by Franklin J. Parker, CFA
The Summary
- Last week’s labor market news was mixed. On the one hand, the US economy added only 559,000 jobs in May—over 100,000 less than expected. However, initial unemployment claims fell to below 400,000 for the first time since the pandemic began, which is a good sign. I think the take-away for investors is that there is LOTS of recovery to go before the economy is back to its pre-Covid levels, especially in the services sector.
- The big news last week was the Fed’s newly-adopted hawkish tone. At his press conference less than 30 days ago, Fed Chairman Powell reiterated that it was not even time to begin talking about talking about tapering (“tapering” = slowing down the creation of money to buy assets). Last week, San Francisco Fed President Daly acknowledged that “we are talking about talking about tapering.” The news was fairly well received by markets, which have been spooked by inflation. As I mentioned before a hawkish Fed doesn’t necessarily mean asset prices drop, other forces matter, too. Ideally the Fed can exit current policies with minimal asset-price damage, but it will be a tightrope to walk.
- Last week’s beginning-of-the-month data deluge means this week is considerably lighter in terms of new data. However, we do get the official inflation print on Thursday which could easily be market-moving. We also get weekly initial unemployment claims on Thursday.
The Details
Some big music deals have been in the news lately. Last week it was announced that Joel Little—songwriter for Taylor Swift, DJ Khalid, and Lorde—has sold his catalogue to Hipgnosis Song Fund. This, after last year’s mega-deal for Bob Dylan’s song catalogue, which sold for an unknown amount (but which was “in the 100s of millions”).
In a world with little-to-no yield, investors have had to get creative in their search for return on investment. The business of music royalties has changed in an era of subscription music streaming services, and music royalties offer investors a stream of cashflows that is different from the more traditional bond structure. Music royalties tend to decay—that is, an artist’s music tends to have a shelf-life as people move on to new artists—but there are industry metrics to help investors adjust valuations for this fact.
Ironically, however, though music royalties may start as an asset class that is unrelated to more traditional risks, they are likely to become ever-more subject to these risks (like interest rate moves, or credit quality) as the asset class becomes “financialized.” Investors face opportunity costs, after all, and if a high-quality bond yields more than a music portfolio, investors will sell down their music portfolio to buy the bond. This forces prices in the music portfolio to move in response to the rest of the financial market.
My point is this. Though our current financial market is replete with innumerable different types of investments—and more are created every day—there are, in the end, only a handful of factors driving portfolio risk. It is those risk factors which drive return, and your decision as to which investments you use to gain risk exposure is secondary to getting the balance of risk factors correct.
Diversification is more complicated than just picking lots of investments!
Chart of the Week
Though mostly a holdout from a bygone era, the Taylor rule has long been considered the theoretical target for the Federal Reserve’s interest rate policy. In general, the Fed’s funds rate more-or-less follows the Taylor rule, though often the Fed will ignore it for a while. With the economic recovery picking up steam and inflation beginning to heat up (at least for now), the theoretical target rate is beginning to tick up. The Fed will likely ignore this move for now, but as the differential between the “should-be” rate and the actual rate increases, so too will pressure on the Fed to push interest rates higher.
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