(Washington)

One of the senior-most figures at the SEC, Michael Piwowar, who has been a commissioner for five years, has just announced he will step down from his post after July 7th. The resignation has massive implications for advisors because Piwowar has been a strong opponent of the DOL version of the fiduciary rule and has generally been very pro de-regulation. His stepping down will leave just four commissioners active, two of whom are Democrats. This means the new SEC version of the fiduciary rule, universally seen as more accommodating to the industry, might have some severe difficulties in getting approved, as the Democrats are likely to vote against its implementation.

FINSUM: So in order to alleviate this risk, the White House and Senate would need to move quickly to nominate and approve a new commissioner/s. Nonetheless, this remains a major risk.

(Washington)

The DOL made an announcement yesterday, telling the industry that it would temporarily suspend enforcement action of various parts of its fiduciary rule. The department said it “will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules”.

FINSUM: This was largely expected given the DOL’s loss in the fifth circuit court, but evidently the wording of it came as a surprise.

(New York)

The market has become very fixated on higher rates and yields, with every investor nervous it will cause losses in their stock and bond portfolios. However, one Wall Streeter is saying fears are overblown, especially as it concerns how stocks lose on account of bonds. The logic is that stock P/E ratios never fully took account of ultra-low yields, so in effect, there is a cushion in stock prices against rising yields. Therefore, yields crossing 3% won’t necessarily cause any losses.

FINSUM: This is the “priced-in” logic of stock prices. We must say we do not agree. This kind of argument assumes that investors are being rational and have long memories, as well being agnostic of short-term changes in priority. We do not think the market is this impervious to fear.

(New York)

The financial media and the research side of Wall Street both seem to have completely succumbed to bearishness over the last couple months. Alongside rising rates, inflation, and yields, as well as some signals about the potential end of the cycle, commentary has become decidedly negative. However, the CIO of Evercore Asset Management has just put out a contrary opinion, arguing that stocks are not overvalued and could return 7% for the next ten years. The crux of his thinking is that P/E ratios are not a good metric of valuation. Rather we should be looking at real earnings yield, which is yields minus inflation. By this metric, stocks are only at average valuations.

FINSUM: Basically this approach tries to take account of the fact that we are in a low-yield, low-inflation environment, and it does make some sense.

(Washington)

For all intents and purposes, the US government has just declared a trade war on China. Rightly or wrongly, President Trump’s list of demands for China to undertake on trade are so onerous that it is impossible they will acquiesce. The US seems to know this, but is drawing a line in the sand. Here is an example of the scope of the demands: “China is to reduce the US-China trade imbalance by $100bn in the 12 months beginning June 1 2018, and by another $100bn in the 12 months beginning June 1 2019”.

FINSUM: We have very mixed views about the new US protectionist approach. On the one hand we do feel the US has gotten the short straw on several trade deals, but on the other, we think this standoffishness could possibly damage the US economy (short-term), or worse, cause a geopolitical conflict.