The Market is Currently Dodging the Shoals

October 3, 2016

The markets finished the quarter on an up-note, with domestic equities advancing 20bps for the week and ~3% for the quarter. Deutsche Bank concerns [a proposed $14B fine threatened its balance sheet] produced a 6.7% decline on Thursday, but CEO assurances combined with a reduction of the fine to ~$5.5B produced a substantial Friday relief rally.

OPEC also made news last week by announcing a reduction in its output, which boosted crude prices by an additional 8% over three days [prices are up 30% YTD after briefly falling below $30 in February {a 13-yr low}]. However, remember that ~0.5M bbl/day is not that big, OPEC often fails to comply with its promised production cuts, and that OPEC is no longer the marginal producer [and its MS is down to 42%].

Finally, although it gives us no pleasure to throw cold water on a popular, bipartisan campaign promise, Phil Gramm’s warning about “The Subprime Superhighway” is a needed dose of reality. He points out that most developed economies are fully leveraged [debt at 85% to 100% of GDP] and that the rate of return on public infrastructure spending is much lower than previously promised. In the past, politicians have raided private savings [recall the Community Reinvestment Act] to fulfill their grandiose promises.  The EU is starting to repeat this wrong-headed funding approach, and the US seems to be not far behind. Let’s hope that cooler heads prevail.

“No really great man ever thought himself so”William Hazlitt