“The person who turns over the most rocks wins the game.”
-Peter Lynch
“Jesus, if this guy owned a funeral parlor nobody would die!”
-Gordon Gekko
Table of Contents:
Government Shutdown Avoided (for now)
Vegas Sphere Opens
Biden on the Picket Line
Home Prices are Up
FTC Sues Amazon
Average Monthly Car Payment
Trivia
Joke Of The Day
Fun Fact
Main Indices
Global Market Indices
Global Commodity Prices
Global Exchange Rates
Interest Rates
Super Dollar
Soaring USD & What It Means For Markets
Its a bird. Its a plane. Its the…growing market impact of a high US dollar?
The greenback has been on something of a tear lately, and the expectation - driven by messaging from Fed Chairman JPow - is that this is likely to continue. A key measure of the USD’s strength is the ‘Dollar Index’ which tracks its performance relative to a basket of six peers.
USD has been ripping lately, rising more than 0.8% over the last five days (in currency land, that’s a lot) to reach 106.2.
The index is up 6% since its July lows - and sure, its still well below its peak 11 months ago in October 2022 of 114.1, but its worth noting that that peak marked the highest level in 20 years.
That pop in the index last year likely had a lot to do with the US leading the charge on rate hikes. Even though most of the world was experiencing inflation as bad as the US, few were as quick to act. For example, the EU was over half a year behind the US in most respects.
How do higher interest rates impact foreign exchange prices you ask? Well, there are more complicated answers (Interest Rate Arbitrage, Carry Trade) but the essence is that people will move money to invest in assets that return the most. If I’m invested in, say, Italian bonds, but US bonds are returning more (higher yield) I’ll sell my Italian ones and buy some US ones. In the process, I’ll have to buy US dollars (which means selling Euros) which pushes the price of US dollars up (and Euros down). Its not a perfect relationship but - adjusting for things like default risk, trading deficits, etc. - nations with increasing interest rates tend to see increasing currency purchasing power.
Another reason why the US dollar often outperforms its peers is that of safety. The US dollar is considered a ‘safe haven’ asset, and the US is considered the safest place to invest. So, when the global economic situation seems fragile (Chinese lockdowns, rampant inflation, shooting war in Europe, etc.) people tend to move money to places less exposed, or ones most likely to endure best - and without fail the US has proven time and again how safe it is. I mean, the US was the cause of the Great Financial Crisis and compared to Europe, got out of it relatively unscathed. Because of this, one of my favorite investing adages is that ‘when the US sneezes, the rest of the world catches as cold’.
Anyway, back to it: The Federal Reserve is still going through a tricky time. Inflation was coming down nicely but that decline seems to have stalled - and even reversed a bit. As a result, at the last Fed press meeting Chairman JPow announced they weren’t raising rates (ya!) but that they will likely have more hikes on in the near future (boo!).
To recap the above, investors expect more increases to interest rates. More increases to interest rates (and signs of a weakening global economy) mean the USD is expected to strengthen further relative to other global currencies.
So why does that pose a risk to US stocks? Again, with everything financial the answers can get complex but the two big reasons are:
Bonds represent a trade-off between investing in equities, and;
A strong dollar can hurt profitability abroad.
In the case of the former, imagine you are an investor holding a risky stock that you think might make you, say, a 10% return but also know it could end up going much higher (upside risk = good) or much lower (downside risk = bad). If you can instead invest in a risk-free US treasury bond over the same period that returns 2%, that might not represent a good enough value proposition for you to swap. But what if instead that bond returned you 5.6% (the current yield on the US 1-Year Treasury Bill), then you might be tempted to make that trade. If lots of other investors do this, that will push the stock down. With rates continuing to increase this poses a real risk to the implicit trade-off between investing in stocks or bonds.
As for the latter point above, think about the large US multinational corporations where sales come mostly from outside the US. If you keep selling your products at the same price in USD, then you can expect demand to decline in foreign markets as your goods just saw an effective increase in the price your customers will have to absorb. If you sell your products for the same foreign price, like say McDonald’s, you presumably can make the same foreign profit but when that money is converted back to USD it’s worth a lot less.
Opinion: For some investors, a higher US dollar isn’t too bad of a situation. Canucks like me see the translational value of our US holdings tick up when converted back to
Tim BitsCanadian Dollars. Moreover, the bigger concern for me at the moment is a more general cooling of the US economy (see ‘Crude Awakening’ below or my spiel on the US Consumer in yesterday’s note). In the event that we see that that, a strong USD will be the least of our concerns.
Personal Consumption Expenditures (PCE), a data point released by the US Bureau of Economic Analysis, is out on Friday. PCE, a measure of the prices that people living in the United States pay for goods and services, is believed to be the Fed’s preferred measure of tracking inflation and could end up being the next catalyst to gauge how the Fed will tackle this sticky inflation problem.
Consumer Confidence
Less Confident Again
The Conference Board Consumer Confidence Index® declined again in September to 103.0, down from an upwardly revised 108.7 in August (Report). This marks the second straight month of declines for the index.
A figure over 100 for the index implies that individuals hold a positive view about the economy…in comparison to 1985 (yep, that’s actually what it means).
Dana Peterson, the Chief Economist at the Conference Board noted that “write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates.” Not great but no apocalypse.
The Conference Board also has their Expectation Index, which measures the consumer outlook for income, business, and labor market conditions. This one was a bit more ugly, falling from 83.3 in August to 73.7 in September. Historically, a reading below 80 was associated with a recession within the next year, according to the Conference Board.
Not everything was blaa, however, as they also track inflation expectations for the year ahead, and in that regard at least things were - unchanged (I know, more of a copper, or tin ‘lining’ than silver but could be worse). Stocks were down on the news straight away with the S&P 500 dropping 1% and the Nasdaq 1.2% in the immediate aftermath.
The Oil Price
Crude Awakening
The price of Oil is starting to find its way back into the news cycle as West Texas Intermediate ($90bbl) and Brent Crude ($93bbl) appear to be closing on the much touted ‘$100 a barrel’ mark where everyone seems to start going crazy. Supply cuts from Russia and the Saudis (Supply Side) and a surprisingly robust global economy (Demand Side), particularly in global travel, have put pressure on prices from both sides.
History has shown the global economy is more than capable of withstanding the pressures at these levels before but with growing concern about softening economies and recession fears in 2024, this may not be the straw that broke the camel’s back but it isn’t very helpful.
Opinion: As central banks continue to hunt down inflation, increasing oil prices – which find their way into everything from mining and manufacturing to shipping and travel – are of little help to future rate hike decisions playing out across the globe. Any increase may lead to even stickier inflation globally at a time when things just started to look under control again.
Moreover, the recent run-up has caught a lot of analysts on their backfoot and unless things sort themselves out in the short/medium term, expect to see estimates incorporate the impact of higher oil prices as it trickles through the financial markets.
Speed Round
Government Shutdown Avoided (for now) - Senate majority leader, Chuck Schumer, and the Senate minority leader, Mitch McConnell, reached an agreement on a stopgap spending plan that would keep the government open past the Saturday deadline. A bipartisan Senate draft measure would fund the government through 17 November and include around $6bn in new aid to Ukraine and roughly $6bn in disaster funding, Reuters reported. Al Jazeera Article.
Vegas Sphere Opens - In a town of crazy sights, its hard to stand out in Vegas but the Sphere does a pretty good job. The MSG Sphere is 366 feet tall, 516 feet wide, and covered with more than a million hockey puck-sized LEDs that can be programmed to flash dynamic imagery. The entertainment venue opens this Friday for a US concert. Barron’s Article.
Biden on the Picket Line - The President made history yesterday by attending a picket line rally on the side of workers under the UAW union. The move marked a departure from the White House’s traditional stance of not getting involved in labor negotiations. "You deserve what you earned, and you've earned a hell of a lot more than you're getting paid now" said the President. None too subtle. BBC Article.
Home Prices are Up - The Case-Shiller Home-Price Index showed the cost of housing in 20 of the nation’s large metropolitan areas increased 0.1% from the year prior in July—the first such gain since February. Economists had expected the index to increase 0.3%, according to FactSet consensus estimates. Even 7% mortgage rates in the States can’t keep prices down. CNN Article.
FTC Sues Amazon - The Federal Trade Commission and 17 US States sued Amazon on Tuesday. Claims made by the FTC included that Amazon has monopoly power which artificially inflates price levels, and that their market control harms competitors by locking sellers onto only their platform. I guess this was to be expected as back in the day a 29 year old Lina Khan, now FTC Chair, wrote an academic article on Amazon and their anti-competitive behavior. BBC Article.
Average Monthly Car Payment - Interest rates are starting to really hit hard. On top of average mortgage rates that recently hit +7%, now the average American car payment from a new vehicle has hit $728, and $530 for a used vehicle. This figure is up from $580 and $440 jus three years earlier.
Grab Bag
Trivia:
John D. Rockefeller’s Standard Oil was broken up in to 43 independent oil companies in 1911. Which of the below can trace their roots back to Standard Oil?
ExxonMobil
BP
Chevron
Shell
Marathon
What's the largest stock exchange in the world, in terms of market capitalization (basically, the total value of all listed companies)?
New York Stock Exchange
Tokyo Stock Exchange
NASDAQ
Bombay Stock Exchange
London Stock Exchange
Hong Kong Stock Exchange
Joke Of The Day:
I lost 50 pounds in the past month
Investing money in the London stock market wasn't a good idea.
Yo mama’s so fat
When she skips a meal, the stock market drops.
Fun Fact:
The ‘Buttonwood Agreement’ - The birth of the NYSE can be traced back to very humble beginnings. The story goes that stockbrokers use to meet outside of 68 Wall Street under a buttonwood tree as their regular spot to trade their shares. As the number of traders grew, this obviously became crowed and wasn’t exactly an optimal way to conduct business (there’s no mention of it, but I’m sure trading in winter was also pretty brutal). One day 24 of them met at Corre’s Hotel and decided to establish their own exchange and the New York Stock Exchange was born! The original document signed by the 24 founders is still held in the NYSE’s archive. And no, the story that the document was signed under the tree is apparently apocryphal.
Market Update
Main Indices
Global Market Indices
Global Commodity Prices
Global Exchange Rates
Interest Rates
Trivia Answers:
Which of the below can trace their roots back to Standard Oil?
Shell is the only one that can’t. Its pretty incredible the how dominant Standard Oil was. At the time of its break-up it reportedly had 64% market share in all oil sales. For context, Saudi Aramco has around 14% share of global oil production (13.6 million barrels a day out of 99.6m global demand) and is worth over $2 trillion.
What's the largest stock exchange in the world, in terms of market capitalization (basically, the total value of all listed companies)? No trick question today - The New York Stock Exchange is still the biggest but that pesky upstart Nasdaq is nipping at its heels.