Junk Bonds, The American Perspective on the Economy & Facebook Currency

We kick this week off with another crazy “this is reality now” article from The Wall Street Journal entitled “U.S. Junk Bonds With Negative Yields? Yes, Kind of.”


US Junk Bonds with Negative Yields? Yes, Kind Of

In today’s topsy-turvy markets, some investors are buying junk-rated corporate bonds that could lose them money even if their prices don’t decline...

This article resonated with me as I spend a lot of time looking for potential fixed income (bond) investments and have noticed an increase in this phenomenon over the last few months.

As of yet, the U.S. has managed to avoid negative interest rates in both government and corporate bonds. However, as the article points out, investors are lending to companies in situations where they can lose money if the bonds are called at a certain point in the bond’s life cycle.

I’ve noticed that some of the highest yielding short term junk bonds available, say a 5% yield to maturity for three years, also carry a negative yield to call. This means investors are knowingly risking a loss of principal for the hope of making 5% per annum on already risky debt. Crazy days in bond-land!

From there we move to an article/infographic from The Economist entitled “Americans are souring on the economy.”

Americans Souring on the Economy.png

In short, the percentage of Americans who think the economy is getting worse, not better, is at an all-time high for the Trump presidency.

Apart from the obvious political ramifications of this data, the perception of the economy’s health by the layperson is likely as important as its actual health (we talked about this “reflexivity” in a previous Beach Reading). As the media has trumpeted ad nauseam in the last few months, the U.S. consumer is the primary driver of economic growth at the moment. Should consumer confidence fade, they may tighten their wallets which would likely lead to a slowdown.

I would bet that the majority of this downturn in confidence is tariff-related. That’s good news because the tariffs could go away tomorrow with a tweet. I'm not sure just how much attention the average American is paying to the trade war, but I do think there's a widespread understanding that tariffs are a (hopefully temporary) drag on the economy. One could argue that the Trump administration’s biggest achievement has been to reignite economic and business confidence, which is apparently a fragile balancing act.

We finish this week with a look at Facebook’s proposed cryptocurrency, Libra. As Fed Chairman Jay Powell recently said, “It could be systemically important right away.”

We’ve watched the rise of cryptocurrencies like Bitcoin with a passing interest. We believe that, as Stan Druckenmiller recently said, Bitcoin is “a solution in search of a problem.” After all, most Americans don’t really suffer from a lack of effective payment options. Certain retailers might be sick of paying credit card fees to the big processing companies, but for the most part the system works well enough that most of us don’t pay any attention to it.

However, we DO see huge potential in the space within emerging market countries. I recently spoke with a Venezuelan friend who sends money home to his father weekly. He said his most recent transfer lost 50% of its value in the few days it took to reach his father’s hands due to the country’s hyperinflation and transfer fees! If that number is anywhere close to correct, any viable alternative would certainly be better. But Bitcoin’s own price instability and the difficulty of actually transacting in it (not just making transfers but payments themselves) renders it an imperfect substitute at best.

Enter Facebook Libra, which has rightfully been scrutinized by lawmakers. If successfully implemented, this “stablecoin,” which is based on the value of existing currencies, could enable people to make virtually free payments and remittances across international boundaries. If you’re like me this won’t change your life. But if you’re one of the tens or hundreds of millions of migrants who send money home to family regularly, this system could save thousands of dollars currently absorbed by companies like Western Union. It would also keep Facebook’s users glued to their ecosystem.

It will be interesting to see if this train leaves the station. If it does, there will be major financial ramifications and cement Facebook, for better or worse, as one of the most important institutions in the world.