options”.

FINSUM: This TIAA option seems like a very good way to help investors bridge their anxiety about trading a lump sum for future income.

(New York)

Retail and recession have a complicated relationship. On the one hand, a downturn in the economy will almost always hammer consumer spending, which means the sector is broadly exposed. However, such economic challenges often create huge victors in the space as it becomes a winner-take-all environment. With that in mind, here are some stocks to own, and some not to. In the last recession, it was cost-conscious retailers, like Dollar Tree and Dollar General that surged. High-priced, discretionary merchandise, like Williams-Sonoma and Restoration Hardware, did the worst. This seems likely to play out again, so take a look at Aaron’s, Dollar General, Five Below, National Vision, and Ollie’s Bargain Outlet. 

FINSUM: Hard to argue with this logic, but we would not be surprised if the coming (potential) recession offered some surprises in terms of consumer behavior.

(Copenhagen)

The inverted yield curve may be odd, and negative yields in Europe may be strange, but the weirdest current perversion of markets (or is it the “new normal”?) is in Denmark specifically. That oddity is the negative rate mortgage. Yes, homebuyers are getting paid to take out mortgages to buy a home. Jyske Bank, Denmark’s third largest lender, is offering a mortgage rate of -.50% before fees.

FINSUM: So this is already happening in Europe, but it may have limited effects given the continent’s demographic struggles. It is hard to imagine this happening in the US, but if it did, we bet it would cause a housing boom.

(New York)

Bloomberg has published a very insightful article about the current state of the market. In particular, it offers a view of how the big run up in bonds is likely to end. The fears that are driving the bond market—mostly that de-globalization will cause a recession—can only end two ways. Either the recession and de-globalization never materialize, in which case yields shoot back up, causing big losses in bonds. Or, the breakdown of global trade does happen, In this scenario, goods likely become significantly more expensive (especially in west) because there is no more labor and cost arbitrage. In this scenario, inflation then jumps, again sending yields much higher and sparking losses. In other words, the current bond market can only end in tears.

FINSUM: This was a very insightful argument in Bloomberg today. While there are some nuances that might cause some different outcomes, the basic contention is quite astute. Stocks seems a much better bet.