The Japanese Takeover
The Treasury Department released the latest foreign holdings data of US debt. The main headline was that Japan widened its lead over China as the top holder of Treasurys in July. Tokyo added roughly $8 billion to $1.13 trillion, while Beijing shed $2.2 billion to $1.11 trillion. This is the fourth consecutive month that Japan has contributed to its portfolio, and it is the fifth straight month that China has decreased its investment in American bonds.
But there were two other interesting findings in the report that are not getting too much attention.
The first is that the rest of the countries in the top five – the UK, Brazil, and Ireland – shed their holdings. The second is that, despite the selloff, total foreign holdings of US debt have risen from the same time a year ago. In July 2018, the total was $6.254 trillion. In July 2019, it was $6.63 trillion.
So, what is happening? That’s easy to answer: The rest of the world is in shambles right now.
While the US government’s fiscal outlook is bleak, thanks to trillion-dollar deficits and skyrocketing national debt, elsewhere on the planet doesn’t look any better. Europe is a lost cause, China is reeling from the trade war, Japan is facing a recession, Canada has a leader draped in blackface and brownface, and everything is just hopeless. Because the US has been the top safe-haven asset for decades, everyone else is turning to the devil they know as opposed to the devil they don’t and seeking refuge in the arms of Uncle Sam.
IPOs Bleeding Red
It is a bloodbath out there in the initial public offering (IPO) market. It is so bad that it is reminiscent of 1999 – and you never go full 1999! It turns out that Uber, Lyft, Slack, and WeWork are not saving us from the volatility of the stock market. Bubbles are how we do this, baby.
According to analysis from Goldman Sachs, companies going public in 2019 are projected to produce the lowest profits of any year since the dot-com bubble. The report found that less than one-quarter (24%) of firms that have filed IPOs this year will record positive net incomes, a 20-year low. In 1999, that number was 28%, which plunged to 21% a year later.
The titan of Wall Street also noted that the IPO total has reached a multi-decade high as more than 75 businesses have taken the IPO route, raising $31 billion. This is the second-highest level since 1995.
Liberty Nation reported in October 2018 that most 2018 IPOs lost money. What the heck is going on? Where’s the beef? Or, in the case of Beyond Meat, where’s the plant-based beef substitute? The meat of the story can be found inside the Eccles Building.
As the Austrian business cycle theory (ABCT) suggests, one of the chief causes of a bubble is the creation of credit, which is cheap these days, thanks to the aggressive pumping of the printing press. Since many of the IPOs are tech-related, it is safe to say that the abundance of credit is flowing into the technology industry. With the Federal Reserve cutting interest rates again, it is also safe to bet that the bubble can balloon even further, which means we will read the same analysis in 2020: This year’s IPO class is the least profitable since the dot-com bubble.
A Middle-Class Act
For all the talk of the middle class dying a slow death during the latest 2020 Democratic debates, there is very little evidence to support this claim. It seems that feelings are facts and the bigger the lie the more people will believe it. Whether you are calculating purchasing power or incomes, America’s middle class is thriving – and moving up.
The US Census Bureau recently released its annual income report of the American people. The findings highlighted how well the population is doing, in spite of the foolishness of the government and the Federal Reserve. Here is what the study told us:
- 30.4% of US households earned $100,000 or more (a record high).
- 41.7% earned between $35,000 and $100,000.
- 27.9% made $35,000 or less (a record low).
What makes this data extraordinary is when you examine the numbers on a long-term path. In 1968, just 9.7% of households earned a six-figure income, half of the country reported $35,000 to $100,000 in income, and more than one-third of households were low-income. This means that households earning $100,000 or more tripled in the last 50 years.
Mark Perry of the American Enterprise Institute wrote:
“Think about it for a moment and let it sink in — in 2018 nearly one out of three (and more than 39 million) US households had annual incomes of $100,000 or more. And the share of American households with that level of income has increased by more than three times since 1967! Then compare that picture of a prosperous America with millions of middle-class households moving up into higher income groups to the narratives we hear all the time that the American middle class is: losing ground, falling behind, collapsing, stagnating, disappearing, fill in the blank ___________.”
Despite complaints about globalization and automation killing jobs, the American people are really living the American Dream.
Roller Coaster Ride
The US economy and markets are in an interesting place right now. Main Street might be doing pretty well for itself, despite a few hiccups, mainly the pavement made out of debt. But Wall Street is offering admission to one heck of a roller coaster ride. IPOs are unprofitable, Treasurys are one of the few attractive bonds in the bubbling market right now, and the Federal Reserve is set to drop money into the equities arena. If you are sitting on the sidelines, bring the popcorn – and Pepto Bismol. If you have skin in the game, you will have intense perspiration and your fingernails will be ravaged.