A lot of what we do every day as analysts, investors, economists, strategists, traders etc… is sift through the noise and separate what’s important for markets and what is not. I do my best to consistently shift attention to what is most relevant and avoid that which is not market moving. There is plenty of important news that we should all be aware of but many times it doesn’t matter to markets. On this, North Korea, the US debt ceiling and possible government shut down certainly qualify.
I don’t want to minimize the risk of North Korea dropping bombs but I will continue to assume nothing comes of this. I mean, how can one position for this anyway? I do however ask myself every day, ‘What does North Korea want? What is the point of all of this? Maybe Kim Jong-un just wants to commit suicide?’
With respect to the debt ceiling, instead of constantly debating how and when to raise it we should all be discussing why we have it all. What is dumber than a debt limit that is never adhered to and is always raised. Here is directly from the Treasury web site, “Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.” Thus having to talk about this every few years is a complete waste of time because we know it will eventually get raised. I laugh at some of the commentary though surrounding this. The Treasury Department themselves said “failing to increase the debt limit would have catastrophic economic consequences. I would cause the government to default on its legal obligations.” Does anyone actually believe that a holder of US government debt will not get paid back, even if its temporarily delayed? Yes, it would be a huge short term inconvenience, but catastrophic? S&P also used the word ‘catastrophic’ when they wrote, “failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery.” Does anyone really believe the debt limit won’t get raised? Will this equate to an implosion of the US banking system due to massive overleverage?
Lastly on the possibility of a government shutdown, I can guarantee this: If it closes, it will soon reopen. Move on.
I’ll repeat again, what is most relevant for markets in the last 4 months of the year is the behavior of central bankers. I know you’re shocked at me saying that but how can it be otherwise. Don’t tell me its earnings instead as we’ve priced that in many times over, aka multiple expansion. Tax reform and what the complexion of it is in terms of size and extent is hugely important of course but that would play against where multiples go.
As for where to be invested, I maintain my nearly 2 year bullish stance on emerging markets, both equity and debt (particularly India and Brazil but no longer South Korea). I think agriculture is one of the few areas of value, particularly in the fertilizer space. My bullish stance on the euro since $1.05 is intact but I acknowledge the bear dollar camp has gotten large and a contra rally may be in front of us. I also like still the commodity currencies like the Aussie$, Canadian $ and Brazilian Real. My stance of US stocks remains the same. They are too damn expensive which of course doesn’t matter until it does and the Fed is staring you in the face and saying it now matters because they are no longer your BFF. QT really matters people, just you wait. This said, there are always attractive individual stock stories, themes and values. Always.
I still love gold and silver and believe the December 2015 lows were the bottom in the 4 year bear market. If correct, the previous highs will be taken out in coming years.
The next big short is the European bond market I’ll say again. What with European junk bond yields little different than the US 10 yr yield and sovereign yields that are in LA LA land for the sole reason that the ECB has their foot on them. Well, whether this week or in October, the ECB will tell us all that the foot is letting up again. European economic growth is good, inflation, while low, is creeping higher.
European stocks are attractive, particularly France with Macron trying to MFGA, and I’ve rode the wave over the past year but I’m completely clueless on how they’ll trade as the ECB alters policy
As for the 2nd and 3rd largest stock markets, I was just in China and am bullish on the Chinese consumer and anything related to the environment such as water treatment. With Japan, higher earnings, ROE, corporate governance, and shareholder friendly activities are positives but with the constant BoJ buying of ETF’s, I just don’t know what’s real and what’s not in terms of performance. Thus, what happens when the BoJ stops or slows down.
Data wise today we saw some new PMI figures overseas. The Chinese private sector weighted Caixin services PMI for August rose to 52.7 from 51.5 and which is back above the year to date average of 52.3. Caixin said “The latest increase in new work was the fastest seen in 3 months and solid overall, with a number of companies linking growth to improving market conditions and new marketing strategies.” Also, payroll growth was the best in 4 months. Price pressures were modest in contrast to those felt in the manufacturing sector. Chinese stocks were little changed in response.
Japan’s August services PMI fell by .4 pts to 51.6 and that is a 6 month low as the delivery of uneven economic data continues. New orders and business confidence both fell (“the lowest recorded by the survey for over a year.” Backlogs though rose as did employment (“moderately”). I hope the BoJ reads this report because on pricing it said this: “Latest survey data showed that service sector input prices continued to increase, maintaining a trend that stretches back to November 2012. Labor costs were cited as a primary inflationary source by those panelists that recorded a rise in average operating expenses in August. Service sector companies sought to protect margins by passing on their higher costs to clients, as highlighted by the strongest increase in average output charges since March.” The underline is mine.
In Europe, the August eurozone services PMI was revised slightly lower to 54.7 from 54.9. The estimate was for no change. It is also now at a 7 month low as lower revisions were seen in France, Spain and Italy. Germany’s though was up a touch. Economic growth in the region is still expected to be 2% this year.
The UK services PMI was lower at 53.2 from 53.8 and below the estimate of 53.5. That is the weakest since September. Employment though did improve and price pressures intensified to the most since February as “higher staff costs, fuel bills and prices for imported items contributed to another solid increase in average prices charged by service providers in August.” There are so many economic cross currents slicing thru the UK economy but what is consistent is the inflationary pressures.
Lastly, for almost 2 years I’ve been talking about the supply side response to the industrial metal bear market that ended in November 2015 and now the CRB raw industrials index is at the highest level since September 2014 at the same time everyone is so sanguine on inflation. It’s up 11 of the past 13 days.