Blaine Rollins: Melting Upward

The good news comes in the context of too many years in which the advanced world has been stuck in a “new normal” of growth that is too low and insufficiently inclusive. Already, it has led economists to improve their short-term forecasts and markets to build on an already impressive multi-year rally in risk assets.

But it is yet to translate into a materially improved medium-term growth path, nor has it significantly reduced worries about elevated financial asset prices and debt. Indeed, one of the most consequential questions facing the US and global economy is whether this could be more than just a short-term uptick in growth.

The protracted period of low and non-inclusive growth has fuelled the seeds of its own demise — economic, financial, institutional and political. Essentially, the global economy has been on a road to a “T-junction” whereby the current finance-reliant growth paradigm would give way to one of two very different outcomes depending on the extent to which the advanced economies’ policy responses include structural reforms, more balanced demand management and better cross-border co-ordination and architecture.

(Financial Times)

Amy Glaser, a senior vice president for Adecco, a staffing firm, sa id that especially during the recent holiday season, there was a surge in demand for warehouse workers, creating opportunities for people who might have struggled to find work earlier in the economic recovery. Two years ago, Ms. Glaser said, companies required warehouse workers to have high school diplomas and experience with the scanners used to track merchandise. Now, increasingly, they require neither, she said.

“We’ve seen an extreme escalation in the past 12 months,” Ms. Glaser said. “If someone applies for a job and you don’t get to them within 24 hours, that person will already have taken another job.”

(NY Times)

It is instructive to look at how the inputs have changed since the start of 2017, when my estimate of the implied ERP was 5.69%. The S&P 500 has risen 19.43%, while cash returned has remained stable; the drop in buybacks has been offset by an increase in dividends. Analysts have become more optimistic about future earnings growth, partly because US companies had a healthy earnings year and partly because of the expected drop in corporate tax rates. It is true that there are judgment calls that I had to make in estimating the implied premium, including using the analyst estimates of earnings growth for the S&P 500 (7.05%), but the resulting error pales in comparison to the standard error in the historical risk premium estimate.

While I take this implied equity risk premium as a market price for risk, and will use it in my individual company valuations in January 2018, there are some who like playing the market timing game. If you are so inclined, the question that you are asking is whether 5.08% is a high, low or reasonable number. If you believe that the current implied premium is too low (high), you also have to believe that stocks are over priced (under priced), and to help you make that judgment, I have graphed the implied equity risk premium for the S&P 500 from 1960 to 2017 in the graph below:

There is a reason why those who are intent on claiming that the market is in a bubble have a tough sell. Unlike the end of 1999, when implied equity risk premiums were at historical lows (close to 2%), the current implied ERP is well within the bounds of historic norms. It is only if you read this graph, in conjunction with the earlier one on risk free rates, that you should be concerned, since one reason that the premium is at 5.08% is because the US treasury bond rate is 2.41%. If the T.Bond rate moves towards 4.50%, and nothing else changes, the implied ERP will drop below comfort levels.

(Aswath Damodaran)

Investors have hoovered up billions of dollars of riskier corporate debt since the start of the new year, fuelled by a rally in equities and high-yield bond prices that some portfolio managers warn borders on euphoria.

Sales of high-yield bonds in the US have more than tripled from year-ago levels, with one lowly-rated group drumming up strong demand for an exotic financial instrument popular before the financial crisis.

Speculative rated companies — those judged to be riskier than their investment grade counterparts by the major credit rating agencies — have borrowed $4.5bn through US debt markets so far this year, the strongest start to a year since 2014, according to Dealogic.

Portfolio managers and investors have latched on to improving economic data in the US, Europe and Japan, as well as rising commodity prices, for their sanguine outlook. Funds that buy high-yield bonds in the US have attracted $2.3bn over the past two weeks, the first consecutive weeks of inflows in three months, data from EPFR show.

(Financial Times)

A modest further decline in the dollar would be welcomed by many large U.S. companies that report substantial earnings overseas. A falling dollar tends to boost exports by making U.S. goods more competitive abroad, a key policy objective of President Donald Trump, and a weaker currency potentially also gives the Federal Reserve more room to raise interest rates.

But some investors worry that an extended drop in the dollar could shake faith in the U.S. economy, elevating concerns about the lofty stock-market valuations and complicating the Fed’s efforts to raise rates. A rapid drop could also spur fears that inflation will rise beyond the moderate pace hoped for by policy makers and investors.

(WSJ)

In an interview with CNBC last week, Berkshire Hathaway CEO Warren Buffett said his firm stashed its cash in Treasury bills and estimated that Berkshire owns about $100 billion in T-bills. Emulating the Oracle of Omaha rarely has been a bad thing, and that goes for savers now.

One-month bills yielded 1.3% Friday, while three-month bills yielded 1.44% and six-month bills returned 1.6%. Hardly anything to send your heart aflutter, but a darned sight better than what most bank accounts, brokerages, or money funds yield.

It goes without saying that T-bills are the gold standard in terms of safety and liquidity for institutional investors such as Berkshire. And for individual investors in high-tax states, the elimination of the deduction for state and local taxes under the new tax law makes Treasuries’ exemption from state and local income levies all the more attractive.

(Barron’s)

International tourist arrivals grew by a remarkable 7% in 2017 to reach a total of 1322 million, according to the preliminary full-year results reported in this issue of the UNWTO World Tourism Barometer. This strong momentum is expected to continue in 2018 at a rate of 4%-5%.

(UNWTO)

When looking for cities that haven’t yet performed to their full potential, Ms. Barnes noted that a few of them are in Europe, where for various reasons, international buying hasn’t been as strong as it’s been in other parts of the world. Dublin tops her list as a city worth considering in 2018 for a few reasons, she said.

“Dublin is a small market where there are a lot of nice fundamentals, such as economic growth and population growth,” Ms. Barnes said, adding that population growth, specifically, is important because it’s tied to capital growth and demand, and something many European cities lack.

Rental yields in Dublin, meaning the annual rental income over a property’s total value, are also high, at 5% to 6% in the luxury sector, which indicates that there’s room for capital growth.

Simon Barry, head of new development at Harrods Estates in London, agreed with Ms. Barnes, and included Dublin at the top of his list of places luxury buyers should look into in 2018.

“More than anywhere else in the E.U., Dublin has sorted itself out since the credit crunch,” Mr. Barry said, “but it still has a long way to go to reach its 2008 peak,” meaning that prices are likely to keep increasing.

(Barron’s)

At the Institute for Marine Mammal Studies in Mississippi, Kelly the dolphin has built up quite a reputation. All the dolphins at the institute are trained to hold onto any litter that falls into their pools until they see a trainer, when they can trade the litter for fish. In this way, the dolphins help to keep their pools clean.

Kelly has taken this task one step further. When people drop paper into the water she hides it under a rock at the bottom of the pool. The next time a trainer passes, she goes down to the rock and tears off a piece of paper to give to the trainer. After a fish reward, she goes back down, tears off another piece of paper, gets another fish, and so on. This behaviour is interesting because it shows that Kelly has a sense of the future and delays gratification. She has realised that a big piece of paper gets the same reward as a small piece and so delivers only small pieces to keep the extra food coming. She has, in effect, trained the humans.

(The Guardian)

Born a Crime: Stories from a South African Childhood is the compelling, inspiring, and comically sublime story of a young man’s coming-of-age, set during the twilight of apartheid and the tumultuous days of freedom that followed—from one of the comedy world’s brightest new voices and The Daily Show host Trevor Noah.

(Trev Noah)