Jobs, jobs, jobs

In today’s world, Fed watchers need to keep a close eye on labor market trends as well as inflation – where new data will come this week. High unemployment and sluggish job growth has stayed the hand of the US central bank in moving to tighten policy this year, even as inflation has risen considerably more than expected.

Last week brought almost nothing but good news on jobs. Could that hasten a shift in policy? The initial market reaction suggested that investors did not expect it. At RockCreek, we think that the Fed will wait for some more data—and more jobs—before signaling a shift in its easy money stance. And we agree with the central bank that temporary supply chain issues are behind some of the recent inflation uptick.

Yes, the news from July’s labor market report was good. Payrolls went up by almost 1 million. May and June jobs numbers were revised up. Unemployment fell half a percentage point to 5.4 percent. The numbers of long-term unemployed declined significantly. And new claims for unemployment insurance dropped to a post-pandemic low. But the labor market is still weaker on all measures than before the pandemic hit. And rapidly rising infections from the Delta variant of Covid-19 are raising fears that economic recovery could slow, just as the labor market is getting  back its strength. The emergence of variants may become part of our lives, but barring new, extremely deadly variants of Covid-19, we don’t expect complete shut downs as we experienced before. The impact on the economy, and on labor markets, will be to slow rather than reverse recovery.
Source: RockCreek, BLS

Although GDP is now back to its pre-pandemic level, there were 5.7 million fewer Americans in work last month than in February 2020. And unemployment is almost 2 percentage points higher now than it was back then. While the UK central bank last week gave a hawkish tinge to its post-meeting remarks, as it projected inflation rising to 4 percent by year end, investors in the US have a little longer before this is likely here. This week’s inflation datawith consumer prices for July due on August 11th and producer prices on August 12thwill be important to watch. If they challenge the Federal Reserve’s view that the inflation surge is largely transitory, others may side with Democratic Senator Joe Manchin, who surprised with a letter last week chiding Fed Chair Jerome Powell for not doing more to fight inflation. Even with another month’s data, it will be too soon to say definitively whether the Fed is right or wrong.  And, as former Fed Chair Alan Greenspan told us in June, monetary policy has time to react when it comes to inflation. At RockCreek, we think it could soon be time to plan to reduce asset purchases, which may not be giving so much support to the economy  at this point. The need for more economic support from monetary policy will also depend on how much new fiscal support will be forthcoming – and whether that will raise inflation worries.

Senator Manchin was likely keeping an eye on his constituents’ concerns on inflation, as he weighs how much new spending to support in the  Democratic budget bill. That legislation will follow the bipartisan infrastructure measure which took another step toward Senate approval this weekend, when 18 Republicans joined Democrats to clear a procedural hurdle. Now Majority Leader Chuck Schumer has to  wrestle  the amendment process, steering a course that keeps support of  enough Senate moderates and conservatives to pass the Senate without causing House progressives to threaten passage in the House.  

Earnings power on with 443 companies in the S&P 500 reporting so far this quarter; all sectors are reporting positive sales and earnings surprises. This is broadly true for small-caps as well with the exception of the Russell 2000 Energy sector, which has disappointed on earnings vs. market expectations, according to data compiled by Bloomberg. Strong earnings have propelled large caps higher so far this quarter with the S&P 500 rising 3.2 percent since June 30th. Small caps have lagged so far, but had a stronger positive reaction to the employment data on Friday August 6th. The Russell 2000 outperformed the S&P as yields backed-up (10yr rose 7bps); if a robust job recovery through the rest of the year ignites a reflationary boost in the months to come, could small-caps repeat their strong outperformance witnessed in Q121?

This morning, the Intergovernmental Panel on Climate Change (IPCC), a group of scientists convened by the United Nations, released its sixth assessment report, by far the starkest warning yet that nations have waited so long to curb fossil fuel emissions that we can no longer stop global warming. The report shows, however, that there is a short window to prevent the worst case scenario, a harrowing future with more intense resulting fires, floods, and extreme weather like have seen around the world in recent months. The scientists called for similar action that we discussed at the RockCreek Climate Summit last month. 

Observations and takeaways for investors:
Delta danger

Rising concerns about the Delta variant are another reason for caution on the US labor market. The latest jobs data were collected in early July, before the rapid spread of the Delta variant had hit home in the US. Few expect the latest surge in Covid cases to lead to broad lockdowns. But the business and consumer mood in the US certainly darkened during July with announcements of renewed mask mandates and delayed office re-openings upsetting the holiday mood. By contrast, in Europe and the UK—where vaccinations have surged—new infections are falling and travel restrictions are being eased further. Can still reluctant Americans be cajoled—or frightened—into getting their vaccine shots? 

Businesses and the government are beginning to wave sticks as well as carrots. Employers are now warning of consequences for those who refuse to be vaccinated without documented medical, religious, or other reasons. The consequences range from frequent testing, as President Biden has said will be the case for unvaccinated Federal workers, to being fired, as under a new United Airlines policy laid out at the end of last week, to take effect in October. CNN fired three employees last week for refusing to get vaccinated, with network President Jeff Zucker citing a zero tolerance policy. Hospitals and other medical facilities are increasingly requiring employees to demonstrate that they have been vaccinated. For working parents, a critical issue will be whether teachers agree both to be vaccinated and to return to the classroom. So far, the teachers’ union leaders have warned against mandatory vaccinations, and may be stepping back from full-throated support of reopening schools. The untimely death last week of AFL-CIO leader Richard Trumka robbed the US of a powerful union voice in favor of vaccines. 

concern for parents will be the risks of the Delta variant to children too young for vaccinations. As the American Academy of Pediatrics (AAP) documented in a report released July 29, the number of children diagnosed with Covid-19 rose steadily throughout July, with nearly 72,000 cases reported just in the last week of the month. Children’s hospitals from Florida to Texas to Tennessee are completely full with Covid patients, and pediatric infectious disease doctors report being “completely overwhelmed.” When it comes to fears of long Covid in children, the AAP report noted that, “at this time, it appears that severe illness due to COVID-19 is uncommon among children. However, there is an urgent need to collect more data on longer-term impacts of the pandemic on children, including ways the virus may harm the long-term physical health of infected children, as well as its emotional and mental health effects.”  

Globally, the virulence and persistence of the new coronavirus continue to confound governments and health experts. We have now had more pandemic-clouded months since the discovery of safe and effective vaccines than there were between the initial terrifying spread of disease and the November 2020 vaccine announcements. Experience has shown that the vaccines work. In fact, they work far better than anyone dared to hope at the start of the pandemic. Yet their distribution and takeup remains problematic. Public messaging—including from the US Centers for Disease Control (CDC)—has added to confusion and mistrust in countries where vaccine supplies are ample or could be afforded. The biggest divide remains that between rich and poor nations, as international bodies from the International Monetary Fund (IMF) to the World Health Organization (WHO) have increasingly emphasized. While support grows in the US for a third booster shot, vaccine supplies and distribution in poorer nations remain far short of what is needed to curb and ultimately crush the disease, prompting calls from WHO for the majority of vaccines to go to low-income countries.

Despite the increased spread of Delta variants globally, Emerging Markets, including China, were up for the week, reversing some of July’s steep losses. Year to date, performance continues to be led by non-Chinese equity markets, including Taiwan, India, Mexico, Russia, and South Africa. It is worth taking stock that each of these countries has faced unenviable domestic crises over the last 18 months, arguably of equal or greater potential consequence than China’s tech crackdown.

In the case of Taiwan, tensions with China and a record setting drought. In the case of India, a tragic public health picture. In Russia, a sclerotic economy weighed down by sanctions. In Mexico, an administration prioritizing and effectively nationalizing its carbon-based energy sector (reversing years of progress on the green energy front), and a drug war strategy that is failing. In South Africa, a political crisis that threatens to upend its tenuous democracy.

Yet, equities in these markets have managed to outperform the world’s second largest capital market. A shortage of semiconductor chips (Taiwan), rising commodity prices (Russia and South Africa), and a thriving base of domestic investors (India) only goes so far in explaining this dichotomy. Perhaps, this development simply underscores how much domestic and offshore investors were caught flat footed by Beijing’s rewiring of its political agenda – and how much markets believed in the notion that big tech as we knew it would continue to grow unabated. Are China’s recent aggressive moves against their own tech companies—and some other big players—a sign of strength or weakness? Opinion is still divided. Whatever the motivation, there is no doubt that the government’s desire for control and central direction of investment will continue to make this market challenging.

As investors reassess opportunities, they may find value in China’s increasingly polarized technology ecosystem. If e-commerce, ed-tech, and video games will not lead China’s growth in years to come, recent performance of China’s homegrown semiconductor names may give us a clue. 

China still perplexing

RockCreek remains cautiously positioned but is actively taking advantage of opportunities. In addition to China, we remain on the lookout for a potential value driven recovery in the ASEAN markets as well as the smaller countries of Latin America. We also believe that longer term sustainable investment themes will continue to do well in emerging markets and developed economies. 

For US business, the rift between the world’s two largest economies is a concern, on top of worries that a renewal of infections in China will slow growth there. After waiting more than six months, a wide swath of American companies last week asked the Biden Administration to drop the tariffs imposed by former President Trump. Although some China experts believe that Xi Jingping’s focus on retaining power may ultimately weaken its economy, the White House continues to see China as its major global competitor and national security danger. On the American side, there is little desire to make nice to China – which in the US political arena always carries the danger of looking weak.  

When is a wage increase not a wage increase?

It has been so long since inflation was at or above target that many have got out of practice in distinguishing nominal from real developments. Hence reports last week that businesses are raising wages to attract needed workers focused mainly on the 0.4% month on month increase in nominal wages in July. Rising wages, particularly among the low paid in service industries, are an important step in addressing inequality and the problems of the working poor. But as long as prices are rising more than wages, living standards are not improving – at least on average. The concentration of inflation in a few sectors where Covid-related supply issues are largely to blame—take used cars for example—has reinforced the view that the recent surge in prices is transitory. It also means that measured inflation likely overstates the impact of rising prices on real spending power. After all, it is possible to decide to put off buying a car until prices and supply settle down. It is too soon to know whether the price inflation that has dented measured real incomes will persist and broaden. Another reason to watch this week’s CPI, and the medium trend.     

Meme stock squared

After a sluggish market debut last week, Robinhood Markets (HOOD), the meme stock trading venue of choice, saw its shares move wildly this week. After opening at $38 a piece last Thursday, shares spent their first three sessions rangebound ($33-$40 per share) before their moonshot to a high of $85 per share on Wednesday, the first day options could be traded on the stock. In retrospect, could there have been a more obvious and inevitable outcome?

The stock finished the week at $55.01 per share, giving the company a valuation of $46 billion. Taking some air out of the rally on Thursday was a filing with the SEC that prominent investors including Andreessen Horowitz, NEA, Index Ventures, ICONIQ and D1 have registered to sell nearly 98 million shares of Class A Common Stock (approximately 39% of their combined interest in the company) earned through the conversion of convertible notes. There were 720 million Class A shares outstanding as of the IPO date. On Friday, Robinhood filed a notification that the pending sales could not proceed until the SEC “declares it effective,” leaving them to HODL for now.
*Shares sold in offering assumes the sale of all the shares offered by the selling stockholder pursuant to the revised prospectus

Crypto consternation

On Tuesday, SEC Chair Gary Gensler spoke before the Aspen Institute’s Security Forum regarding the regulation of crypto. His statements can be summarized as:
  • The SEC’s primary mandate is investor protection [as it relates to the purchase and sale of securities];
  • Many crypto tokens are securities [see Howey Test] lacking “disclosures or market oversight” leaving “prices open to manipulation” and thus “investors vulnerable.” As a result, the SEC has effectively squashed the initial coin offering (ICO);
  •  If these crypto tokens are securities and offered on decentralized finance (DeFi) platforms (e.g., exchanges and lending venues) that Americans are participating on, those DeFi platforms are in the SEC’s jurisdiction and must register with the Commission;
  •  Stablecoins are an essential part of the DeFi system used in order to “sidestep a host of public policy goals connected to our traditional banking and financial system” and may themselves be “securities and investment companies”;
  • The SEC is seeking authority from Congress to “prevent transactions, products, and platforms from falling between regulatory cracks” (i.e., DeFi and stablecoins);
It would be alarmist to describe the speech as an indication that the “SEC is coming after crypto” as one Bloomberg news alert described it. As indicated during the speech, for crypto to “reach any of its potential to be a catalyst for change” crypto must be part of the existing “public policy frameworks.” We would agree that for further adoption many facets of the industry must move out of the existing sizable grey area. This was another step in that direction.

It ultimately wasn’t the SEC Chair’s speech that had the crypto community on high alert this week – it was the Senate’s infrastructure bill. Included in the 2,700 page bill is a provision tightening the reporting requirements for digital asset “brokers” in an effort to increase tax revenues from the industry. While there was no objection to the level of taxation, it was the definition of broker that triggered an uproar. As defined in the bill, anyone “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” would be responsible for issuing 1099s and disclosing transactions over $10,000 to the IRS. This was read by industry participants as including not just traditional brokers (e.g., Coinbase) but also validators (miners), wallet service providers and protocol developers – impossible requirements, for most of these entities to fulfill, the industry argued,  and thus a threat to the industry’s existence in the U.S.

More than 100 organizations affiliated with the industry cosigned a letter backing the Wyden-Lummis-Toomey Amendment that seeks to narrow the definition of “broker” to just those “who conduct transactions on exchanges where consumers buy, sell and trade digital assets” while explicitly excluding the miners, wallet providers and developers. The amendment has found resistance within the Biden administration and faces the challenge of a competing amendment (Portman-Warner-Sinema), supported by the White House,  that changes the broker definition only slightly to exclude proof-of-work (PoW). The battle is set to continue this week.
RockCreek Update
Last week, the International Finance Corporation (IFC) launched its latest Investing for Impact report, which shows that $2.3 trillion were invested for impact around the world in 2020. The report highlighted that RockCreek has the largest amount of assets—$14.2 billion—privately managed in alignment with the Operating Principles for Impact Management. 

CEO Afsaneh Beschloss said of the report, “The maturity of the impact investing market in 2020 is an encouraging signal for investors. We are delighted to see that more and more investors are committed to integrating impact while generating returns throughout their investment lifecycles. This will continue to bring greater discipline and transparency to the market.” RockCreek was a founding signatory to the Impact Principles when IFC led the launch in 2019. You can read the full Investing for Impact report here

Thank You Summer Class of 2021

Last week, we said farewell to our outstanding 2021 class of summer interns and analysts. Ranging from high school—through a partnership with Rise DC—to MBA and graduate students, our 12 interns joined us from 10 states and 3 countries and represented a dozen different schools across the US. Fifty percent of this year’s class identified as female, and more than 90 percent come from diverse backgrounds. 

“I had a wonderful experience at RockCreek understanding the financial markets as a US investor, given my international investment background, and learning more about the Credit market and how it relates to rates and macro,” said Federico Sierralta, an MBA Student at Georgetown University who hails from Santiago, Chile.  
Members of the 2021 RockCreek Summer Intern Class 

“The Summer Analyst role offered me visibility and hands-on experience in all the key areas of investment management, from manager due diligence to asset allocation and even a pitch meeting with the leadership of a potential OCIO client,” said Brennan Murray, a Masters in International Business student at Tufts University’s Fletcher School. “RockCreek has cultivated the type of environment where anyone can confidently contribute, and the firm’s positioning as a thought leader on climate and other forward-looking investment areas makes working here particularly rewarding.” 

Summer interns gained experience in every aspect of RockCreek’s work, from portfolio construction to emerging manager selection to planning and helping produce
RockCreek’s Global Climate Summit in July. 

“RockCreek’s emphasis on ESG, diverse, and impact investing has been truly inspiring. They prioritize the right values, while working hard to generate the best returns, said Meghan Keenan, an economics major at Williams College from Massachusetts. “I am so happy that I was introduced to asset management in such a value-oriented environment. I will never look at investing the same and am inspired to make a difference.
RockCreek summer interns at the close of the Global Climate Summit

The RockCreek Team

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