Radio Show: America's good Economic Time


Thursday, December 01, 2016 // Written by Enzio von Pfeil

Why you should be buying American stocks and bonds.

US

In a series of tweets overnight, US President-elect Donald Trump has said he will be “leaving his great business in total in order to fully focus on running the country.” He says legal documents are being drafted to take him fully out of business operations, without giving any more details.

  1. When he talks of a “blind trust”, I wonder just who is supposed to be blind? I think that he expects all of us to be blind to his surreptitious business antics.  Trump is honestly dishonest, whilst Clinton was dishonestly dishonest…
  2. He remains the sophist: always skirting the laws in a smart-aleck way. This means that when he says that “legal documents are being drafted”, these will be festooned with plenty of slip clauses – precisely so that he can continue running his businesses – sneakily.

Donald Trump has appointed former Goldman Sachs banker and hedge fund manager Stephen Mnuchin as Treasury Secretary. He confirmed that Mr Trump will push to cut the top corporate tax rate from 35% to 15%. He also wants to offer a tax holiday on overseas profits. American companies are estimated to have $2.6 trillion in untaxed profits sitting overseas.

Mr. Mnuchin also promises "the most significant middle income tax cut since Ronald Reagan".

  1. Mnuchin. Talk about “draining the swamp”: just like everything else, he has been reversing his position ever since he got elected. 
  2. Corporate tax cut to 15%.  What Trump intends to do and what actually happens are two separate things.  Trump won’t get along with a very divided Republican Congress. And don’t forget that in the Senate, the Republicans always must get eight DEMOCRAT votes to get the necessary majority with which to pass legislation.
  3. Tax holiday. So he offers a tax holiday on the repatriation of overseas  profits. Until we know the real deal – for instance, how long will this holiday last? What is Trump getting and thus what is he giving in this deal? We cannot be certain that he will be able to keep to his promise of such a tax cut. Besides, what will companies do once they repatriate their profits? More share buybacks?
  4. $2.6 trillion in un-taxed profits. I probably am the father of this figure, having written a book, TRADE MYTHS, about how US MNCs affect her trade balance. I reckon that their very successful MNCs stash about $4 trillion A YEAR away in unreported overseas profits….

78-year old investor and financier Wilbur Ross has been appointed to lead the Commerce Department and will be responsible for managing America’s business and trade policies. Mr. Ross is known as the “king of bankruptcy" for buying distressed companies and turning them around, and has personal wealth of about $2.9bn, according to Forbes magazine.

Mr Ross has blamed the North American Free Trade Agreement with Canada and Mexico, and China's 2001 entry to the World Trade Organization, for causing huge US factory job losses.

  1. Talk about “draining the swamp”!  Wilbur Ross is right in there – with the rest of them.  I wonder what his company’s lobbying activity on the Hill has been…
  2. Wilbur Ross is being a simplistic sophist when he blames everyone else for US factory job losses: his analysis is “deeply shallow”. The fact is that the appalling US education system has not prepared today’s youngsters for tomorrow’s jobs: the educators are not speaking with employers, these chopsticks run parallel to each other, they don’t cross as a demand/supply graphic should..

MARKETS

The U.S. small cap Russell 200 Index has ended the month of November with an 11% gain, handily beating the large cap S&P 500 index which rose 3.4% over the month.

  1. Evidence-based investing. This is how we invest clients’ money:  harnessing the power of smart beta.
  2. è Time and time again, for instance,  it has been shown that small caps beat large caps..
  3. Thus, it is of little surprise that in November, small caps beat large caps by 2.5x

In other notable November market moves, Brent crude oil is up 4.5% over the month. Copper has risen over 19%. The USD has risen over 9% against the Japanese yen. That has sent the broad-based Topix index up 5.5% over the month. U.S. 10-year Treasury bond yields have jumped 57bps in November. And Gold is down 8.4% for the last month.

  1. Oil.  This price is driven by the politics of OPEC and its accompanying piranhas: simple supply/demand analysis won’t do.
  2. Copper. Dr. Copper has been stabilising for some months, bang in line with the view that we put forth in late 1015 – namely, that the uS economy has been stabilising and recovering gingerly.
  3. Yen.  Its weakness is determined by the BoJ, primarily. They want a weak yen in order to
    1. Propel exports : but this is a mirage, as I emphasised in my book, Trade Myths
    2. Translation effect. The weak yen means that Japan’s MNCs “make” more money on their overseas plants – but only because of this translation effect.
    3. Import inflation. Here is a good, tangible resut that the BoJ aspiring to boost:: imported inflation.
  4. 10-year US Treasury yields
    1. Over-bought the Moby Dick of inflation. Bonds have been oversold because of people anachronistically thinking that inflation will return. Demand-pull inflation won’t, however. Besides, people are getting older so they have to save all the  more for retirement, meaning that they will keep buying bonds. 
    2. Budget deficit blowout. Instead, yields  have risen MAINLY because  the market’s subconscious  expects a budget deficit blowout from Trump’s fiscal plans:

                                         i.    $100 bn/year extra in infrastructure spending and

                                        ii.    $1 trillion / year in lost revenues due to tax cuts.

  1. Investment implication has to be: buy cheap Treasuries, financials and cyclicals! Demand-pull inflation cannot return, courteously of higher productivity due to artificial intelligence, diminished need for labour, and globalisation, which makes the supply curve infinite: you want to produce more, just tap the overseas markets.
  2. Gold. 
    1. Like oil, its price has NOTHING to do with demand/supply considerations.
    2. Instead, it is an insurance policy
    3. And the strong dollar has made it more expensive to buy in non-dollar terms.

On the data front U.S. private companies added 216,000 jobs in November beating estimates of 165,000. The government’s non-farm payroll report will be released tomorrow.

  1. Jobs.   Plenty being created, in line with a continued improvement in America’s Economic Time®.
  2. Labour force participation rate.  BUT the labour force participation rate remains weak, hovering at 62%. This means that over one third of America’s labour supply have given-up looking for jobs.  That low participation rate, in turn, keeps a lid on upward wage and thus demand pressures.

The Chicago PMI index came in at 57.6 well above October’s reading of 50.6.

  1. This underlines America’s gradual improvement in her Economic Time®

Pending home sales rose 1.8% year-on-year in October in line with expectations.

  1. Low interest rates will be helping, along with rising income security
  2. BUT the next market crash has been programmed: banks now are issuing Collateralised Loan Obligations….

The Fed’s Beige Book released overnight said the US is seeing moderate growth in most regions of the country. However, uncertainty over the US Presidential election led to lower job openings and a slowdown in consumer purchases of autos and durable goods. Uncertainty over the Affordable Care Act impacted the healthcare sector, according to the Beige Book.

  1. It is a reasoned document that ties in with our view of America’s Economic Time® continuing to improve….

You can listen to the RTHK podcast here. Enjoy!

 

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