The Reflation Movement Grows Louder ·Invest Accordingly!
Invest Accordingly!
Virtually all of the data points this past week support our reflation thesis. It is fascinating to watch how fast the tide has turned from an ultra-conservative fiscal bias to anticipated widespread fiscal stimulation. The baton clearly has clearly been handed off by monetary authorities to governments to enact policies to stimulate growth. Populism has become a global movement against the entrenched establishment. Clearly the politicians’ have gotten the message and understand that unless they implement real policy changes to stimulate growth, they will be voted out of office. The reflation movement grows louder by the day.
The naysayers debate whether these policy changes will actually be implemented; whether they will work at all; and if they do, whether the markets have moved too far, fast and high to reflect all the benefits of reflation. They just don’t get it! We are in the early innings of a nine-inning game.
The simple truth is that a majority of investors remain over-invested in bonds and under-invested in stocks and industrial commodities. They own yesterday’s winners, which are the defensive assets rather than the beneficiaries of reflation. The key to successful investing is not only proper asset allocation but also owning the right asset classes based on where you are in an economic cycle. For example, do you want to own bonds in the face of monetary tightening and a steepening yield curve? Do you want to own defensive stocks or those that benefit from an accelerating economy?
Paix et Prospérité continues to significantly outperform the markets as we looked forward through the windshield, saw reflation on the horizon, shifted our asset allocation and stock selection to benefit from the environment we predicted no matter who was elected President. The trend is our friend, and we won’t get off until we see another change that alters our view. It is easy to sell early and declare victory but that is not how to create real wealth. Ask George Soros, my former partner, and brilliant, successful manager for over 35 years at the Quantum Fund.
We supported Trump for a number of reasons. First, we wanted significant change in Washington; second, we favored his fiscal, tax and regulatory policies over the Democrats; third, we felt that he would bring the most qualified people into his administration rather than life-long bureaucrats and lastly, we believed that America could indeed become great again and respected on the global scene under his leadership.
Let’s look at the numerous data points this week that support the reflation thesis:
1.) The United States is leading the way becoming the engine of global growth. It is also leading in positive change to stimulate future economic growth and prosperity for all. In fact, the OECD raised its forecast for 2017 and 2018 global growth to 3.3% in 2017 and 3.6% in 2018 solely based on acceleration in growth in the U.S..
The list of positive data points since election is long: third-quarter GNP was revised upward to a 3.2% gain with pretax corporate profits accelerating to a 6.6% improvement and after tax profits up 5.2%, the strongest reading since the fourth quarter of 2012; consumer confidence rose to 107.1 in November from 98.6 in October; the Beige Book supported continued moderate growth in most of the U.S. with only modest increases in wages; manufacturing expanded at its largest pace in November as the ISM index rose to 53.2 from 51.9 the month before; U.S. house prices climbed back above the historic peak reached more than a decade ago; and finally employment rose by 178,000 in November, the jobless rate fell to 4.6% as over 400,000 people dropped out of the labor force and finally wages fell 3 cents from the prior month but were up 2.5% over the last year.
Trump and his team were active last week filling out his cabinet positions and working on legislation to reduce taxes, amend/abolish Obama Care, amend Dodd Frank; amend NAFTA; and reduce regulations amongst many other things. Yes, he also was successful in convincing/threatening Carrier (UTX) not to move additional jobs to Mexico. I liked most of his cabinet choices as they were all successful people in their own right and will bring a lot of brainpower and experience to the Trump Administration including General Mattis who will raise the status of the U.S. military both here and abroad.
I was particularly impressed on Friday when Trump announced a White House Strategic and Economic Panel from the “best of the best” business leaders in America, including many Democrats, to advise his administration on economic policy. Meetings will start in February and will be held on a regular basis. Now that’s smart! Who wouldn’t want Jack Welch on their team?
2.) There certainly was a lot of important news out of Europe last week. Brexit and the Trump victory have had a profound impact on upcoming elections in Europe and in the future of the Eurozone. We will be watching the elections in Italy and Austria closely this weekend to see if the establishment are upended by the rise in populism. I was surprised that French President Holland has decided not to run again in 2017. Needless to say, I feel that Germany may be slowly losing its grip on leading/controlling the future of the Eurozone. In fact, the odds of the Eurozone unraveling as an economic entity are rising which may be good for some members but bad for many others. But for now, business activity and confidence are likely to rise bolstered by the anticipated success of Trump and his team implementing policies to accelerate growth in the U.S. which would benefit Europe.
It was announced last week that the UK would be willing to pay for market access into the Eurozone after Brexit is completed even as it reduced immigration. If successful; then Brexit may turn out to be a net positive for the independent Brits. If so, other nations in the Eurozone may seriously considering following Britain’s lead and vote to exit too.
3.) It is clear that China is pulling out all stops to benefit from the U.S. talking about pulling back or hardening its position on international trade deals. Russia is too. China is likely to achieve its growth targets of greater than 6.5% in 2016 and 2017 boosted by fiscal stimulus, monetary ease and acceleration in U.S. growth. By the way, the purchasers’ managers index rose to 51.7 and the non-manufacturers PMI increased to 54.7 in November.
4.) OPEC members put internal strife aside for the moment and agreed to cut production by around 4% to 32.5 million barrels per day while non-OPEC members agreed to reduce production by 600,000 b/d. The agreement sparked a short squeeze and prices have risen above $50/b. Clearly economics ruled the day as most, if not all, OPEC and major non-OPEC members are operating at huge deficits. It is generally believed that Saudi Arabia needs $70/b oil breakeven. We continue to believe that oil prices will be capped as shut-in U.S. shale production becomes economic at $55 per barrel.
There has been another mindset shift since Trump has won the election. Both consumer and business confidence have risen appreciably, which will positively impact future actions. We believe that holiday sales will meet or beat all prior estimates although the continued shift to online buying may impede retail margins. We know that corporate managements are factoring in a Trump victory into future plans already even without having the full details of his tax, regulatory and trade policies. Expect to see hiring and spending plans go up from prior budgets.
Let’s wrap this up.
The outlook for the U.S. economy has improved appreciably since the Trump victory. We expect his team will hit the ground running after inauguration and come out with a series of policy changes that will accelerate our economy in 2017 and 2018. Global economic forecasts will rise too.
You must look to the future which may mean altering your mindset and positioning your portfolios to benefit from reflation. I recognize that the markets have moved quickly since the election and may correct at any time but the trend is your friend. If you have made the necessary portfolio changes that we have discussed for months now, hold on. If you have not made the necessary portfolio changes, there is no better time than the present to reposition accordingly. Take all your tax losses this year, as they may be more valuable today, as Trump will for sure lower the tax rates next year. If you are a hedge fund, carried interest may be endangered so get the proper tax advise and act on it now.
Remember to review all the facts; step back, pause, reflect and consider mindset shifts; adjust your capital allocation and risk controls; do in-depth primary research on each investable idea and…
