Are We In The Goldilocks Zone?

For many investors in either bonds or equities we can safely say we are currently in the Goldilocks zone. Neither too hot nor too cold just right. How else can one explain the lack of volatility and how returns have been not too high nor too low but stable.

I was listening to the Indeed Chief Economist (large U.S. recruitment firm) who when asked about Friday’s jobs number talked about how jobs are affected by technology and whether Trump’s infrastructure plan would affect pricing of labour. The response was in a broad sense suggesting that the big infrastructure plans would not affect labour terribly much. It was also interesting to note that pareto for employment is about 160k and Friday’s number fell well short. It is also worth noting that in the 60’s when the economy was rapidly changing, wages growth was 6%, in the 90’s it was 4% and now that technology is not really revolutionising anything other than social media and services wages growth has stagnated to 2% growth. I think there is a message here. As I have been wailing on about productivity, marketing only helps to sell product it does not mean making the widget is cheaper or quicker. Too much effort has gone into posting feel good Facebook or Instagram selfies rather than the engineering. That is also a symptomatic problem with many CEO’s, money is going towards the image, paying dividends and doing share buy backs rather than growing business.

What we saw today in markets was a subdued reaction to the exclusion of Qatar in the Saud Peninsula on the pretext of being a disparate State. One could question Saudi support of extreme Madrassa’s which are a major problem and so too the support of Chechen fighters. Either way it looks more oil related and Qatar being a major exporter of gas is causing problems for the Saudi Aramco IPO. Qatar has $350bio in its wealth fund and is a major investor in Volkswagen, Deutsche, Barclays and Brookfield.

For markets, however everything is in the Goldilocks zone. With low volatility and reasonable earnings this quarter it is easy to determine the theoretical price of a security. This makes it easy to justify current equity prices which goes some way to explaining the short low volatility moves we are seeing today. The equity market fell with the Dow down 0.1%. The Stoxx also fell by 0.1%.

Bonds were marginally weaker on the day. And why not, after all the Fed is expected to raise rates next week by 0.25%. with the probability of a rate hike 93.6%. The 10-year U.S. treasury closed at 2.18% up 2 bp and the 2-year closed at 1.306% up 1 bp. Europe was slightly stronger on the day as the Europeans feel the ECB will continue with the bond purchases until the German election has finished. The 10-year bund closed at 0.28%, the OAT 10-year close at 0.71% and the 10-year gilt finished at 1.04%. Goldilocks, not too hot but not too cold.

On the day commodities were mixed. Copper and zinc led non-ferrous metals weaker. Copper fell 0.5%, tin was down 0.73% and zinc was down 1.4%. Hogs were down 1.89% (eat more bacon), soya beans a staple of the cattle industry was down 0.43%.

The Bloomberg Dollar Spot Index fell 0.2%, the Mexican peso rose 1.9% and the pound gained 0.2%.

For Trump, however things are heating up. Macron gave Trump a dose of his medicine by trolling him today. Macron had some fun on screen whilst playing Trumps speech to leave the climate Paris accord. What Macron did on the screen and in English refute point by point each of Trump’s points. Macron is proving that he wants to be a leader on the world stage and is having nothing of Trump’s isolationist views. Trump also has the problem of Comey testifying this week and his son in law appears to be in trouble again. Kushner’s development company is being asked to supply details of its EB5 visa details at a time when it requires $250 million to refund loans due. This comes in the light of Kushner’s sister promoting the fact that by investing in a Kushner project one could possibly rub shoulders with the President. Kushner is still being questioned about his possible links to Russia. Meanwhile U.S. banks are steering well clear according to reports. They are worried about links to Russia and the fallout with the EB5 visa issues. Notwithstanding the project 666 Park Avenue is struggling to meet investor demand as many units remain unsold.

Watch out for political consequences.

The Aussie Market Today

Aussie equities should be soft on the day but not overly weak. Bonds may drift a little. The markets are likely to be in sell off mode for the week however as traders prepare for the long weekend and sell non-core positions. Expect profit taking to determine this week’s moves.