How Donald Trump’s New Top Economic Adviser Views the World
[Gary Cohn] On the challenges facing global policy makers, particularly at the Federal Reserve, at a conference in Naples, Fla., last month:
“We have successfully globalized the world whether we like that or not, which means we have successfully globalized monetary policy. (…)
“With the evolution of the global economy, technology and global logistics, we now have a globalized workforce, which means we have a globalized monetary policy. So the Fed in many respects can only do so much because they’re constrained by the rest of the world and what they’re constrained by, ultimately, is the strength or weakness of your domestic currency.
(…) So that was a really long-winded way of saying the Fed’s in a really tough position because they’re only one piece of a global puzzle.”
On whether China is headed for a hard landing, to Bloomberg TV, January 2016:
“I do not believe that. I actually think if you’ve listened to what China has told you for the last 10 years, they are doing exactly what they told you they were going to do. China started out on a plan a few decades ago to build out the infrastructure of their cities. They spend enormous amount of money, enormous amount of capital on building infrastructure. (…)
“The Chinese have taken multidecade views on what they’re doing. They built up their surplus capital account over many, many years. It is going down. It is undeniably going down, and you can see it in the numbers. They may take some actions in the next few months to deal with that. You know, look, so I believe that they’re going to end up devaluing the currency? I do believe they will end up devaluing the currency.”
On bank regulation since the 2008 financial crisis, to CNBC last month:
“I do think that part of the regulation we’ve gone through has inhibited our ability to transmit that capital. On the other hand, remember U.S. banks today are the strongest banks in the world….That’s a huge competitive advantage for U.S. banks, and I don’t want to lose that.”
(…) On proposals to encourage more long-term investment strategies for businesses and investors, at the NYT DealBook conference in November 2015:
“I wish we had more incentives for long-term investing….We need capital that’s willing to be committed through the cycle and rewarding investors that are willing to make those contributions is in everyone’s best interest.”
On a “race to the bottom” by central bankers experimenting with negative interest rates, at a finance conference in March 2016:
“I think it is absolutely horrible….I think we are using the 1980s playbook in the 2016 world. Another way to say it is we are using the analog playbook in the digital world. By that I mean, the old analog playbook was when your economy slows down or your economy falters, lower interest rates, devalue your currency and grow at the expense of another economy. And in the 1980s and prior to that, that strategy worked. It worked because each of our economies was somewhat independent from each other and we didn’t have fungibility and we didn’t have real-time transparency.
“In 2016…when every individual of the world has real-time access to real-time data to real-time fixed income markets, real-time currency markets, the ability for one country to cut its interest rates and grow its economy at the expense of another [country] no longer works. So what you have seen is all of the central banks have been following each other down this death spiral of cutting interest rates ….
“And now you have two countries, two countries in the world that are willing to have a relatively strong currency, and it is unsustainable that the rest of the world try and devalue against these two currencies. It is not fair to those two countries. And I think we have got to do something with this. We will never have those real conversations, but if we woke up tomorrow and every central bank in the world raised their interest rates by 300 basis points, the world would be a better place. No currency should move because all the relationships would be the same, but insurance companies would work, pensions would work, savers would work, we would get people out of bank-loan funds, we would get people out of bond funds and they could put their money back in banks and back in government bonds where it belongs.” (…)
And then there was only one. Look at what happened to the renminbi since Cohn said the above:
Kudlow Close to Being Named Trump Chief Economist, Paper Says
College Enrollment Drops as Adults Head Back to Work
(…) Total fall-term undergraduate and graduate enrollment slid by 1.4% to 19.01 million students as of the beginning of this month, according to the National Student Clearinghouse Research Center, a nonprofit education organization.
Enrollment peaked at nearly 20.6 million in 2011.
The undergraduate student count fell by 1.9%, to 16.3 million this term, while graduate-student enrollment rose by 1.5% to 2.71 million.
Students over age 24 account for almost the entire overall decline, as adults who may consider returning to school to boost their career prospects are finding jobs instead. That population of “older” students was about 6.63 million at last count, generally concentrated at community colleges and for-profit schools that offer more flexible and vocational courses.
Rosters at four-year, for-profit colleges shrank by 14.5% to 970,267 this fall. There were nearly 1.64 million people enrolled in those schools at their 2010 height.
Four-year private, nonprofit schools, many of which rely heavily on tuition dollars for revenue, posted a 0.6% decline, with 3.79 million students. (…)
Rising Rates Ripple Through Mortgage Market
(…) The most immediate pain on the home-loan front will be felt by homeowners shopping for home-equity lines of credit, or Helocs. These are typically used by people who want to borrow against the value of their home for renovations or other purposes.
(…) Existing Heloc borrowers will see an increase in their interest rate and monthly payments within the next one to three billing cycles, he said.
That would be a second hit to some Heloc borrowers struggling to make payments. Most Helocs require interest-only payments during the first 10 years, and then principal payments kick in.
Delinquencies have been rising as millions of these loan-payment resets have been under way or are coming up. (…)
Borrowers with adjustable-rate mortgages also are likely to pay more.
ARMs are relatively rare, with about 3.4 million in existence, or only 7% of all mortgages outstanding, according to mortgage data-firm CoreLogic. Many of these loans are taken by borrowers because their lower introductory rates make it easier to afford more house, Mr. Whalen said.
“Borrowers who just barely got into that house by going with the ARM are the ones who are going to
default first,” he said. As rates rise, “the cost savings they had in their pocket will disappear [and] by 2018 you’ll see a significant increase in defaults.”
ARM rates generally move in tandem with either the yield on the one-year Treasury or the one-year London interbank offered rate, or LIBOR. Both have been on the rise in recent months and will likely continue to increase on expectations of more Fed rate increases on the way, said Frank Nothaft, chief economist at CoreLogic. (…)
(…) Lenders base the rate they charge on credit-card balances on the “prime” rate, which generally tracks the Fed’s benchmark and rose a quarter of a percentage point to 3.75% this week. (…)
If the prime rate were to move up a total of 1 percentage point, the additional annual cost to consumers would be nearly $6 billion, according to a recent report by the U.S. Consumer Financial Protection Bureau. (…)
Some 9.3 million consumers are at risk of falling behind on credit card or other loan payments as a result of the Fed’s latest rate increase, according to TransUnion. (…)
The total dollar amount of credit-card debt that consumers in the U.S. are carrying is approaching $1 trillion—a level that was last breached in 2007. (…)
Meanwhile,
The NY Fed Nowcast GDP tracker declined sharply last week, forecasting only a 1.8% GDP growth in Q4 and 1.7% in Q1 of next year (annualized). US growth better pick up soon to justify such lofty stock prices. (The Daily Shot)
The Atlanta Fed GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2016 is 2.6% on December 16, up from 2.4% on December 14.
EU Monthly Car Sales Rise 5.8%, on Track for Best Year Since 2007
New car sales in the European Union rose 5.8% in November, putting the region on track for its best year in almost a decade and perhaps set a record in 2017.
New car registrations, which closely mirror sales, rose to 1.15 million in the EU in November from 1.09 million in the same month last year as strong growth in Spain, France and Italy helped the region rebound from a stagnant October.
Through the first 11 months of the year new car registrations in the EU climbed 7.1% to 13.5 million vehicles.
The EU should hit 14.7 million in car sales this year, a 7.1% increase over 2015, Italian research institute Centro Studi Promotor said Thursday after the release of the November figures.
That would be the best year for the region since 2007 when consumers bought 15.5 million new cars. (…)
Promotor sees the EU closing the last bit of the gap and reaching the 2007 level next year, which implies growth of almost 6% in 2017. Evercore ISI is more cautious, estimating sales growth to be flat next year.
Spain led the way in November with an advance of 13.5% followed by France at 8.5% and Italy at 8.2%, according to the European Automobile Manufacturers’ Association, or ACEA. Rounding out the main markets, the U.K. rose 2.9% and Germany 1.5%. (…)
China Extends Tax Break for Small Cars
China extended a tax incentive for small-engine cars into 2017, keeping the tax below its normal level as authorities look to ease worries about slowing demand in the world’s largest car market.
The Ministry of Finance said Thursday it would levy a 7.5% purchase tax on vehicles with engines up to 1.6 liters from Jan. 1, an increase from the current rate of 5% but below the normal 10%.
China cut the purchase tax to 5% from 10% in October 2015 in response to months of slow sales. The market has rebounded significantly since then, as the majority of cars sold in the country qualify for the incentive.
The finance ministry said it would restore the tax to its 10% level from Jan. 1, 2018. (…)
Through November this year, China’s new-car sales were at 21.7 million vehicles, up 16% from the same period a year earlier, when sales grew 5.9% from the year before, official data show.
Yale Zhang, managing director for analyst firm Automotive Foresight, had forecast flat sales next year if the purchase tax were restored to 10%. He now predicts a 3% to 5% rise in China’s car market next year in light of move to set the tax rate at 7.5%.
China is a vital market for global auto companies, especially at a time when sales in the U.S. are tapering off while other emerging markets such as Brazil and Russia are shrinking. China accounts for 37% of General Motors’ global vehicle sales, 36% of Volkswagen AG’s, and 17% of Ford Motor Co.’s.
Companies Face Delays Getting Cash Out of China Multinationals operating in China are facing new delays in recent weeks as Chinese regulators impose tougher restrictions on the movement of capital out of the country to slow the yuan’s decline.
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Chinese Interbank Lending Freezes, Forcing Massive Intervention By China’s Central Bank China’s central bank stepped in with record liquidity injections last week, and “urged” major commercial banks to lend to non-bank financial institutions after many suspended cross funding operations as interbank lending froze amid tight liquidity conditions.
Japan’s Export Volume Rises at Fastest Pace in Nearly Two Years Boosted by demand from China, Japan’s export volume rose at the fastest pace in nearly two years in November, signaling that the world’s third-largest economy is on a steady growth track.
(…) Overall, export volume rose 7.4% in November from a year earlier, driven by demand for semiconductors, ships and car parts, the Ministry of Finance said on Monday.
(…) Japan’s exports to China increased 4.4% from a year earlier to ¥1.1 trillion ($9.3 billion) during November, the first rise in value terms since February. (…)
This trend was confirmed by the latest PMI survey.
SENTIMENT WATCH
(…) all 10 strategists see stocks gaining more ground next year. Compare that with September, when only four of the group were bullish—and some forecasters thought the market would head south for the remainder of this year. (…)
Our prognosticators forecast aggregate growth in S&P 500 earnings of about 7% next year, to $127 from an expected $118.75 in 2016. In most cases, the 2017 number doesn’t include the majority of Trump’s proposed reforms. Instead, it reflects incremental earnings gains plus a sharp rebound in energy-company profits, now that oil prices have nearly doubled from their February low. The Trump agenda, in force, could add $5 to $10 to S&P earnings, the strategists say. Industry analysts are forecasting 2017 earnings of $132.69, a 12% increase over this year. (…)
According to Tobias Levkovich, chief U.S. equity strategist at Citigroup’s Citi Research, if the effective corporate tax rate—now about 27% for S&P 500 companies—were to fall to 20%, that would add $12 to his $129 earnings estimate for 2017. Levkovich has a 2017 year-end target for the S&P 500 of 2325, but notes “there is room for it to be higher.” He calls himself a “short-horned bull,” because the actual details of policy remain to be sorted out. “Will companies see reductions right away or in 2018, for example?” he asks.
Glionna says the tax-cut portion of the Trump agenda “is sustainable and will happen.” Yet it is important to make distinctions. He notes that many stocks are up 10%-15% since the election, but some companies might see only a 6% tax benefit, whereas other could see a reduction of 30% or more. Glionna favors health-care stocks, including Humana (ticker: HUM) and Anthem (ANTM), as both could see earnings gains of more than 30% from tax relief.
BlackRock’s Richardson says the biggest beneficiaries of a reduction in taxes for repatriated cash will be technology and health-care stocks, as both industries have substantial cash overseas. But don’t assume it will go to capital investment when it comes home. Historically, she notes, repatriated funds have been spent on stock buybacks and dividends.
SOME STRATEGISTS THINK the sharp rise in infrastructure, engineering, and materials stocks in the past month could be overdone. Given a fiscally conservative Republican Congress that is averse to raising the federal deficit significantly, the infrastructure spending that Trump has promised might be scaled back, or undertaken after 2017. (…)
(…) This tight consensus, envisioning such benign outcomes, recently moved not one, but two sage market observers—David Rosenberg, Gluskin Sheff chief economist and strategist, and Doug Kass, head of Seabreeze Partners—to invoke Rule No. 9 of Bob Farrell, Merrill Lynch’s legendary former market guru: “When all the forecasters and experts agree, something else is going to happen.” (…)
Whereas initially markets were enthused by the GOP sweep and the ostensibly pro-business implications of the Trump/Ryan fiscal/regulatory agenda, investors are now beginning to filter that platform through the lens of political and mathematical reality. While a lot of the early corporate tax reform enthusiasm was predicated on a cursory examination of the headline rate cuts, markets are now are examining the radical changes being proposed to the intricacies of the code.
Thursday and Friday saw notable weakness in apparel/retail-linked stocks and a big factor behind the selling was concern around the border adjustment concept that sits at the heart of the GOP corporate tax reform plan. Republicans (for now) are standing behind the idea despite mounting criticism, but should it wind up being diluted (or eliminated) the Treasury would be robbed of the revenue needed to help pay for a reduction in the overall statutory headline rate.
The outlook for European equities is surprisingly bright going into 2017, given the political clouds gathering around the euro zone and the broader European Union.
With at least three general elections in the offing amid surging support for anti-establishment parties and the United Kingdom’s slowly unfolding Brexit drama, investors might be expected to head for the hills. They shouldn’t.
The Stoxx Europe 600 index is widely forecast to fare better next year than its 1% loss so far in 2016. More telling is its performance over the past three months, when it has risen 4.7%, fueled by improving economic indicators. While most economists currently expect the euro zone’s gross domestic product to loiter around the 1.4% annualized growth rate it notched in the third quarter, investors have been buoyed recently by better-than-expected data, including encouraging purchasing managers’ activity and retail sales figures. Consensus forecasts put the Stoxx index at around 381 at the end of 2017, a gain of 5.8% from the current level. (…)
Here we go again! Why bother with this dysfunctional, underperforming region? Euro stocks always look cheaper but there are many good reasons for that.
Industrial metals prices and the dollar are rising in tandem on expectations that U.S. economic growth and inflation will accelerate during Trump’s presidency. Usually, they move in the opposite direction as the dollar’s strength makes commodities, which are mostly denominated in the currency, more expensive for buyers outside the U.S.
The trend is so rare that it’s only happened a handful of times in the past decade, and it’s one of the many reasons that mining companies such as Glencore Plc are rebounding. The commodities giant is benefiting from lower costs and higher metal prices at its zinc operations, and is on track to resume paying dividends next year as part of a broader turnaround plan.
The rising dollar is hurting demand but the investment appetite is offsetting the fundamentals, for now…
Another factor: Chinese investors are buying dollar-priced commodities like copper and zinc as a hedge against yuan depreciation, strengthening the correlation between metal prices and the dollar, JPMorgan Chase & Co. analysts said in a Dec. 2 note. (…)
TRUMP’S TAX CHANGES: WINNERS AND LOSERS
From howmuch.net:
(…) Under the Trump plan, only three tax bands would remain: 12%, 25% and 33%.
This would be good news for everyone currently in the top two brackets (35% and 40%). These taxpayers would see their effective rate drop down to 33%, by 2 and 7 percentage points respectively. Conversely, the simplification would bad news for the taxpayers in the lowest bracket (10%). These would see their effective tax rate go up by 2 percentage points, to 12%.
But even in the middle, where many would stay in the same bands as before (25% and 33%), there would be losers as well as winners. Most people in the 15% bracket would drop down to a 12% rate. But a tiny sliver of top earners in this bracket (earning between $37,500 and $37,650) would have the misfortune of seeing their effective tax rate go up by 10 percentage points, to 25%.
A similar thing would happen to the old 28% bracket: taxpayers with incomes between $91,150 and $112,500 would drop three percentage points to 25%, while those between $112,500 and $190,150 would see their tax rate go up 5 percentage points to 33%.
The graph does not take into account other aspects of the Trump tax plan not directly related to the changes to income tax bands, such as the increase of standard deductions and a cap on itemized deductions, although of course these would also have an impact on net incomes.
