Stefano Sciacca

Fri, Oct 11

Expensive Stocks, Fed Hopes, Over-Hyped Trade Deals…And Middle-Class Is Fading Away

Since the last global sell-off of last December, the markets have strengthened ignoring weakening soft (i.e. Manufacturing Surveys, Industrial Production, PPI, Consumer Sentiment) and hard (GDP, Employment) data, deteriorating earnings (and an increased amount of companies profit-warning/lowering FY guidance), less strong-than-expected revenue growth, whilst Fed “hopes” and rumours on a “partial” US-China trade deal are feeding already historically high valuations (S&P 500 is again challenging the 3000 level).


Jerome Powell during one of his recent two-in-two days Minutes has announced a further Central Bank Balance Sheet expansion by acquiring US corporate bonds on a regular basis. I want to emphasize that the Fed Chair on purpose claimed that this won’t be a Quantitative Easing n.4, as it is by definition different from the asset repurchase programme deployed after the financial crisis.



Now, no matter the way you put it or how you want to call it, the truth is that the Fed is again trying to boost the economy by injecting fresh money (or liquidity) into the system, devaluating the dollar and hence lifting-up the stock market. In fact, there is practically no other way to limit/decrease the amount of fresh low-yielding and less compelling (from a rational investor point of view) freshly issued corporate bonds that are enriching managers and falsely pushing up big corporates’ performance.


At the time of writing, the Danske Bank of Denmark is in the process of issuing the first negative 10-year fixed-rate mortgage, following the German Finance Ministry's complain on historical lack of the demand for the recently issued 30-year Zero-Coupon Bonds. In the meantime, the US and Sweden are contemplating launching half and full-century government bonds (already tested by the Austrian Finance Ministry).


In terms of social mobility, the outcome of such a globally intense expansionary interest rate landscape has led the top 1% (defined as ownership class as they own on average more than 60% of their asset in public and private equity) to benefit the most from QE, while the bottom 50% of households have seen their net worth lowering by 8.6% since Q1 2000. 



The tables below presented show how the top percentile of the population (wealth-wise) has grown their nominal wealth by 165% in 19 years, while the bottom 50th percentile has gone down by 8.6%. If we consider the distribution of nominal wealth, the top 1% now control circa 31% of the global wealth in the US, while the bottom 50% only own 1.3% of it. As you can see clearly on the chart of the week section, the main wealth boosters have been the public and private equity rally ($7.2 tn and $7.9 tn, respectively) over the period in question. On the other hand, the main wealth growth deterrent for the lower-income households has been increased debt level (home mortgages, consumer credit).


Most importantly, it is worth mentioning that given the low-interest rate environment, the big banks are experiencing a profit tightening period which is leading them to strictly select the credit counterparties. The reason is simple: they cannot afford defaults anymore. Hence, they will release credit facilities to the most creditworthy individuals and companies (richest and biggest, respectively), while the middle-class will continue to struggle save-up as rents skyrocket and the small-sized-companies will not easily find the funds required to efficiently (from a financial perspective) finance new projects and organic growth.



Next week our macro spotlight will be on?



  • Balance of trade - China
  • Industrial Production - China
  • Industrial Production - Eurozone


  • Inflation Rate - China
  • Industrial Production - Japan
  • Unemployment Rate - UK
  • ZEW Economic Sentiment - Germany ZEW
  • NY Empire State Manufacturing Index


  • Inflation Rate - UK
  • PPI - UK
  • Balance of Trade - Eurozone
  • Inflation Rate - Canada
  • Retail Sales - US
  • Business Inventories - US


  • Unemployment Rate – Australia
  • Retail Sales – UK
  • Housing Starts - US
  • Continuing Jobless Claims – US
  • Industrial Production – US
  • Manufacturing Production – US
  • GDP - RUS


  • Inflation Rate - Japan
  • GDP - China
  • Auto Production - China


Chart of the week


Fact of the week


A strong sales update from LVMH (LVMH.PA) boosted stocks across the luxury goods sector on Thursday.


Quote of the week


 “I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis…In no sense, is this QE” 


Jerome Powell, Federal Reserve Chairman on his last minutes last week