Trump Makes Revised Trade Deals an Early Priority President Trump is taking immediate steps to reorder U.S. economic alliances in his first days in office, setting up meetings with leaders from Mexico and Canada on North American affairs and hosting U.K. Prime Minister Theresa May this Friday.
Foxconn Considers $7 Billion Investment to Build U.S. Factory Foxconn founder Terry Gou says the Taiwan company is looking for incentives to build a flat-panel screen factory in the U.S.
(…) Any deal would hinge on getting land and power at bargain rates, Mr. Gou said.
“If U.S. state governments are willing to provide these terms, and we calculate and it is cheaper than shipping from China or Japan, then why wouldn’t Sharp build a factory in the U.S.,” he said.
Mr. Gou singled out Pennsylvania as a likely location for a Foxconn panel factory.
“Right now Pennsylvania is very proactive,” he said. “I have to tell other states to hurry up or we’ll go ahead and sign with Pennsylvania.” (…)
Mr. Gou has been considering a flat-panel factory in the U.S. for years. In 2014, he said he was evaluating the feasibility of such a factory, since it was costly to ship large-screen TVs from Asia. The project never made headway because U.S. local governments didn’t offer terms that were favorable enough, a person familiar with the matter said.
The company announced a new $8.8 billion flat-panel factory in southern China’s Guangzhou last month, with Mr. Gou praising the local investment environment.
Raging Inflation Has Not Arrived A close look at the factors affecting CPI suggests that last week’s number is no cause for alarm, though 2018 or 2019 could see gains.
(…) Three factors drive core inflation: total consumer income, which is a product of wages, employment, and hours worked as measured by the index of aggregate weekly payrolls; the dollar, or the cost of things we like to buy; and the growth of borrowing—leveraged spending. A cleareyed look at the numbers behind these factors indicates that core inflation in 2017 will be pulled lower.
First, growth in the payrolls index affects core inflation with an average lag of 12 to 18 months. Year-over-year growth in the payrolls measure peaked in February 2015 at 5.4%, and, on schedule, core inflation (CPI excluding food and energy) peaked in February 2016 at 2.3% year over year. My preferred inflation index is CPI excluding food, energy, and shelter, known as supercore CPI, and it also peaked last February at 1.7%.
Later in 2016, the payrolls index was losing momentum. In December, it rose only 4%, and the year closed with a 3.4% quarter-over-quarter annualized increase, compared with 5.1% gain in September. Supercore CPI was up 1.2% year over year in December, compared with a 1.3% rise a year earlier. In other words, consumer income growth has and will continue to reduce core inflation.
THE SECOND FACTOR listed was the trade-weighted broad dollar index. It affects supercore CPI with a lag of 18 to 24 months. The dollar index began its accelerated upturn after registering 102.3 in July 2014. From there, it rallied 22%, peaking at 125.1 in January 2016—after which the dollar fell back. Supercore CPI peaked at 1.7% year over year last February (about 18 months after the dollar rally began), and dropped to 1.2% by 2016’s end. Based on this lagged response to the dollar index, supercore CPI looks set to drop to 0.7% near the end of 2017 or early 2018.
The Fed’s quantitative-easing moves ballooned its balance sheet by creating commercial bank deposits at the central bank that are available for banks to lend out. This hasn’t happened. It takes a rapid expansion of bank credit to fuel the leveraged spending that becomes too much money chasing too few goods—the definition of inflation. In December, total loans and leases at commercial banks were up 6.5% over the prior December. A year earlier, the increase was bigger, 7.9%.The pace of borrowing dropped off in the fourth quarter, leaving the year’s growth below 2015’s pace—another factor pulling inflation risk lower.
The price changes needed for a market economy to function differ from inflation. The factors I’ve noted affect inflation, and they are abating. Energy and rent are price changes pushing up total CPI and CPI excluding food and energy. When these prices rise as growth in total consumer income decelerates, we get a kind of consumption tax, which could explain sluggish December retail sales.
Nothing now conjures higher core inflation; quite the opposite. Markets appear to agree—forward Treasury yields are pricing in higher real interest rates, possibly a result of more capital spending, but not higher inflation. By spring, today’s higher inflation forecasts probably dissipate. We all have to wait to see what our new president does. Odds are—mindful that inflation is an echo of prior credit-fueled growth—inflation is affected first in 2018 and more so in 2019.
The call on inflation is getting pretty important. Higher and accelerating inflation would impact the bond market (i.e. longer term interest rates), trigger a hawkish mood at the Fed (i.e. short term rates), squeeze real consumer income and reduce equity P/E multiples.
I did not check Steven Blitz’ leads and lags mentioned above but here’s my two cents on his analysis:
- His “Payrolls Index” (wages x employment x hours worked) seems to have troughed in August 2016 at +3.3% YoY. During the last 4 months of 2016, the Payrolls Index has risen at a 4.5% annualized rate and is now +3.9% YoY. Hourly earnings have been accelerating from a stable +2.0-2.2% YoY range in 2013-14 to +2.9% last December.
- His “Supercore CPI” only accounts for 45% of the CPI and excludes major spending items such as shelter (now nearly 4.0% YoY from +3.0% a year ago) and energy (+5.4%). The recent deflation in food prices will not last very long. Add that medical care inflation is +4.1% and it is obvious that inflation in most non-discretionary expenditures is accelerating.
- The strong dollar is negatively impacting import prices but these are a small fraction of the CPI where services account for 63% of the index. In fact, “core goods” represent only 20% of the CPI and core imported goods is a fraction of that. In addition, foreigners have lately been raising prices more actively (see below).
- While lending activity has slowed a little, it remains fairly strong in the 6-7% range against the recent 2.5-3.0% range in nominal GDP.
- Why would Treasury yields be pricing in “possibly more capital spending” (even though loan demand is slowing) rather than higher inflation?
The reality is that total inflation has accelerated from +0.8% YoY in mid-2016 to +2.1% in December. Core CPI has been fairly steady at +2.2% but hit +2.4% annualized in the last 2 months of the year. The Cleveland Fed’s Inflation Nowcast for January 2017 is +0.29% MoM for total CPI (+2.3% YoY) and +0.18% for core CPI (+2.1%).
Several recent stats and surveys suggest that corporations are raising prices more aggressively in the U.S. and abroad:
Related: Why Inflation Won’t Last
Eurozone credit standards tightening for the first time since Q4 2013 The latest Bank Lending Survey (BLS) from the ECB, showed that credit standards tightened somewhat in Q4 2016. But the details were much more upbeat than the headline reading.
The January Bank Lending Survey (BLS), released today by the ECB, showed that the credit standards applied by commercial banks to loans to enterprises tightened somewhat in Q4 2016 for the first time in three years. But the headline number was mostly accounted for by the Netherlands, and the details of the survey were much more upbeat.
In terms of what the survey means for the ECB, the main takeaway is that expansionary monetary policy is likely to be maintained throughout this year. Given that the latest BLS report is signalling more modest gains in credit flows in the next few months, the risk is that the ECB might actually need to do more than it already has. (…)
The BLS also indicated that banks expect a net easing of credit standards across all loan categories during the first quarter of 2017.
Also on the positive side, the ECB noted that the net easing of banks’ overall terms and conditions continued across all loan categories, mainly driven by further narrowing of margins on average loans and competitive pressure. Nevertheless, the picture is mixed, with Spain and France, reporting a tightening in terms and conditions.
Net demand for bank loans continued to rise “across all loan categories” in Q4 (see Chart 3), according to the BLS. Demand rose for loans to SMEs and large firms alike. At the country level, net demand for loans to enterprises increased for the five largest euro area economies except Spain.
The consumer price index advanced 1.5 per cent in December from a year earlier, and retail sales rose 0.2 per cent, Statistics Canada reported Friday from Ottawa, both missing forecasts in a Bloomberg survey of economists. Three new measures of core inflation remained at or below 2 per cent. (…)
The so-called common measure of core inflation advanced 1.4 per cent – up from the November pace of 1.3 per cent, which was the slowest since 1996. (…)
Food prices fell 1.3 per cent in December, with the third straight decline marking the most significant drop since the early 1990s, Statistics Canada said. Gasoline prices rose 5.5 per cent, swinging from a 1.7 per cent November decline.
The retail-sales figures showed consumers still opening their wallets for the big-ticket items linked to the country’s housing boom and the era of low interest rates.
Motor vehicle and parts dealer sales rose 0.8 per cent, the third straight increase, led by new car dealers. Sales at building material and garden supply stores rose 2.9 per cent, the most since the start of last year.
The gains aren’t as good outside housing. Sales rose in five of 11 major categories marking 45 per cent of the industry total.
Overall, 12% of the companies in the S&P 500 have reported earnings to date for the fourth quarter. Of these companies, 61% have reported actual EPS above the mean EPS estimate, 15% have reported actual EPS equal to the mean EPS estimate, and 24% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (71%) average and below the 5-year (67%) average.
In aggregate, companies are reporting earnings that are 4.2% above expectations. This surprise percentage is below the 1-year (+5.0%) average and below the 5-year (+4.5%) average.
In terms of revenues, 47% of companies have reported actual sales above estimated sales and 53% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is below the 1- year average (52%) and below the 5-year average (53%).
In aggregate, companies are reporting sales that are 0.4% below expectations. This surprise percentage is below the1-year (+0.1%) average and below the 5-year (+0.5%) average.
The blended earnings growth rate for the fourth quarter is 3.4% this week, which is slightly higher than the earnings growth rate of 3.2% last week. Upside earnings surprises reported by companies in the Financials sector were mainly responsible for the small increase in the overall earnings growth rate for the index during the past week.
The blended revenue growth rate for Q4 2016 is 4.6%.
Equity strategists are yet again predicting that this will finally be the year European profits deliver.
This time, it’s Citigroup Inc.’s Jonathan Stubbs forecasting the region’s earnings will jump at least 10 percent to end a three-year dry spell. His bullishness on Europe is reminiscent of early 2015 and 2016, when strategists and investors doubled down on the region’s stocks, drawn by the promise that monetary stimulus and a weak currency would be sufficient to prop up corporate profits. But so far, no dice. (…)
Interested? Read EUROPE VS U.S. EQUITIES, YET AGAIN! in this post.
Another fine piece from Jason Zweig.
Confidence is contagious. But acting on it can be dangerous. (…)
An article published this past week in the Journal of Neuroscience finds that a particular region in the human brain monitors how positive other people seem to be about their choices.
“We’re biologically equipped with the potential to allow more-confident people to have greater sway over our own beliefs,” says Daniel Campbell-Meiklejohn, a psychologist who runs the Social Decision Laboratory at the University of Sussex in the United Kingdom and who led this study. (…)
“The human brain has evolved with neural mechanisms to handle the uncertainty that accompanies social sources of information,” says Prof. Campbell-Meiklejohn. That sensitivity to cues about how sure other people are “can operate independently of learning from first-hand experience.”
And confident investors suddenly seem to be everywhere.
Robert Shiller, the economist at Yale University who won a Nobel Prize in 2013 for his research on inefficient markets, has long measured the confidence of professional and individual investors. (“Confidence,” here, means the percentage of investors who expect stocks to have a positive return.) In December, the proportion of individuals in the survey expecting the Dow Jones Industrial Average to go up over the coming year rose from 68.5% to 75.8% — the sharpest increase since Prof. Shiller began reporting updates monthly in 2001.
A survey of more than 2,000 wealthy investors, released by UBS Wealth Management Americas this past week, found that 58% were optimistic about the economy over the coming year, up from 39% in mid-October. Even investors who had supported Hillary Clinton became significantly more sanguine.
And 42% of investors said they were likely to raise their exposure to stocks, up from only 9% before the election. (…)
But the history of such measures suggests that investors’ confidence is a poor predictor of how well markets will perform. In a paper published in 2000, Prof. Shiller showed that confidence varies over time, often going up after the market rises and falling after it goes down.
The confidence of individual investors rose by 4% in July 2008, for instance — right before the U.S. stock market got sucked into the black hole of the global financial crisis.
Conversely, from August 2012 through January 2013, the confidence of individual investors declined in five of six months; institutional investors became less optimistic in four out of those same months. Nevertheless, the S&P 500 gained 32.4% in 2013.
(…) most of the time, what the market does next has nothing to do with how optimistic investors are about it; the results are disconcertingly random.
Meanwhile, the more cocky those around you become, the more important it becomes to wall yourself off from their influence.
This bull market for stocks is 94 months old, making it the second-longest in modern history, according to S&P Dow Jones Indices. Now more than ever, you should take extra risk only because your own rigorous analysis leads you to conclude that it’s a good idea, not because other folks think it is.
(…) A lot of our success in life depends on the attitude we bring to it. Mr Trump will doubtless face many challenges and make many mistakes, but one thing he has delivered already is a huge reservoir of confidence and enthusiasm for the future. The genius of the American system was to fix sovereignty not in a legislative body but in the people themselves. Gradually, as if in illustration of de Tocqueville’s warning about encroaching “democratic despotism”, that sovereignty has been leached from the people and vested in a distant and increasingly unaccountable bureaucracy.
On November 8, the people rose up and snatched back their initiative, just as the British people did last June 23. At noon on Friday, Washington time, Mr Trump delivered a short inaugural speech, gracious but plain-speaking, reassuring the hundreds of thousands who had gathered there, and the tens of millions watching at home or at work, that the source of power was about to be wrested from the tenacious grasp of the bureaucrats and returned to where Madison, Hamilton, Jefferson and their colleagues had intended it to live, with We The People.
(…) In the days ahead of Friday’s inauguration, senior executives from Morgan Stanley (MS.N), Delta Air Lines (DAL.N) and other major U.S. corporations said the Trump White House has already sparked a brighter outlook for business.
“There is certainly more reason to be optimistic as we enter 2017 than there was at the beginning of 2016,” Morgan Stanley CEO James Gorman said on Tuesday after his bank said profit doubled in the fourth quarter. He pointed to factors including a surge in consumer confidence after the Nov. 8 election and lower taxes promised by Trump. (…)
Over a dozen S&P 500 companies reporting results in the last week have signaled optimism about potential tax cuts, infrastructure spending, employee benefit costs and reduced regulation. (…)
After United Continental Holdings (UAL.N) on Tuesday posted lower December-quarter profits, airline President Scott Kirby told analysts on a call, “It feels like we are on a really good path. It felt to me like there was an inflection point after the election for business demand.”
An also upbeat Delta Air Lines Chief Executive Ed Bastian told analysts this month that he was excited about potential infrastructure spending promised by Trump, as well as a chance to make his case about unfair competition from Middle Eastern airlines heavily subsidized by governments.
Vince Delie, Chief Executive of F.N.B. (FNB.N), which own First National Bank, said on a quarterly conference call on Thursday that he was saw more confidence among commercial customers and a potential pickup in lending.
“There are at least conversations occurring about larger capex opportunities within our customer base, which didn’t happen before,” Delie said. (…)
Everybody is upbeat as these Yardeni charts attest:
ANIMAL SPIRITS EVERYWHERE
Central Banks Embrace Risk in Era of Low Rates Central banks from Switzerland to South Africa are investing a bigger share of their growing foreign-exchange reserves in equities, corporate bonds and other riskier assets.
Warnings from Bob Farrell:
- Rule #9: When all the experts and forecasts agree — something else is going to happen
- Rule #5: The public buys the most at the top and the least at the bottom
- Rule # 3: There are no new eras — excesses are never permanent
Other wise quotes:
- You are neither right nor wrong because the crowd disagrees with you. You are right because your data and your reasoning are right. (Benjamin Graham)
- You don’t have to trade with Mr. Market when he wants to, but only when you want to. (Benjamin Graham)
- Buy not on optimism, but on arithmetic. (Benjamin Graham)
- We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. (Warren Buffett)
- We can never know the future — least of all at the very moments when it seems most certain. (Peter Bernstein)
- The stock market is filled with individuals who know the price of everything, but the value of nothing. (Phillip Fisher)
- Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. (Sir John Templeton)
(…) In case there were any lingering doubts about the sincerity of Donald Trump’s “America First” campaign, he laid those to rest the moment he swore the oath of office. His brief inaugural address was perhaps the most xenophobic in US history.
The 45th president’s one specific foreign policy promise was to eradicate Islamist terrorism “from the face of the earth”. His only other message to the rest of the world was to put it on notice that America would take precedence again after an age in which the US had “defended other nations’ borders” and subsidised their armies.
That age was over, he said. “I will fight for you with every breath that I have,” he promised America. “We will follow two simple rules: buy American and hire Americans.” The rest of the world should be on notice. Mr Trump intends to rip up the US-created global order. His address will go down as a turning point in America’s postwar role — and quite possibly its death knell. (…)
Mr Trump’s reply was this: “We have made other countries rich while the wealth and confidence of our country have dissipated over the horizon . . . Protection will lead to great prosperity and strength.” To Mexico he said this: “We will protect our borders from the ravages of other countries.” And to the whole world he said this: “It is the right of all nations to put their own interests first . . . America will start winning again — winning like never before.” (…)
It is anybody’s guess how quickly, and with what specifics Mr Trump rolls out his radical agenda — though Kellyanne Conway, one of his senior advisers, said on Friday that he would deliver “a shock to the system” within the first week. (…)
Peggy Noonan: President Trump Declares Independence His message to America: Remember those things I said in the campaign? I meant them. I meant it all.
(…) The inaugural address was utterly and uncompromisingly Trumpian. The man who ran is the man who’ll reign. It was plain, unfancy and blunt to the point of blistering. A little humility would have gone a long way, but that’s not the path he took. Nor did he attempt to reassure. It was pow, right in the face. Most important, he did not in any way align himself with the proud Democrats and Republicans arrayed around him. He looked out at the crowd and said he was allied with them. (…)
“From this day forward it’s going to be only America first—America first.” To American workers and families: “You will never be ignored again.” (…)
This was a declaration that the president is going his own way and they’d best follow. (…)
Anyway, it was a remarkable speech, like none before it, and it marked, I think, yet another break point in the two-party reality that has dominated our politics for many decades.
And so, now, it begins. And it simply has to be repeated: We have never had a political moment like this in our lives. We have never had a president like this, such a norm-breaker, in all the ways we know. We are in uncharted seas. (…)
No one knows what he’ll be like as president, how this will go. Including, probably, him. (…)
Normally a new president has someone backing him up, someone publicly behind him. Mr. Obama had the mainstream media—the big broadcast networks, big newspapers, activists and intellectuals, pundits and columnists of the left—the whole shebang. He had a unified, passionate party. Mr. Trump in comparison has almost nothing. The mainstream legacy media oppose him, even hate him, and will not let up. The columnists, thinkers and magazines of the right were mostly NeverTrump; some came reluctantly to support him. His party is split or splitting. The new president has gradations of sympathy, respect or support from exactly one cable news channel, and some websites.
He really has no one but those who voted for him.
Do they understand what a lift daily governance is going to be, and how long the odds are, with so much arrayed against him, and them?
Like Reagan, Trump seems set to go to the people directly if politicians don’t cooperate. He successfully reached enough Americans during the campaign. But unlike Reagan, he is not a popular President with barely 38% support right at the gate (Reagan 52%). Trump got 46% of the popular vote, Reagan 51%. Trump won 29 states, Reagan 44. Trump won the electoral college 302-227. Reagan 489-49. Reagan was a truly remarkable speaker, capable to reach everybody. Trump has his followers but can he reach out enough to sway Congress and the Senate towards his policies?
Trump has garnered an array of impressive people to lead key portfolios. How will these also strong men and women deal with the tweeting boss? Needless to say, the next 4 years will not be boring…
ALT-FACTS White House Backs ‘Alternative Facts’ Defending a series of false statements by the official White House spokesman, a senior Trump adviser suggested the official had been invoking “alternative facts” rather than untruths.
Somebody once said that everybody is entitled to his own opinions but you can’t have your own facts…We now have fake news and fake facts!