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Zero or Lower

The momentum continued this week with rumors of a trade breakthrough and a delay of new tariffs on Chinese goods.  In addition to what appears to be positive developments on the trade front, the Federal Reserve is up next week with the highly anticipated next round of interest rate cuts.  Given this backdrop, the markets look to continue the upward trend started a few weeks ago.

While data for the United States remains stable, that coming out of Europe shows weakness persisting. With this information in hand, the European Central Bank (ECB) announced this week it is further cutting its interest rate. While this is not unlike what is happening in the United States, what is different is that their deposit rate is now -0.50%. The outcome is that the $27.8 trillion of non-U.S. dollar investment grade global debt is collectively yielding just 0.11%. Of all global investment grade debt delivering any yield, 95% is from the United States. This will likely continue to put pressure on U.S. interest rates as foreign investors look abroad, specifically to the United States, for credit opportunities. Naturally, President Trump further reiterated his displeasure for his choice of Federal Reserve Chairman, Jerome Powell, and insists that the Federal Reserve should lower interest rates to zero or lower immediately

Last week I posed the question whether corporate debt is the next big bubble. Given the demand for a positive yield in investment grade paper, U.S. companies have been more than happy to oblige. The downside is that increasing levels of corporate debt could lead to credit downgrades. Well, not a week since I wrote about this, we learned that Moody’s credit rating agency has cut its rating on Ford to junk status citing concerns over the automaker’s balance sheet. The company no longer carries an investment grade credit rating as Moody’s cites weak earnings and cash generation as the company pursues a lengthy and costly restructuring. While Ford may be the most recent example of what I am talking about, I suspect it won’t be the only one or the last one in the years ahead.

In other news, the U.K. remains a bit of a basket case with Brexit still up in the air. A lot of political maneuvering is happening between the various political parties without a clear idea of an endgame. The British courts have ruled Boris Johnson’s shutdown of parliament as unconstitutional, yet the ambiguity of the situation remains intact. For now, it appears the British government is gridlocked and potentially sidelined until October 15th, just two weeks before the Brexit deadline. 

As for company news, there was quite a bit this week. Apple held an event during which it introduced its latest iPhones and an updated Apple Watch. There weren’t any huge innovations, unless you count the addition of a new ultra wide-angle lens. 5G capability was absent this year and could diminish some consumers desire to upgrade in favor of waiting until next year when this will undoubtedly be available. Toyota reported it is testing a solar-powered Prius that was inspired by new ultra-thin solar panels developed for satellites. The electricity from the panels goes directly to the drive battery, so the Prius can charge while moving or when parked. On a good day, the charge can be sufficient for up to 35 miles of travel. Closer to home in Cincinnati, we learned this week that Fifth Third Bank has been approved for a national charter. In his statement, CEO Joseph Otting said a national charter and associated regulatory framework would make it easier for the bank to successfully conduct business across the country. Implicit in that statement is “across the country.” It seems a nationwide expansion is in order.

 To close out this week let’s talk about traffic.  The kind of traffic that seems to grow with each passing year and clog our highways and major thoroughfares.  No matter how many lanes are built, it never seems to be enough.  In fact, it seems to invite more traffic.  This week I read an article about a Chinese company taking an interest in a German flying taxi start-up named Volocopter.  If anyone can pull this off it is the engineering of the Germans with the manufacturing prowess of the Chinese.  Maybe we’ve been looking at this wrong the whole time.  Instead of laying down more pavement, maybe we should be looking to the skies?  Volocopter looks to bring its VoloCity all-electric aircraft to commercial launch within the next three years.  Now you know.

Bruce Mason, MBA