Global Economic Battle

Don’t believe all the bravado coming out of foreign governments, pundits and media. The facts speak louder than the words. It is crystal clear that we are in the midst of a global economic battle with ramifications that will last decades.

We all admire China for its long-term planning so why not praise Trump for passing a pro-growth, pro-business agenda that includes a major tax overhaul and reducing cumbersome regulations to make the US globally competitive and a destination of choice? His pro-America agenda includes changes in global trade patterns and protecting our IP where the US has been disadvantaged for decades by outdated agreements like the WTO.

Trump’s positive impact is evidenced by:

  • The strength in our stock market over all others
  • Economic growth accelerating while weakening overseas
  • S & P earnings are forecasted to increase over 20% in 2018
  • A super strong dollar resulting in huge capital inflows from abroad
  • A surge in domestic hiring with the unemployment rate falling under 4% and hourly earnings up near 3%
  • Productivity accelerating, finally, keeping a lid on unit labor costs and inflation
  • Capital spending surging reducing costs and improving global competitive position
  • Becoming energy independent
  • Our Fed starting a path toward normalization before all others
  • US domiciled corporations NOT relocating overseas anymore
  • US global financial institutions gaining market share worldwide

Can you now understand why Trump holds the upper hand and has the wherewithal to renegotiate our trade deals? These deals will improve our ability to export by opening protected foreign markets while reducing government-supported imports from abroad beneath market prices. Our IP will be better protected, too.

Let’s briefly look at some additional facts from last week that support that Trump and the US is winning the global economic war:

  1. The Commerce Department reported that July retail sales accelerated to a 0.5% gain over June. Employment gains, along with hourly wage increases over the last year, paint an optimistic view of upcoming Christmas sales. Industrial production is increasing but not as fast as sales, so the I/S ratio has fallen setting up strong production gains ahead. Non-farm productivity accelerated meaningfully in the second quarter registering a 2.9% gain resulting in a 0.9% decline, yes a decline, in unit labor costs which presages lower inflation ahead. Third-quarter economic growth is likely to exceed 3.5%.
  2. Eurozone economic growth continued to decelerate in the second quarter with combined GDP expanding by 1.4% in the second quarter, the smallest rate of gain in 3 years while US growth accelerated to a 4.1% gain. Export growth and business confidence continues to fall while inflation is running at 2.1%, above the ECB target. The ECB is in a bind unable to start its path toward normalization. Second half economic growth is likely to be below 1.4% too, with inflation remaining over 2.0%.
  3. Turkey’s currency weakened further over the week despite numerous attempts by Erdogan to bolster it. There is no quick fix as the country is over burdened with too much debt denominated in euros and dollars. We expect the government to release the Priest reducing tensions with the US. While Italy is on everyone’s list as the next country in trouble, we believe that the ECB and US won’t permit any contagion beyond Turkey.
  4. Economic growth has clearly decelerated in China over the last few months as evidenced by only 5.5% year-on-year growth in fixed capital investment and retail sales growth of only 8.8% year on year growth in retail sales in July, both below forecasts. Unemployment rose to 5.1% from 4.8% in June. It is now projected that second-half growth could be only 6.4% vs. 6.9% in the first half despite government efforts to loosen lending standards and increase reserves while significantly boosting domestic spending. The Yuan continuing to fall last week says it all.  By the way, have you noticed Walmart’s request to its suppliers that they move out of China? Think about the broader implications of that comment!

Is global economic peace on the horizon?

We were pleasantly surprised that it was announced on Friday that Chinese and American negotiators were going to meet shortly in DC to plot a road map to resolve their trade dispute by November before the Asia-Pacific Economic Cooperation Forum. The hope was that both leaders could meet at that time to bless a deal, or at least a path to a deal much like what is happening now between the Eurozone and the US. Watch to see if both sides announce a ceasefire before additional tariffs are enacted before month’s end.

We believe that it is increasingly difficult for the naysayers to stay short all markets. If both countries announce a ceasefire with a map to resolving all trade conflicts, we believe that all financial markets will have meaningful rallies, bond yields will move up, commodity prices will head north and the dollar would decline.

Let’s wrap this up!

We continue to recommend looking over the valley, as it is clear that all parties everywhere are looking for workable solutions to Trump’s demands for changes in outdated trade policies while protecting IP. The US is in the driver’s seat as our economy is strong, benefiting from Trump’s pro-growth, pro-business agenda while all other economies are decelerating with capital outflows weakening foreign currencies. As Kudlow says time and again, “a strong currency connotes a strong economy” and the reverse is true. too.

While no one can be certain how and when all of this will unfold, it is clear that the glass is now half full having shifted from half empty a week ago. We continue to maintain a portfolio of great companies that will succeed regardless of what occurs in the immediate future.

We remain over-weighted US large multi-national banks, global capital good and industrials, technology at a fair price to growth, industrial commodity companies generating huge free cash flow, healthcare and some consumer nondurable companies and special situations where internal actions will enhance shareholder value.

Remember to review all the facts; pause, reflect and consider mindset shifts; always look at your asset composition and risk controls; do in-depth independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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