More Fed Changes Over The Weekend
Over the weekend Bill Dudley announced his resignation increasing the turnover at the Fed which was already about to be large with all the empty positions from previous resignations. The Fed officials recognize that President Trump is cleaning house which appears to be why they are resigning. There isn’t a clear direction the Fed is headed in because if the President puts Warsh or Taylor in one of the vacancies, he has added a dove in Powell, a moderate in Quarles, and a hawk in Warsh/Taylor. There are fresh faces, but the monetary policy shouldn’t change much. The one area which will change is regulation as all of President Trump’s picks want to eliminate the unnecessary/burdensome ones.
An analogy would be trimming the excess fat that was created during the post-recession era where regulations were added to prevent the next crisis. We won’t know the context of which the Fed was overhauled in because we don’t know what the economy will do in 2018. If 2018 is a lot like 2017, we probably won’t notice the changes. The Fed is currently on autopilot. However, added inflation or volatility in markets can provoke action which will test the new Fed. I can’t add any more commentary than that until we see who the vice chair will be. That choice will be made in the next few weeks.
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Records And No Volatility
Monday was a typical day on Wall Street as the 3 major indexes barely moved and all hit records. The VIX went up 2.84% but stayed below 10 showing how calm the market is. The chart below is evidence of how unusually amazing this market has been. As you can see, there have been 63 new all-time highs in the Nasdaq this year, marking a new record. It’s quite something to see the Nasdaq hit more records than any year in the late 1990s when the tech bubble was in its heyday. The Dow is in the same situation as the Dow has hit 57 record highs this year. That’s the third most record highs going all the way back until 1910 (the most is 69). There is a lot of excitement on Wall Street not just because stocks never go down, but also because deal-making is back. Broadcom is attempting to buy Qualcomm for $103 billion. The low volatility makes the situation ripe for deals. There tends to be more deals at the peak of cycles which isn’t a great signal.
Yield Curve Flattens
Another bad signal is the 10 year minus the 2-year bond yield fell below 70 basis points. The yield curve is a sober timepiece which cuts through euphoric measures such as high ISM PMI reports to get to the truth of where the economy is in the business cycle. Some bears have discussed the idea that the yield curve doesn’t need to invert to signal a recession because the Fed manipulated the long bond with QE and interest rates are so low that rates can’t invert. I disagree with that thesis. Interest rates will probably go up prior to the next recession as inflation grows stronger. Also, the yield curve has been correct in not predicting a recession by being normal for the past 8 years since the last one. I wouldn’t go against this indicator until it makes a mistake. As of today, it implies a recession is coming in about 3 years. If the tide turns and the economy fades, it will flatten quickly, pushing up the timetable for a recession. The yield curve inverts because the bond market anticipates rate cuts. Since the Fed will hike rates in 2018 and GDP growth has been +3% for the past 2 quarters, it wouldn’t make sense for an inversion to occur now.
C&I Lending Conditions Are Very Loose
One of the reasons why I know it’s too early to start looking at the yield curve for signs of an impending recession is because the credit markets are incredibly loose. As you can see in the chart below, the senior loan officer survey shows that more lenders are loosening standards than tightening them. The biggest problem appears to be the demand for loans. It’s also important to point out that the same conditions are in place for small, large, and medium sized firms. It’s weird to see conditions easing while the Fed unwinds its balance sheet and raises rates. It might be because real interest rates are still negative or because global central bank balance sheets are still expanding rapidly. The pace will start to slow significantly in January when the ECB’s taper starts.
Apple iPhone X Phones Selling Like Hotcakes
On an anecdotal note, my sister tried to get an iPhone X from T-Mobile on Monday. The wait time to get the new device is 4-6 weeks. It’s clear that the customers who didn’t buy the iPhone 8 were waiting for the iPhone X. The $1,000 price point didn’t dismay customers as there were lines outside of the stores like usual iPhone launches. The lack of lines outside the stores for the iPhone 8 was actually good news as the iPhone X provides more profits than the iPhone 8. AAPL stock is now at $174.25 with a $900 billion market cap poised to have a great holiday season.
Looking at actual analysis, the iPhone X did great on the first weekend when it went on sale. The chart below looks at usage as a percentage of the of iOS devices. Usage indicates iPhone X sales were better than iPhone 8 sales. If you add up the two launches this fall, the results total the most since the iPhone 6/6 Plus. This doesn’t take into account the fact that the iOS user base has grown throughout the years, meaning the percentages are equivalent to higher numbers as the years go on. The projection for iPhone 8/8 Plus and iPhone X is for 12.8 million devices sold in the first weekend. There were only 9.9 million expected to be sold in 2014 for the iPhone 6/6 Plus (+10 million were sold according to Apple). To be clear, the first weekend is important because it’s the signal of how demand will be throughout the life cycle of the product. As this point, the biggest challenge Apple has is keeping up with demand. The company had a brilliant strategy to give the phones out to tech reviewers a few days before the device went on sale to generate excitement about the iPhone X.
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