What Do You Believe?


The global markets continued to advance last week despite the normal twists and turns about trade which will continue until there is certainty one way or another. After listening to Trump at the New York Economics Club last Tuesday, it only reinforced our belief that he will NOT do anything, including trade policy, that would set back the U.S economy and stock market. This is how he gauges his success and is his ace in the hole to get re-elected. The bottom line is that we expect Phase I of a trade deal with China to be completed, any additional tariffs to be postponed, a steepening yield curve and further advances in stock prices.


Let’s review what transpired last week on the four key topics that we are monitoring: monetary policy, trade, Brexit and Trump:


Monetary Policy: Fed Chairman Powell spoke last week to the Joint Economic Committees of Congress stating that he believes the current Fed policy is appropriate and will not likely be changed in the foreseeable future unless there is a major shift in their economic outlook. While that part of his presentation was expected, we were very surprised to hear him mention that low interest rates are here to stay as long as the economy remains on its current path. Interest rates could move lower if economic growth was lower. We have long argued that low interest rates are not transitory therefore the stock market multiple could easily reach/exceed 19 times earnings especially with bank capital/liquidity ratios so high. Remember that the stock market multiple has averaged over 15 times earnings over the last 25 years with interest rates 3 – 600 basis points higher with bank capital/liquidity ratios much, much lower than now. Even if the Fed does not lower its funds rate, don’t forget that the Fed is effectively easing further by buying $60+ billion of Treasury bills per month. The bottom line is that global monetary policy will remain extremely accommodative; low inflation will keep interest rates lower than you may think; and investors will be forced to move further out on the risk curve which is favorable for stocks.


Trade: While we continue to hear that snags remain on completing Phase I of a U.S/China trade deal, we are not surprised as each side will continue to negotiate down to the wire. On the other hand, we hear from top authorities on both sides that a deal is near which is likely as each side needs to complete it. Trump needs one to get reelected and Xi needs one if he intends on achieving his goal for China 2025. The real truth is that the U.S economy can do quite well without a deal, but the Chinese economy will continue to weaken without one. The bottom line is that we do expect Phase I to be completed before December 15th  when the next round of tariffs is to go into effect. On another note, Nancy Pelosi commented Thursday that there was a breakthrough in the House and that the trade deal with Canada/Mexico could be passed imminently. That is important and very goods for stocks!


Brexit: As we mentioned last week, it now appears that Johnson may have the vote on December 12th to win the election and control of Parliament. If so, his Brexit deal with the Eurozone should get passed. If not, he will have another 6 weeks to conclude a new deal. Either way, both sides need a deal as their economies, which are already in bad shape, would only tank further.


Trump: Trump has clearly put his economic policy at the center of his 2020 campaign as the numbers are good for sure. A standing President who has had a strong economy in his first terms almost always wins reelection and he knows it. We really doubt that he would shoot himself in the foot by escalating trade tensions with China and the Eurozone. We do expect Phase I to be completed and Trump to push out any thought of auto tariffs against European manufacturers until after elections next year. In addition, we are already hearing about a huge middle/lower class tax cut paid for by closing tax loopholes benefiting only the wealthy; a new health care policy as well as an infrastructure bill to be introduced next year. Trump will do any and everything to get reelected using his power of the Presidency for sure.


We do expect trade deals and aggressive monetary ease to support stronger global economic growth as we move through 2020. Clearly bond investors agree as global rates continue to move up as we anticipated.


What do you believe?


Before we go on, we would like to comment on Elizabeth Warren’s misplaced attacks on self-made, philanthropic billionaires. We despise personal attacks especially those that hit below the belt. We can agree to disagree and debate the strengths/weaknesses in any proposals putting personal attacks aside. We do not accept the excuse that this is how politics works.  It is time that this country come together rather than being dominated, at least in the media, by the far right or far left.


Now let’s review the most recent data points by region that support/detract from our view that there is no place like home as the Chinese/Eurozone/Japanese economies continue to weaken.


United States


Virtually all of the economic statistics reported last week support continuing strong consumer demand and fiscal spending which make up over 90% of our economy: retail sales rose a seasonally adjusted 0.3% in October while industrial output weakened 0.8% which was no surprise due the impact of the GM strike; the  core CPI rose only 0.2% and is up 1.8% from a year ago; the PPI fell 0.3%; small business optimism rose to 102.4; and finally the U.S October budget gap widened to $134.5 billion from a year ago which is highly stimulative.


We continue to anticipate that the U.S economy will expand by 2% +/- 0.25% for the foreseeable future without any significant increase in inflation. We were pleased that the GM strike ended which will boost manufacturing and Ford just ratified a new deal with the union.




China’s economy continued to weaken as industrial output has risen only 4.7% from a year ago; retail sales have grown only 7.2% compared to an expected 7.8% gain, and fixed-asset investment has slowed to only 5.2% so far this year. Notwithstanding we were not surprised to see Alibaba’s “Singles Day” knocking the ball out of the park with sales increasing to over $38.4 billion worldwide. Jack Ma, the company’s founder, was surprisingly disappointed with the results.


The Chinese economy is continuing to decelerate and badly needs a trade deal to even get close to 6% growth which the government considers a necessity to provide enough jobs to give credence to achieving China 2025 which appears less likely by the day as manufacturers shift their supply lines at an accelerating rate. For instance, Ralph Lauren has cut its dependence on Chinese suppliers in half since the beginning of the year.




The European economy is already in a technical recession in our opinion. Just imagine what it means if the strongest country in the region, Germany, grew only 0.1% in the third quarter. No way can Germany reach 0.5% growth for the year which is their current forecast. Can the government hold off much longer using its budget surplus to increase fiscal spending? We doubt it. Clearly the region, like all others, are banking on a U.S/China trade deal to boost their growth rates. But what if there is no trade deal?




Japan’s growth depends on global trade which is suffering as we all know. It certainly did not help their economy that the government went ahead with increasing the consumer retail tax to 10% on October 1st. The government is hopeful that the U.S and China will sign a trade deal and that the Regional Comprehensive Economic Partnership (RCEP) will be signed early next year with more than a dozen countries in Asia Pacific. Without these trade deals, Japan’s economy will stay stuck in the mud.


Investment Conclusions


Global hope springs eternal that the U.S and China reach an initial trade pact ending the continuing escalating in trade tensions around the world. We do expect one and if so, global growth will improve next year. Clearly the markets agree as evidenced by the sharp rise in interest rates globally as well as higher stock prices.


While we continue to emphasize investing in the U.S as we are less vulnerable if no trade deal is forthcoming. We bought some global industrials, capital goods, machinery and industrial commodity companies; added to technology emphasizing semis as you know and raised our financial exposure that will benefit from a steepening yield curve and acceleration in loan demand. We have increased our retailer exposure here expecting a great Christmas season. Naturally, we maintain a number of special situations selling well beneath intrinsic value.   We own no bonds as we the yield curve to continue to steepen and are flat the dollar although we do expect it to fall.


The weekly Investment Committee webinar will be held on November 18th at 8:30 a, Eastern Standard Time. You can join by typing https://zoom.us/j/9179217852 into your browser.


Remember to review all the facts; pause, reflect and consider mindset shifts; look at your asset mix with risk controls; do independent research and…


Invest Accordingly!


Bill Ehrman

Paix et Prospérité LLC

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