Today's Blog

Main content

Wednesday, September 26, 2018

The latest salvo in the global trade war saw Chinese tariffs taking hold on $60 billion of U.S. exports, which followed the imposition of U.S. tariffs on $200 billion of Chinese exports.

Probably the most important new developments are Secretary of State Pompeo saying, “[W]e are going to get an outcome which forces China to behave in a way that if you want to be a power…you don’t steal intellectual property,” and a Chinese white paper asserting, “The door for trade talks is always open but negotiations must be held in an environment of mutual respect…and not under the threat of tariffs.” Not much wiggle room from either side, though for now both countries have imposed lower levies than originally threatened, i.e., the United States 10% vs. 25% and China 5‒10% vs. 25%. China clearly is still a strong story: consider that exports have picked up pace, after having doubled in almost 10 years and quadrupled over 15 years.

It is important to understand that China has been forthcoming during this dispute. According to a June 2018 International Monetary Fund report, “the Chinese authorities said they would respond to the U.S. tariffs with comprehensive measures, but they also announced new opening-up plans. These include lowering entry barriers on financial services and autos, reducing import tariffs for a wide range of consumer goods and autos, loosening sectoral restrictions on foreign investment through a shortened negative list, and seeking faster progress toward joining the WTO Government Procurement Agreement. The direct macroeconomic impact of tariffs announced to date appears limited, but could be amplified significantly through financial and investment channels, and further rounds of retaliation, raising downside risks.” It will be an interesting few months.

Tuesday, September 25, 2018
The Fed funds target rate and Treasury yields remain historically low, even though the Fed increased the target rate in December 2016.

The Federal Reserve meets tomorrow and forecasts for a rate increase are close to 100% certain. The market will be looking at the commentary and language of Fed Chair Jerome Powell for clues as to the Fed’s future actions. The word “accommodative” is important because it implies that the Fed funds rate is still below the “neutral rate,” i.e., the rate consistent with full employment, trend growth and stable prices. An economy in this state presumably doesn’t need to be either stimulated or slowed by monetary policy. As of now, Fed rates are still accommodative. If Powell discusses tariffs, trade tensions or emerging markets it could be perceived as dovish – the Fed is willing to stay accommodative longer. If Powell focuses on the labor market and inflation, investors may deem his comments hawkish and more willing to raise rates. The strength of the economy has also increased the likelihood of a December rate hike, with odds currently at 75%. The picture becomes less clear moving into 2019, but consensus is currently for two more hikes next year. While the Fed has expressed willingness to remain neutral for a time, it also wants to make sure it has some ammunition ready for the next economic downturn.

Please follow the Fed funds rate on page 34 of the Global Perspectives book.

Friday, September 21, 2018
Two scenarios of Returns

Investors have been able to set aside the trade tensions and markets have climbed to historic highs. Those investors sitting on the sidelines may be kicking themselves and thinking they missed the rally. Markets care more about profits than politics and based on earnings growth projections for Q3 (19%), Q4 (17%) and 2019 (10%) the market has room to run. The continued strength of the economic outlook has been mistakenly downplayed. If you are in the market, regular rebalancing to lock in gains by selling your high flyers and buying your now cheaper holdings is always a good idea. If you are close to retirement, you may like what you see on your 401K statement but should always plan for market downturns by being globally diversified and remember that significant downturns in the early years of your retirement can derail your withdrawal strategy, which may extend more than 30 years. That’s where a good advisor can help you devise a plan. Your withdrawals won’t just be affected by market returns. Inflation, interest rates, taxes and liquidity needs will all play into your strategy. Please see page 91 of the Global Perspectives book for an example of two retirement portfolio withdrawal scenarios with markedly different terminal values based on a market downturn in the early years.

Thursday, September 20, 2018

Today’s initial jobless claims of 201,000 takes us back to the sixties to find a number so groovy. In addition, the latest economic data points indicate a robust economy that is totally right on. A rebound in the regional Philly Fed index to 22.9 in August was higher than consensus. Existing home sales held steady at 5.34 million annual rate with a welcome bump up in lean inventories. Leading indicators came in at .4, supporting forecasts of a 3% + economy for the first time since 2005. In addition, the moderation of the U.S. dollar is helping to alleviate some of the emerging market angst and long-term yields are moving up for the right reason – growth. Investors are digging it and the market is at all-time highs. However, markets rarely move in a straight line. The trade tariffs, U.S. debt and deficits, emerging market debt, and mid-term elections are just a few of the potential threats to the current vibe. Diversification across asset classes including bonds and a proactive plan to deal with market and economic cycles is always cool. Please read the Global Perspectives Mid-Year outlook for an in-depth look at what is driving markets.

Wednesday, September 19, 2018
Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

August was a good month on the U.S. inflation front. While I do not like to write an “elevator report,” in this case most cars are heading to lower floors. In a flurry last week, the full run of price measures was down on a year-over-year (YoY) basis. The “headline” Consumer Price Index for All Urban Consumers (CPI) rose 2.7% YoY in August, compared to 2.9% in July. Core CPI, which excludes food and energy prices, rose 2.2% YoY in August, down from 2.4% in July. If you are more goods oriented, the headline Producer Price Index (PPI) rose 2.8% YoY for August, compared to 3.3% in July. Core PPI — excluding food, energy and trade — in August rose 2.9% YoY, slightly up from 2.8% in July. Export prices were up 3.6% Yoy in August, down by 0.7% from July. Import prices — bolstered by a 5% rise in the U.S. dollar in six months — fell to 3.7% in August, down by 1.2% from July.

There was one modest uptick within all the inflation data: real average hourly earnings rose 2.9% YoY in August, compared to 2.7% in July. That is a long way from the January 2015 peak of 2.4%, but a pleasant surprise. Expect to see more wage increases as the labor market tightens. If the Phillips curve is a labor market output rather than an inflation rate input, then the entire concept of slack or NAIRU (the non-accelerating-inflation rate of unemployment) will not hold. A rise in productivity is required to move real wages higher.

This aligns with economic theory, which holds that employee compensation is not a cost-push phenomenon. As a general consideration, it is a truism that slack — especially the unemployment rate — does not drive inflation; inflation is “always and everywhere a monetary phenomenon,” to quote Milton Friedman. Unemployment below the “natural rate” does not cause causes inflation; rather, there will be inflation if and only if there has been a monetary policy mistake. With the Federal Reserve tightening policy, it is possible that inflation will remain in its current trend for longer than market participants, and possibly the Fed, expect.

Please check out page 60 of the Global Perspectives book for more on inflation - consumer price index.

Tuesday, September 18, 2018
Over 90% of the world’s consumers reside outside the U.S., making global trade imperative for growth. The global growth slowdown corresponds with an overall slowdown in trade..

Another round of trade tariffs on $200 billion of Chinese imports has been announced and will take effect on 9/24. The planned 10% tariff is less than the 25% initially proposed but it will move up to 25% by the end of the year. Retaliatory measures by China are expected. The Chinese trade issue has been hanging over the market for quite some time and the market has become adept at shrugging it off. While some industries and companies are feeling the impact, the overall implications to the global economy have been minimal. Bilateral trade between the U.S. and China accounts for a mere 2.5% of total global exports. In addition, the strength of the dollar versus the Chinese Yuan has helped buffer the additional cost of Chinese imports to the consumer. The uncertainty is certainly a negative for businesses and planning. But the robust U.S. economy and record high corporate earnings continue to provide markets with the gas to move higher. Please follow global imports and exports on page 47 of the Global Perspectives Book

Thursday, September 13, 2018

On the 10-year anniversary of the great financial crisis and the 9/15/2008 Lehman collapse, financial officials are defending the actions of the government post Lehman as necessary in making sure a very bad situation did not get even worse. True enough. It is hard and unfair to judge programs like TARP when the extent of the potential downturn if no action was taken cannot be accurately measured. However, most economists note that the cracks in the financial system began to show six months earlier with Bear Stearns and even so, no one could really see such a disaster coming. Not so fast, Speedy. It was actually in the third quarter of 2007 when corporate earnings growth started rolling over. Companies made less in the third quarter of 2007 than the third quarter of 2006. If investors thought this was a one-off blip, fourth quarter 2007 earnings were posting even more dramatic negative growth. With earnings screaming, “Danger, Will Robinson,” it would be disingenuous to say no one saw it coming. Earnings are the principal indication of macro-economic conditions and the paramount guide to proper global market positioning. The signs were there almost a year before the Lehman collapse that sent the markets to the precipice, they were just ignored. Today, we are way past that and despite U.S. markets at record highs they continue to grind higher following ever-higher earnings. There is optimism on the trade talks with China and as expected, inflation eased a bit in August with both CPI and PPI readings coming in lighter than forecasted with core inflation slowing to 2.2% year-over-year (2.7% headline) and the monthly PPI declining for the first time since February 2017. The bottom-line is that markets follow their fundamental earnings growth and should we see earnings growth go negative then “watch out” as this “canary in the coal mine” sings for a bear market. Today we are not even close to this worry. Please see page 6 of the Global Perspectives Book for earnings growth.

Wednesday, September 12, 2018

It appears to be a growing consensus that a fiscal policy largely of tax cuts is a ‘sugar high’ whose effects will begin to fade by early 2019. Basically, this mainstream forecast assumes that the “New Normal” of sub-2 percent trend growth is indeed a lasting state. Tax cuts are good for growth and I doubt that the effect fades quickly. Part of the improvement in the economic scene is deregulation; part is the result of rising animal spirits. Here’s how to analyze the policy mix: The correct tool is directed at the correct target. That is: a) monetary policy is focused solely on inflation-stability. Frankly, we have just had an experiment in the efficacy of monetary policy as an instrument of growth. I’ll grade it a “D” for growth, though an “A” for lifting deflation risk; b) Fiscal policy has to be graded at least a “B+”. Deregulation and tax reform have now been turned towards growth generation, and growth is happening; c) Trade policy is an “Incomplete”. If the goal is to pressure China and to lower tariff barriers globally then it will merit an “A+”. For now, there is too much uncertainty for the economy and markets (although I do not believe we will see a trade war) and d) Labor policy is an “Incomplete”. The Administration has to find a balance between growing the labor force without weighing on wages, whether skilled or unskilled. So while the monetary/fiscal policy mix appears to be on track to lift the growth rate, the latter two ‘incompletes’ need to be settled, one way or another to determine where the US is going. Currently, we have uncertainty. And, unnecessary uncertainty detracts from the long-term story. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, September 11, 2018

Small business optimism hit an all-time high in August with more business owners than ever reporting that it is a good time to expand. Shhh, don’t tell anyone. It’s a secret. The number of job openings in the U.S. rose to a record high of 6.94 million according to the latest JOLTS survey, with the most jobs created in insurance, finance and manufacturing while the lower paying retail sector shed jobs. Shhh, that is a secret too. The reason for the secrecy regarding this positive economic data is that everyone knows that the death knell of a bull market is euphoria. When anyone who can fog a mirror has a stock tip for you, you know it’s time to get defensive. (Remember Bitcoin?) Luckily, investors are plenty worried about trade wars, political drama, the growth ability of the tax cuts and the reputation of the month of September as a stock market bully. And 10 years after the Lehman meltdown, investors are still once bitten, twice shy with more than $10 trillion of cash on the sidelines. Please see Doug Coté discuss this perplexing attitude on CNBC.

Friday, September 7, 2018

It’s hard to poke holes in today’s non-farm payroll numbers. In August the U.S. economy added 201K jobs, the 95th straight month of job creation, and the unemployment rate remained at an 18-year low of 3.9%. Despite slight net downward revisions in June and July, this year’s average monthly gain of 207K jobs is running higher than last year’s average job gains. In addition, wage growth accelerated, up 2.9% YoY from 2.7%. But this does not necessarily foretell a spike in inflation. The recent increase in productivity (up 2.9% in Q2 and running 1.2% over the last six quarters) is an offset to higher wages. With higher productivity, employers can offer raises to workers without eroding profit margins. Markets reacted negatively to the payrolls report because it affirms a robust economy and the perceived pressure on the Fed to raise rates. Some economists have also bemoaned the lack of skilled workers as a gaping hole in the employment picture. However, there are still more than 96 million noninstitutionalized civilians between ages 16 and 64 not employed, many of whom can be enticed back into the workforce and trained to fill gaps. Please keep track of labor costs and productivity on page 65 of the Global Perspectives Book.


Footer content