Something Other Than Trump

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In recent months it seems like everyone I speak with wants to talk about Donald Trump.  And everyone I read seems to want to write about Donald Trump.  It certainly is an easy topic with a lot of new content to opine about; but nobody is really saying anything of much substance.  It’s still mostly half-baked emotional waves from the election, either euphoric or dismal.  Most people are still amplifying their own opinions, and that’s fine if that’s how they want to spend their time and energy, or get their ratings and sales up.  But I’m tired of it and I’d bet you are too.  So this piece isn’t about Donald Trump, at least not directly anyway.  Are you relieved?

That said, it’s impossible to avoid the indirect discussion of The Donald.  After all, he is now President Trump and that fact can’t be ignored.  But what I’ve noticed time and time again after elections is how the new President is always assumed to have much more influence than they actually have.  Don’t get me wrong, the Presidency is remarkably powerful and the tone set from that chair permeates society on a certain level.  But the reality is that we elect a President, not a supreme ruler.  So far the major events that have transpired since the election are the swearing in of Supreme Court Justice Gorsuch and the failure of the new administration to swiftly repeal and replace Obamacare.  To me, this illustrates both the power and the limits of the position of POTUS; this one and all to come.  For the sake of space, I realize that I’m making a simplified point here and I don’t mean to trivialize the many other issues that have been addressed to date.  The simple point that I don’t want to lose focus of is merely that we are still a democracy and I believe that is a good thing.


The Foreign Potential

Most of what I believe is interesting in recent months are events that are happening well beyond the Trump dominated headlines.  Maybe even in a bit of contrast to them, actually.  It seems like the financial media could do a better job of covering the steady improvement in the world outside the United States.  While headlines have been bombarded with the American agenda, what’s being lost is the large amount of capital inflows to non-US markets as reported by groups like TrimTabs.  In the face of concerns about possible trade wars and Brexit, more money has poured into foreign investment markets than US markets since the election.  I’m not suggesting anyone take this as a negative view toward the US.  Instead, I find it interesting that while most people’s current opinion of foreign markets is skewed negatively, institutional investment sentiment has turned solidly positive.  And this has been a very quiet development.  Perhaps we are finally nearing the time when the foreign markets play a long awaited game of ‘catch-up’ after trailing the US markets for an unprecedented length of time.

Along these lines, I noticed (for better or worse) that the International Monetary Fund (IMF) has just announced their view that the “economic upswing seems to be materializing”.  And they make it clear that this is a global upswing.  Indeed this might be the first time in quite a while that we have an era of synchronous global growth.  The IMF upgraded their growth forecasts the most for the Euro area, Japan, the UK, and China.  They believe the US might also show modest improvement from here.  In sum, their 2017 global growth forecast is now 3.5%.  I say ‘for better or worse’ simply because the IMF doesn’t exactly enjoy a great reputation for their ability to forecast.  Nevertheless, it is yet another piece of evidence of the general rise in confidence in the global investment world.

With investments, as with most things, excesses eventually get dealt with and things begin to moderate.  Assuming this all-time truth doesn’t finally run afoul, consider these simple observations:  Research firm Gavekal stated in December that “The Trump rally has taken the US share of world equity market capitalization to 40%, the highest it’s been in more than a decade”; and that in February JP Morgan’s research team pointed out that the “US stock market is at a 40 year high relative to Europe”.  Morgan Stanley also commented on the noticeable disparity between the US and Europe stating “US outperformance is near a 40-year extreme”.

Notice that I’ve commented on a global scale and most notably on Europe so far, but the story is even bigger relating to the emerging markets.  While stocks from developed markets around the world have done very little since the end of the Great Recession, emerging market stocks have actually managed to fare even worse.  Emerging market stocks hit their lows in January of 2016.  Since that time they have outperformed the S&P 500.  All of this has seemingly been under the radar.  Money has been committed to both the developed and emerging countries in a fairly big way these past few quarters and their markets are starting to show early outperformance.  The news has centered its attention on all that can go wrong in the foreign markets with very little discussion of what might actually happen if things go right.

Now, we’re not moving ahead with reckless abandon and don’t suggest anyone else do either.  There are truly some derailing risks that need to be understood.  For example, if the French elections swing in favor of Marine LePen that could throw a wrench into the wheels of the Eurozone.  Likewise, if the Brexit long goodbye between the UK and the EU turns nasty, that could also be a wet blanket.

But the current probabilities of a LePen victory are slim, and the majority of the other potential winners aren’t viewed in any particularly negative economic light.  And British Prime Minister Theresa May has just called for early general elections to assure a firm leadership is in place to help the UK  best negotiate with the EU; a move aimed to help reduce uncertainty as they move through the process.

The bottom line is that money flows and market returns have turned positive outside the US while the media has stayed negative.  If we are seeing a shift toward better days overseas, I would contend that they will last quite a while.  There’s no need to over-commit to the possibility at this stage as there should be plenty of time to enjoy a nice multi-year ride once things get a little more entrenched in the proper direction.


The US Recap

In the United States, we are still in what I’d call a Plow Horse economy.  I’ve been using this symbolism for a few years now and I continue to hope for the day when we might again better resemble a Race Horse economy.  While we might be leaning in the proper direction, we aren’t there yet.  Most confidence measures (things like consumer and business confidence surveys) have nudged a bit higher in recent months.  But it’s going to take more than the animal spirits of confidence to lift economic growth from the sluggish pace of the past several years.  It’s going to take genuinely better economic policies.  The pump seems to be primed.  The fundamental trends that drive growth in consumer spending continue to look good, including healthy job growth, accelerating wages, and very low consumer financial obligations relative to historical norms.  According to the economics team at First Trust, seven years ago consumers were 90+ days delinquent on more than $1 trillion in consumer loans.  But that figure has declined every year since and is now at $400 billion.  Confirmation of this trend comes from the work of the Federal Reserve. Their work showed a peak in the household debt service ratio of nearly 14% in 2008-2009 and that ratio is now closer to just 9%. In other words, the US consumer has more room to spend since they aren’t saddled by as much debt.  And since we are still a consumer driven economy, I do believe our economy is on solid footing and has a good chance of improving from here.

With respect to interest rates and bonds, I’m still not looking for the rapid change of the landscape so many others are.  How long has it been since the gurus have been calling for the bond market implosion?  Where are those so-called bond vigilantes?  In my view, they’ve succumbed to the laws of economics.  We just don’t yet have sufficient growth to warrant dramatically higher rates.  And in this global world, US treasury bonds at 2+% compare very favorably with Japanese yields of 0.02% and German yields of 0.16% and so on.  Against this backdrop, I would suggest the US bond market will still see ample inflows to keep the upward pressure on rates subdued.  Over time I certainly do expect bond yields to rise, but not immediately or in any panic stricken way.

On the corporate side of the bond market, defaults haven’t risen at anywhere near the rate most analysts were predicting either.  In recent years the only companies we’ve seen default were essentially the obvious names that had very weak business models that were funded almost entirely by debt.  In other words, companies that never really needed to exist in the first place.  The fears of defaults never really crept up the quality scale as many feared.  We have, for the most part, the strongest corporate balance sheets we’ve had in a long time.  With bond prices as high as they currently are this doesn’t mean they’ll make investors a lot of new money from here.  But it does suggest that future income payments are highly probable to keep coming on time and principal is likely be paid back in full upon maturity.  I don’t look for defaults to rise much in the coming quarters, but this is something we are always monitoring.

The Federal Reserve is watching these types of things closely, too.  As we came into the New Year, the common belief was they’d be able to raise interest rates four times throughout the year; this was their own belief as well.  Keep in mind that they were also expecting to be able to have raised rates a few more times in recent years but didn’t judge the economy as strong enough to handle it.  I wouldn’t be at all surprised if they have the same problem again this year.  I have little doubt they’ll be able to raise rates again in the near future, but I am not so sure the economy will be strong enough to warrant all four desired hikes.  The ‘normalization’ of interest rates will likely be slow and steady.  The economy is growing well enough to keep that ball rolling, but I doubt they’ll look to push the pace if they aren’t entirely sure of the economic underpinnings.


The Takeaways:

  • The US economy is still a Plow Horse, but it is now trying to trot at least a little bit. It’ll take some time, but the odds are slowly improving.
  • Investments outside the United States are showing signs of life again. Not only are foreign valuations lower, so are the expectations.  That’s a common starting point for long-lasting periods of expansion.
  • While the media and even the President might want to rush to an emotional outburst, try not to get swept up into it. As humans, we will all feel emotional occasionally.  It’s part of what makes life worth living!  But acting on those emotions, from an investment perspective, usually has a bad outcome.  History demonstrates that the key to long-term investment success isn’t doing something absolutely brilliant – it’s not doing something terribly foolish.




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Investing in securities underlying in currencies other than the U.S. dollar involves certain considerations comprising both risk and opportunity not typically associated with investing in U.S. securities.  The security may be affected either favorably or unfavorably by fluctuation in the relative rates of exchange between currencies, by exchange control regulations, or by indigenous economic and political developments. As with any investment, there is no guarantee against potential loss.  Investments in securities and insurance products are:


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