2 August 2019 FT — Articles to Read

2 August 2019


Question: According to MSN: Money, what is the new limit for cash-out refinance for a home with FHA, Freddie, and Fannie?


Bank of England sees 1 in 3 chance of economy shrinking as Brexit fears rise – Pg. 1

  • It predicted output would rise 1.3% in both 2019 and 2020 even if it were to cut interest rates, as markets expect. The BoE had forecast in May that output would grow by 1.5% and 1.6%, respectively
  • The BoE’s central forecasts were premised on a smooth Brexit that would boost the economy. They show growth recovering to 2.3% in 2021 and inflation overshooting its target, rising to 2.4% on a three-year horizon
  • The bank acknowledged this forecast overstated inflation because it builds in current exchange rates and market expectations that interest rates will fall to cushion the shock of a potential EU exit on October 31 without a withdrawal agreement
  • Unlike the US Federal Reserve and ECB, the BoE showed no sign of responding to the weakening outlook by cutting rates


Fed chief faces challenge over easing – Pg. 4

  • When the Fed chairman said that the move was a “mid-cycle adjustment in policy” – not the start of a full-blown easing cycle, which would imply multiple and possibly deep rate cuts – investors were spooked
  • Mr Powell’s unwillingness to commit to deeper monetary easing with great detail as a way to tackle low inflation and interest rates around the world and protect the US from weaker conditions in the world economy, including the impact of trade tensions
  • Although equity markets dropped sharply during Mr Powell’s press conference, they did recover some ground after he indicated the Fed did not intend to stop at “just one” interest rate cut


Family offices are diving into new markets – Pg. 9

  • Once, property advisers mainly sold malls to developers, retail groups or banks. Now, however, there is rising demand from family offices.
  • As the Fed and other central banks loosen monetary policy, private pools of capital are searching for evermore innovative ways to earn returns. Thus, if you want to understand the impact of Wednesday’s rate cut, don’t just watch bond and equity prices, track what is happening with assets such as Water Tower Place as well
  • It is not easy to monitor such financial flows with precision, since the family office sector – which is estimated to control almost $6tn in assets – is highly secretive. However, financiers say that a shift is under way.  A few decades ago, the sector (like most asset managers) put most of its money in public bond and equity markets, with a smaller allocation to real estate (Prof Note: I am currently working for a family office where the talent is top shelf.  The family offices have the resources, knowledge, understanding to literally hire the best talent.)
  • At the same time, investments in private equity and real estate have risen to account for 22% and 17%, respectively
  • “Family offices continue to re-evaluate traditional approaches to investing [with] accelerating interest in making direct investments in real estate and operating businesses” (Prof Note: The amount of quant family offices place into underwriting is equivalent to what I saw in my energy trading days and have not seen in real estate underwriting. What I respect about family offices, at least the one I am most familiar, is there is little “group thought”.  Being right matters, i.e. supporting one’s position, rather than supporting the position of the senior person in the group.  Also, unlike corporations where the money is really “shareholders” and there is no downside risk, other than job loss(es), family office(s) use their own capital.  Therefore there is as much effort placed on downside risk as there is upside potential.  Quite honestly, it is refreshing!)
  • But there is also a $6tn catch. The more that elite private pools of capital find juicy returns outside public markets, the more this risks fueling wealth gaps.  After all, most non-elite investors remain stuck in public markets and bank deposits, exposed to the vagaries of low interest rates


ING warns against more central bank stimulus – Pg. 12

  • The positive effects of the ECB’s quantitative easing policies have “dried up”, according to the chief executive of one of the eurozone’s largest retail banks
  • Record-low interest rates have weighed on retail banks’ profits as they have been forced to lower borrowing charges and in some cases pay to store money at central banks, without a similar cut in the rates they pay to savers


Mood of caution as US companies take foot off the pedal on stock buybacks – Pg. 17

  • The breakneck growth in corporate share buybacks that has helped propel the stock market to record highs is starting to cool at a pivotal time for US equities, as concerns around a slowing global economy, trade tension and a dovish central bank weight heavily
  • Buybacks are set to hit a total of $940bn this year….up 13% on last year’s total but a sharp deceleration form the 54% growth seen in 2017-18
  • The deceleration adds another layer of uncertainty for equity investors alongside the spectre of slowing growth, trade tension and the Federal Reserve’s ambiguous stance on interest rates


Answer: 80%; down from 85%