Stocktake: Unhappy Trump continues to bash the Fed

Donald Trump’s desire for interest rate cuts is clearly shared by investors. Markets now expect three rate cuts in 2019, a prospect which has helped drive the S&P 500 within touching distance of fresh all-time highs after beginning June with its biggest weekly gain of 2019. Nevertheless, Trump isn’t happy.

"They certainly didn't listen to me because they made a big mistake" in raising rates too fast in 2018, Trump told CNBC last week. Trump would prefer if the US was more like China, saying President Xi Jinping was effectively the head of its central bank and "can do whatever he wants".

The people on the Fed’s board, he complained, are “not my people”. There was more Fed-bashing the following day, Trump tweeting about “ridiculous quantitative tightening!” and how the Fed “don’t have a clue!” The irony is Trump’s demands for lower rates potentially reduces their realisation, with many worried the Fed may not cut rates when it should in an attempt to demonstrate its independence.

Now, the Fed has done nothing to encourage that perception, with chairman Jerome Powell steering clear of the political debate and insisting earlier this year that it is "never going to take political considerations into account or discuss them as part of our work".

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Doubtless, if the Fed does go into rate-cutting mode, Trump will be quick to take the credit and some critics will charge that the Fed has allowed itself to be bullied by the president. Still, the Fed should do what the Fed should do; as a Washington Post editorial last week argued, the best way the Fed can demonstrate its independence is to behave as if it doesn’t care about it.

Beyond Meat is beyond bubbly

Markets are pretty efficient most of the time but things go a little loco every now and again. That’s certainly the case with Beyond Meat, a maker of plant-based meat alternatives which has soared more than 600 per cent since its initial public offering (IPO) in early May.

That briefly gave the money-losing company, which posted revenues of $40 million (€35.6 million) in the first quarter, a market capitalisation of over $10 billion (€8.9 billion). It's all very bubbly and is reminiscent of last year's craze for cannabis stock Tilray, which was briefly valued at $28 billion (€24.9 billion) after enjoying a 17-fold rise within two months of going public before going on to lose most of its value. Short sellers envisage a similar fate for Beyond Meat and have been betting against the stock en masse.

Shares lost a third of their value over a 24-hour period last week but, nevertheless, the shorts have lost a bundle thus far. Markets can stay irrational longer than you can stay solvent, as the old adage has it; a short squeeze could develop whereby shorts are forced to close their losing positions, driving the stock to even sillier levels.

Although speculators might dabble in the stock, analysts rightly reckon investors should steer clear – not one of the eight analysts covering Beyond Meat now rate it as a buy. However, nor does the stock have any sell ratings, analysts instead preferring labels like “hold”, “neutral” or “market outperform” – all euphemisms, a cynic might suggest, for “get out now!”.

Cautious investors flock to bonds

Stocks may be near all-time highs but investors continue to flock to bonds. According to a Sanford Bernstein note, stocks have seen outflows of $155 billion (€138.2 billion) this year while bonds have registered inflows of $182 billion (€162 billion) over the same period. That’s an extreme divergence, one not seen in 15 years, and it augurs well for stocks.

Bernstein examined previous instances where stock outflows relative to bond inflows were at least two standard deviations away from their average; a year later, stocks had gained at least 10 per cent in each instance. Today, conditions are even more extended – three standard deviations, to use the statistical lingo – so any kind of reversal would surely help the S&P 500 secure fresh all-time highs.

Woodford investors paying for underperformance

Embattled fund manager Neil Woodford has rejected calls by MPs and the UK financial regulator to scrap his fees after preventing investors from withdrawing their money from his underperforming fund. That was a poor PR move from Woodford, who, along with his chief executive Craig Newman, collected £36.5 million (€40.9 million) in the 2017-18 financial year – not bad, given the fund's lousy performance during that time. However, outrage over Woodford's compensation, and the fact his investors continue to be charged a reported £65,000 (€73,000) a day for the management of their frozen fund, misses the point.

Firstly, Woodford’s management fee of 0.65 per cent is actually quite low by industry standards. Secondly, this is simply the way the active fund industry works. It’s no secret – managers collect their hefty fees whether their funds do well or do poorly. Most do poorly, so investors end up paying for underperformance.

If you don’t like that prospect, then don’t invest in active funds: buy a cheap index tracker instead.