We’re Only In The Sixth Inning

There is no one better to ask than Warren Buffett about investing. The same can be said for asking Jamie Dimon for his perspective on the global economy, the financial markets and politics.

We have known and worked with Jamie for nearly 35 years, since his early days as second in command and protégé of Sandy Weill, a hugely successful dealmaker and manager of some of the largest financial services companies in the world. Jamie is Chairman of JP Morgan Chase and is easily considered the best and most respected banker in the world. He probably has more information at his fingertips about the global economy, business/consumer sentiment and spending plans than anyone, including heads of state. He sees it all, has all the data, speaks to everyone, and knows how to synthesize all of it such that his bank is number one in the world.  So when he says something, listen, as it means something. You can take it to the proverbial bank. Chase has long been one of our core holdings.

Last week Jamie spoke at a Bernstein conference. His key points were:

  • The economy was only in the sixth inning of growth
  • Capital spending is entering a super cycle
  • Banks are entering a golden age as they are over capitalized with reduced regulations with great opportunities ahead
  • Chinese banks are becoming increasingly aggressive and competitive
  • World leaders need to work together on trade policies as the consequences of trade wars are negative for growth and business sentiment

We concur with his comments as you can glean from our past blogs. Our portfolios continue to emphasize companies that will benefit from Trump’s pro-growth, pro-business, America First policies. We strongly believed that the financial market’s counter trend rally two weeks ago was off-base; that the pundits were wrong, once again, looking through their rear-view mirror. We used the market correction to add to our core holding. And kept shorting bonds!

Let’s briefly update our comments from last week on the issues in the forefront concerning investors and the pundits:

  1. Russia and Saudi Arabia are under pressure from other OPEC members not to increase production such that oil falls beneath $75/barrel.
  2. Global economic growth has not materially slowed despite weakness in the Eurozone and Japan. Economic performance in the US (#1 economy by size), China (#2), United Kingdom (#5) and India (#6) are all above expectations. Our employment numbers reported last week were sensational!
  3. The United States and North Korea have set June 12th to meet in Singapore. Don’t expect a deal to conclude anytime soon, but consider this meeting is a positive move.
  4. Trade talks continue with China, but don’t be surprised to see some skirmishes along the way before a real deal is reached. We continue to believe that one will ensue down the road.
  5. We remain concerned about trade negotiations with Europe and Japan. It is very hard for them to give up on the trade benefits given after WW2. Also, the WTO is outmoded, outdated and ineffective. It was wrong that German and Japanese auto companies built plants in Mexico to benefit from NAFTA after Trump was elected as it was a slap in his face. There is nothing wrong with fair and  reciprocal tariffs.
  6. We remain hopeful that a trade deal can be worked out with Canada and Mexico, as the mutual benefits are clear-cut for both sides. It may turn into bilateral deals in the end.
  7. Fed policy is held captive right now by what is happening overseas. Economic weakness in Europe and Japan combined with political issues in Italy have tied the hands of the BOJ an ECB. On the other hand, the Fed cannot raise rates much despite a strengthening economy for fear of a further significant move up in the dollar, which would only exacerbate our trade deficit and put downward pressure on inflation. Foreigners keep buying our debt with both hands suppressing the longer end of our yield curve. A flattening yield curve does not mean that the Fed is overly restrictive.
  8. We remain convinced that Italy will not exit the Eurozone nor default on any of its debt. However, our banks are benefiting significantly from perceived financial weakness in the European banks. Score one for Jamie and the other US multinational banks.

A number of cross-currents occurring at the same time are certainly challenging the financial markets. Opportunities come when views are disparate such that pricing is inefficient. Now is the time to play the long ball as new investable trends are obvious and will be very rewarding for the patient investor.

We have argued for months to emphasize those companies that will benefit most from Trump’s policies and to sell/short the losers. Same goes for the new policies in China. The most obvious investable trend here is that we have entered a multi-year surge in domestic capital spending. Whether you were a domestic or foreign producer that sold in the US either from domestic plants or imported from abroad, where would you choose to build that next plant? Here, of course. It does not hurt that our new tax and trade policies along with reduced regulations help make the US a destination of choice. Clear-cut winners include industrials, capital good, technology and low cost, well-financed industrial commodity companies including domestic steel and aluminum. All of these companies should be re-rated over the next few years as growth and returns easily exceed historical levels. We want to avoid the historic stable growers that can be hurt by disruptors as their volumes and margins will remain under pressure for years to come.

A second area that we continue to emphasize is the US large multinational financials. The banks have entered a golden area as they have had huge increases in their capital ratios and liquidity, benefit tremendously by a surge in capital spending, are gaining market share at the expense of its weakened foreign competition, and have much more opportunities to profit due to decreased regulations and are benefiting from widening spreads although not as much as earlier anticipated. It does not hurt that most of the strongest banks have huge stock buybacks going along with dividend hikes. We expect financials to be re-rated higher in the years ahead.

Finally our portfolio is full of special situations where managements are making huge internal changes that will lead to higher valuations over time. M & A is extremely high too as the sum of the parts in many of our investments exceeds the whole. Patience is needed here too.

It really is very easy to create a profitable that will outperform over time by identifying new investable trends. Broadly speaking we want to emphasize companies in the US that will benefit from the capital spending surge and higher domestic production while emphasizing companies in China that will benefit from growth in consumption and technology. Patience is a necessity as none of this occurs over night. But the rewards will be huge for the investor.

Remember that we are only in the sixth inning with much more to come.

Review all the facts; pause, reflect and consider mindset shifts; always look at your asset allocation and risk controls; do independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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