by Franklin J. Parker, CFA
The Summary
- Of course, the big news last week was the Fed’s interest rate hike. Powel reiterated the point that the economy still needed to slow and the labor market weaken for the fight on inflation to be won. That, plus to his comment that September is a live meeting, seems to indicate that rates may yet go higher before they go lower.
There does appear to be strain building in the system. Employment remains positive, but if the Fed is aiming to reduce employment in the economy, there is not much left to support growth. Manufacturing is in contraction, services are at about breakeven, companies are making about 7% less money than last year, the index of leading economic indicators has been in contraction for a year and a half, and the yield curve is inverted (a classic recession signal). When we step back and look at the full economic picture, employment is the last domino to fall — and it is a domino the Fed is trying to make fall. - This is a busy week for earnings, with some big names reporting including Caterpillar, Starbucks, Pfizer, Occidental Petroleum, Apple, and Amazon. Overall, S&P 500 companies are expected to see a decline in earnings of about 7.5% from this time last year, making this the third quarter in a row of declining earnings. Interestingly, companies who have the majority of sales outside the US are seeing earnings declines of about 21%. We see important data this week including employment figures for last month, job openings, factory orders, and services/manufacturing PMIs.
- Another important development occurred last week, though it is a bit technical. The central bank of Japan ended its long-standing program of strictly controlling its yield curve. Essentially, the BOJ was buying government bonds to keep rates at or below 0%. They announced an end to that program last week, allowing rates to now float up to 1%. For over a decade now, investors have ridden a so-called “carry trade,” wherein they borrow (at practically 0%) in Japanese Yen and use the cash to buy US or European stocks, bonds, and commodities. By borrowing at a low rate and investing at a higher rate, investors could pocket the difference. While that trade has not quite ended, it has certainly come under threat, and we saw western markets react strongly at the announcement. It is certainly something worth watching.
The Details
Should you buy a lottery ticket? The answer is more complicated than you think.
I fielded an answer to a question on Quora.com once: why don’t billionaires buy every possible lottery ticket combination and thereby guarantee they’d win the lottery? The answer to which is very simple: because the payout for the lottery is about 40% less than what gets made selling tickets. You’d be guaranteed to lose 40% of your “investment.”
But what about you? Should you buy (a few) lottery tickets?
Traditional economic theory tells us that gambling is always irrational — you should never buy lottery tickets. Any game where the odds are against you and the expected return on your investment is negative, you should avoid playing.
However…
New lines of thinking are giving us better models of what it is people are trying to do in the real world. In these new lines of thinking, we find something very interesting. Most people have many different goals they’d like to achieve, and each of those goals has a different priority. Retirement might be a very high priority, while buying a sailboat might be much lower. We fund those goals from high priority to low priority, so our low-priority goals tend to get a smaller chunk of our money.
Lot’s of people have aspirational goals, too. Things that they’d dream of achieving, but if those goals don’t come to fruition they’d lose no sleep over it.
And for those goals, it may be rational to gamble, though it is certainly not rational to gamble everything, nor all the time. While lottery tickets may not be the best vehicle for that, this could well explain why people buy meme-stocks, or Bitcoin.
They key is to ensure that your important objectives are funded with a high level of confidence. That, of course, involves cohesive financial planning.
Assuming that is true, then the next time you think about buying a lottery ticket or two… maybe go ahead and do it.
Chart of the Week
This week’s chart is an economic indicator I follow loosely. Bankruptcy filings are an important thing to check in on every now and again. While the absolute number of filings does not matter as much (though there is a whole story about why they are at all-time lows), the direction is what we watch for. Typically, bankruptcies start to tick upward as a recession approaches (or sets in). And, as you can see, bankruptcies have been moving upward in a meaningful way over the last 12 months.
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