Gordon Gekko’s garden | On Line Opinion

A thought-provoking opinion from John Wright who lectures in philosophy at the University of Newcastle:

At the end of our street is a community garden. Many of the local residents have their own box in which they grow tomatoes, onions, lettuce, and so on. It works on a culture of trust and sharing. There is no fence around the garden. It is understood that if someone needs, say, a few carrots from a public box they are free to help themselves.

But recently, it has not been going well. Today I went down to get a lettuce from the box my partner and I had been tending, and its entire contents had gone. Inquiries revealed this had been happening to other people’s boxes. The problem is so widespread many have decided to pull out of the community garden altogether.

Of course, when compared to the great events that befell the world in 2016, this is hardly head-line news. But I also think it exemplifies, in a very simple way, factors that have led to some of the larger troubles of our societies.

….I’m sure we have all encountered people who take the view: “In this world, it’s each person for themselves. Only a mug would do something for the good of the community.”

Of course, it’s only a small number who take this view. But so many boxes have been cleared out that a lot of residents have given up and decided to withdraw from the garden.

What all this illustrates is just how fragile a sense of community, co-operation and the common weal can be, and how easily it can be replaced by: “It’s each person for themselves”.

Lately Donald Trump’s “America First” foreign policy catch-phrase, and Theresa May’s promise to “Put Britain First” in Brexit negotiations, have received a lot of media coverage.

What these attitudes reflect is a lack of community between states, not just individuals sharing a vegetable patch. For too long, some players in the international community have displayed a self-interested view, benefiting from the international community at the expense of others. Whether this be NATO members failing to meet their defense budget commitments, instead relying on the US security umbrella, or China and Japan furthering their own economic interests, running large trade surpluses while subverting the balancing mechanism of floating exchange rates, at the expense of their trading partners.

Similarly interest groups within states have furthered their own agendas at considerable cost to their fellow-citizens. Global corporations, for example, profited from offshore manufacturing without consideration of the millions of manufacturing jobs lost and ultimate hardship in their own country.

In his 1982 book The Rise and Decline of Nations, Mancur Olson highlighted the dangers of self-interest groups within society and how redistributive struggles, where insiders manipulate the system at the expense of productive efforts, can lead to economic decline. He attributed the rise of Japan and Germany after WWII, relative to the UK, to the absence of pressure groups in the former which were largely wiped out during the war.

Trump’s campaign promise to “drain the swamp” would similarly restore growth to the US. But pursuit of self-interest on the international stage, instead of strengthening the international community, is likely to achieve exactly the opposite.

Source: Gordon Gekko’s garden – On Line Opinion – 24/1/2017

How to survive the next four years

Donald Trump

We are entering a time of uncertainty.

Donald Trump started his presidency with a continuation of the confrontational approach that he exhibited throughout his campaign, with scant regard to unifying the country and governing from the middle. Instead he has signed off on two controversial oil pipelines that, while they would create jobs, have met fierce opposition and are likely to polarize the nation even further.

Subtlety is not Trump’s strong point. Expect a far more abrasive style than the Obama years.

Trump also signed off on constructing a wall along the border with Mexico. Again, this will create jobs and slow illegal immigration — two of his key campaign promises — while harming relations with the Southern neighbor.

Another key target is the trade deficit. The US has not run a trade surplus since 1975. Expect major revision of current trade agreements like NAFTA, which could further damage relations with Mexico, and a slew of actions against trading partners such as China and Japan who have used their foreign reserves in the past to maintain a trade surplus with the US. Floating exchange rates are meant to balance the flow of imports and exports on current account, minimizing trade surpluses/deficits over time. But this can be subverted by accumulating excessive foreign reserves to suppress appreciation of your home currency. Retaliation to US punitive actions is likely and could harm international trade if not carefully managed.

Apart from wars, Trump and chief strategist Steve Bannon also seem intent on provoking a war with the media, baiting the press in a recent New York Times interview:

Bannon delivered a broadside at the press…. saying, “The media should be embarrassed and humiliated and keep its mouth shut and just listen for a while.” Bannon also said, “I want you to quote me on this. The media here is the opposition party. They don’t understand this country. They still do not understand why Donald Trump is the president of the United States…..”

Trump and Bannon’s strategy may be to provoke retaliation by the media. One-sided reporting would discredit the press as an objective source of criticism of the new presidency.

On top of the Trump turmoil in the US, we have Brexit which threatens to disrupt trade between the UK and European Union. If not managed carefully, this could lead to copycat actions from other EU member states.

Increasingly aggressive steps by China and Russia are another destabilizing factor — with the two nations asserting their global power against weaker neighbors. Iran is another offender, attempting to establish a crescent of influence in the Middle East against fierce opposition by Saudi Arabia, Turkey and their Sunni partners. Also, North Korea is expanding its nuclear arsenal.

We live in dangerous times.

But these may also be times of opportunity. Trump has made some solid appointments to his team who could exert a positive influence on the global outlook. And confrontation may resolve some long-festering sores on both the economic and geo-political fronts.

How are we to know? Where can we get an unbiased view of economic prospects if confrontation is high, uncertainty a given — the new President issuing random tweets in the night as the mood takes him — and a distracted media?

There are two reliable sources of information: prices and earnings. Stock prices reflect market sentiment, the waves of human emotion that dominate short- and medium-term market behavior. And earnings will either confirm or refute market sentiment in the longer term.

As Benjamin Graham wrote:

“In the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”.

In the short-term, stock prices may deviate from true value as future earnings and growth prospects are often unclear. But prices will adjust closer to true value as more information becomes available and views of earnings and prospects narrow over time.

We are bound to experience periods of intense volatility over the next four years as hopes and fears rise and fall. These periods represent both a threat and an opportunity. A threat if you have invested on hopes and expectations rather than on solid performance. And an opportunity if intense volatility causes prices to fall below true value.

It will pay to keep a close watch on technical signals on the major indexes. As well as earnings growth in relation to index performance.

Also, keep a close eye on long-term indicators of market risk such as the Treasury yield curve and corporate bond spreads. These often forewarn of coming reactions and will be reviewed on a regular basis in future newsletters.

Factors that Could Derail Equity Markets | Bob Doll

Bob Doll

From Bob Doll at Nuveen Investments:

….Although we have a generally positive view toward the economy, earnings and equity markets, we think it is worth pointing out some possible risks given how quickly and how far markets have moved higher over the past month. To us, the main risk to equity markets is the surge in government bond yields and the rising value of the U.S. dollar. Higher bond yields could create a drag on equity valuations and a higher dollar could put pressure on corporate earnings.

If the current advances in yields and the dollar moderate, equity markets should not experience much damage ….we expect any equity market sell-off resulting from a possible yield/dollar spike to be short-lived.

We are also watching possible political negatives from Donald Trump’s presidency, such as escalating geopolitical turmoil, currency wars with China or anti-immigration/anti-globalization trends. Additionally, investors may become wary of improving sentiment and less attractive valuations.

….Unlike the period since the end of the Great Recession, market sell-offs have been brief and followed quickly by strong risk-on moves. As a result of this shift and a seemingly more solid economic and earnings backdrop, we think it makes sense to retain overweight positions in equities.

I am cautiously bullish. A lot of good could come out of Republican control of both Congress and the Senate, including a revision of the corporations tax code and a more cautious approach to globalization.

The dangers are high stock valuations, with the potential for a backlash if earnings falter or risk levels spike, and low business investment that could hurt future growth. I still consider a Trump administration an additional risk factor. Trump has made some solid appointments, like the highly-regarded Mike Mattis (pleased to see Michael McFaul, former Obama point man on Russia, supporting the appointment) but still has the potential to do some crazy stuff as Bob pointed out.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

Trump the biggest positive and negative risk for growth, survey finds

From Zac Crellin:

The policies of a Trump administration are both the biggest downside and upside risks to the global economy, an international survey of companies by Oxford Economics has found.

While 38 per cent of respondent companies were hopeful for US growth to surge thanks to President-elect Donald Trump’s fiscal stimulus program, 27 per cent feared Mr Trump would instigate a trade war between the US and China….

Source: Trump the biggest positive and negative risk for growth, survey finds

Priming the Pump

US stocks are buoyant on hopes that a Donald Trump presidency will benefit business, with major indexes flagging a bull market. But promises come first, the costs come later. While I support a broad infrastructure program and the creation of a level playing field in global markets, the actual execution of these ideas is critical and should not be allowed to be hijacked by the establishment for their own ends.

Erection of trade barriers is a useful negotiating position but is unlikely to be achieved without enormous damage to the global economy. As long as your trading partners think you are crazy enough to do it, they may be more amenable to establishing fair ground rules for international trade. If they don’t believe the threat, they will be happy to continue on their present path. So Trump walks a fine line between reassuring his allies and the domestic market, while keeping others guessing about his intentions.

Before we get carried away with hopes and expectations, however, we need to evaluate the current state of the economy in order to assess the current potential for growth.

The Cons

Let’s start with the negatives.

Construction spending is slow, at about three-quarters of pre-GFC (and sub-prime) levels. It will take more than an infrastructure program to restore this (though it is a step in the right direction). What is needed is higher growth expectations for the economy.

Construction Spending to GDP

Industrial production is close to its pre-GFC peak but has been declining since 2014.

Industrial Production Index

Job growth is slowing. Decline below 1.0 percent would be cause for concern.

Employment Growth

Rail and freight activity also reflects a slow-down since 2015.

Rail & Freight Index

The Philadelphia Fed’s broad-based Leading Index has also softened since 2014. Decline below 1.0 percent would be cause for concern.

Leading Index

One of my favorite indicators, this graph compares profit margins (per unit of gross value added) to employee costs. There is a clear cycle: employee costs (per unit) fall after a recession while profits rise. As the economy recovers and approaches full capacity, employee costs start to rise and profits fall — which leads to the next recession. At present we can clearly see employee costs are rising and profit margins are falling.

Profits and Employee Costs per unit of Value Added

It will be difficult for corporations to continue to grow earnings in this environment. Business investment is falling.

Gross Private Nonresidential Fixed Investment

Plowing money into stock buybacks rather than into new investment may shore up corporate performance for a while but hurts construction and industrial production. Turning this around is a major challenge facing the new administration.

The Pros

Retail sales are rising as increased employee compensation costs lift consumer confidence. Solid November sales with strong Black Friday numbers would help lift confidence even further.

Retail Sales

Light vehicle sales are also recovering, a key indicator of consumers’ long-term outlook.

Light Vehicle Sales

Rising sales and infrastructure investment are only part of the solution. What Donald Trump needs to do is prime the pump: introduce a fairer tax system, minimize red tape and reduce political interference in the economy, while enforcing strong regulation of the financial sector. Not an easy task, but achieving these goals would help restore business confidence, revive investment, and set the economy on a sound growth path.

In the short run, the market is a voting machine
but in the long run it is a weighing machine.

~ Benjamin Graham: Security Analysis (1934)

ASX banks rally

The ASX 200 is testing resistance at 5500. Rising Money Flow indicates selling pressure has ended. Breakout above 5500 would complete a bear trap, indicating a primary advance to 5800*.

ASX 200

ASX 300 Banks Index followed through above 8000 after a brief retracement respected the new support level. Target for the primary advance is 8800*. A further secondary correction to test the new support level at 8000, however, should not be ruled out. A Twiggs Money Flow trough above zero would strengthen the bull signal.

ASX 300 Banks

* Target medium-term: 8000 + ( 8000 – 7200 ) = 8800

Hollow Trees | Peggy Noonan

Great metaphor from Peggy Noonan:

You don’t know a tree is hollow until you push hard against it and it falls. The establishments of both parties did not know, a year ago, that they were hollow trees. They thought themselves strong because they always had been, and people think what has been true will continue. Then suddenly the tree is pushed and falls. To me that is the symbol, the image of 2016: the hollowed trees and how easily they fell.

Election night 2016 was not like 1980. That year produced an outcome fully within the political norms: a former two-term governor won the presidency. This year’s outcome went beyond all previous norms. Twenty-sixteen was like nothing in our lifetimes. In the future people will say, “Where were you that election night?” the way they do for other epochal moments.

Much of the mainstream, legacy media continues its self-disgrace. Having failed to kill Donald Trump’s candidacy they will now aim at his transition. Soon they will try to kill his presidency. Any journalists who are judicious toward Trump, who treat him fairly or even as a human being, are now accused of “normalizing” him. This is a manipulation: It is a way of warning your colleagues to approach the president-elect with the proper hostility or be scorned. None of this will do our country any good…..

Source: What to Tell Your Children About Trump – WSJ

Platinum’s Kerr Neilson slams ‘naive’ Western-centric view of the world

[Kerr Neilson, the founder of $23 billion Platinum Asset Management] said China “absolutely smashes America” when measured by physical goods, producing more motor cars, eight times more steel and 10 times more cement.

“We’re just comatose. We have no idea, particularly in the West, what’s really changing. So we have all this debate, that’s the politicians’ hard sell. You can no longer make these silly promises and say ‘we’ve got to be more equitable’,” he said.

“Sure, it’s a great idea, but in fact the place we’re competing against, these other teams … they play a very hard game. It’s no good complaining about the referee.”

Source: Platinum’s Kerr Neilson slams ‘naive’ Western-centric view of the world

Donald Trump vs. AT&T | WSJ

Other businesses watch to see if the phone giant can push its planned merger with Time Warner through a still-undefined presidency

By Thomas Gryta,John D. McKinnon and Keach Hagey:

Few companies had more at stake in the presidential election than AT&T, which made an $85 billion wager last month that would turn the giant telephone company into one of the world’s biggest media companies by swallowing Time Warner.

When the news was announced, Donald Trump told supporters in Gettysburg, Pa., he would block the deal if elected president. “It’s too much concentration of power in the hands of too few,” he said, calling the merger “an example of the power structure I am fighting.”

How the deal fares has become a test how of the Trump administration balances its deregulatory impulses with its populist aversion to large, powerful companies. Many other businesses are watching the merger as a signal of what’s to come…..

Source: Donald Trump vs. AT&T: A Signal Test of How Business Will Fare in New Washington – WSJ

Why the establishment were clean-bowled by Trump

Forget private email servers and sex tapes. Forget men versus women. This election was decided on the following three issues:

1. Globalization.

Currency manipulation by emerging economies like China and consequent offshoring of blue-collar jobs has gutted the US manufacturing sector. Accumulation of $4 trillion of foreign reserves enabled China to suppress appreciation of the Yuan and maintain a competitive advantage against US manufacturers.

China Foreign Reserves ex-Gold

Container imports and exports at the Port of Los Angeles (FY 2016) highlight the problem. More than 57% of outbound containers are empty. Container shipping represents mainly manufactured goods, rather than bulk imports or exports, and the dearth of manufactured exports reflects the trade imbalance with Asia. Even the container statistic understates the problem as many outbound containers contained scrap metal and paper rather than manufactured goods, for processing in Asia.

Port of Los Angeles (FY 2016) Container Traffic

Manufacturing job losses were tolerated by the political establishment, I suspect, largely because corporate profits were boosted greatly by offshoring jobs and low-cost imports. And corporations are the biggest political donors. Corporate profits as a percentage of GDP almost doubled over the last two decades.

Corporate profits as a percentage of GDP

2. Immigration

This is a similar issue to that highlighted by the UK/Brexit vote. Blue collar workers, losing jobs to globalization, felt threatened by high levels of immigration which, among other problems, stepped up competition for increasingly-scarce jobs.

3. Wall Street

Wall Street bankers with their million-dollar bonuses were blamed for the global financial crisis and collapse of the housing market, the primary store of wealth for middle-class families. While there is no doubt Wall Street had their snouts in the trough, the seeds of the GFC were laid years earlier when Bill Clinton repealed the Glass-Steagall Act with backing from a Republican congress. Failure to prosecute or otherwise punish even the worst offenders of the sub-prime mortgage debacle was seen by the public as collusion.

The Democrats in 2015 recognized that Hillary had been damaged by the private email server controversy and did their best to maneuver the election into a Trump-Clinton stand-off. Their view was that Hillary would be beaten by either Rubio or Kasich. Even the reviled Ted Cruz was seen as a threat. Hillary was seen as having the best chance against a flawed Trump who would struggle to unite the Republican party behind him.

Hillary Clinton and Donald Trump

Hillary Clinton was presented as the ‘safe’ candidate in the election, representing the status quo and stability. But that set her up for a fall as their strategy underestimated the anger of American voters and the risks they were prepared to take to bring about change.

While I am relieved that we can “close the history book on the Clintons”, to use Trump’s words, I viewed him as a lame-duck candidate, too flawed to hold the office of President. Fortunately there are many checks and balances in the US political system. It survived Nixon and should be able to survive this too. Especially if Trump takes a hands-off approach, along the lines of Reagan who was reputed to doze off in cabinet meetings. A lot will depend on his appointees and the next few months will be critical in setting the direction for his presidency. Expect financial markets to remain volatile until they have grown accustomed to the change. It could take a year or even longer.