Friday, 3rd of August 2018
It is Friday again. One would imagine that we would be used to this, as it happens just about every week… This week was relatively quiet under the increasing heat of summer. It is often that we say that this is the worst ever weather, hottest or coldest, wet or dry. We often feel the present as more accentuated than the past. This time it might indeed be right- Last year was one of the hottest on record, according to a new study released Wednesday by the American Meteorological Society. The report is another piece of compelling evidence that our planet is warming faster than at any other point in modern history. It’s the 28th version of the annual check-up for the planet and the study has updated numerous global climate indicators such as polar ice, oceans and extreme weather events around the world. The State of the Climate in 2017 report, led by National Oceanic and Atmospheric Administration’s Centres for Environmental Information, was compiled using contributions from more than 500 scientists in more than 60 countries. The fact that 2017 was either the second- or third-hottest year, depending on the dataset used, does not come as a surprise. It follows a string of record hot years in 2014, 2015 and 2016 — and while 2017 did not provide a fourth consecutive record, it was the hottest non-El Niño year ever seen. The major greenhouse gases, carbon dioxide (CO2), methane and nitrous oxide, all rose to record high amounts in our atmosphere during 2017, according to the report. The global average carbon dioxide concentration was 405.0 parts per million (ppm), which is the highest ever recorded and also higher than at any point in the last 800,000 years, according to ice-core data. The oceans are also heating up, with significant planet-altering consequences. The global average sea surface temperatures were near a record high, just slightly below the record from 2016, and the last three years have seen the hottest on record. Warm seas equal rising seas, and 2017 also set a record for global sea level — which has risen year on year for six consecutive years and 22 of the last 24 years. Global sea level is rising at an average rate of 1.2 inches (3.1 cm) per decade, and that rate has been even higher in the most recent decades as sea-level rise accelerates.
China’s north plain, one of the most densely populated regions on Earth, is set to become the world’s deadliest heatwave zone by the end of the century, scientists say. New scientific research suggests that unless there are heavy cuts in carbon emissions, climate change will lead to humid heatwaves that could push the area “against the boundaries of habitability” by 2070. The results of the study of China’s northern plain, which includes the capital Beijing, are particularly worrying because many of the region’s 400 million people are farmers exposed to climactic conditions. The study said that heat and high humidity can create conditions that kill even healthy people within six hours of being outside. “This spot is going to be the hottest spot for deadly heatwaves in the future,” said Professor Elfatih Eltahir, at the Massachusetts Institute of Technology (MIT), who led the new study. “China is currently the largest contributor to the emissions of greenhouse gases, with potentially serious implications to its own population,” said Eltahir, who specializes in hydrology and climate science.
You must be wondering if we have been affected by the heat wave. Why are we harking about weather in what is supposed to be a markets’-oriented newsletter? Well, if there is a disruptive risk on our mutual horizon, it might well be derived from the climatic changes, not the Donald’s tweets.
Yes, today feels hot, hotter than we like…
Coming back closer to our usual hunting grounds, The Federal Open Market Committee votes unanimously to keep the target range for its benchmark rate at 1.75% to 2%. The committee says “economic activity has been rising at a strong rate,” a more bullish view than the June characterization of “solid” growth. The statement also notes that household spending has “grown strongly.” However, the committee is widely expected to approve an increase at the September meeting and a tweak in the language from the post-meeting statement could be a nod toward more monetary policy normalization. However, the committee went on to note that “economic activity has been rising at a strong rate,” a more bullish view than the June characterization of “solid” growth.
Well, this outlook might well have been the motor for the US 10-year Treasury Note to trade above 3% yield… But it didn’t last. We observed this benchmark sink-back to 2.98%. Our own crystal ball had foreseen a 3% yield for the end of 2018. This is definitively a few months too early…
Central banks around the world are starting to reverse course after a decade of nursing economies back to health by buying up trillions of dollars’ worth of bonds. The market had never seen this bond-buying activity, called quantitative easing, and has also never witnessed a period when it is being reversed. That could mean uncertainty. J.P. Morgan’s Jamie Dimon has been consistently optimistic about the strength of the U.S. economy. “I don’t want to scare the public, but we’ve never had QE,” Dimon said. “We’ve never had the reversal. Regulations are different. Monetary transmission is different. Governments have borrowed too much debt, and people can panic when things change.”
Away from the wisdom of Jamie Dimon we read some words from the “other” financial function in the US government- The Treasury Department predicted that the U.S. government’s borrowing needs in the second half of this year will jump to their most since the financial crisis a decade ago as the nation’s fiscal health deteriorates despite a strong economy. The department expects to issue $329 billion in net marketable debt from July through September, the fourth-largest total for that quarter on record and higher than the $273 billion estimated in April, Treasury said in a report Monday. The department’s forecast for the October-December quarter is $440 billion, bringing the second-half borrowing estimate to $769 billion, the highest since $1.1 trillion in July-December 2008.
The Treasury will be “issuing debt”, the Fed will be selling-down its portfolio. Think through the semantics- Both the Treasury AND the Fed will be selling US Government bonds. Speak of coordination… The Congressional Budget Office in late June predicted total government spending would exceed revenue by $1 trillion in 2020. We suggest you heed our long-standing advice to stay away from bonds now… And this “T Word” whilst scary in the bond world sounds like music to equity investors- Yesterday, Apple’s market value crossed the $1Trillion mark! Wow, a thousand “Unicorns” in one… Beating Amazon to the mark…
Amazing! But away from the US centric stand point on just about everything, Apple was indeed the first AMERICAN company to be valued at a trillion. PetroChina’s market cap hit $1 trillion in 2007 after a successful debut on the Shanghai Stock Exchange on Nov. 5 of that year. It was all downhill from there, however, as oil prices collapsed, and a global financial crisis broke out. PetroChina’s market value plummeted to less than $260 billion by the end of 2008, representing the largest destruction of shareholder wealth in world history, according to Bloomberg. When PetroChina was “worth” a trillion, it was valued with a P/E of 60X… Apple is valued at a Trillion with a P/E of 18X, quite cheap when compared to the broad S&P500.
We are just bantering in the heat… If you are worried about the financial world it would appear that you are in the dollar-weighted minority- The VIX is at 12 or so, a low value. Gold hit a one-year low yesterday hitting the lowest since July 2017 at $1,206.80. The Dollar Index, the DXY is rising to trade above 95 (way under our prediction of 110 into 2019!). And let’s not forget Mark Carney, Governor of the Bank of England who announced The Monetary Policy Committee voted unanimously for an increase in rates from 0.5 to 0.75% on the back of a strong labour market and credit growth. The central bank said in a statement that if its macroeconomic forecasts proved right, the BOE would probably have to increase rates further, albeit gradually. We wonder if they have heard of BREXIT?
“Consistency is the last refuge of the unimaginative”. Oscar Wilde
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