Quiet the DC Chatter

Rarely has the global economic and corporate backdrop been so good only to have the financial markets held back by the needless, sometimes reckless, chatter out of Washington.

While few disagree with most of the messaging coming out of Washington on trade, no one likes how those messages are delivered. Someone should take Trump’s cell phone away so he can’t tweet 24/7.  Let him say what he wants by speaking to all Americans on television and/or holding press conferences fully explaining his positions, his desired remedies and how they would benefit America and our trading partners. It is time for Trump to calm down, act more Presidential, and gather support both here and abroad to press forward with a unified front.

Again, we support most of his economic agenda including his stance on trade calling for open and free trade with reciprocal tariffs, but his delivery is woefully lacking. He is a bull in a china shop when dealing with foreign leaders.

No human wants to be embarrassed in public, never mind the head of China. It’s time he learned to improve his Emotional Intelligence. We are on the cusp of a great market only if he was courageous enough to be humble and admit this significant weakness in how he relates to others and get to work on correcting it. He needs act thoughtfully, and I don’t say this lightly. My wife is an executive coach and works with leaders to help them learn to communicate in ways to engender trust and build collaboration.

It is a simple fact that we live in a global economy where some countries operate under different political, economic and financial systems than our closest trading partners and us. We need enforceable rules that all can live by to promote fair and open trade with remedies for misbehavior, including stolen IP, which can be enacted in a timely fashion. The WTO, which we created, just does not work effectively. The WSJ has recently published articles articulating the failure of WTO to work on trade issues with China, as well as with other countries, with the U.S and many others of our allies. The simple fact is that many Presidents have taken on the trade imbalance problem with China, but none have had the fortitude to enact change. Trump and his team are right here to take on this issue head on, including stolen IP, but it is their way of handling it in public that we question.

Let’s bring in other countries along with corporate executives and make a coalition, then lay out all the issues for everyone to see, offer viable, workable solutions and then set a timetable for action. If that does not work, then move on to tariffs and/or other remedies not alone but in concert with others.

Markets hate uncertainty and each day we sit on the edge of our seats waiting for that next tweet by Trump or an off-handed comment by one of his team to hit the markets. That is no way to run an investment portfolio – let alone a country.

Market volatility has shot through the roof since the beginning of the year. Initially due to fears of an overheating economy that would lead to four Fed hikes this year and next with the 10-year Treasury bond yield increasing rapidly over 3%. That concern has dissipated for a host of reasons as the market concern/fears have turned to a possible trade war with China wiping out all the economic benefits of the tax cuts (refer to the U of Penn study). By the way, all of this is occurring just as corporate profits/cash flows are taking off. The market multiple has declined over the first quarter from near 19+ times earnings projected 2018 earnings to below 17 times projected earnings this year to less than 16 times 2019 expected earnings while the 10 year treasury bond yield hovers around 2.8%.

The bottom line is that the markets are significantly statistically undervalued for the investor looking through all the noise, which will end one way or another. And there are many industries/companies that would not be punished much at all if a trade war did persist over many years. By the way, where do you think China will get all those airplanes that they sorely need if not Boeing? And where do you think China can find 29 million tons of soybeans? How many people does Starbucks employ in China? Talk is talk, but sometimes it is just cutting off your nose to spite your face. After all we are running a nearly $400 billion trade deficit with China. Do you really believe that we are at greater risk than China?

But what do we think will happen?

Trump and his team are not foolish as no one wants a trade war, but this administration wants real tangible and measureable action by China and others who have unfair trade policies with the U.S.. Can anyone really fault the call for open, fair and reciprocal trade agreements where IP is protected? Every former administration just kicked the can down the road while the size of the problem just increased year after year. Read Jimmy Dimon’s letter in the Chase annual report to get his perspective on this and other important issues as it was from someone who did not support Trump. It’s interesting that most all-corporate executives agree on the unfair imbalances of trade, but no one wants to walk the walk so they are willing to maintain the status quo. Ask yourself what you would do and how you might act differently than Trump’s team. There really is no better time than now to take this issue on as we have economic momentum due to tax reform and the new, highly stimulative government budget.

The bottom line is that we do not expect Trump and his team to back down here nor do we expect a full-blown trade war. We expect the U.S. to bring in our closest trading partners including Japan and the EU to join in with us negotiating a better trade deal with China. We do not expect these talks to be open ended at all but with a timetable to have some real movement before year-end. It serves everyone to negotiate a fair deal for all, which we expect.

On a more positive note, we expect a NAFTA deal to be concluded within months that will be better for the U.S. than the current deal. Also, don’t worry that the U.S. has backtracked on protecting domestic steel and aluminum. All deals made will have quotas that will prevent transshipped steel from China to find its way into the U.S. Domestic steel demand and prices have already started to benefit meaningfully from the trade deal. The domestic aluminum industry is benefiting, too.

The global economy continues to perform exceptionally well. We expect global growth to accelerate as we move through the year and achieve the IMF forecasts of 3.9% this year and next up from 3.7% in 2017. Inflationary pressures will stay muted too, and most all-monetary bodies will remain one step behind. Please note that global bonds rates have fallen back recently after sharp moves up in January and February.

Jerome Powell gave a speech last week which emphasized that the domestic economy is strong, wage pressures and inflation remain surprisingly tame and the Fed will be data dependent on future funds hikes but is still on track for 3 hikes this year and next. The unemployment report last week showed an average gain over 200,000 per month in the first quarter with muted wage pressures increasing 2.7% year over year. Pretty good! First quarter real growth should come in about 2.6% with gains of 3.0% over the remainder of the year.

Stay the course while maintaining excess liquidity at all times to take advantage of the excessive volatility cause by computer, systematic trading.

The market is substantially undervalued today for an investor with a one to two year time frame. Our portfolios are less than 12 times earnings with growth above the S & P projected 18% gain in 2018 eps. In addition, our average yield is above the 10-year Treasury.

We continue to emphasize the financials, global industrial and capital goods companies, low-cost industrial commodity companies including domestic steel and aluminum yielding over 5% and selling at 10 times projected 10 times 2018 earnings; technology companies at a fair price to growth such as Cisco, Intel and Microsoft; and special situations where internal change will create revaluation over the foreseeable future.

Review all the facts; pause, reflect and consider mindset shifts; analyze your asset mix and risk controls; do independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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