(New York)

Investors look out! After years of booming asset prices on the back of extraordinarily loose monetary policy, everything looks like it is about to implode. Not only is the Fed hiking and looking hawkish, but the ECB is in the middle of a covert meeting likely about how to end QE. China also looks close to reigning in its economy. Altogether, the economy on which current markets have been built looks set for change, which might cause big problems for equity investors.

FINSUM: So far “normalization” of interest rates has been quite slow, which has let investors sort of ignore the process. If things start accelerating quickly, then markets may react very sharply.

(Washington)

In a widely expected move yesterday, Jerome Powell announced the first hike of his stint as the head of the Fed. The move was a quarter point higher to between 1.75% and 2%. Powell promised to be more open and transparent about the Fed’s outlook than in former times. Powell presented the rosiest outlook on the US economy in memory, repeatedly expressing strong optimism. He indicated that there were two more hikes planned for this year.

FINSUM: All the optimism comes across as quite hawkish despite Powell’s intentions to seem gradual. We appear to be on definite course higher.

(New York)

Before President Trump got elected, and immediately after, there was a great deal of excitement that financial firms were going to experience a flourishing as the US cut back heavily on financial regulation. 500 days in that hope has failed to significantly materialize. While small and medium sized banks have benefitted, and the DOL’s fiduciary rule is gone (great for wealth management), large banks have not seen gains. For instance, the Fed has made stress tests for large banks more stringent.

FINSUM: Banks had the prop trading rules (Volcker rule) weakened recently, so that is positive, but otherwise there hasn’t been much change.

(Chicago)

One of Elon Musk’s most promising and exciting ideas just won a major funding bid. A couple of years ago Musk divulged his idea for underground “hyperloop” travel that sent people whisking around at hundreds of miles an hour underground. Well, the idea is going to become a reality, as Chicago has just awarded Musk’s “Boring Company” a contract to build such a link between O’Hare airport and the city. The distance between the two is 18 miles and currently takes around 40 mins. Musk’s plan would cut the trip to 12 min. The deal will be privately funded.

FINSUM: This sounds like a great proof of concept for Musk, but we do worry it will take some of his focus away from executing on Tesla.

(Washington)

A week ago it didn’t seem like it was going to happen, but nonetheless it is. Trump plans to move ahead with imposing $50 bn worth of tariffs on China starting as soon as tomorrow. The move is expected to bring heavy retaliation from Beijing. Several days ago, China made a conciliatory offer to boost purchases of US goods by tens of billions of Dollars.

FINSUM: We think the US’ approach to link the trade situation to working with China on North Korea is not a very smart angle, as nuclear security and agricultural goods don’t sit comfortably.

(New York)

Whether you like it or not, the next recession is on its way. The big question is how long until it arrives. Most estimates range from 6-24 months, but most agree we are coming to the close of a very productive economic and market cycle. So what is the best way to prepare your and client’s portfolios for a downturn? The answer may be unconstrained bond funds, such as the Loomis Sayles Bond fund. Unconstrained bond funds, which can invest in any type of fixed income instrument in any geography, have done quite well this year compared to other areas of fixed income. Some funds are focusing much more on shorter term corporate credit, rather than rates, to greatly lower their interest rate risk.

FINSUM: Unconstrained bond funds seem like a good way to get some solid yields while also protecting against big losses. We think short-term Treasuries and investment grade are good choices, but are wary of longer-term sovereign bonds and junk bonds right now.

(Washington)

There has been a great deal of industry feedback on the SEC’s best interest rule already and the comment period has only just begun. One point of contention among many is that the SEC proposal did not define the term “best interest”, leaving it vague and wide open to interpretation. However, that was likely the point, and the SEC may be very clever in doing so. According to Charles Schwab, “Once you define something, then it becomes easier to figure out how not to be engaged in that definition”.

FINSUM: The SEC left the definition of best interest out of the proposal because it wants to make it harder for those in the industry to side-step the regulation. Smart play.

(New York)

In what might be a sign of a rough patch to come for the global economy and markets, 16 of the largest global banks have collectively just entered a bear market, falling 20% from their peak. Those 16 come from among the 39 global “sifis”, or systemically important financial institutions. One research analyst says “If these banks are supposed to be systemically important then policymakers ought to be watching them to see what is happening”.

FINSUM: The odd part about these falls is that rising interest generally help banks, as they have wider net interest margins. So why the downturn?

(Washington)

President Trump seems to have emerged from the summit with North Korea with a very high degree of confidence that the situation there has been handled. Trump put in writing yesterday that “there is no longer a nuclear threat of North Korea”. Interestingly, North Korean state media also reported the meeting as a major success, but did not mention denuclearization at all. Trump did backtrack a bit, saying “I may be wrong. I mean, I may stand before you in six months and say ‘Hey, I was wrong’. I don’t know that I’ll ever admit that, but I’ll find some kind of an excuse”.

FINSUM: We think this summit was a success and that Kim has played the whole situation very sharply. Our only concern is the lack of detail about how North Korea will actually go about denuclearizing.

(New York)

The whole retail world is centered on Amazon right now. Will ecommerce, led by Amazon, continue to disrupt traditional retailers? That is the nauseatingly frequent question being fretted over by investors. Well, here are a group of Amazon-proof strategies that investors can use to pick retail stocks. The core of the argument is that retailers need to focus on the areas that Amazon is not good at offering. In particular: “experience; customer service; partnerships with influencers; and personalization”. Private label brands are another area, as companies like Target have launched in-house brands that are exclusive to their stores.

FINSUM: We believe in three of the areas mentioned, but in-house brands and customer service are not good strategies to outcompete Amazon in our mind. In-house brands just aren’t compelling enough (especially nascent ones), and we feel Amazon has better customer service (at least online) than almost anyone.