POP QUIZ

The Beatles broke up in 1970, but about how much do they make in yearly royalties today? (Scroll to the bottom to find the answer!)

IN THE NEWS

📓 Journalism Meets Trading in New Company

A new business model just dropped. The FT reports, “A group of veteran U.S. financial journalists is teaming up with investors to launch a trading firm that’s designed to trade on market-moving news unearthed by its own investigative reporting.”

Wait, wait, wait: Maybe this isn’t a new business model. This is just a hedge fund — analysts dig through publicly available information while periodically publishing their research, and traders execute based on these insights.

It’s not an uncommon practice for hedge funds to hire journalists or those with sleuthing skills to uncover unique information about companies. Short sellers, like Hindenburg Research, infamously do this.

• They find issues with companies that aren’t broadly understood, bet against them, and unveil their findings so others realize what’s wrong and drive the price down — to the short seller’s profit.
• But short sellers aren’t, or shouldn’t be, trading based on “material” information from inside sources. Instead, they’re piecing together information that is, in theory, broadly available or at least accessible.
• For example, observing parking lot traffic in front of Walmart to predict quarterly sales is legal, landing somewhere between audited financial statements (widely available) and illegal insider information.

You might describe this business model as hedge funds subsidizing journalism. But what about journalism that subsidizes stock trading?

• That’s what Nathaniel Brooks Horowitz and writer Sam Koppelman are looking to do, which is the “new business model” we described above. It’s raising eyebrows across the financial world.
• They’re calling it “the first trading fund driven by a global publication.”

Why it matters:

The elephant in the room is when journalistic sourcing for trades becomes insider trading.

Journalism vs trading: Profiting from non-public corporate information is how newspapers & journalists make their money. They make public information that, in another context, could be considered insider info.

• In other words, insider trading happens when you trade. Journalists shouldn’t trade on insider info before it’s made public. Investment bankers and many others in the corporate & financial world face similar constraints.

A few concerns: If the company trades on insider info uncovered by its journalists before reporting it, it makes itself liable to insider trading allegations. And if it reports stories that prove incorrect and trades off those, it may be liable for market manipulation charges, among other legal hangups.

• Beyond the issues with trading based on your reporting, another question arises around the journalistic integrity of its business.
• Would you trust a company that trades on the stories it reports before you read them?

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😬 Powell’s Comments Work Against Him

Being Chairman of the Federal Reserve is tough. As mentioned in the intro, Jerome Powell’s press conference was mostly uneventful. However, investors were so excited about no news of another rate hike and Powell’s implication that more hikes may be unnecessary that his comments worked against him.

Back to econ class: See, the Federal Reserve determines overnight borrowing rates in the economy, which, as a matter of policy, it adjusts upwards & downwards.

• These rates are a baseline, and when they move higher (or lower), so does everything else — think savings account rates, mortgages, car loans, credit cards, etc.
• But not everything is affected equally. For example, for much of this year, 2-year Treasury bond yields were more highly correlated with Fed policy than longer-dated 10- and 30-year Treasury bonds.
• As yields on 2-year bonds jumped higher with Fed hikes, longer-dated ones inched ahead.

Why it matters:

One of the biggest stories in recent weeks, though, is that said longer-dated bonds (known as the “backend of the curve” in Wall Street lingo) have finally surged higher after over a year of rate hikes.

• Why that has occurred is a contentious topic, but Powell cited this finally happening as a reason the Fed may no longer need to keep hiking overnight interest rates (at the “front end of the curve”), comparing higher long-term Treasury yields to rate hike substitutes.

The market’s response? Let us paraphrase: ‘Great news! The Fed is done hiking, so it’s a great time to buy bonds again, especially long-dated bonds!’

In other words, after Powell’s comments, financial conditions “loosened,” reversing some of the uptick in Treasury bond yields that Powell had said was helping fight inflation (making more rate hikes by the Fed less necessary.)

• Stocks also surged, and the dollar’s value declined against other major currencies — more signs of looser financial conditions (bad for fighting inflation.)
• Now, Wall Streeters are wondering whether Powell played himself, and with the rally in Treasury bond prices (and decline in yields), if the Fed will have to hike rates again after all.
• Safe to say, Wall Street loves playing mind games with the Fed.

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😐 The Economy is Strong, But Americans Aren’t Thrilled

“Everything is amazing and nobody is happy.” — Comedian Louis C.K.

That kind of sums up the results from a recent Wall Street Journal survey, which found that 69% of respondents said the U.S. is headed in the wrong direction. President Biden’s approval ratings have been around 40% or lower, and Americans don’t feel more confident about the economy despite a few positive developments:

• The job market continues to prove resilient.
• Economic growth is evident (4.9% annual pace).
• The stock market has bounced back in 2023 after a tough year.

Maybe inflation is to blame for the unease: Even though it has fallen sharply since the June 2022 peak (9.1% to 3.7%), many Americans still feel the effects of higher prices. (Ahem, nobody needs the reminder.)

Meanwhile, the University of Michigan sentiment index is around recession-like levels. Again, inflation could be the primary reason: 40% of respondents say they feel worse off, blaming inflation.

• The Federal Reserve is trying to get that 3.7% figure down to 3%, then 2%, by raising interest rates and keeping them higher. Nearly everyone knows this, and yet sentiment remains quite negative.

Perception and reality: Sentiment this year has been more negative than you’d expect when we’re in a strong economy — with near-record-low unemployment.

Wages used to lag behind inflation, but that isn’t the case anymore. Generally, workers get more paid time off and flexibility (remote or hybrid work), so job satisfaction is relatively high.

• Plus, high housing and stock prices have lifted the median household’s wealth after inflation by 37% between 2019 and 2022 — the largest in the history of the Fed’s survey.

Why it matters:

Well, really, the question is: Why is this happening?

Referred pain: Political divides play a role, as they usually do, as well as stress around the increasing pace of the news cycle. Here’s WSJ’s Greg Ip with some theories:

• “I suspect a lot of pessimism about the economy is ‘referred pain.’ Just as one part of your body can hurt because of injury to another, pessimism about the economy may reflect dissatisfaction with the country as a whole.”
• One could cite political conflicts, the pandemic, the border, mass shootings, crime, and the wars in Ukraine and the Middle East as reasons to be pessimistic about America and the economy.

But as the financial author Morgan Housel would say, there’s the psychological idea that being pessimistic might make you sound or feel smarter. “For reasons I have never understood, people like to hear that the world is going to hell,” historian Deirdre N. McCloskey said in 2016.

• After all, Daniel Kahneman did win the Nobel Prize for showing that people respond stronger to loss than gain.
• This is another example of how much of what happens in the marketplace traces back to human behavior.

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TRIVIA ANSWER

The Beatles earn tens of millions of dollars, if not hundreds of millions, in royalties each year. There’s no official tracker, but Paul McCartney reportedly earns around $70 million annually in royalties alone.