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Wednesday, October 18, 2017

Deregulation is contributing mightily to the US economy and aiding sentiment. Expectations are the leading edge of growth, given the importance of ‘animal spirits’ to risk taking. Importantly, ISM New Orders are still rising, with ISM Manufacturing hitting 60 for the first time since 2010. The Empire State Manufacturing Survey hit +30, up from -17 in January 2016. The NFIB Small Business Optimism Index is holding at 13 year highs. The University of Michigan Consumer Sentiment Index is at 16 year highs. It’s no surprise that the IMF in its annual review revised upward US growth to over 2% in both 2017 and 2018.

Now it’s up to Congress to push for a tax reduction package. There is some talk about a ‘roll out’ of tax cuts over a few years: in no uncertain terms, this would be a major mistake. Economic activity happens at the margin. When it becomes clear that economic actors will face a lower future tax rate, what activity can be pushed out will be. This is the story of the Reagan tax cut, which saw growth explode when the phase-in to lower rates was completed in 1983. Another mistake being mooted would be ‘temporary’ tax cuts. Economic theory holds that temporary increases to incomes are saved, not spent. That’s been borne out in practice, as shown by temporary tax cuts by Presidents Bush, Bush and Obama. (It’s important to remember that reducing debt is a form of saving). The clock is ticking; passage of a Q4 tax program seems unlikely. But as Senator Lindsey Graham recently noted, if Republicans don’t pass tax rate reduction the 2018 election could be lost. The stakes for the market and the outlook are high. For more insights on the global markets, please see our most recent quarterly commentary: The Teflon Markets, Growth and Reflation. - Special Guest Blogger: Tim Kearney

Tuesday, October 17, 2017

The Dow just hit 23,000 for the first time. Are you surprised? Well, you shouldn’t be. All year, Global Perspectives has been advising investors that the bias is to the upside. Fundamentals are robust and earnings continue to forge ahead. Yet investor skepticism abounds. Investors are worried about the age of the bull market and higher than historic valuations and the Fed raining on the parade and the Washington drama and the recent hurricanes and wildfires. Do you see a theme here? Aha! It’s a lack of Global Perspective. The global economy continues to accelerate and that is what is feeding earnings and the seemingly insatiable market. Here are a few anecdotal global tidbits from Evercore ISI Macro Views:

  • German IP accelerated to +4.5% y/y.
  • Taiwan exports accelerated to +21% y/y.
  • Japan machine tool orders accelerated to +46% y/y.
  • The MSCI WORLD accelerated to a +18% y/y increase.
    • Those investors enjoying the ride up need to make sure they don’t get too complacent and remain diversified across asset classes to help level any bumps in what has been a remarkably smooth road. Please see page 55 of the Global Perspectives™ Book for a snapshot of some key global economic data.

    Friday, October 13, 2017

    Friday the 13th is often thought to be unlucky. Not today. September retail sales surged 1.6%, the fastest pace in more than two years. Automobiles, gas stations, and home building suppliers were big contributors to the increase, benefiting from a post hurricane bump. Hurricane effects were also evident in the latest inflation numbers. The hurricane related disruption in the oil industry led crude prices higher and the consumer price index (CPI) rose 0.5% in September to post the largest increase in eight months. Although year over year consumer prices are only up 2.2% (1.7% excluding food and energy), slightly below expectations, inflation is slowly creeping toward the Fed’s target. But the biggest positive data element released today was a mammoth leap in consumer sentiment. The University of Michigan Consumer sentiment reading soared to 101.1, the highest reading since 2004, shattering expectations of 95. So go ahead and walk under a ladder, break a mirror, spill some salt and let a black cat cross your path. Then maybe buy a lottery ticket. And follow the latest Global Perspectives on the market here.

    Thursday, October 12, 2017

    The Q3 earnings season party has begun. Financials are usually the first to report and so far the big banks have been exceeding expectations. However, the financial sector is still expecting negative earnings growth for Q3. The Insurance sub-sector is the culprit, dragging Financials down due to the impact of the hurricanes. But a big pop in insurance company earnings is expected in Q4. The Consumer Discretionary sector is also forecasting a negative growth quarter, but a subsequent huge surge in Q4 - especially in the automotive sector - is anticipated. Overall earnings growth in Q3 will most likely be mid-single digits; not as high as the growth reported in the last two quarters, but not too shabby either. These earnings estimates are mostly baked into the market cake and barring any huge surprises, the market is already looking forward to Q4. The fourth quarter anticipates strong positive growth across all sectors, continuing to support the bull market. Can it get any better than this? Yes, corporate tax cuts would be the icing on the cake. Maybe it’s time for investors to dig in. Please watch Karyn Cavanaugh's latest comments on the markets and corporate earnings (Karyn appears at the 10 minute mark).

    Wednesday, October 11, 2017
    Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

    The FOMC released the minutes of the September 19-20th meeting this afternoon. Participants worried that forces keeping inflation down could be more persistent than previously thought, departing from comments earlier in the year regarding the influences of one-time factors such as cellphone plans being more transitory. The bulk of the committee still see a December interest rate hike as appropriate, however some remain data dependent. Participants acknowledged that upcoming inflation and growth data could be influenced by the effects of the recent hurricanes, but don’t see the storms affecting medium or long term growth. Some participants also questioned whether the estimate for the natural rate of employment is lower, implying more slack in labor markets.
    Market responses to the minutes' release were muted, with 10-year yields falling 1 basis point and the expectations for a December interest rate hike staying put at 77%. The effects of the hurricanes will allow the committee to look through at least a few data points as hurricane-influenced, and we share the market’s view that there will be a hike in December. If lower than target inflation indeed persists and there is slack remaining in the labor market, the FOMC should move slower in normalizing policy and risk assets should benefit. Please see page 59 of the Global Perspectives™ Book: “Inflation - Consumer Price Index”. - Special Guest Blogger: Pavel Dekhman

    Thursday, October 5, 2017
    Taxes matter. High U.S. corporate income taxes have spawned a recent wave of tax inversion deals.

    Tomorrow’s Non-Farm Payroll report has had its decade in the sun. It has been all the Central Banks, pundits and media could focus on. Now it’s time to focus on something far more important and meaningful to the U.S. Consumer. It is “take-home pay”. The government seems so concerned about rising wages – I call it “alligator tears” – and what that means to the “middle class”. Really? I am not buying it. If Congress is so concerned about the middle classes’ income they would not just cut taxes but slash taxes. Tax cuts would immediately increase “take home pay”, increasing the well-being of congress’s constituents – a true bipartisan issue. Taxes were responsible for the Boston Tea Party in 1773 led by Samuel Adams, beginning the Revolutionary War. Every relatively recent president that took the ax to taxes created an economic boom that raised the standard of living for all. These included Presidents Kennedy, Reagan, Clinton and hopefully Trump. Yes, close the loopholes, rid the markets of Central Bank interference, make it simpler, fairer and more reasonable. Did you know that the top 50% of AGI taxpayers pay 97.5% of all taxes or that the top 10% pay 70% of all taxes? Here is an idea – make it pro-business – unleash capitalism. There is indication that even the discussion of tax cuts and a meaningful reduction in wasteful regulation is spurring the economy. So ignore tomorrow’s employment report – which is near full employment – but we can always use more and focus on wages and tax cuts. Please see page 73 of the Global Perspectives™ Book to find that the USA has the highest tax rates in the world.

    Wednesday, October 4, 2017

    Globally, deflation is no longer the major risk and inflation is under control. The G-3 Central Banks have done a good job of escaping deflation though they are still not at their (generally) 2% inflation targets. We expect that 2018 will see both the FOMC and ECB begin to normalize their balance sheets and that the BoJ will remain accommodative well past 2018. There are likely to be unanticipated effects from the normalization since it is uncertain how exiting from QE will work in practice. As a result, we expect the Fed and ECB to move slowly and on net, global monetary policies will remain accommodative in 2018. With the G-3 growing at above trend rates, this is a good scenario for riskier assets.
    Globally, inflation is not a major problem. The IMF measure of GDP-weighted CPI inflation has averaged 3.6% over the past 10 years, sub-3% over the past three years. Importantly, global liquidity has stabilized in 2017 after a long decline. The IMF measures total world foreign exchange reserves. We see this as a form of a world-wide exchangeable monetary base. That’s because it is basically the total of all the foreign assets on all central bank balance sheets. The rebound is positive for maintaining global growth. For more insights on the global markets, please see the full list of our latest commentaries. - Special Guest Blogger: Tim Kearney

    Tuesday, October 3, 2017
    The U.S. manufacturing report has rebounded after a month of contraction; the latest eurozone and emerging markets reports also indicate expansion.

    A “Bear Trap” is when investors are convinced that the market is poised to come crashing down when instead it relentlessly marches upward. Pity the poor bears overweight in cash – or worse short the market – betting that it will go down. Then add insult to injury with Monday's blockbuster factory orders (ISM Manufacturing) report at an astounding 60.8 reading, the second highest in 30 years, to the delight of the bulls and to the decimation of the bears. This reading was so good it corresponds to, that is, predictive of a 5.5% increase in real GDP annually. This bull market has been good to stocks, bonds, domestic, international, and Emerging Markets with all positive returns for both the third quarter and the year. That is what a pro-business environment is supposed to do, but we haven’t seen anything yet – until massive tax cuts arrive. Please see page 8 of the Global Perspectives™ Book - Global Manufacturing & Services.

    Friday, September 29, 2017
    Declining funding and sponsorship of pension plans is shifting the burden of retirement savings to participants in defined contribution plans.

    The U.S. stock market is closing out the third quarter with what is shaping up to be the best September since 2013. When people think of who owns the stock market they usually think of rich Wall Street CEO’s, but according to, the biggest owner of stocks is retirement plans. As of 2015 retirement plans held 37% of all stocks. That includes 401K plans and pensions (defined benefit plans). Individual taxable accounts make up only 24% of the total stocks held. Other big players include foreign investors, insurance companies, and non-profits. So the stock market’s record highs are good news for retirement savers and the future economic landscape because we know that social security will be under pressure to service the burgeoning aging population. In addition, many guaranteed benefit plans are woefully underfunded and need a boost to meet their obligations to pensioners relying on them. The proposed tax reform will help corporate profits. Those profits pass through to the owners/shareholders – primarily retirement accounts. Please see page 88 of the Global Perspectives™ Book for a look at retirement funding.

    Thursday, September 28, 2017
    Taxes matter. High U.S. corporate income taxes have spawned a recent wave of tax inversion deals.

    A tax reform package has final been revealed. The proposed changes offer simplicity, a reduction in individual tax rates, and most importantly, a change in corporate taxes. U.S. businesses face one of the highest corporate income tax rates in the world, 35%. Compare that with business-friendly Ireland at 12.5%. Small businesses often pay taxes at the owner’s individual rate - as high as 39.6%. Corporations are also subject to the very unfavorable business model which requires them to not only pay taxes in the country where income is earned, but then pay another 35% on cash brought back to the U.S. This is truly a business buzz kill. Opponents of the new plan are lamenting a $2.2 trillion potential increase in the deficit and are calling for a revenue neutral plan. Where were all of the deficit hawks when more than $4 trillion was added to the deficit over the last 8 years resulting in very tepid growth? In addition, the calculations don’t account for a surge in business investment, productivity and GDP. While economists can’t be sure how much growth will ensue when the U.S. becomes a true competitor in the global market, one thing everyone agrees on is that the U.S. corporate rate is too high. Please compare corporate tax rates by country on page 73 of the Global Perspectives™ Book and watch Karyn Cavanaugh’s latest comments on the market.


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