Blackrock Checked “No” on 93% of Environmental and Social Proxy Votes

Blackrock’s Support for ESG May Have Been Unsustainable

Blackrock, a firm with a reputation for strongly supporting ESG resolutions, having voted yes on 47% of them in 2020, voted down 93% in the past year. The company provided the reasons for shunning 371 proposals out of 399 in its annual Stewardship Report released on August 23rd. With $9.4 trillion under management, investors pay attention to the investment manager. This gives it the power, whether it likes it or not, to create trends as others follow its lead. Should the company’s adjusted position on ESG be taken as something others want to mimic? The reasons given leave that in question.

BlackRock is the world’s largest asset manager. As such, the funds it manages own significant amounts of shares of a broad array of public companies. The Blackrock funds vote on important matters related to the underlying companies if a corporate resolution requires a shareholder vote. Think of the ETF or mutual fund as a trust, and the fund manager, Blackrock, gets to vote on behalf of the assets in the trust. Whereas if an investor owns individual shares of a company, they get to decide and vote themselves, either at a board meeting or more likely, through a proxy statement. Certainly, the amount of control over the decisions of corporations worldwide given to an asset manager of this size is immense.

Each year, the company files a report on its voting during the proxy season. It broke records by voting down 91% of all shareholder proposals and against 93% of those focused on environmental and social issues during the 2023 proxy year. The 7% of ESG proposals that BlackRock supported this year is down sharply from 2022, when BlackRock’s investment stewardship team supported 24% of such proposals, and from 2021, when it supported 47%.

BlackRock’s Investment Stewardship team, makes the voting decisions on both management and shareholder proposals on behalf of BlackRock’s clients. It said the large number of “NO” votes this year is partly related to a huge influx of shareholder proposals. These were described as “poor quality” by the BIS team, either because they were “lacking economic merit,” were “overly prescriptive” and “sought to micromanage a company’s strategy,” or were simply redundant, asking a company to do something it had already done, the Stewardship Report said.

BlackRock’s support for management proposals (not shareholder proposals), which accounted for more than 99% of the roughly 172,000 proposals voted on by BIS, remained high at 88%.

BlackRock’s trend of voting against shareholder proposals is largely in line with other fund managers. The median shareholder support for environmental and social proposals in the U.S. fell sharply from 25% in 2022 to just 15% in the 2023 proxy year.

The firm has backed away from ESG as a term if not a concept. The most recent CEO newsletter did not include the acronym at all, and during a June interview, CEO Larry Fink said he does not use the term, he gave this reason, “I’m not blaming one side or the other, but it has been totally weaponized,” Mr. Fink said. “In my last CEO letter, the phrase ESG was not uttered once, because it’s been unfortunately politicized and weaponized.” He now has a reluctance to have his firm associated with the term ESG after a wave of backlash from both sides of the political spectrum.

In December 2022, Florida’s chief financial officer announced that the state would pull $2 billion worth of assets managed by BlackRock, the largest such divestment by a state opposed to the asset manager’s environmental, social and corporate governance (ESG) policies. BlackRock also lost some of its business of oil rich Texas from its government pension funds because of its ESG policies. Louisiana and Missouri, have also taken steps to divest from BlackRock.

Although not specifically stated in the report, Blackrock fund managers still support the idea that good corporate citizenship could in turn, benefit shareholders. But they will no longer be out front as though ESG factors are the most important criteria. Earlier this month S&P Global Ratings decided it would not provide ESG ratings separate from its credit ratings. Instead, S&P will factor in all of the obligors’ business practices as it relates to risk of non-payment, and assign only a credit rating.

The term has become polarizing as differing political philosophies tend to stand together in support of ESG issues being taken into investment consideration, and other political leanings stand opposed to the not fully developed concept. This has hurt Blackrock.

Republican politicians have been probing Blackrock’s business dealings and asking conservative-leaning state pension funds to divest from the company, which they say has unfairly excluded the traditional energy sector.

On the other hand, environmental activists have lambasted Mr. Fink and his company for not doing enough to stop climate change, protesting in front of BlackRock’s headquarters and heckling senior executives at public speaking engagements. In June Blackrock began providing high-level security to protect Mr. Fink and others in management.

Take Away

When you put your money into most mutual funds, you give away the power that comes with voting on important matters to the underlying shares held by the trust of which you are a part owner. As mutual funds and ETFs have grown, more of the power to guide companies has been handed to the elite running asset management companies.

The growth in popularity in “sustainability” investing caused a rush from investors to these funds, which then needed to place assets in the limited number of companies in the segment. This caused a rise in the share prices of the companies and a rise in the popularity of the funds. Many investors were indifferent to ESG, but not indifferent to making money, they also jumped in. Companies quickly caught on and adjusted their logos to include leaves and the color green, altering some business practices.

While the leadership that Blackrock provides may signal the eventual demise of the term ESG, there has always been, and will always be an interest in putting your money where your heart is. The concept will live, but with Blackrock’s lead, the acronym may transform to something that is less political and less likely to cause protests outside of his home.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wallstreetmojo.com/shareholder-resolution/

https://www.pionline.com/esg/blackrock-ceo-larry-fink-says-he-no-longer-uses-term-esg

https://www.ft.com/content/06fb1b85-56ba-48cd-b6f6-75f8b8eee7e1

https://www.reuters.com/business/finance/blackrock-continues-lowering-support-environmental-social-proposals-2023-08-23/

https://www.blackrock.com/corporate/insights/investment-stewardship

No Suit, No Tie, No Problem – What Happens in Jackson Hole?

What to Expect Out of This Year’s Jackson Hole Symposium

Since 1978, the Federal Reserve Bank of Kansas City has sponsored an annual event to discuss an important economic issue facing the U.S. and world economies. From 1982, the symposium has been hosted at the Jackson Lake Lodge at Grand Teton National Park, in Wyoming. The event brings together economists, financial market participants, academics, U.S. government representatives, and news media to discuss long-term policy issues of mutual concern. The 2023 Economic Policy Symposium. “Structural Shifts in the Global Economy,” will be held Aug. 24-26.

Those attending are selected based on each year’s topic with consideration for regional diversity, background, and industry. In a typical year, about 120 people attend.

The event features a collegiate feel with thoughtful discussion among the participants. The caliber and status of participants and the important topics being discussed draw substantial interest from the financial community in the symposium. Despite the interest in the annual event, The Jackson Hole event works best as a smaller open discussion, attendance at the event is limited.

Similarly, although the Federal Reserve District Bank receives numerous requests from media outlets worldwide, press attendance is also limited to a group that is selected to provide important transparency to the symposium, but not overwhelm or influence the proceedings. All symposium participants, including members of the press, pay a fee to attend. The fees are then used to recover event expenses.

Source: Federal Reserve, Kansas City, MO

What’s discussed?

The Kansas City Fed chooses the topic each year and asks experts to write papers on related subtopics. To date, more than 150 authors have presented papers on topics such as inflation, labor markets and international trade. All papers are available online.

Papers provided to the Bank in advance and presented at the annual economic policy symposium will be posted online at the time they are presented at the event. Other papers, such as conference comments, are posted as they become available. Additionally, transcripts of the proceedings are posted on the website as they become available, a process that generally takes a few months. Finally, the papers and transcripts are compiled into proceedings books which are both posted on the website and published in a volume that is available online or in print, free of charge.

Source: Federal Reserve, Kansas City, MO

Worldwide Representation

The goal of the Economic Policy Symposium when it began was to provide a vehicle for promoting public discussion and exchanging ideas. Throughout the event’s history in Jackson Hole, attendees from 70 countries have gathered to share their diverse perspectives and experiences.

Source: Federal Reserve, Kansas City, MO

This year’s theme will explore several significant, and potentially long-lasting, developments affecting the global economy. While the immediate disruption of the pandemic is fading, there likely will be long-lasting aftereffects for how economies are structured, both domestically and globally, as trade networks shift, and global financial flows react. Similarly, the policy response to the pandemic and its aftermath could have persistent effects as economies adjust to rapid shifts in the stance of monetary policy and a substantial increase in sovereign debt. The papers will share how these developments are likely to affect the context for growth and monetary policy in the coming decade.

The full agenda will be available at the start of the event on Thursday, Aug. 24 at 8 p.m. ET/6 p.m. MT. Federal Reserve Chair Jerome Powell’s remarks will be streamed on the Kansas City Fed’s YouTube channel, on Friday, Aug. 25 at 10:05 a.m. ET/8:05 a.m. MT. Papers and other materials will be posted on the Kansas City Fed’s website as they are presented during the event.

What Else

The markets seem to be expecting hawkish comments from the US Central Bank President on Friday at Jackson Hole. This is being priced in, as investors expect the Fed Chair may say something that spooks the bond market which naturally impacts stocks. There has been a lot of talk about how central banks globally should treat target inflation, all ears will be on that subject.

Paul Hoffman

Managing Editor, Channelchek

Are Reverse Stock Splits a Red Flag?

There are Many Reasons for a Reverse Split; All are Designed to Benefit Stakeholders

So far this quarter, there have been 59 reverse stock splits. These include industries as diverse as the apparel company Digital Brands Group (DBGI), which is consolidating its shares today, and Blue Apron (APRN), an e-commerce food prep provider, back on July 8th. In theory, this is a financial arrangement similar to asking for a $100 bill in exchange for five $20 dollar bills. But the reasons are more complicated and diverse. Understanding why a company you own, or are considering buying or shorting shares in, is consolidating ownership units can help you understand if the new shares are more likely to gain or lose value.

Background

As with the exchange of smaller denominated bills for larger ones, a reverse stock split is an action in which a company reduces its total outstanding shares while proportionally increasing the price per new share. It’s done by the company’s registrar by combining a certain number of existing shares into a single new share. For example, a 1-for-10 reverse stock split would result in every 10 shares of the company being converted into 1 new share.

From the shareholder side, their percentage ownership in the company remains unchanged; the value of that percentage will change as market forces revalue those shares.

Reasons for a Reverse Split

A corporate action such as a reverse split is not inexpensive for the company, so if it is conducting one, it must see a benefit. The primary reasons range from crisis management to an attempt to broaden the share’s appeal.

The category of crisis management includes working to prevent delisting from an exchange. The major stock exchanges have minimum share price requirements. If a company’s stock price falls below this minimum, it will be delisted from the exchange. Back in March, Bed Bath and Beyond went to shareholders asking for permission to do a reverse split in order to not be delisted for having a stock price lower than the Nasdaq threshold. The company was criticized as it showed that management did not have confidence that the price would rise on its own. At times when a company is approaching the minimum threshold for being listed on an exchange, they will look to do a reverse split, this can boost the per share price and prevent delisting.

In some cases there isn’t a crisis; management is simply managing perception in an effort to improve the stock’s image. This is because a stock that trades at a low price may be perceived as being risky or unpopular. A reverse stock split can give the appearance of a more valuable stock, which may attract more investors.

Conforming to the requirements of certain buyers, specifically institutional investors may also lead to a reverse split. Many institutional investors have minimum investment requirements. A reverse stock split can help to make a stock more attractive to these investors.

Bringing up the dollar price to simplify trading is another reason. A reverse stock split can make it easier to trade a stock, especially if the shares have a price below one dollar.

The Caution Signs When a Company Undergoes a Reverse Split

There are certainly potential negatives to shareholders when a company has a  reverse stock split. For example, a reverse stock split can decrease liquidity, making it less liquid; for example, it may be more difficult to buy or sell.

Some investors may view a reverse stock split as a negative signal about the company’s financial health; if the action isn’t expected to cure the ailment, it may serve to feed into a growing list of things investors don’t like about the company.

Shareholders could wind up owning a lesser portion of the company if the split results in fractional shares. For example, if the stock you own 97 shares in reverse 1 for 10. You’ll receive 9 shares and, most often, the cash equivalent of seven shares.

Ultimately, whether or not a reverse stock split is a good idea for a company depends on the specific circumstances. Investors should carefully consider the pros and cons before making a decision about whether or not to buy or sell a stock that has undergone or is being talked about as considering a reverse stock split. In most cases only board of director approval is required.

Opportunity for Investors?  

The opportunities for investors after a reverse stock split depends on the reasons for the split. If the split is done to prevent delisting, it is likely that the stock price will increase in the short term. However, if the split is done for other reasons, such as to improve the stock’s image or to make it more attractive to institutional investors, the long-term impact on the stock price is uncertain. Remember, management presumably got board approval as they thought it was in the best interest of the company; as a shareholder, you are technically an owner and would reap any benefit of it turning out to be a good move.

Take Away

A reverse stock split means the number of shares owned will be reduced, but the ownership level will remain the same. The price per share will increase, but the market capitalization of the company will change little. The reverse stock split may have a negative impact on the liquidity of the stock. It may also be seen as a negative by some investors.

Overall, reverse stock splits are always conducted for with the best interest of the company onwers in mind. But the reasons for the move, and if it will be successful needs to be evaluated by stockholders.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.prnewswire.com/news-releases/dbgi-announces-1-for-25-reverse-stock-split-effective-august-22-2023-301905859.html

https://www.securitieslawyer101.com

AMC Converting APEs and Reverse Splitting

AMC Theatres APE Units Will Cease to Exist After Thursday

The last day of trading for AMC Entertainment (AMC) Preferred Equity Units (APE) is Thursday, August 24th. The dividend shares that were provided 1:1 for AMC shareholders one year ago, will be converted to AMC common stock, which will then be the only class of stock AMC Entertainment has outstanding. But the company still has mounds of debt, which is part of the reason for rolling the preferreds into common shares. The move doubles the number of common shares outstanding, which the company then has plans to address.

On August 11, the wild ride shareholders had been on got a bit wilder as a Delaware Court judge gave the green light to AMC proceeding with a revised plan to convert its preferred shares. This drove up shares of APE units and down the price of AMC common stock.

Month to date, APE units, which will not be trading by the end of the week, are up nearly 15% while AMC common stock is down over 37%. Since the court notice, volume has been significantly higher in both preferred and common.

Source: Koyfin

The single AMC common share class is part of the movie theater chain’s recovery from the pandemic era debt built up. AMC is also planning a reverse 1-for-10 split of its common stock and an increase in its authorized common shares.

In Form 8-K filed with the SEC last week, AMC explained that the reverse stock split is expected to also occur on Aug. 24. The market will open on August 25th with the conversion complete, and the ticker APE delisted from the New York Stock Exchange.

Expectations of the stock-conversion is that AMC will be more resilient and will eliminate capital-raising inefficiencies of APE units trading at a significant discount to AMC shares, said CEO Adam Aron.  

Analysts expect the shares to converge around the $3 price range.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://public.com/learn/ape-stock-amc-dividend#:~:text=%24APE%20is%20a%20new%20class,22.

https://courts.delaware.gov/Opinions/Download.aspx?id=351520

Is Nvidia Stock Positioned for a Classic Slide?

What History Says About MegaCap Companies with NVDA’s Multiples

What’s riskier, a stock like Nvidia that has been moving up since the start of the year and has now risen more than 200%, or the stock you pick by throwing a dart at the Wall Street Journal? Nvidia (NVDA) will report earnings on Wednesday, the report has a significant risk of disappointing, even if it exceeds forecasts.

Background

The last time Nvidia reported quarterly results, the chip maker forecasted record revenue that was far above anything it had accomplished before. Naturally, investors sent the stock up and then up some more to the level we see today. On Wednesday, August 23rd, the company will share the actual results of its second-quarter earnings. If it doesn’t deliver or exceed expectations, there may be a lot of disappointed investors. Plus, a repeat projection of future earnings growth would seem necessary to maintain its trajectory. Nvidia’s current valuation is extremely high, it has been the poster child of the AI investment boom, it would seem there are more scenarios where it will disappoint the frenzy in the market for the stock then there are positives for a company with such high valuations.

Source: Koyfin

What Does History Say?

The phrase “the bigger they are, the harder they fall” was used in the context of the stock market as early as the 19th century. In 1873, the New York Stock Exchange crashed, and many investors lost their life savings. The crash was blamed on the overvaluation of stocks. Since then, there have been a number of times the market and individual stocks have come to terms with the idea that the price has gotten ahead of itself, causing speculators to flee, causing a sharp decline.

Nvidia was big and has gotten bigger. As it relates to its report on second-quarter earnings on Wednesday, analysts have been expressing positive expectations. In a “buy the rumor sell the news” way of thinking, this alone may cause the stock price to deflate after the report.

An article published by Barron’s on August 21st points out, using data from WisdomTree, that Nvidia has a price-to-projected sales ratio, of 25, this jumps to a whopping 40 when using 12-month trailing sales.

The company now holds the distinction of having the highest price-to-sales ratio in the S&P 500. It is only the 100th company to hold that title since the 1960s. Tech companies had been in this position 27 times, and utilities a mere once. What has happened to these mega-cap hot stocks in the years to follow?

Image: Research conducted for stocks for the long run 6th edition, Jeremy Siegel w/ Jeremy Schwartz (2022).

Over the next year, the average price-to-sales monsters saw their price rise 12% versus the average for the market of 11%. Then, over the next three years, the average stock dropped 4% annually, compared to the market’s 9% rise. The relative fall off continued over the next five years, as the average for these stocks had fallen 2%, versus the market’s 10% gain, according to a book by Wharton economic professor Jeremy Siegel.

Image: Research conducted for stocks for the long run 6th edition, Jeremy Siegel w/ Jeremy Schwartz (2022).

As illustrated in the table above, the underperformance is even greater for the tech companies that hold the biggest price-to-sales ratios. And the median performance for stocks at these price-to-sales ratios is even worse.

Take Away

Based on its guidance, there is little doubt that Nvidia is on track to post results that are beyond enviable. At least a dozen equity analysts have recently raised price targets on NVDA. But can the news be good enough in light of its current pricing and the history of tech stocks that have come before? NVDA would have been a great stock to have bought months ago and held; the current probabilities, based on history, now suggest the run-up is over, and the potential for a decline within a year has increased dramatically.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.marketwatch.com/story/expectations-for-nvidias-earnings-are-massive-will-they-even-matter-b054a1?mod=search_headline

https://www.marketwatch.com/story/the-history-of-companies-with-nvidia-like-valuations-isnt-a-good-one-17f46efe?mod=home-page

The Week Ahead – Jackson Hole, Johannesburg, Consumer Sentiment

 Powell’s Talk at the Jacksonhole Symposium Won’t be Until Friday

The light economic calendar is likely to take a backseat to the annual Jackson Hole Symposium this week and the BRICS summit in Johannesburg, South Africa. In Jackson Hole, the overriding theme is  “Structural Shifts in the Global Economy”. The annual meeting is intended to have an overriding academic tone, but the number of Fed policymakers involved allows the markets to listen for any meaningful interest rate bias. The expected focus is on remarks from those actually conducting monetary policy, US central bankers. Powell is scheduled to give his speech on the “Economic Outlook” at 10:05 ET on Friday. Meanwhile, 9,900 miles away, the BRICS group of major emerging economies – Brazil, Russia, India, China and South Africa – will hold its heads of state and government summit in Johannesburg from Aug. 22-24. South African President Cyril Ramaphosa, Chinese President Xi Jinping, Brazil’s President Luiz Inacio Lula da Silva and Indian Prime Minister Narendra Modi are expected to attend in person. Russian President Vladimir Putin will not attend in person, as there is an arrest warrant out related to the war in Ukraine. He is expected to attend virtually. The markets will be interested to see if the group expands by allowing other countries,also any news related to the New Development Bank (NDB) sometimes called the BRICS bank, and all around economic cooperation.

Stocks may also take their cue from interest rates and the longer end of the yield curve, which has begun adjusting with rising rates for longer-dated maturities.

Monday 8/21

•             There is no key data being released and no expected talks or events with market implications.

Tuesday 8/22

•             7:30 AM ET, Richmond Fed President Thomas Barkin is scheduled to speak. Recent comments from Barkin have been hopeful. Barkin recently said the greater-than-expected easing in inflation in June may be an indication that the US economy can have a “soft landing,” returning to price stability without a damaging recession.

•             10:00 AM ET, the Existing Home Sales annual rate for July is to be at the same level as it was in June, 4.16 million. The National Association of Realtors has been citing a lack of available inventory for the slow pace of sales as existing homeowners are choosing to keep their lower mortgage rates.

•             2:30 PM ET, Chicago Fed President Austan Goolsbee is scheduled to speak. Goolsbee has made it clear he is on the fence as to whether tightening at the September meeting is warranted.

Wednesday 8/23

•             9:45 AM ET, Purchasing Managers Index (PMI) composite for services is expected to show that the number holds above 50 in July, as it has for the last six PMI releases. As for manufacturing,  the consensus is 48.8, which would be down a bit from the  49 reported in June.

•             10:00 AM ET,  New Home Sales in July, a month before mortgage rates began their recent spike, is expected to move higher to a 702,000 annual rate after slowing to 697,000 in June which, though lower than expected, was still the second highest rate in more than a year.

•             10:30 PM ET, EIA The Energy Information Administration (EIA) provides the Petroleum Status Report weekly with information on petroleum inventories in the US, whether produced in the US or abroad. The level of inventories helps determine prices for petroleum products.

•             8:30 PM ET, BRICS Summit.

•            11:00 PM ET, Jackson Hole Symposium.

Thursday 8/24

•             8:30 AM ET, Durable Goods Orders are forecast to fall 4% for August after a 4.6% increase in July, pushed higher by aircraft orders. Ex-transportation orders are forecast to be up 0.2%, with core capital goods orders unchanged.

•             4:30 AM ET, The Fed’s Balance Sheet is expected to have decreased by $31.208 billion to $8.146 trillion for the seven day period ending August 23. This would be a $61.5 billion decline. Market participants and Fed watchers look to this weekly set of numbers to determine, among other things if the Fed is on track with its stated quantitative tightening (QT) plan.

Friday 8/25

•             10:00 AM ET, Consumer Sentiment is expected to end August at 71.2, unchanged from August’s mid-month flash with year-ahead inflation expectations also expected to be unchanged at 3.3%.

•             10:05 AM ET, US Federal Reserve Chairman is expected to give his address at Jackson Hole.

What Else

Have you attended an in-person roadshow organized by Noble Capital Markets? Noble has been reaching out to retail and institutional investors and holding these events designed for investors to meet management teams. Investors have been able to discover more about their companies, often enough to make an informed decision. The forum has been getting rave reviews from investors and company management teams. Use this link to see if a roadshow is scheduled near you.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://tradingeconomics.com/calendar

https://us.econoday.com/byweek.asp?cust=us

As BRICS Cooperation Accelerates, Is It Time for the US to Develop a BRICS Policy?

Image: External Affairs Ministers at BRICS foreign ministers meeting, MEA Photogallery (Flickr)

An Expansion of BRICS Countries Would Increase its Negotiating Strength

When leaders of the BRICS group of large emerging economies – Brazil, Russia, India, China and South Africa – meet in Johannesburg for two days beginning on Aug. 22, 2023, foreign policymakers in Washington will no doubt be listening carefully.

The BRICS group has been challenging some key tenets of U.S. global leadership in recent years. On the diplomatic front, it has undermined the White House’s strategy on Ukraine by countering the Western use of sanctions on Russia. Economically, it has sought to chip away at U.S. dominance by weakening the dollar’s role as the world’s default currency.

And now the group is looking at expanding, with 23 formal candidates. Such a move – especially if BRICS accepts Iran, Cuba or Venezuela – would likely strengthen the group’s anti-U.S. positioning.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Mihaela Papa, Senior Fellow, The Fletcher School, Tufts University, Frank O’Donnell, Adjunct Lecturer in the International Studies Program, Boston College, Zhen Han, Assistant Professor of Global Studies, Sacred Heart University.

So what can Washington expect next, and how can it respond?

Our research team at Tufts University has been working on a multiyear Rising Power Alliances project that has analyzed the evolution of BRICS and the group’s relationship with the U.S. What we have found is that the common portrayal of BRICS as a China-dominated group primarily pursuing anti-U.S. agendas is misplaced.

Rather, the BRICS countries connect around common development interests and a quest for a multipolar world order in which no single power dominates. Yet BRICS consolidation has turned the group into a potent negotiation force that now challenges Washington’s geopolitical and economic goals. Ignoring BRICS as a major policy force – something the U.S. has been prone to do in the past – is no longer an option.

Reining in the America bashing

At the dawn of BRIC cooperation in 2008 – before South Africa joined in 2010, adding an “S” – members were mindful that the group’s existence could lead to tensions with policymakers who viewed the U.S. as the world’s “indispensable nation.”

As Brazil’s former Foreign Minister Celso Amorim observed at the time, “We should promote a more democratic world order by ensuring the fullest participation of developing countries in decision-making bodies.” He saw BRIC countries “as a bridge between industrialized and developing countries for sustainable development and a more balanced international economic policy.”

While such realignments would certainly dilute U.S. power, BRIC explicitly refrained from anti-U.S. rhetoric.

After the 2009 BRIC summit, the Chinese foreign ministry clarified that BRIC cooperation should not be “directed against a third party.” Indian Foreign Secretary Shivshankar Menon had already confirmed that there would be no America bashing at BRIC and directly rejected China’s and Russia’s efforts to weaken the dollar’s dominance.

Rather, the new entity complemented existing efforts toward multipolarity – including China-Russia cooperation and the India, Brazil, South Africa trilateral dialogue. Not only was BRIC envisioned as a forum for ideas rather than ideologies, but it also planned to stay open and transparent.

BRICS alignment and tensions with the US

Today, BRICS is a formidable group – it accounts for 41% of the world’s population, 31.5% of global gross domestic product and 16% of global trade. As such, it has a lot of bargaining power if the countries act together – which they increasingly do. During the Ukraine war, Moscow’s BRICS partners have ensured Russia’s economic and diplomatic survival in the face of Western attempts to isolate Moscow. Brazil, India, China and South Africa engaged with Russia in 166 BRICS events in 2022. And some members became crucial export markets for Russia.

The group’s political development – through which it has continually added new areas of cooperation and extra “bodies” – is impressive, considering the vast differences among its members.

We designed a BRICS convergence index to measure how BRICS states converged around 47 specific policies between 2009 and 2021, ranging from economics and security to sustainable development. We found deepening convergence and cooperation across these issues and particularly around industrial development and finance.

But BRICS convergence does not necessarily lead to greater tension with the United States. Our data finds limited divergence between the joint policies of BRICS and that of the U.S. on a wide range of issues. Our research also counters the argument that BRICS is China-driven. Indeed, China has been unable to advance some key policy proposals. For example, since the 2011 BRICS summit, China has sought to establish a BRICS free trade agreement but could not get support from other states. And despite various trade coordination mechanisms in BRICS, the overall trade among BRICS remains low – only 6% of the countries’ combined trade.

However, tensions between the United States and BRICS exist, especially when BRICS turns “bloc-like” and when U.S. global interests are at stake. The turning point for this was 2015, when BRICS achieved major institutional growth under Russia’s presidency. This coincided with Moscow enhancing its pivot to China and BRICS following Western sanctions over Russia’s annexation of Crimea in 2014. Russia was eager to develop alternatives to Western-led institutional and market mechanisms it could no longer benefit from.

That said, important champions of BRICS convergence are also close strategic partners to the U.S. For example, India has played a major role in strengthening the security dimension of BRICS cooperation, championing a counter-terrorism agenda that has drawn U.S. opposition due to its vague definition of terrorist actors.

Further constraints on U.S. power may emerge from BRICS transitioning to using local currencies over the dollar and encouraging BRICS candidate countries to do the same. Meanwhile, China and Russia’s efforts to engage BRICS on outer space governance is another trend for policymakers in Washington to watch.

Toward a US BRICS Policy?

So where does a more robust – and potentially larger – BRICS leave the U.S.?

To date, U.S. policy has largely ignored BRICS as an entity. The U.S. foreign and defense policymaking apparatus is regionally oriented. In the past 20 years, it has pivoted from the Middle East to Asia and most recently to the Indo-Pacific region.

When it comes to the BRICS nations, Washington has focused on developing bilateral relations with Brazil, India and South Africa, while managing tensions with China and isolating Russia. The challenge for the Biden administration is understanding how, as a group, BRICS’ operations and institutions affect U.S. global interests.

Meanwhile, BRICS expansion raises new questions. When asked about U.S. partners such as Algeria and Egypt wanting to join BRICS, the Biden administration explained that it does not ask partners to choose between the United States and other countries.

But the international demand for joining BRICS calls for a deeper reflection on how Washington pursues foreign policy.

Designing a BRICS-focused foreign policy is an opportunity for the United States to innovate around addressing development needs. Rather than dividing countries into friendly democracies and others, a BRICS-focused policy can see the Biden administration lead on universal development issues and build development-focused, close relationships that encourage a better alignment between countries of the Global South and the United States.

It could also allow the Biden administration to deepen cooperation with India, Brazil, South Africa and some of the new BRICS candidates. Areas of focus could include issues where the BRICS countries have struggled to coordinate their policy, such as AI development and governance, energy security and global restrictions on chemical and biological weapons.

Developing a BRICS policy could help re-imagine U.S. foreign policy and ensure that the United States is well positioned in a multipolar world.

The Three Causes Crushing Crypto

Bitcoin’s Throttleback Thursday Explained

Bitcoin and Ethereum had a bad day. After gaining a lot of upward momentum from late June after Blackrock, Fidelity, and Invesco filed to create bitcoin-related exchange traded funds (ETFs), the volatile assets have shown cryptocurrency investors that the bumpy ride is not yet over. What’s causing it this time? Fortunately, it is not fraud or wrongdoing creating the turbulence. Instead, three factors external to the business of trading, mining, or exchanging digital assets are at work.

 Background

On Thursday, August 17, and accelerating on August 18, the largest cryptocurrencies dropped precipitously. Bitcoin even broke down and fell below the psychologically important $26,000 US dollar price level before bouncing. While some are pointing to CME options expiration on the third Friday of each month, most are pointing to a Wall Street Journal article, and blaming Elon Musk, as the reason the asset class was nudged off a small cliff. There are other less highlighted, but important, catalysts that added to the flash-crash; these, along with the WSJ story, will be explained below.

Smells like Musk

What could SpaceX, the company owned and run by Elon Musk, possibly have to do with a crypto selloff? On Thursday, the crypto market had a downward spike around 5 PM ET. It was just after the Wall Street Journal revealed a change in the accounting valuation of SpaceX’s crypto assets. Reportedly, SpaceX marked down the value of its bitcoin assets by a substantial $373 million over the past two years. Additionally, the company has executed on crypto asset divestitures as well. When the reduction took place is uncertain, but cryptocurrency holdings have been reduced both in terms of the amount of coins and the value each coin is held for on the books.

Elon Musk’s reputation is that of a forward thinker, and one that embraces, if not leads, technology. He has significant influence over cryptocurrency valuations, often instigating pronounced market fluctuations brought about by Musk’s influential posts on his social media company, X. The reduction coincides with a similar crypto reduction on the books of publicly held, Musk-led, Tesla (TSLA). The electric car manufacturer had previously disclosed in its annual earnings report that it had liquidated 75% of its bitcoin reserves.

While it should not be surprising that two companies stepped away from speculation on something unrelated to their business or lowered support for the still young blockchain technology, it gave a reason for a reaction to this and other festering dynamics.

Wary of Gary

The Chairman of the Securities and Exchange Commission (SEC), Gary Gensler, is viewed as a “Whack-a Mole” to crypto stakeholders that prefer more autonomy than regulation. Every time the SEC gets knocked down as a potential regulator, it resurfaces, and crypto businesses have to deal with the agency again.  

Last month, Judge Analisa Torres made a pivotal decision in a case involving payment company Ripple Labs and the Commission. Her verdict declared that a substantial portion of sales of the token XRP did not fall under the category of securities transactions. The SEC claimed it was a security. This judgement was hailed as a triumph for the crypto sector and catalyzed an impressive 20% uptick in the exchange Coinbase’s stock in a single day.

On the same Thursday as the WSJ article, the SEC showed its face again with a strong response to the earlier ruling. Judge Torres allowed the SEC’s request for an “interlocutory” appeal on her ruling. This process will involve the SEC presenting its motion, followed by Ripple’s counterarguments. This is slated to continue until mid-September. Afterward, the Judge will determine whether the agency can effectively challenge her token classification ruling in an appellate court.

The still young asset class, its exchange methods, valuation, and usage techniques, once they are more clearly defined, will serve to add stability and reduce risk and shocks in crypto and the surrounding businesses. The longer the legal system and regulatory entities take, including Congress, the longer it will take for cryptocurrencies to find the more settled mainstream place in the markets they desire.

Rate Spate

The eighteen-month-long spate of rate hikes in the U.S. and across the globe is providing an alternative investment choice instead of what are viewed as riskier assets. Coincidentally, again on Thursday, August 17, the ten-year US Treasury Note hit a yield higher than the markets have experienced in 12 years. At 4.31%, investors can lock in a known annual return for ten years that exceeds the current and projected inflation rate.

Take Away

The volatility in the crypto asset class has been dramatic – not for the weak-stomached investor. On the same day in August, three unrelated events together helped cause the asset class to spike down. These include an article in a top business news publication indicating that one of the world’s most recognized cryptocurrency advocates has reduced bitcoin’s exposure to his companies. The SEC being granted a rematch in a landmark case that it had recently lost, where the earlier outcome gave no provision for the SEC to treat cryptocurrencies like a security. And rounding out the triad of events on crypto’s throttleback Thursday, yields are up across the curve to levels not seen in a dozen years. Investor’s seeking a place to reduce risk can now provide themselves with interest payments in excess of inflation.

But despite the ups and downs, bitcoin is up 56.7% year-to-date, 11.1% over the past 12 months, 110.5% over three years, 300% over five years, and astronomical amounts over longer periods. Related companies like bitcoin miners, crypto exchanges, and blockchain companies have also experienced growth similar to that found in few other industries over the past decade.   

Paul Hoffman

Managing Editor, Channelchek

Sources

https://finance.yahoo.com/video/bitcoin-sinks-below-28k-crypto-202201698.html

https://www.barrons.com/articles/sec-crypto-regulation-ripple-coinbase-d8143058?mod=hp_DAY_5

https://www.forbes.com/sites/siladityaray/2023/08/18/bitcoin-drops-to-lowest-level-since-june-amid-wider-crypto-sell-off/?sh=28df65ce55ff

https://app.koyfin.com/share/1d479a881a

The Other BlackRock, Citadel, Bitcoin Story

Unhyped Information to Improve Investment Success

The Ripple XRP Case Creates Many Questions

AI models Are Powerful, But are They Biologically Plausible?

Machine Learning Offers Insights Into Any Role of Astrocytes in the Human Brain

Adam Zewe | MIT News

Artificial neural networks, ubiquitous machine-learning models that can be trained to complete many tasks, are so called because their architecture is inspired by the way biological neurons process information in the human brain.

About six years ago, scientists discovered a new type of more powerful neural network model known as a transformer. These models can achieve unprecedented performance, such as by generating text from prompts with near-human-like accuracy. A transformer underlies AI systems such as ChatGPT and Bard, for example. While incredibly effective, transformers are also mysterious: Unlike with other brain-inspired neural network models, it hasn’t been clear how to build them using biological components.

Now, researchers from MIT, the MIT-IBM Watson AI Lab, and Harvard Medical School have produced a hypothesis that may explain how a transformer could be built using biological elements in the brain. They suggest that a biological network composed of neurons and other brain cells called astrocytes could perform the same core computation as a transformer.

Recent research has shown that astrocytes, non-neuronal cells that are abundant in the brain, communicate with neurons and play a role in some physiological processes, like regulating blood flow. But scientists still lack a clear understanding of what these cells do computationally.

With the new study, published this week in open-access format in the Proceedings of the National Academy of Sciences, the researchers explored the role astrocytes play in the brain from a computational perspective, and crafted a mathematical model that shows how they could be used, along with neurons, to build a biologically plausible transformer.

Their hypothesis provides insights that could spark future neuroscience research into how the human brain works. At the same time, it could help machine-learning researchers explain why transformers are so successful across a diverse set of complex tasks.

“The brain is far superior to even the best artificial neural networks that we have developed, but we don’t really know exactly how the brain works. There is scientific value in thinking about connections between biological hardware and large-scale artificial intelligence networks. This is neuroscience for AI and AI for neuroscience,” says Dmitry Krotov, a research staff member at the MIT-IBM Watson AI Lab and senior author of the research paper.

Joining Krotov on the paper are lead author Leo Kozachkov, a postdoc in the MIT Department of Brain and Cognitive Sciences; and Ksenia V. Kastanenka, an assistant professor of neurobiology at Harvard Medical School and an assistant investigator at the Massachusetts General Research Institute. 

A Biological Impossibility Becomes Plausible

Transformers operate differently than other neural network models. For instance, a recurrent neural network trained for natural language processing would compare each word in a sentence to an internal state determined by the previous words. A transformer, on the other hand, compares all the words in the sentence at once to generate a prediction, a process called self-attention.

For self-attention to work, the transformer must keep all the words ready in some form of memory, Krotov explains, but this didn’t seem biologically possible due to the way neurons communicate.

However, a few years ago scientists studying a slightly different type of machine-learning model (known as a Dense Associated Memory) realized that this self-attention mechanism could occur in the brain, but only if there were communication between at least three neurons.

“The number three really popped out to me because it is known in neuroscience that these cells called astrocytes, which are not neurons, form three-way connections with neurons, what are called tripartite synapses,” Kozachkov says.

When two neurons communicate, a presynaptic neuron sends chemicals called neurotransmitters across the synapse that connects it to a postsynaptic neuron. Sometimes, an astrocyte is also connected — it wraps a long, thin tentacle around the synapse, creating a tripartite (three-part) synapse. One astrocyte may form millions of tripartite synapses.

The astrocyte collects some neurotransmitters that flow through the synaptic junction. At some point, the astrocyte can signal back to the neurons. Because astrocytes operate on a much longer time scale than neurons — they create signals by slowly elevating their calcium response and then decreasing it — these cells can hold and integrate information communicated to them from neurons. In this way, astrocytes can form a type of memory buffer, Krotov says.

“If you think about it from that perspective, then astrocytes are extremely natural for precisely the computation we need to perform the attention operation inside transformers,” he adds.

Building a Neuron-Astrocyte Network

With this insight, the researchers formed their hypothesis that astrocytes could play a role in how transformers compute. Then they set out to build a mathematical model of a neuron-astrocyte network that would operate like a transformer.

They took the core mathematics that comprise a transformer and developed simple biophysical models of what astrocytes and neurons do when they communicate in the brain, based on a deep dive into the literature and guidance from neuroscientist collaborators.

Then they combined the models in certain ways until they arrived at an equation of a neuron-astrocyte network that describes a transformer’s self-attention.

“Sometimes, we found that certain things we wanted to be true couldn’t be plausibly implemented. So, we had to think of workarounds. There are some things in the paper that are very careful approximations of the transformer architecture to be able to match it in a biologically plausible way,” Kozachkov says.

Through their analysis, the researchers showed that their biophysical neuron-astrocyte network theoretically matches a transformer. In addition, they conducted numerical simulations by feeding images and paragraphs of text to transformer models and comparing the responses to those of their simulated neuron-astrocyte network. Both responded to the prompts in similar ways, confirming their theoretical model.

“Having remained electrically silent for over a century of brain recordings, astrocytes are one of the most abundant, yet less explored, cells in the brain. The potential of unleashing the computational power of the other half of our brain is enormous,” says Konstantinos Michmizos, associate professor of computer science at Rutgers University, who was not involved with this work. “This study opens up a fascinating iterative loop, from understanding how intelligent behavior may truly emerge in the brain, to translating disruptive hypotheses into new tools that exhibit human-like intelligence.”

The next step for the researchers is to make the leap from theory to practice. They hope to compare the model’s predictions to those that have been observed in biological experiments, and use this knowledge to refine, or possibly disprove, their hypothesis.

In addition, one implication of their study is that astrocytes may be involved in long-term memory, since the network needs to store information to be able act on it in the future. Additional research could investigate this idea further, Krotov says.

“For a lot of reasons, astrocytes are extremely important for cognition and behavior, and they operate in fundamentally different ways from neurons. My biggest hope for this paper is that it catalyzes a bunch of research in computational neuroscience toward glial cells, and in particular, astrocytes,” adds Kozachkov.

Reprinted with permission from MIT News ( http://news.mit.edu/ )

Are We in a Period of Value Outperformance?

Why Growth Companies May Take a Backseat for a While

Most everything runs in cycles; this is especially true for investment trends, investment styles, and investment performance or results. It looks like value investing has been making its long-awaited return to favor. This could be good news for investors that are frightened of the dizzying heights reached by tech’s top performers (the bigger they are, the harder they could fall) and provide an opportunity for those that know stock market history and expect it to repeat its time-tested performance attributes.

Value Versus Growth

It makes sense to quickly define value stocks and growth stocks as there are big differences, even though to the untrained, it may sound like we are talking about the same thing.

Growth stocks are stocks that are expected to outpace the overall market. These stocks are typically priced higher, using metrics we’ll discuss later, than value stocks because investors are willing to pay a premium for the expected future earnings growth. The definition can include large-cap companies still on a high growth trajectory like Apple (AAPL) or Tesla (TSLA), and small-cap companies such as AI company Soundhound (SOUN) or microcap companies like last quarter’s digital mining favorite Bit Digital (BTBT).

Value stocks are those trading for less than their intrinsic value. This means that for any one of a number of reasons, including momentum traders being distracted from value, the stock is priced below what the investor believes it should be worth. Put simply; value investors believe that they can identify stocks that are undervalued because they are not current “favorites” in the market.  Large-cap examples could include well-established consumer goods company Proctor and Gamble (PG) as it is stable and growing, but not with great speed, or small-cap digital, television, and audio provider Entravision (EVC). Microcap companies may also be considered value stocks, take for example dry-bulk shipping company, Eurodry (EDRY). While the company has earnings and pays an above-average dividend, the nature of the business does not place its earnings expectations to become a multiple of its current business five or ten years from now.

Created by Channelchek

The Important History

Going back more than 40 years to the decade of the 1980s value stocks outperformed; the 1990s were led by growth opportunities. Then, in 2000, value investing beat growth for seven consecutive years. From there growth companies dominated through 2021. These are long cycles. In 2020, the year of ample stimulus money and Robinhood trading, growth seemed to have reached a crescendo and may have concluded its outperformance cycle with the strongest leg, beating value by more than 30 percentage points – the widest margin since at least 1927. Then, in 2021 value became the more dominant provider of performance. While trends are best seen in the rearview mirror, it appears that value investing has made and is continuing to make a comeback.

Last year, 2022, value beat growth by almost 25%, that is, using as a benchmark the S&P 500 Growth ETF (IVW) relative to the S&P 500 Value ETF (IVE). Both were down, but growth fell by 29.5% while value dipped by 5.4%.

Those that missed the growth stock go-go part of the cycle can only wish they could turn back time.  Instead they must play the cards that are in their hands now. You can’t invest on yesterday’s circumstances. The question now is, has there been an ongoing shift to value, and how far can it go? Will it make up for the many underperforming years?  

Are We in a Period of Value Outperformance?

One point already made is that markets and segments of the financial markets run in cycles. That actually lacks a clear definition. Surmising that over a long enough time period, the two will take turns outperforming with value more often, providing higher returns to investors lacks definition and traditional factors for one to outperform.

Over the last decade, low interest rates brought a lot of investors into the stock market. Most of those years investors were highly rewarded. Those with a greater risk tolerance did best which increased the risk appetite across the board. Growth, especially on the technology front, was rapid, during the pandemic. The demand for technology reached a peak and was met with investor cash as factors like stimulus checks, no commission trades, smartphone trading apps, and free time all converged at once. No wonder 2021 was so strong.

Consider this: The Price Earnings Ratio (P/E) of the Nasdaq 100 is 30.25, that is to say the average stock is priced at over 30 times annual earnings. The growth ETF IVW is at 23.5 times earnings. Meanwhile, the P/E of the value ETF IVE is only 20.6 times earnings. If earnings of past high flyers discontinue their growth trajectory either by increased costs such as interest rates or decreased sales partly prompted by the Fed injecting cash into the system, their growth may stall for some time. Investors will have to look for opportunity elsewhere, in other words, find value. The cheaper stocks (lower P/E) are where they have turned in the past, which keeps the two running in cycles.

Take Away

Value had a much better year than growth last year and seems to be in a position to make up for over a decade of lost ground to the riskier growth stocks. A portion of yesterday’s demand may have been met and likely borrowed from today’s demand for products involving communication and technology. For instance, Apple is expected to sell far fewer smartphones this year.

The year 2022 was a wake up call for those involved that became accustomed to making money each time they chased and bought an already expensive stock. These stocks now are competing with certificates of deposit rates at the local bank, and the idea that there is too wide of a gap between growth and value. For those that are long-term investors, they may look at history and decide that stocks, not fixed income, will provide the most return. Using a similar comparison, they may also expect that for growth and value to approach their normal relationship to each other, value will need a few years of significant outperformance or many years of mild outperformance. Either way, value investing is now the easier argument to make.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.barrons.com/articles/apple-stock-price-buy-iphone-15-94f742a2?mod=Searchresults

https://am.jpmorgan.com/gb/en/asset-management/adv/insights/value-vs-growth-investing/

The FOMC Minutes Suggest They are Not Done Yet

U.S. Federal Reserve Board of Governors

The Majority of Fed Policymakers are Still Concerned About Inflation

The minutes of the July 25-26 FOMC meeting were released and showed ongoing concerns about U.S. inflation are still front and center on the minds of most policymakers. During the July meeting, Federal Reserve officials were still focused on rising prices expressing that more rate hikes could be necessary unless conditions change. The July meeting had resulted in a quarter percentage point rate hike; the minutes are being looked at by market participants to get a sense of the Fed’s next steps.

While the Fed says it is data dependent, so a surprisingly weak economic report or lower-than-expected inflation statistics could change the Fed’s hawkish stance at the next meeting, if economic conditions remain unchanged or get stronger, the Fed is likely to keep applying the economic brakes by raising rates.

“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the meeting summary stated.

The increase in the Fed Funds rate after the last meeting brought the key interest rate to its highest level in 22 years, 5.25%-5%.

The Fed has held for more than 18 months that they are targeting a 2% inflation rate. During that time, key inflation indicators have been as high as 9%. Depending on the measure used, inflation at the last read was between 3% and 4%.

“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee’s 2% objective over time,” according to the Fed’s recent release.

The Fed always risks overdoing it during a tightening policy period. So, while members agreed inflation is “unacceptably high,” there were indications “that a number of tentative signs that inflation pressures could be abating.”

As written in the release, “Almost all” the meeting participants, which includes nonvoting members, were in favor of the July rate increase. However, a couple of members opposed and suggested the Committee could skip a hike to monitor how previous hikes play out in inflation indicators. Navigating economic activity and price levels is not a precise science, and there is a lag between actions and impact.

“Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening,” the minutes said.

The minutes did indicate that the economy was expected to slow and unemployment likely will rise somewhat. Of note is a retraction in an earlier forecast that troubles in the banking industry could lead to a mild recession this year. A number of smaller banks found themselves challenged and even requiring government assistance in March.

The minutes indicated that the policymakers are also watching the health of the commercial real estate (CRE) market as they raise rates. Specifically cited were “risks associated with a potential sharp decline in CRE valuations that could adversely affect some banks and other financial institutions, such as insurance companies, that are heavily exposed to CRE. Several participants noted the susceptibility of some nonbank financial institutions” such as money market funds and the like.

Looking Forward

Federal Open Market Committee members emphasized the two-sided risks of easing too quickly and risking higher inflation against tightening too much and sending the economy into contraction. The most current data shows that while inflation is still 50% or more from the central bank’s 2% target, it has made marked progress since peaking above 9% in June 2022. Examples are the Consumer Price Index (CPI), ran at a 3.2% annual rate through July. The Personal Consumption Expenditures (PCE) price index core was at 4.6%.  

In their consideration of appropriate monetary policy actions at this meeting, participants concurred that economic activity had been expanding at a moderate pace. The labor market remained very tight, with robust job gains in recent months and the unemployment rate still low, but there were continuing signs that supply and demand in the labor market were coming into better balance. Participants also noted that tighter credit conditions facing households and businesses were a source of headwinds for the economy and would likely weigh on economic activity, hiring, and inflation. However, the extent of these effects remained uncertain. Although inflation had moderated since the middle of last year, it remained well above the Committee’s longer-run goal of 2%, and participants remained resolute in their commitment to bring inflation down to the Committee’s 2% objective.

Take Away

While the Fed will react to incoming data when they decide at the September 19-20 FOMC meeting, the minutes from the July meeting suggest that if there is little change in economic activity, the majority of members are apt to vote to hike rates once more.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.federalreserve.gov/monetarypolicy/fomcminutes20230726.htm

Yellen Feels Cautiously Optimistic About U.S. Prospects

Image: US Treasury Secretary Janet Yellen in Las Vegas, Nevada, US, on Monday, Aug. 14, 2023.

China’s Economic slowdown is a “Risk Factor” for US, Says Treasury Secretary Yellen

A month after returning from her visit to China, U.S. Secretary of the Treasury Janet Yellen opened up about the interplay between the two countries’ economies, the risks the Chinese slowdown has on the U.S., and a side trip she took courtesy of ingesting magic mushrooms. Addressing growing concerns over the economic downturn in the world’s second-largest economy, and possible spillover effects to the U.S., the Treasurer was optimistic about her country’s path.  

China and U.S.

Amidst the growing concerns surrounding China’s economic prospects, including a 5% devaluation of the yuan, and across-the-board weakening economic indicators, China now has the worst-performing currency in Asia after the yen.

Treasury Secretary Yellen, speaking in Las Vegas, seemed to be undoing some of the recent strong talk from U.S. President Biden at a fundraiser on August 11. Biden referred to China’s economic issues as a “ticking time bomb” and referred to Communist Party leaders as “bad folks.” The U.S. President expressed concerns about China’s slowed growth and elevated unemployment rate. She was speaking at  a press conference following a speech in Las Vegas. Yellen referred to China’s economic woes as a “risk factor” for the US, a risk that she believes won’t significantly undermine the overall prospects of the American economy.

As Yellen touted the economic policy achievements of the Biden administration, she highlighted the resilient state of the US economy.

Risks to U.S.

In classic economist style, Yellen hedged her “low risk” comments by suggesting there is a possibility that while China’s slowdown will primarily impact its neighboring Asian nations, there will inevitably be some repercussions for the United States.

Yellen strongly emphasized uncertainty, “That said, I feel very good about US prospects overall. Let’s call that a risk, she said, signalling her measured optimism amidst the uncertainties linked to China’s economic trajectory. Yellen underscored the unexpectedly robust state of the U.S. labor market despite the Federal Reserve’s aggressive rate-hiking campaign – one of the most vigorous tightening efforts in decades.

Janet Yellen spoke on CNN about her meal in China

Psychedelic Side Trip?

While in Beijing, Yellen made a bit of a stir both in China and in her home country for having been seen easting a psychedelic mushroom-based dish called Jian shou qing, or “see hand blue”, a fungi dish known for being hallucinogenic.

Yellen spoke about her experiences on CNN. She recognized the humor of the episode but said that the cooked food had no side effects.

Take Away

The U.S. economy is likely to be impacted by trade with the world’s second-largest economy. According to the U.S. Treasury Secretary, weakness in China will be somewhat contagious. She remains cautious but optimistic that the robust state of growth and employment in the U.S will serve to minimize negative effects.

Paul Hoffman

Managing Editor, Channelchek

New GDP Forecast Indicates Much Higher Growth With an Inflation Uptick

GDPNow from the Atlanta Federal Reserve Has a Surprising Forecast

If good news is bad, The Atlanta Federal Reserve’s GDPNow report is horrible – that’s how good it is. GDPNow is a model for estimating Gross Domestic Product (GDP). Created and published by the Federal Reserve Bank of Atlanta, it has been fairly accurate in recent years. An estimate of third-quarter US GDP released on August 15th forecasts that growth is increasing dramatically – inflation is also shown to inch up in the forecast.  

The Indicator

GDPNow uses recently published economic data to update a model to estimate GDP, a statistic that is reported with a significant lag to the input data.The output, or forecast, is an aggregation of other current economic indicators within the quarter. The data is entered into the mathematical model to calculate a GDP estimate at that specific point in time. There are still 45 days left in the third quarter, but up until now, this is what it calculated the growth to have been. As time passes and more reports are issued, more economic indicators are fed into the model. These reports come from the US Bureau of Labor Statistics, the US Census Bureau, the Institute for Supply Management, and the US Department of the Treasury. The accumulated data contributes to the historical accuracy of GDPNow’s calculations in relation to the GDP reports that the US Bureau of Economic Analysis (BEA) releases.

The Current Forecast

The GDPNow model’s latest estimates show the real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.0 percent on August 15, up from 4.1 percent where the estimate stood on August 8. Included in the model are recent releases from the US Census Bureau, the US Bureau of Labor Statistics, and the US Department of the Treasury’s Bureau of the Fiscal Service.

The model also provides other forecasts, from statistics, that will present themselves during the quarter and be finalized after the quarter ends. This includes third-quarter real Personal Consumption Expenditures (PCE). Remember that PCE is the Federal Reserve’s favored inflation gauge. The PCE inflation forecast, by this model, has been near accurate. It’s latest forecast is for it to rise to 4.4% annualized.

Take Away

There are a lot of mixed signals in the market recently, savings is down, consumer borrowing is up, interest rates out on the yield curve have finally moved up, and there are some fund managers that are extremely bearish, while bullishness is on the rise on the prospect of a soft or undetectable economic landing in the US.

The GDPNow snapshot of where a mathematical model shows where we may be now has no human intervention. It is created by a model without the kinds of bias that could cause a human to overweigh one factor over another. The most recent report shows tremendous growth and an uptick in inflation. In today’s financial marketplace, where the markets still sell-off on good economic news and rally on bad, it’s uncertain what this means for the markets. But it is important for investors to understand that others view this and weigh it in their own expectations.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

https://www.imf.org/en/Capacity-Development/Training/ICDTC/Schedule/ST/2022/NWCST22-31#:~:text=Nowcasting%20refers%20to%20the%20practice,lag%2C%20such%20as%20real%20GDP.

https://www.atlantafed.org/economy-matters/economic-research/2022/07/14/pulling-back-the-curtain-on-gdpnow