Welcome to the first of many issues of Volunteer Capital Insights! We want to thank you for taking the time to hear our perspectives. If you’re a student, faculty, or alumni, we would greatly appreciate it if you would spread the message of Volunteer Capital Insights with your friends, family, and colleagues. In this week’s issue we have a lot of interesting perspectives including mergers & acquisitions, yen carry trade, interest rates, and a little bit of politics.
We would also like to thank Peter Costa from Costa's Corner for helping edit and advise on this issue of Volunteer Capital Insights.
Let’s break it down!
Economics
Interest Rate Cuts Imminent
After weeks of convoluting economic data, the Federal Reserve is now signaling a September rate cut of 25 basis points. Earlier this month, unsettling jobs data shook the market, raising fears that a recession might be closer than anticipated. However, recent weekly employment reports suggest the job market is more stable than initially thought. Last week’s softer CPI at 2.9% and PPI at 2.2% hammered the nail in the coffin for a September rate cut.
While rate cuts are on the horizon, the media often portrays the current interest rate as unusually high. However, if we look at the past 50 years, the average fed funds rate was 4.60%, just 73 basis points below the current rate. Although the economy is slowing, the Fed's aim for a "soft landing" should not push us back to the extremely low interest rates seen over the past decade.
By Andrew Brown
Equities
Dilemma of the Japanese Yen Carry Trade
The recent market volatility has been driven by the reversal of a popular investment strategy known as the carry trade. The carry trade was triggered after the Bank of Japan hiked interest rates to a 16 year high of .25%. In this strategy, investors borrow in currencies with low interest rates, like Japan’s yen, and invest in countries with higher rates or strong financial systems. The yen has been a favored borrowing currency because of Japan's low rates, but recently, the yen surged by 7.5%.
This surge caught investors off guard, triggering margin calls. Margin calls happen when the value of the borrowed yen rises, meaning the loans become more expensive to pay back. Since investors borrowed yen expecting it to stay cheap, they were forced to put up more collateral or sell assets to meet these obligations. To cover their losses, investors had to buy more yen quickly, which further increased demand for the currency, pushing its value even higher and causing a chain reaction of more margin calls. This cycle hurt U.S. markets as well, leading to a sell-off of riskier assets as investors scrambled to cover their positions. The instability has shaken confidence and increased concerns about financial stability, especially for those heavily invested in these trades. Ultimately, the majority of market events nowadays have a short lifespan.
By Cayle Beltran
M&A
Mergers & Acquisitions Rollercoaster
The past couple of years of M&A activity has been lackluster at best, and disastrous at worst. However, as the back half of 2024 nears the midway point, many are expecting the recent uptick in activity to continue. Before we discuss the recent transaction volume, it is important to go back in time to the glory days of M&A, or 2021. During this time, M&A deal value reached an unprecedented $5.9 trillion, shattering past records (Bain & Company). The market saw a steep increase in valuation multiples, which soon cratered in the years to follow. 2021 saw corporate led deals grow by 47% and deals led by financial investors grow by 100% (Bain & Company). However, these good times wouldn’t last forever.
In the year 2023, U.S. M&A deal value fell 11% compared to 2022, and a staggering 49% compared to 2021 (Paul Weiss). Since 2021 the M&A market has essentially been at a standstill, mainly caused by uncertainty of interest rates, record inflation, geopolitical tensions, and fears of a recession. This uncertainty has led to a mismatch in valuations between private equity buyers and sellers. Recently, the market has gotten more clarity on interest rates, and strong economic and inflation data has led to a slight increase in M&A deal volume, investment banking related activities, and private equity led deals. Private equity firms are sitting on record levels of dry powder, and have held assets much longer than they expected. Eventually, private equity firms are going to have to unload their assets, as Limited Partners (LP) await their distributions, many of which have been reluctant to write new checks to many of these firms. According to a recent poll conducted by CFO, ⅔ of dealmakers expect an increase in deal volume if a .25% or .5% rate cut occurs. A good sign for the M&A market has come from investment banks. Larger banks Goldman Sachs, JP Morgan, BofA, Morgan Stanley, Citi, and Wells Fargo all posted double-digit increases in investment banking revenue (The Wall Street Journal). Elite Boutiques also saw a sizable revenue increase, as Lazard posted a 17% increase in financial advisory related revenues (Reuters). Although the M&A outlook remains clouded throughout the back half of the year, many expect deal activity to tick up as central banks around the world begin to lower interest rates, and private equity firms sell off their assets.
By Charles Curtis
Op-ed
Trumponomics vs Harrisonomics
Over the past week, both Harris and Trump's campaigns have outlined their economic policies, each of which has significant flaws. Nationwide inflation remains the most pressing political issue, affecting everyone from the wealthy to the middle class to the poor. One often overlooked aspect of this inflation is that it was largely driven by actions taken by both Trump and Harris. Trump's $2.2 trillion Covid relief bill in 2020 initiated inflation, and Harris, by casting the tie-breaking vote for Biden's $1.9 trillion American Rescue Plan, exacerbated it further. The Biden-Harris bill was implemented after the economy had already begun recovering post-Covid, which only intensified inflation. Trump's proposed solution to inflation involves significantly increasing the U.S.'s drilling capacity, a logical approach given the reliance of nearly every industry on oil and gas. However, the U.S. is currently at its peak domestic oil production under the supposedly anti-drilling Biden-Harris administration. While Trump’s return could see the revival of projects like the Keystone pipeline, it’s questionable whether this would dramatically curb inflation, as the primary issue lies with elevated price levels, not just inflation itself.
Both Trump and Harris have embraced populist policies, including the elimination of taxes on tips—a policy both candidates have supported (who said it first, we’ll leave that for another day……). This move, however, could open more tax loopholes, regardless of who wins the election and implements the policy. Harris’s most significant policy proposal involves a federal ban on food price hikes, framing the issue as big corporations raising prices for profit. Yet, across the nation, businesses of all sizes have been forced to raise prices, due to the government’s excessive spending trickling down into the economy. The idea of empowering the government with more price control is not the true solution to the problem.
If either candidate genuinely wants to tackle inflation, they will need to make substantial cuts to federal government spending.
By Andrew Brown
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