by tyler | Apr 13, 2023 | CNN, investing
Jeremy Grantham made his name predicting the dot-com crash in 2000 and the financial crisis in 2008. Now, the famous investor warns another epic bubble in financial markets is bursting — and the turmoil that swept through the banking sector last month is just the beginning.
“Other things will break, and who knows what they will be,” Grantham told CNN in an exclusive interview. “We’re by no means finished with the stress to the financial system.”
The co-founder of investment firm GMO is known for his bearish views. A frenzy in multiple US markets spurred by rock-bottom interest rates after the coronavirus pandemic led Grantham to call “one of the great bubbles of financial history” back in 2021.
Since early 2022, when the S&P 500 hit an all-time high, US stocks have dropped about 15% as central banks have jacked up borrowing costs. But Grantham sees much steeper declines on the horizon.
The “best we can hope for,” he said, is a fall of about 27% from current levels, while the worst-case scenario would see a plunge of more than 50%. The low point might not arrive until “deep into next year,” he added.
Analysts at Bank of America and Goldman Sachs, for their part, see the S&P 500 finishing 2023 only about 2% below Wednesday’s close. Morgan Stanley foresees a drop of nearly 5%.
Stocks aren’t the only assets that notched excessive valuations when cheap money encouraged investors to take big risks. The prices of government bonds, real estate and even cryptocurrencies also shot up.
This widespread exuberance could lead to a particularly harsh reckoning, according to Grantham. The recent failure of Silicon Valley Bank, for example, was triggered in part by losses on its bond holdings as interest rates jumped and prices of US government debt fell.
As the bubble deflates, it’s all but certain to result in an economic downturn, he predicted.
“Every one of these great bursts of euphoria, the great bubbles with overpriced markets … has been followed by a recession,” Grantham said. “The recessions are mild if everybody does everything right and there [are] no complications. They are terrible if people get everything wrong.”
In the meantime, investors should “count on being surprised,” Grantham said.
It would have been difficult to predict the implosion of Silicon Valley Bank, or the need for the Swiss government to swoop in and orchestrate an emergency rescue of Credit Suisse, he explained.
“When the great bubbles break, they do impose a lot of stress on the system,” Grantham said. “It’s like pressure behind a dam. It’s very hard to know which part will go.”
The correction in the bond market may be almost complete, Grantham forecast. But stock valuations remain “way above any long-term traditional relationship” to corporate performance.
Strain in the financial system could therefore grow when, as he expects, the US economy enters a recession and corporate earnings begin to take a hit. Economists at the Federal Reserve are predicting a mild recession in late 2023 because of fallout from the banking crisis.
Even in this environment, though, there will be opportunities to make money. (GMO has a US equity fund, with holdings in companies such as Apple
(AAPL), Microsoft
(MSFT), ExxonMobil
(XOM) and Kroger
(KR).) But in the short term, “almost everybody gets hurt” as asset prices come back down to Earth, Grantham said.
Grantham sees uncomfortable parallels between markets today and 2000, when an explosion in the price of tech stocks was followed by a dizzying crash. There are also echoes of 2008, when a painful comedown in the US housing market almost broke the banking system.
What’s even more worrying is that this time, bubbles in the stock market and the real estate market are poised to burst simultaneously, Grantham said.
That’s what happened in Japan in the early 1990s, unleashing a long period of economic stagnation that haunts the world’s third-largest economy to this day.
“They have had basically a lost 20 years, and in addition a fairly lame 10 years,” Grantham said.
He added: “The occasions where people have tried to break a bubble in the stock market and the real estate market together are fairly ominous.”
Fears about the health of the US commercial real estate industry have grown in recent weeks. The sector, which relies heavily on debt financing, has been hit hard by rising interest rates. The popularity of remote work has been particularly difficult for offices, a market Grantham quipped was in “ragged disarray.”
Meanwhile, US home prices, which hit record highs in 2022, have also started to drop as mortgage rates have leaped.
Grantham blamed central bankers for the emergence of the latest market bubble in the United States. They pursued policies in recent decades that artificially drove up the value of financial assets, setting the stage for crashes, he said.
Every Federal Reserve chair since Alan Greenspan, who led the US central bank from 1987 to 2006, “has followed the same policy that lower rates are good for you,” he said. “What has it delivered? It’s delivered a series of great bubbles that then break and inflict a lot of pain.”
Jerome Powell, the current Fed chair, would be wise to follow the example of Greenspan’s predecessor, Paul Volcker, according to Grantham.
Volcker raised interest rates to unprecedented levels to fight inflation in the late 1970s and early 1980s. He succeeded in curbing price rises, though his policies also led to a series of recessions.
“If Powell could just channel a little bit of Volcker, that would be a distinct improvement,” Grantham said, suggesting that the Fed needs to stay the course on its rate hikes instead of buckling prematurely.
Consumer inflation in the United States eased to 5% in March, the lowest annual rate since May 2021. That has boosted speculation among investors that the Fed could soon stop raising borrowing costs.
But longer-term trends could prop up inflation for years to come, Grantham said.
Climate change is resulting in extreme weather and more intense and frequent natural disasters. That will disrupt the supply of commodities and raise food prices. Aging populations also pose a risk as smaller workforces command higher wages.
“These are not mild influences,” Grantham said. “These are very clear and important.”
by tyler | Apr 11, 2023 | CNN, investing
Persistent inflation remains the Federal Reserve’s No. 1 concern, even as the banking sector remains on edge after two big bank failures last month. This week’s Consumer Price Index, due to be announced Wednesday at 8:30 am ET, could determine whether the central bank raises rates again in May.
That means it will also weigh on markets, especially now that Wall Street’s focus has shifted from the financial system to the economy.
“Inflation is no less relevant than it has been for the past two years,” wrote Greg McBride, chief financial analyst at Bankrate. “The Consumer Price Index remains the most-watched monthly economic report.”
So what are they expecting?
What’s happening: Core inflation levels have eased for five months in a row on an annual basis, according to CPI readings, but they still remain near historic highs at 6% – well above the Federal Reserve’s goal of 2%.
Last month’s reading showed an increase in prices between January and February, which doesn’t “inspire confidence that 2% is just around the corner,” said McBride.
For March, economists forecast a 0.4% monthly increase in the CPI, which matches the September – February average and would keep those year-over-year averages high.
So what will it take to make the Fed, and investors, happy?
“To feel good about where inflation is headed, we need to see more than just moderation in the rate of both headline and core inflation,” said McBride. “We also need to see moderation in price pressures across a wide range of categories that are staples of the household budget: shelter, food, electricity, motor vehicle insurance, apparel, and household furnishings and operations.”
But “resiliently elevated prices have the potential to spark yet another Fed rate hike in May,” said Greg Bassuk, CEO at AXS Investments. That’s notwithstanding the slowing economy “that has been weighed down even more heavily by the banking system debacle,” he added.
What it means for markets: Between inflation data and the start to the first-quarter corporate earnings season (three of the largest US banks, JPMorgan Chase, Wells Fargo and Citigroup report this Friday), this week is set up for heightened stock volatility, said Terry Sandven, chief equity strategist at US Bank Wealth Management.
“Persistent inflation, rising interest rates and uncertainty over the pace of earnings growth in 2023 remain headwinds to advancing equity prices. Each will be in focus this week,” he said.
TD Ameritrade released its March Investor Movement Index on Monday, which tracks what retail investors are up to.
The report found that retail traders continued to be net buyers of equities in March. That means Main Street traders, not large financial institutions, are purchasing the majority of new stock in the US.
The increasing power of the retail investor – fueled by stimulus cash, easier access to trading platforms and more market education amongst other things, has been an ongoing trend since the beginning of the pandemic. Lately, large companies have begun to change their investor relations strategies to become more retail investor friendly. Now even the ‘smart money’ traders are using Reddit for stock tips.
So where are they investing? The strongest buying interest is in the Financial sector, found TD Ameritrade. That comes despite macroeconomic catalysts in March like the collapse of Silicon Valley Bank and the emergency sale of Credit Suisse.
“March was full of surprises, but the overall impact among TD Ameritrade retail clients when it came to exposure to the markets was neutral,” said Lorraine Gavican-Kerr, managing director at TD Ameritrade. “For the second month in a row, our clients were net buyers of equities, seemingly eying an opportunity to buy into the Financial sector’s lows and to sell off the highs in Information Technology.”
The five most popular stocks to purchase, according to TD Ameritrade were Tesla, Rivian, Ford Motors, Amazon, and the embattled First Republic Bank.
Retail investors, meanwhile, were net sellers of Meta, NVIDIA, Advanced Micro Devises, Intel and Apple.
Inflation expectations have increased at the short-term and medium-term horizons, according to The Federal Reserve Bank of New York’s March Survey of Consumer Expectations, released on Monday.
Inflation expectations for the year ahead have increased by half a percentage point to 4.7%, the survey found. That marks the first increase since October 2022.
The survey, which questions about 1,300 household heads in the US each month, also found that respondents were more pessimistic about the outlook for the US labor market than they were in previous months. Unemployment expectations — or the probability that the US unemployment rate will be higher one year from now — increased by 1.3 percentage points to 40.7%, the New York Fed found.
The recent banking crisis and looming credit crunch also appears to be worrying households in the United States. The Fed reported that “perceptions of credit access compared to a year ago deteriorated in March.” The share of households that said it’s harder to obtain credit than one year ago reached an all time high.
by tyler | Apr 10, 2023 | CNN, investing
In an unusual coincidence, the US jobs report was released on a holiday Friday — meaning stock markets were closed when the closely-watched economic data came out.
It was the first monthly payroll report since Silicon Valley Bank and Signature Bank collapsed. It also marked a full year of jobs data since the Federal Reserve began hiking interest rates in March 2022.
While inflation has come down and other economic data point to a cooling economy, the labor market has remained remarkably resilient.
Investors have had a long weekend to chew over the details of the report and will likely skip the typical gut-reaction to headline numbers.
What happened: The US economy added 236,000 jobs in March, showing that hiring remained robust though the pace was slower than in previous months. The unemployment rate currently stands at 3.5%.
Wages increased by 0.3% on the month and 4.2% from a year ago. The three-month wage growth average has dropped to 3.8%. That’s moving closer to what Fed policymakers “believe to be in line with stable wage and inflation expectations,” wrote Joseph Brusuelas, chief economist at RSM in a note.
“That wage data tends to suggest that the risk of a wage price spiral is easing and that will create space in the near term for the Federal Reserve to engage in a strategic pause in its efforts to restore price stability,” he added.
The March jobs report was the last before the Fed’s next policy meeting and announcement in early May. The labor market is cooling but not rapidly or significantly, and further rate hikes can’t be ruled out.
At the same time Wall Street is beginning to see bad news as bad news. A slowing economy could mean a recession is forthcoming.
Markets are still largely expecting the Fed to raise rates by another quarter point. So how will they react to Friday’s report?
Before the Bell spoke with Michael Arone, State Street Global Advisors chief investment strategist, to find out.
This interview has been edited for length and clarity.
Before the Bell: How do you expect markets to react to this report on Monday?
Michael Arone: I think that this has been a nice counterbalance to the weaker labor data earlier last week and all the recession fears. This data suggests that the economy is still in pretty good shape, 10-year Treasury yields increased on Friday indicating there’s less fear about an imminent recession.
There’s this delicate balance between slower job growth and a weaker labor market without economic devastation. I think this report helps that.
As it relates to the stock market, I would expect the cyclical sectors to do well — your industrials, your materials, your energy companies. If interest rates are rising, that’s going to weigh on growth stocks — technology and communication services sectors, for example. Less recession fears will mean investors won’t be as defensively positioned in classic staples like healthcare and utilities.
Could this lead to a reverse in the current trend where tech companies are bolstering markets?
Yes, exactly. It’s difficult to make too much out of any singular data point, but I think this report will hopefully lead to broader participation in the stock market. If those recession fears begin to abate somewhat, and investors recognize that recession isn’t imminent, there will be more investment.
What else are investors looking at in this report?
We’ve seen weakness in the interest rate sensitive parts of the market — areas that are typically the first to weaken as the economy slows down. So things like manufacturing, things like construction. That’s where the weakness in this jobs report is. And the services areas continue to remain strong. That’s where the shortage of qualified skilled workers remains. I think that you’re seeing continued job strength in those areas.
What does this mean for this week’s inflation reports? It seems like the jobs report just pushed the tension forward.
it did. I expect that inflation figures will continue to decelerate — or grow at a slower rate. But I do think that the sticky part of inflation continues to be on the wage front. And so I think, if anything, this helps alleviate some of those inflation pressures, but we’ll see how it flows through into the CPI report next week. And also the PPI report.
Is the Federal Reserve addressing real structural changes to the labor market?
The Fed was confused in February 2020 when we were in full employment and there was no inflation. They’re equally confused today, after raising rates from zero to 5%, that we haven’t had more job losses.
I’m not sure why, but from my perspective, the Fed hasn’t taken into consideration the structural changes in the labor force, and they’re still confused by it. I think the risk here is that they’ll continue to focus on raising rates to stabilize prices, perhaps underestimating the kind of structural changes in the labor economy that haven’t resulted in the type of weakness that they’ve been anticipating. I think that’s a risk for the economy and markets.
A few weeks ago, Before the Bell wrote about big problems brewing in the $20 trillion commercial real estate industry.
After decades of thriving growth bolstered by low interest rates and easy credit, commercial real estate has hit a wall. Office and retail property valuations have been falling since the pandemic brought about lower occupancy rates and changes in where people work and how they shop. The Fed’s efforts to fight inflation by raising interest rates have also hurt the credit-dependent industry.
Recent banking stress will likely add to those woes. Lending to commercial real estate developers and managers largely comes from small and mid-sized banks, where the pressure on liquidity has been most severe. About 80% of all bank loans for commercial properties come from regional banks, according to Goldman Sachs economists.
Since then, things have gotten worse, CNN’s Julia Horowitz reports.
In a worst-case scenario, anxiety about bank lending to commercial real estate could spiral, prompting customers to yank their deposits. A bank run is what toppled Silicon Valley Bank last month, roiling financial markets and raising fears of a recession.
“We’re watching it pretty closely,” said Michael Reynolds, vice president of investment strategy at Glenmede, a wealth manager. While he doesn’t expect office loans to become a problem for all banks, “one or two” institutions could find themselves “caught offside.”
Signs of strain are increasing. The proportion of commercial office mortgages where borrowers are behind with payments is rising, according to Trepp, which provides data on commercial real estate.
High-profile defaults are making headlines. Earlier this year, a landlord owned by asset manager PIMCO defaulted on nearly $2 billion in debt for seven office buildings in San Francisco, New York City, Boston and Jersey City.
Dig into Julia’s story here.
Tech stocks led market losses in 2022, but seemed to rebound quickly at the start of this year. So as we enter earnings season, what should we expect from Big Tech?
Daniel Ives, an analyst at Wedbush Securities, says that he has high hopes.
“Tech stocks have held up very well so far in 2023 and comfortably outpaced the overall market as we believe the tech sector has become the new ‘safety trade’ in this overall uncertain market,” he wrote in a note on Sunday evening.
Even the recent spate of layoffs in Big Tech has upside, he wrote.
“Significant cost cutting underway in the Valley led by Meta, Microsoft, Amazon, Google and others, conservative guidance already given in the January earnings season ‘rip the band- aid off moment’, and tech fundamentals that are holding up in a shaky macro [environment] are setting up for a green light for tech stocks.”
by tyler | Apr 10, 2023 | CNN, investing
Tupperware shares fell as much as 40% in premarket trading Monday following a bleak warning that its future is looking murky.
In a regulatory filing late Friday, the container maker said there’s “substantial doubt about the company’s ability to continue as a going concern,” and that it’s working with financial advisers to find financing to stay afloat.
Tupperware said it won’t have enough cash to fund its operations if it doesn’t secure additional money. The company said it is exploring potential layoffs, and it’s reviewing its real estate portfolio for potential money-saving efforts.
The New York Stock Exchange also warned that Tupperware’s stock is in danger of being de-listed for not filing a required annual report.
“Tupperware has embarked on a journey to turn around our operations and today marks a critical step in addressing our capital and liquidity position,” CEO Miguel Fernandez said in a press release. “The company is doing everything in its power to mitigate the impacts of recent events, and we are taking immediate action to seek additional financing and address our financial position.”
The 77-year-old business has been struggling in recent years to maintain its relevance against rivals. It has been trying to shed its staid image and attract younger customers with newer and trendier products. It also struck a deal with Target last year to sell its products.
Tupperware
(TUP) said the entry into Target is part of the brand’s reinvention, which includes plans to grow the business through multiple retail channels and get its products in front of younger consumers who’ve never even heard of Tupperware
(TUP) parties.
But that has failed to work so far: Shares are down 90% over the past year. It also issued another “going concern” warning last November.
by tyler | Apr 6, 2023 | CNN, investing
After months of a remarkably strong US labor market and economy, everything seems to be slowing down.
The latest high-frequency data shows that the consumer could be running out of steam, hiring activity is moderating, business activity is softening, interest-rate sensitive sectors are pulling back and housing is suffering.
The question is whether Friday’s monthly jobs report, easily the most anticipated piece of data out this week, will confirm the trend.
The unflinching resilience of the US labor market is one of the greatest sources of tension in today’s economy. Federal Reserve officials have said employment numbers and the pace of wage increases need to shift lower before “sticky” inflation can be overcome.
Over the past year, the Fed has raised interest rates from nearly zero to a range of 4.75% to 5% to cool the economy. But jobs numbers have blown past expectations for the past 11 months. Unemployment currently sits near historic lows at 3.6%.
A slowdown in the official US jobs report Friday could signal an economic sea change.
Slowly cooling: “Recent labor market evidence, along with our conversations with business executives, indicate that hiring efforts have been scaled back notably across numerous sectors,” wrote Gregory Daco, chief economist at EY, in a note on Wednesday. That could mean payrolls for March come in well below the 240,000-consensus estimate, he added.
More jobs data released this week shows that hiring may be slowing. ADP estimated that private sector employment rose by 145,000 jobs in March, below the 200,000 consensus forecast; and ADP’s measure of year-over-year wage growth slowed to 6.9% from 7.2%.
The February JOLTS Report, meanwhile, showed that job openings dropped 632,000 to 9.93 million in February, from 10.56 million in January. That’s the lowest level of job openings since May 2021.
The strength of the American consumer — which Bank of America CEO Brian Moynihan has previously said was single-handedly propping up the US economy — also appears to be waning.
Spending momentum cooled in February, and analysts are expecting more weakness in March.
The US Treasury publishes daily data for tax refunds, and “the level of tax refunds to households tells us something about how much support there is to consumer spending,” said Torsten Slok, chief economist at Apollo Global Management. Tax refunds in recent weeks have been coming in at a lower rate than in the previous two years.
“Credit conditions are tightening and the recent banking sector stress will only further exacerbate the impact, leading to slower spending on big-ticket items and services,” wrote Daco.
Existing home sales, meanwhile, have plunged more than 20% over the past year and the latest ISM manufacturing survey shows that business investment is slowing. Commercial real estate is in trouble and while major US stock indexes are up this year, there’s underlying weakness in market fundamentals.
Wrapping it up: “The economy is unwell. It’s not the flu, but it is a throat ache. And it’s unlikely to get better in the coming months,” wrote Daco.
Friday’s job report will give us a better idea of how sick the economy actually is.
Strained ties between China and the United States and Russia’s invasion of Ukraine have led to an increase in financial isolation over the past few years.
Those tensions have slowed international investments and hurt payment systems and asset prices, undermining global financial stability, wrote the International Monetary Fund in a new report on Wednesday. “This in turn fuels instability by increasing banks’ funding costs, lowering their profitability, and reducing their lending to the private sector,” they said.
The report comes as credit lines tighten in the wake of the Silicon Valley Bank collapse and subsequent financial system crisis.
Rising geopolitical tensions add to that, wrote the IMF. “Imposition of financial restrictions, increased uncertainty, and cross-border credit and investment outflows triggered by an escalation of tensions could increase banks’ debt rollover risks and funding costs,” according to the report, led by Mario Catalán, deputy chief in the Monetary and Capital Markets Department of the IMF.
Those tensions, wrote researchers, “could also drive up interest rates on government bonds, reducing the values of banks’ assets and adding to their funding costs.”
At the same time, geopolitical tensions also affect banks through the real economy. Supply chain and commodity market disruptions hurt growth and lead to elevated inflation, which reduces banks’ profitability.
“The stress is likely to diminish the risk-taking capacity of banks, prompting them to cut lending, further weighing on economic growth,” said the report.
Walmart
(WMT) plans to slow its pace of hiring in the coming year and focus on building out AI technology to serve customers.
The retailer announced at its annual investor meeting this week that it intends to depend heavily on automation to achieve its goal of adding more than $130 billion, or 4%, in sales over the next five years.
“We’ll grow our top line, improve our margin and improve our return on investment,” CEO Doug McMillon told investors Wednesday. “That’s reflected in our five-year plan. We think growing a company of this size in the 4% range over time and growing profit faster than sales is achievable.”
Walmart also said it plans on servicing about 65% of its stores by automation by 2026. The company also announced that it expects 55% of fulfillment center volumes to go through automated warehouses in the next three years, which it said would lower unit cost prices by 20%.
Shares of Walmart stock closed Wednesday up 1.7%.
by tyler | Apr 4, 2023 | CNN, investing
The British pound crashed to a record low last fall as investors rebelled against budget plans by former Prime Minister Liz Truss. Now, it’s enjoying a comeback.
Sterling hit its highest level against the US dollar in 10 months on Tuesday, topping $1.25 for the first time since June 2022. The pound, which has advanced about 3.3% versus the greenback since the start of 2023, is the best-performing currency among developed economies this year.
The UK currency has been boosted by indications the country’s economy is holding up better than expected. Activity is now thought to have expanded 0.1% in the final three months of last year, up from a previous estimate of no growth at all. Gross domestic product growth in January has been estimated at 0.3% after dropping 0.5% in December.
This resilience is bolstering expectations the Bank of England will maintain aggressive interest rate hikes despite concerns about the health of the global banking sector. Rising rates can boost the domestic currency because they help attract foreign investors searching for higher returns.
Inflation in the United Kingdom also jumped to an annual rate of 10.4% in February, underscoring the need for the Bank of England to maintain its tough approach.
The pound plunged close to $1.03 in September 2022 after the Truss government unveiled plans to boost borrowing while slashing taxes, unleashing panic in financial markets that fueled fears of a recession in the United Kingdom.
The International Monetary Fund predicted in January that the UK economy would contract by 0.6% this year, while all other advanced economies would grow, if only slightly.
“There was a lot of pessimism being priced into the pound,” said Francesco Pesole, a currency strategist at ING.
But the sharp pullback in energy prices and China’s reopening have provided some relief about the economic outlook since the start of the year.
“There was a big re-rating of growth expectations around Europe, and that impacted the UK,” Pesole said.
The euro has also been lifted by these dynamics, rising 2.3% against the US dollar in 2023. The pound’s rally has been sharper in large part because its 2022 declines were more severe, according to Pesole.
Both currencies have been aided by the greenback’s sharp drop from highs reached last September as recession fears have percolated in the United States.
A lack of clarity around the Federal Reserve’s next steps has also restrained the dollar in recent weeks. Investor speculation has increased that the Fed could pause or stop rate hikes due to concerns about the economy following the failure of Silicon Valley Bank last month.
Jordan Rochester, a currency strategist at Nomura, said he thinks the pound could rise to $1.30 this year and “potentially higher.” But he still sees risks given the uncertainty surrounding the Bank of England’s plans and how rate rises will feed back through the country’s economy. And Pesole cautioned that currency fluctuations are often overdone when markets are choppy, as they are now.
“In a volatile market environment, moves are exacerbated,” he said.
