billehrman:
Global bonds are being
dumped everywhere as the yield curve steepens. This is the greatest indicator
that reflation is coming, if not already here. We have been recommending for some
time that you sell all bonds, as well as the old winners in the stock market
and reposition your portfolios to benefit from an acceleration in global
growth, inflation and, most of all, corporate profits.
Remember, the stock market
is a predictor of future events six to nine months down the road. At Paix et
Prospérité, we made these adjustments to our portfolios and have had one of our
best absolute and relative performances last week. We own industrial,
technology, commodity and financial stocks that will benefit from the reflation
coming in 2017 through 2018 at the minimum.
The pendulum is swinging
back from fears of deflation and/or lack of inflation towards reflation and
rising inflationary expectations.
We only buy best in class in
each category meaning the strongest management teams with clear-cut winning
strategies regardless of the environment that are investor-friendly with
increasing earnings, incremental margins, cash flow and free cash flow. The best is yet to come for these companies even
though many of these stocks are already up 20% or more so far this year.
Yes, Paix et Prospérité is having
another outstanding year due to our ability to look through the windshield to
anticipate the future rather than looking at the past through the rear view
mirror. Indeed, active management is the only way to go to create real wealth
while minimizing risk.
Before we go on, I have to
comment on my difficulty in choosing our next President. One does not have a
filter and has a morality problem while the other one is not trustworthy. I
still believe that change is imperative throughout our government. We need new
leadership with bold ideas. Clearly, I support Trump’s economic plan over
Clinton’s. Choosing the lesser of two evils is no way to elect a President to
lead our country.
Notwithstanding, our country
will survive the election but certainly we could do better than with these two
nominees. However, both do have pro-growth
agendas starting day one with huge infrastructure spending programs. I hope that no matter who becomes President
that we have a stalemate in Congress.
I believe that the election
of Clinton or Trump will have opposite impacts on the financial markets both
short and longer term. A Clinton victory will be met with cheers initially but
that will slowly erode as her agenda will do little to lift this country out of
the quagmire of the last few years while a Trump victory, like Brexit, will
initially be met by concern and fear but that will give way and move higher as
his agenda stimulates growth and enhances the status of our country on the
world scene.
Let’s look at the events of last week that support
our reflation theme:
1. U.S. economic growth
expanded by a surprisingly strong 2.9% in the third quarter boosted by growth
in inventories adding 0.61 percentage points to growth and a surge in net
exports, boosted by soybean exports, contributing 0.82 percentage points to
growth. It is important to note that final sales rose only 1.4% in the quarter
down from a 2.4% increase in the second quarter; after tax disposable income
climbed at a 2.2% rate and the savings rate held at 5.7%.
Basically growth in the quarter was clearly not as good as the headline number
indicates but continued growth in employment and wages will support fourth
quarter GNP growth in excess of 2.0%.
2. Third quarter reported
earnings continued to beat estimates by a factor of 3. The bottom of prices for
most commodities was reached in the spring, 2016 and prices increases since
then are holding with additional increases scheduled for Jan 2017.
Inventory/sales ratios are low for most commodities, which is norm at the
bottom of cycles when buyer pessimism is highest setting the stage for higher
prices down the road as demand picks up while capacity has been reduced.
3. Eurozone economic
confidence rose to a 10 month high in October with consumer confidence
increasing to 106.3 from 104.9 in September. France’s President Hollande is
under pressure to announce further fiscal measures to stimulate growth which remains
below plan, as elections are just six months away. In Spain, the conservative government led by
Prime Minister Rajoy finally was able to beat back the Socialist Party and form
a new government over the weekend. We expect to see more fiscal stimulus here
like in Italy over the next year to stem the rise in populism. Italy’s Prime
Minister Renzi introduced his new budget last week with no increase in the
sales tax, cut in business taxes and higher fiscal spending to stimulate growth
recognizing that the budget deficit may increase. He, too, faces a referendum
in the near future and recognizes the need for change to withstand the rise in
populism in his country.
Do you see the pattern? Each
and every country in the Eurozone except Germany is under the gun to stimulate
their economies as monetary ease has done all it can do. It is time to pass the
baton to governments. It will happen in 2017 one way or another. I might add
that everyone sees that Brexit has been anything but a disaster for the English
economy so, Germany better watch out as other countries may opt out while
limiting immigration too.
4. China’s government
continues to acknowledge its debt problem and the need to rid the country of
zombie industries and excess, inefficient capacity. It is time to walk the walk
and stop the talk. The decline in the yuan has helped these industries somewhat
but is not the answer longer term. The country’s expansion will continue above
6.5% supported by a large increase in loans and higher government spending on
infrastructure projects that has boosted property values. Consumer spending
will maintain double-digit growth for the foreseeable future.
5. India’s growth remains
the highest of any major industrialized country and will likely exceed 7% this
year. I want to highlight that every country and company wants to invest in India,
as the future indeed looks bright.
6. The emerging market
economies are doing better as commodity prices have risen and global growth has
improved over the last quarter. We expect these positive trends to continue in
2017 and 2018.
7. Canada and Europe finally
agreed on a free trade agreement, which I hope sets the tone for future global
trade deals. Free trade with agreed upon and enforceable boundaries is a
necessity in a truly global economy.
It is clear that the global
economies are about to confound the naysayers and accelerate as we move through
2017 into 2018. The by-product will be higher prices than most anticipate at
this point in time, a steepening in the yield curves and much higher profits too.
We expect monetary authorities to stay one step behind for fear of stopping/impeding
this recovery. Remember that they have been battling weak economies and fears
of deflation for years.
Two additional comments
before wrapping up. First, it is no
surprise that OPEC is having problems finalizing a production deal as it is impossible
for Iran and Iraq to agree on anything as I have mentioned many times. There is
deep-seated hatred and lack of trust between these nations that just won’t go
away. Notwithstanding, global growth next year will help support a better
balance between supply/demand for oil and we expect prices to stay range bound
between $40 and $55 dollars per barrel on the upside where shut in U.S shale
production becomes economic once again.
Second, I want to comment on
the strength in the dollar. I remember when a strong currency was a sign of
strength and was considered a positive. A strong dollar will impede our trade
numbers reducing growth and reduce the translation of foreign earnings for our multinationals
but it also reduces inflation and helps keep interest rates lower than they
might be due to capital flows into our country from abroad. I continue to
recommend staying long the dollar. It is a good thing.
Stay the course.
Accelerating global growth
is on the horizon so look through the windshield anticipating future events
rather than looking in the rear view mirror staying mired in the past. Change
is occurring everywhere creating unique opportunities to profit. Construct your
portfolios accordingly.
Review the facts; pause,
reflect and consider mindset shifts; consider the proper asset allocation with
risk controls at all times; do independent research on each investable idea
and…
Invest Accordingly!
Paix et Prosperite LLC