Financial and Economic News: March 13, 2024

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Government Funding Fiasco Averted… For Now

First up, the US Congress approved a $460 billion funding package over the weekend, narrowly averting a government shutdown just before the deadline. This deal allocates spending until September for some federal agencies, with the rest facing a March 23 cutoff. Despite many disagreements over spending priorities, the Senate passed the bill with bipartisan support, following earlier approval in the House.  Without getting too deep into the nitty-gritty politics of the deal, Democrats resisted demands for several conservative policy changes, while Republicans managed to include provisions such as making it easier for veterans to buy guns. So for you folks at home, this means continued functioning of essential government services without interruption… at least until September, when we get to do this all over again right before the election. And although the broader global economy largely anticipated such compromises, the deal reflects that there CAN still be bipartisan cooperation in a divided government, and that progress can still be achieved for the good of the country. How are we going to cover this additional funding….we’ll you probably guessed it–higher future taxes and more printing of money, which only results in more inflation.

Biden Unveils Bold Budget Agenda

Next up, President Joe Biden presented an ambitious $7.3 trillion budget proposal for fiscal year 2025, outlining his strategic vision for strengthening government services and providing tax relief to middle-income earners. This proposal, which builds on ideas he mentioned in his State of the Union address last week, is significant for its attempt to balance social spending with increased taxation on the wealthy and corporations. Biden's plan introduces various initiatives, including tax credits for homeowners and subsidies for childcare, while also proposing tax code revisions to raise corporate taxes and establish a minimum tax rate for billionaires and large companies. Essentially, Biden's budget aims to address pressing societal needs while navigating political hurdles and fiscal constraints. And while some people may like this proposal, it’s very unlikely that it will become a reality, due to a divided Congress and the nature of election year politics. At the same time, it’s an interesting outline for what we could expect if Biden is re-elected for another term. 

Wall Street Vexed by Tech Valuation

Meanwhile in the stock market, Wall Street strategists at JPMorgan Chase and Goldman Sachs are dismissing concerns of a bubble in tech. A JPMorgan rep noted that the "Magnificent Seven" tech giants (which includes companies like Apple and Microsoft) are trading at lower valuations compared to the S&P 500 than in previous years due to robust earnings, suggesting they may withstand profit disappointments better than traditional cyclicals. Echoing this, Goldman Sachs highlighted that despite the market's concentration being at a historic high, top stocks are trading at lower valuations than during the tech bubble peak. So what does this mean? First and foremost, these trends should reassure investors about the sustainability of the rally in tech giants and its potential resilience to ongoing market fluctuations. At the same time, recent divergences in the performance of these stocks, such as Nvidia's record highs versus Apple's technical correction, highlight the fact that there is still market volatility and even if you think you’ve found a winning stock, there is always a chance that you could lose money in the market. Remember: never invest what you can’t afford to lose.

Wall Street Bets on Boring

Staying on Wall Street, investors are increasingly favoring short-volatility bets, shifting their focus from high-flying tech stocks to strategies centered around market calm. Billions are being funneled into Exchange-Traded Funds (ETFs) that sell options on stocks or indexes, similar to the short-volatility trades that led to a stock market plunge in early 2018 – but now at a larger scale and in different forms. These short-volatility trades promise reliable profits during stable markets, yet concerns are mounting about their potential to suppress stock swings and fuel a feedback loop of bets on market calm. Here’s the thing though: Although income ETFs that sell options while holding stocks have structural differences that can help reduce broader market contagion risks, the increasing popularity of short-volatility trades, which involve complex derivatives like the dispersion trade, is causing concerns about the stability of the market. I know that’s a lot of technical jargon to throw at you on a Wednesday, so let me put it this way. People are making money by betting against the VIX (market volatility index), because the market has been relatively strong and stable. And while current conditions are favoring low volatility, what goes down must eventually come up. As a result, any unexpected market shock could trigger a severe reaction due to prolonged volatility suppression, potentially disrupting the stock market's steady climb and compounding losses for investors in these short-volatility bets. So while there could be a lot to gain, be careful when making a move like this, because there’s always a possibility of losing a lot too.

Gold Glitters Amidst Inflation Uncertainty

And in other investing news, gold prices remained relatively steady this week, near record highs following a nearly 5% surge last week driven by a weakening US dollar. The bullion's eight-day rally saw a slight dip following Tuesday's consumer price index release (which we’ll get to later), as investors saw no indications of Federal Reserve interest rate adjustments coming any time soon. Despite Chair Jerome Powell's previous comments emphasizing the need for more evidence of inflation nearing the 2% target before considering rate cuts, gold prices had spiked in March, surprising investors. That recent surge was supported by US economic data showing an increase in unemployment, prompting a decline in the dollar and Treasury yields. However, the hotter-than-expected inflation reading may now slow any further gains in gold, which thrives in a low-rate environment. Alongside gold, silver, platinum, and palladium prices also climbed. Looking at the big picture, this just highlights the fact that there are lots of avenues out there for investing your money and building your financial future, even during periods of inflation or other economic challenges. Always be on the lookout for those new opportunities!

Boeing Experiencing Heavy Turbulence

Meanwhile, Boeing is continuing to grapple with its ongoing crisis as its stock has now plunged over 25% this year and hit a 5 month low. All this comes amid a number of eyebrow-raising scandals, including a Justice Department criminal investigation, multiple safety issues during recent flights, delivery delays with their new planes, and the concerning news that a whistleblower against the company has turned up dead. Regulatory bodies such as the FAA and NTSB are involved in investigating a recent 737 Max incident (the one where a door came off during flight) which has sparked concerns about Boeing's safety practices and regulatory compliance. The company's alleged failure to fully cooperate with investigations has also strained its relationship with regulators, leading to further scrutiny and legal action. So looking at the bigger picture, this crisis may heighten concerns about the safety of Boeing aircraft and impact consumer confidence in air travel in general. Globally, Boeing's stock decline may affect investor sentiment and disrupt supply chains within the aviation industry, while regulatory actions and legal proceedings could have lasting repercussions on the company's reputation and financial stability. Let’s be honest: this situation is only just starting, and the next few months (if not years) are probably going to be pretty challenging for this company. You can be sure that we’ll follow this story and all its revelations closely, to see if Boeing can recover from this nosedive.

Bitcoin Bounce Creates Thousands of Millionaires

Over in the world of crypto, Bitcoin's unprecedented rally is creating approximately 1,500 new "millionaire wallets" daily, according to Kaiko Research, as investors capitalize on the soaring value of the currency. These wallets, representing digital addresses on the Bitcoin blockchain, store cryptocurrency, but since they are anonymous, it makes identifying their owners a challenge. Despite Bitcoin's 70% surge this year, the pace of new millionaire wallets is slower compared to the 2021 bull-market run, peaking at 1,691 on March 1. This deceleration is likely being caused by a few factors, including a delayed influx of fresh capital, profit-taking by large investors, and a shift towards storing holdings with custodians instead of personal wallets. Kaiko Research suggests that caution among investors may also be influencing this trend, as they await confirmation of Bitcoin's sustained growth before making any further investment. So looking at the bigger picture, this Bitcoin surge could potentially create many more cryptocurrency millionaires, while impacting investor sentiment and the broader dynamics of the crypto market.

IPO Reveals Reddit Riches

Next up, Reddit and its investors are pursuing an initial public offering (IPO) to raise up to $748 million, with 22 million shares priced between $31 and $34 each, potentially marking one of the year's largest offerings. The journey to going public has seen several shifts in the company’s valuation, with Reddit emphasizing throughout the process that its greatest strength is its user base – reported at 73.1 million daily active unique visitors in Q4 2023. Led by major financial institutions including Morgan Stanley and Goldman Sachs, the IPO aims to provide liquidity to existing shareholders and fuel future plans. CEO Steven Huffman highlights advertising as a primary revenue source and Reddit's venture into AI licensing as another exciting avenue for growth. Huffman, holding 3.5% voting power, and major shareholders like FMR and Tencent are pivotal in the company's trajectory. So considering the strength of social media and tech stocks, investing in the Reddit IPO could create an exciting opportunity. Don’t take my word for it though, I’m just some guy on the Internet (Ha!) As always, do your research and thorough due diligence before making ANY investments.

Google Billionaire Seeks ESG Edge

And speaking of big investments, Google co-founder Sergey Brin has made a big one in hiring Rachel Teo to run his family office, Bayshore Global Management. Teo, who is the former head of sustainability at Singapore's sovereign wealth fund GIC Pte, will now oversee green investments at Bayshore, reflecting the increasing importance of environmental, social, and governance (ESG) factors in investment decisions. Her appointment underscores Singapore's emergence as a hub for green investments, supported by government initiatives such as tax incentives and carbon trading markets. The move also signals a broader trend of family offices investing in ESG-focused deals, leveraging their capital and resilience to political pressure. At first glance, the investing decisions of a rich guy like Sergey Brin might not seem important to regular folks, because they usually have no material impact on our lives. But in this particular case, it may lead to more sustainable investment options and contribute to addressing environmental and social issues. And on a global scale, it could reshape investment strategies and influence corporate behavior, contributing to sustainability efforts and addressing climate change. For Singapore, its positioning as a hub for green investments could enhance its economy and reputation in the global financial landscape.

Inflation Sees February Flare-Up

Finally, we learned Tuesday afternoon that US core inflation exceeded expectations for a second consecutive month in February, driven by price increases in used cars, air travel, and clothing. The core consumer price index (CPI), excluding food and energy costs, rose by 0.4% from January and 3.8% year-over-year, indicating persistent inflationary pressures remain in our economy. This reinforces the Federal Reserve's cautious stance on interest rate cuts, despite Chair Jerome Powell's suggestion that he is confident we are nearing levels for easing policy. Economists now anticipate the Fed maintaining interest rates steady for the time being, awaiting broader signs of a decline in inflation. The CPI report also underscores ongoing challenges in managing inflation, with shelter and gasoline contributing significantly to the overall monthly increase. But it’s not all bad news. Sustained wage growth continues to outpace inflation, providing some relief to everyday folks. In the long term though, persistent inflation may negatively impact purchasing power, particularly if wage growth fails to keep pace.