This week the markets look to finish higher despite or perhaps due to a lack of news. This bucks the three-week slide we’ve recently experienced. With third quarter earnings announcements right around the corner, it isn’t a surprise that companies have gone quiet. Yet, investors took what was released, along with a dash of optimism over a potential trade deal, and conveyed that into a 1.25% move higher for the week. We’ll take it.
With little to go on, we turn to the recently released minutes of the September Federal Open Market Committee (FOMC) meeting. The report highlighted “increased risks to the economic expansion” but also noted the diverging views on what to do about it. Bore out by this week’s data releases, inflation still lags the Fed’s target and business optimism isn’t as high as hoped for. On the bright side, consumer sentiment easily beat consensus, and the consumer represents a larger part of the economy than the manufacturing sector. September’s core consumer price index, which excludes food and energy, ticked up only 0.10% M/M, slowing from the 0.30% rise in August. Additionally, the producer price index in September also disappointed, falling -0.30% M/M. But as mentioned above, the University of Michigan October consumer sentiment came in at 96, above the 92 expected and 93.2 reading in September.
Of note, interest rates in Europe and Japan have been negative for some time now. I mentioned this anomaly in the past but never touched on the ramifications. Up until recently, these negative rates were confined to sovereign debt, i.e. foreign government bonds. Unless you were an investor, a negative rate was a non-issue. Well, that all changed this week as German banks started passing negative rates to retail clients. Berliner Volksbank is applying a -0.50% rate on deposits of more than approx. $110,000. Deutsche Bank and Commerzbank, two of Germany’s largest banks, indicate they are also considering a similar move. However, Germany’s banks which have resisted passing on negative interest rates to retail clients have run out of ways to offset the effect on earnings. This is certainly a development worth paying attention to. While we’re not in the same predicament as Europe, it is a business practice that is unwelcoming to say the least.
You may have notice the price of gold has crept higher much of this year. Commodities are an asset class that aren’t typically part of one’s asset allocation. After all, who wants to own corn, pork bellies, or soybeans? But gold is altogether different. Unfortunately, had you owned gold from 1979 to 2001, you would have earned a return of approximately 22% versus 1,260% for the S&P 500. Factoring in inflation, you would have lost a little bit of buying power had you held gold over this time. Yet starting around 2004 and culminating with its peak in 2011, investors poured into gold, mostly due to fear consistent with the financial crisis in 2008. Things slowed down again until August 2018 when it once more started gaining steam.
Since the start of 2019, China has added more than 100 metric tons of gold to its reserves as the country continues to diversify its reserve assets away from the U.S. dollar. Russia has also been adding substantial quantities of bullion. In fact, central banks worldwide have snapped up more than 450 metric tons during the first eight months of 2019. For reference, it is estimated that since the start of gold mining, a total of 190,000 metric tons of gold have been extracted. All this to say, the most recent rise in the price of gold is not a function of retail investors buying a few gold coins here and there, but instead a result of large purchases by central banks around the world which still only amounts to roughly 0.20% of the gold in existence today.
In closing, let’s turn to the millennials once more. I know it seems like I am picking on them, but the stories are just so juicy I can’t help myself. And I do like millennials. Really, I do. But this week I must talk about the trend that is making a comeback. It seems millennials are bringing back the mustache. The lumberjack beard is on its way out and is being replaced with the mustache. Barbers from Brooklyn to London have observed this trend noting the classic mustachioed men are an inspiration. “Tom Selleck is the ultimate ‘stache-daddy’, forever” noted Russell Maxwell, a barber in Brooklyn. Things always seem to cycle back and what was old is new again. Prepare yourself for the onslaught of mustachioed men. Now you know.
Bruce J. Mason, MBA