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Thursday, August 16, 2018

Yes, I bring back a retro term to describe the perennial lackluster Eurozone. Germany’s growth has been a bright spot but it is hard to get excited about yesterday’s report of its quarterly (annualized) 1.8% GDP growth when America grew at a 4.1% clip. The WSJ reports “Germany has pulled off an impressive feat”, said Oliver Rakau, chief German economist at Oxford Economics. “In contrast to the performance of its Eurozone peers, growth has picked up slightly in the second quarter”. Talk about a downer. I guess if you set the bar low enough anything is good. The simple fact is that the success of the U.S is squarely attributable to pro-business fiscal policies emanating from slashing tax rates and crushing blows to the regulatory framework. In other words, these pro-business policies have unleashed growth. I feel bad for the European people since their leaders do not clearly articulate that every single time pro-business policies are enacted more growth and more jobs result. Eurosclerosis will continue until the European Union gets the memo that U.S. pro-growth policies have made them uncompetitive on the world stage. Please read our 2018 Forecast: Pro-Business Economy Unleashes Growth for further insight.


Wednesday, August 15, 2018

Emerging market currency turmoil is at top of mind this week, led but not limited to the Turkish lira. The August currency swoon is a tiresome trope but tiresomeness is nonetheless still a problem. The past couple of months has been especially hard on the Turkish Lira (down 30%) but not limited to it considering that the USD has risen by 3.4% against the Euro too. While it is often said that EM currencies do not float they sink, generally they do not sink without some weight put on them by either the global economy or their own weak spots. In the case of Turkey, Russia and Iran sanctions from the U.S. are not helping. Nor is the global pressure (likely also Fed induced) from commodity markets.

There are other signs of Fed excess tightness beyond the stronger dollar and faltering commodities, not least the flattening yield curve. In this case, it seems policy induced as ten- year UST yields haves been stable despite a pick-up in CPI inflation to 2.9%. I see this as a resulting clash of a tight fed pulling down on yields meeting the need for yields to move higher due to higher trend growth, hence this stalemate. In addition, while there has been much discussion about the flattening yield curve, it is not clear that it has been enough to drive the U.S. into recession. The Fed has presented an alternative recession probability model based on the near-term slope and should be free from some of the complications relating to the term premium. As such, it sees a 15% recession probability over the next 12 months versus a 20% probability implied by the ten-year minus two-year model. Certainly global PMIs are still showing expansion, albeit at a slower rate, but with some major emerging market countries stumbling. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, August 14, 2018

Turkey and Greece. I think there is a joke there but will leave it alone. Greece fanned the flames of the Euro-Crisis in 2010 leading to widespread panic due to scary media headlines, while the underlying data was sanguine. The end result was missing the beginning of one of the great bull markets. Let’s see if investors run for the exits again – this time with record GDP, corporate earnings and small business on a “stratospheric trajectory” as stated by the NFIB’s CEO. Granted that Turkey is bigger than Greece about the size of the Netherlands or seven percent of Eurozone GDP. We take a global perspective and recommend investors use a simple rule of thumb we call the 'Big Three'. That is, if the U.S., Europe and China are all marching upward and onward in concert with their economic statistics as they are in manufacturing, services and employment, then buckle up and stay invested. Please read my 2018 Forecast: Pro-Business Economy Unleashes Growth.

Friday, August 10, 2018

Don’t say goodbye to summer just yet! It’s about to get hotter, especially in the currency markets. The Turkish lira has plunged more than 20% against the U.S. dollar over the last week and more than 40% against the dollar year-to-date, rattling global equity markets. Turkey’s significant borrowing in U.S. dollars to fund growth caused the rout. The high external debt has made Turkey especially vulnerable to any movements in the dollar. What’s more, the Turkish central bank’s refusal to raise interest rates, to stem the nosedive in its currency, has made a bad situation worse. As a result, the dollar index (DXY) has soared to +96, the highest level of the year. Investors are sweating on fears of contagion to other emerging markets. Therefore, they are flocking to safe havens such as the U.S. Treasury market, which is driving the 10-year Treasury yield below 2.9%. Emerging markets are down about 0.5% YTD, but the broader impact from Turkey likely will be small. Meanwhile, core CPI index increased 2.4% year-over-year, in line with expectations but the highest reading since 2008. Inflation is not surging and is in fact showing signs of moderating. Nonetheless, we believe the steady pace of price increases and the robust U.S. economy, support additional Federal Reserve rate hikes and a stronger dollar, which will put additional pressure on emerging markets. Please see EM currencies on page 55 of the Global Perspectives book.

Thursday, August 9, 2018

The market is nearing all time peaks, and investors are realizing the strong fundamental economic narrative is not crumbling despite the many negative headlines. But are you participating in what will soon be the longest bull market in history or are you playing it “safe” in cash? Men who are 65 years old today can expect to live to age 83 and women who are currently 65 can expect to live until 86. Most people have not saved enough to fund their retirement years and need their money to work for them while they are sleeping. According to Bankrate, an investment in a money market fund is likely to pay about 0.2%. A one-year CD currently offers an average yield of 1.28%. These options do not keep up with inflation and therefore are eroding your purchasing power. Retirement investors need to consider tapping the potential of the equity markets to build the wealth they need to cover healthcare costs, let alone the silver fox sailing lifestyle generally depicted in retirement brochures. Although it is wise to save as much as possible, the market may be able to do some of the heavy lifting to grow your nest egg. Markets do have ups and downs. Diversification can help with the inevitable bumps, and often detrimental investor knee-jerk reactions, when market volatility spikes. The key to saving is starting early. Consider this example: Jim saves $5,000 a year from age 25 to age 35 before quitting his job to travel the world, terminating his contributions. Alternatively, Joe travels the world after college and finally gets a job at age 35, diligently saving $5,000 a year from age 35 to age 65. Assuming a realistic 6% rate of return, at age 65 Jim will have $401,230 and Joe will have $419,008. Joe’s nest egg is only marginally higher even though he saved for 20 more years than Jim. Ah, the power of compound interest. Einstein called it the eighth wonder of the world.

Please see an example of effective diversification on page 4 of the Global Perspectives book.

This hypothetical example is for illustrative purposes only and does not represent an investment in an actual product. It does not take into account the effects of taxes or withdrawals.

Diversification does not guarantee against a loss, and there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.

Wednesday, August 8, 2018

The market this year has been as gullible as Charlie Brown. Lucy, instead of pulling the football just screams “China tariffs” and the market, like Charlie, once again falls. Here is a rule of thumb that works pretty well. Whatever Armageddon scenario that the news repeats every hour, day and week tends not to be an issue to the market. The past couple of years have been rampant with examples of fears about Brexit, Russia, China, Trump, inflation and growth yet the market shrugs it off and moves higher. It does have a cost though – investors needlessly going too cautious or exiting equities altogether. Meanwhile, the fundamentals just continue to steamroll along and brings the market along kicking and screaming. Keep in mind the ABC’s that drive markets A-Accelerating Corporate Earnings; B-Broadening Manufacturing and C-Consumer as the game changer. The ABC’s are at all-time record highs and that matters more than regular geopolitical spats so ignore Lucy’s comical warnings. Please read more about our ABC’s in our Voya Global Perspectives 2018 Forecast.

Tuesday, August 7, 2018

The problem with an expanding economy is that economic data does not accelerate indefinitely and a deceleration in the rate of expansion is frequently viewed too negatively. Consumer confidence moved up in July to 127.4, close to an 18-year high but not quite as high as 130 a few months ago. The ISM manufacturing index showed very strong July manufacturing activity at 58.1, but the lowest in 4 months. The Case Shiller Home Index revealed prices moved up higher by .2% in June but the rate of price increases has slowed. Not every data reading can be a record high. Last quarter investors were rattled by comments about peak earnings growth. First quarter earnings growth was 25%. This quarter, it looks like earnings will grow a mere 24%. In addition, not only do we have tariff worries, a strong dollar and rising interest rates, we also have to deal with Iran sanctions, giving investors plenty to hate. Yet despite the negative headlines, the market keeps vexing the bears and notching gains. Are investors learning to shake off the overly pessimistic headlines and dig into the fundamentals – company earnings that just keep delivering? Could Taylor Swift offer some valuable investing advice – “players gonna play… haters gonna hate… I shake it off”? Meanwhile, there is one economic data point that keeps rocketing higher – the number of job openings soared to an all-time high of 6.662 million. Please read the Global Perspectives Mid Year Outlook for a deeper dive into the fundamentals driving markets.

Friday, August 3, 2018

Guest Blogger: Tim Kearney

Non-farm payrolls and private payrolls fell short of the consensus on the month – but when the upward revisions are factored in, the two-month numbers were right on top of consensus. That is, we had 157k total payrolls (193k expected), but July’s 213k was revised up to 248k. Net/net, two-month total of 405k on the headline. Manufacturing continues to grow nicely at 37k on the month (25k was expected). Participation rate was stable hence a dip back below 4% on the unemployment rate. But (big but) the underemployment rate of 7.5% is a 17 year-low. No movement yet, however, on wages with average hourly earnings stuck at 2.7%. We’ll need to see productivity rise before we see a big change in earnings. Maybe this is the cover the Fed will need to keep hikes at a moderate pace.

As for the trade report, June did not see any pre-tariff rush buying. That could take some time (a J-curve effect) as contracts are set a bit in advance before showing up in the data. FWIW, China is tariffing another $60bn of US goods. Perhaps a sign of weakening resolve on their part, the PBoC raised the reserve requirement on FX trades to support the CNY.

A Little Bear sort of report, the porridge continues to be just right.

Thursday, August 2, 2018

There is confusion about whether a correction and a bull market can coexist. The answer is unequivocally yes and it is in fact healthy to have not only corrections but swift rotations in equities between growth/value, large cap/small cap and domestic/international. This bull market was started, was fed and got fat on monetary accommodation and now is getting lean, mean and chiseled on animal spirits driven by pro-business tax cuts. China and Europe are still fat on accommodation and undoubtedly are going to be disrupted until they compete on a pro-business platform. This may cause corrections but ultimately is positive for the global markets as this double-header bull market begins - with USA in the lead. Look at page 64 of the Global Perspectives Book for today’s low unemployment claims that bode well for a blockbuster employment report tomorrow.

Wednesday, August 1, 2018

No need to rehash the Q2 GDP report, which was pretty good especially as nominal GDP grew by a strong 7.1%, up from 4.2% in Q1. First, if there were a binge in pre-tariff inventory buying it has not occurred yet; they dropped by the biggest amount since 2009. Investment growth (+9% H1) implies that the incentives from the tax bill may be acting on the economy. And the most interesting kernel in the report was the five-year benchmark revisions, which hiked 2017 personal savings rate to 6.7% with Q2 at 6.8%, putting a pall over the narrative that consumers are maxed out.

This is a great history but what can we expect going forward? 1) In the July employment report, watch average hourly earnings, which are basically zero in real terms. It will be tough for the Fed to become more aggressive without more inflation confirmation from the core level. 2) It is clear there will be an inventory-build in H2 and I expect to see the H2 GDP consensus move above 3%. 3) The key to the longer-term outlook is productivity, with increased Labor Force Participation Rate (LFPR) to a lesser extent. The consensus expectation for Q2 is a 2.3% increase (SAAR), which would deliver a four-quarter rise of 1.4%. That is not a breakout by any means, but since 2010, productivity has averaged just 0.7% growth, so at least it's a start. That data comes out on 8/15. - Special Guest Blogger: Tim Kearney, PhD


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