Merrill's 2017 Global Outlook
Here is the word from my breakfast with Bank of America-Merrill Lynch on the outlook for 2017. Global equities head Ethan Harris summarized the positives and risks of the new US government “good Trump, bad Trump” which contained no surprises although he certainly was right to call the election “a game changer.
He then moved on to a global tour which featured better ideas that Wall Street, notably Japan which of course has been the loser for decades. Now, citing house exert Louis Duvalier, Harris said “the stars are aligned” for growth: thanks “easing monetary policy” and “job market tightness”. He said in Japan it is now “all systems go”. Mr Harris also predicted that US wages will rise as pay goes into catch-up mode in the coming mature stage of the business cycle. Whatever Trump does, there will be higher inflation and higher interest rates in the US which will make financial assets less desirable than real assets next year..
US equities, they argue, have gotten ahead of themselves since the global financial crisis, having produced a12000 percent return since 1950, 65% of it since 2008 whereas non-US equities gained only 700% from 1950 and only booked half of this since the GFC. Chief economist Michael Hartnett then explained that “only if productivity picks up can you have your cake and eat it” getting growth without interest rates going up enough to nip it in the bud.
For the global economy, Mr Harnett predicted that there would be positive total return on markets next year but that “under the surface there will be tremendous volatility” as a result of exchange rate changes. He forecast that the yen will fall to 120 to the dollar and that the euro will fall to $1.05—but with lots of feints and reversals.
Mr Hartnett cited the biggest event (from his perspective) in 2016 was the day in July when the US 30-yr bond yielded 2.88% while the Swiss could borrow for 50 years paying a negative yield. “Everyone was positioned for that to continue” but of course it didn't after the Bank of Japan changed its policy from tight to easy fiscal policy rather than monetary stimulus, and these huge interest rate gaps disappeared.
As a classic economist, Mr Hartnett thinks the interplay of interest rates and inflation will determine growth and corporate profits and the house Merrill line appears to be that the US will not be the big winner in 2017. Instead, apart from Japan, there is more upside in EU which he called his “contrarian play”. He cited the fact that the capitalization of Apple and Google together exceeded that of all European equities as a reason for there to be more European profit and stock rises.
But he also warned about “massive dispersion” in results over countries and over time creating “rotation and volatility”.
Apart from Europe and Japan, the BoA-Merrill insights included a taste for oil company investment, and a focus on value stocks and small caps vs growth stocks and big stocks. This allowed the team to mention that that the next year will be one where active management would prove more lucrative than passive—a word from our sponsors.
Among emerging markets, Merrill thinks China will slow down from 11% growth in GDP in 2008 to 6% nest year. India will do better, with 7.2% growth next year (l6.67% from its stock gains, and eaving out the impact of the currency withdrawal which came after the forecasts were made). Merrill also expects cyclical recovery in Latin Americato produce real returns, with Brazil achieving double-digit ones along with Turkey, Russia, and South Africa. The Thundering herd also expects decent but lower positive returns in Mexico and Colombia, Poland, Czech Republic and Hungary, and anachronistically, in Israel, which it insists on calling an emerging market..
The elephant in the room is China which is expected to continue to cheapen its currency against others—notably the US$. Merrill currency expert David Woo predicts that under Trump, “the US and China [will be] on a collision course in 2017”. While nowhere as bearish about the RMB than CLSA (which expects a 19% fall to 8 to the dollar) or Rabobank (which expects a 12% drop to 7.6 to the dollar), BofA calls for 7 RMB to the greenback, a drop of 4%, by the start of the new year, a level not seen since 2008. The consensus is that mounting debt and slower growth will zap the currency.
Overnight there was a scary episode which showed what this might mean when the Chinese renminbi fell sharply. It seemed like a deliberate devaluation to show Pres.-elect Trump who controls China's exchange rate policy. But in the end, it turned out to be a fat fingers goof perpetrated Monday night by a UK money brokerage, ICAP plc. Here again we dodged a bullet, as for some years we owned the ADR, IAPLY. But in fact the bullet dodged was by the whole world, because a deep renminbi devaluation could have caused a major international incident with the future US Administration, and a test of Trump's temper. Luckily it was just an error by markets.
I also may have given too much credit to the PEOTHUS over his telephone conversation with the Taiwanese president, in violation of taboos which date back to the Nixon-in-China deal. My assumption was that It turns out that a lobbyist for Taipei, former Senator Bob Dole, arranged the chit-chat over the course of 6 months for $150,000 in fees.
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We dodged a few bullets without realizing it.
A major accounting fiddle in 2010 of the books at Brazilian airline Gol will cost the local arm of Deloitte the largest fine ever imposed by US regulators, $8 mn, and a ban on 11 partners of the firm from practicing their profession. Further fines were imposed by the Brazilian securities regulator. Moreover, in a break from tradition, Deloitte admitted that it had knowingly produced “materially false” audit reports, and then spent years trying to cover up the problem, by providing false testimony under oath.
Our portfolio used to include the ADRs of Gol, a fast-growing airline with global ambitions. Our Latin America reporter, Frida Ghitis, persuaded me to sell the share because of what she called “operational risks”. I assumed she meant possible airplane crashes. But looking back, given the revelations by Bloomberg yesterday, Frida probably picked up hints about accounts being falsified.
We also exited a Brazil exchange-traded fund at her urging at the same time. An ETF tracking a country, in this case Brazil, is forced by its rules to buy more of a stock that is taking off, as this airline was doing. Levitation leads to more levitation even the airplane share is due to crash. And it did take 6 years.
Another lucky exit was from Irish bookie Paddy Power plc, a strong player in betting shops in Britain, where its shares have their primary listing. In addition to suffering from poorly set odds on the Brexit election and then the Trump one, PDYPF is also confronting a British crack-down on its most profitable business, “contracting for difference” (CFD) or “spread betting” on stock markets. This highly leveraged bet lets UK punters predict stock markets' direction without owning stocks.
Now Britain's Financial Conduct Authority is setting new rules to control these products, which are already banned in the USA (where they were actually invented in the first place.) The British regulators think too many British retail investors are buying these product without understanding the risks. Some 82% of British CFD accounts lose money.
The main reason we sold Paddy was that US brokerages and market-makers shut its ADR out from trading because CFDs were considered a form of unfair competition. I got fed up with owning a share without a US price and that is why I sold. It fell another 2.6% today.
More today from Mexico, Israel, Denmark, Finland, Sweden, Brazil, Japan, Spain, Jamaica, Britain, Panama, Pakistan, and Canada. Tomorrow's blog will be late as I am attending a BofA-Merrill Lynch 2017 Forecast session.
My Advice for PEOTUS
Here is my advice for the President-Elect of the US, PEOTUS.
In October, 1962, Pres. John F. Kennedy publicly lambasted a group of US steel companies for raising their prices, giving his Republican opponents a chance to call his administration “anti-business”. Since then the US president has failed to use his “bully pulpit” (a term invented by a Republican president, Theodore Roosevelt) for making US corporations conform to government policy by limiting their moves to maximize profits by acting against the national interest.
Pres-elect Trump has now adopted a Kennedy-esque attitude toward large corporations re-siting factories in cheap-labor countries at a cost to US jobs, starting with Carrier air-conditioning and now also calling out Rexnord, maker of parts for autos, and energy and water systems.
Protectionism as policy risks encouraging counter-measures from America's trading partners, notably increasingly protectionist Europe and China. Meanwhile picking on individual companies is less likely to result in nasty reactions. Both US firms were planning to move production from Indiana to Monterrey, Mexico, showing that VP-to-be Pence, a regular Republican, is behind these Trump initiatives. Mexico is being made the scapegoat because it has little ability to react to US bullying.
But now that he has inaugurated his bully pulpit and his plan to impose high tariffs on companies moving factories and jobs offshore, I expect the Trump Administration will take on businesses from other states and other sectors.
I have a few suggestions. One of the post-election best-performing Dow stocks has been Goldman Sachs, the vampire squid which always seems to find a way to gain entree into US cabinet posts in recent administrations from both parties. Having won election by opposing Wall Street, Mr Trump can score some political points easily by turning on its least loved operator.
Hospitals and insurance plans are other huge gainers which need to get a warning. The same with US drug-maker majors, in a relief rally because Clinton did not win, but still susceptible to a political backlash over soaring drug prices. These businesses are more easily attacked than Obamacare which provides some benefits to those with existing conditions and to young adults keeping their family coverage which Mr. Trump wants to retain. While he extricates himself from these mixed medical messages, the price gougers present a tempting target.
More for paid subscribers follows from Canada, Israel, Denmark, Switzerland, Finland, Brazil, Colombia, Mexico, Trinidad and Tobago (a first), and Ireland.
Performance Tables Posted
As is my wont on Sunday, I have posted our performance tables on the website, www.global-investing.com, where you may read the ones available, all tables for current subscribers including our stock advice; and the closed positions one for pre-subscribers who are encouraged to come on board to get the full monty. As always, spreadsheets are easier to read if you hit the button saying "printer-friendly" even if you don't want to print the tables.
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China and Zimbabwe Plus False News
“It was sad, it was sad, it was sad when that great ship went down,.
“Husbands and wives, little children lost their lives,
“It was sad when that great ship went down.”
There is a terrible symmetry in the opening of a new Chinese replica of the RMS Titanic this week to wserve as a hotel in a future tourist resort in Daying, Sichuan Province, 900 miles from the sea.
China is no more unsinkable than the original ocean liner, which sank off Newfoundland in 1912.
Chinese seeking loopholes to get their wealth out of the country have been blocked by rules against buying insurance in Hong Kong and against large investments by local magnates in non-related foreign (mostly US) industries. But exit-seekers are not easily dissuaded.
Savvy Chinese know that the current situation is untenable. State-owned enterprises are in debt which totals over $19 trillion. There is no way that it can be repaid.
The big passage lately has been physical gold, with Chinese buying at record levels, to preserve their private wealth from the authorities. According to gold-bugs Hebba Alternative Investments LLC, at November settlement the Shanghai Gold Exchange delivered over 28 metric tonnes of the yellow metal, a record, and moreover are paying a premium over global prices to get it.
The Shanghai gold market is also used for tax evasion according to Reuters, so not all the gold delivered really hit the market.
Our Zimbabwe-born contributor Martin Ferera comments:
“How many Americans or Canadians or Britons do you know who are trying to export their capital out of their homeland? I guess the answer is none.
“This has always been my best single indicator on whether China can surpass the US economically. “When economists forecast China gaining the lead, I know they haven't the faintest idea what they are talking about.
“If an economy is thriving, people are not exporting their capital. Just ask South Africans and Zimbabweans. I know from personal experience. The US will continue to be the dominant economy.”
The fall of US unemployment levels to 4.6% increases the inflation risk from expansion and job-protection measures by the new administration. It is at the lowest level since before the Global Financial Crisis, in 2007.
Having published (however skeptically) a comment from a pro-Trump reader LC forecasting the arrest of both Bill and Hillary Clinton for running a pedophile ring, I have to tell you that it was all a fake. A DC pizzeria called Comet Ping Pong, run by Democrat Party donor James Alefantis was revealed as a fundraiser for Clinton in hacked emails from John Podesta's account.
Because his restaurant posted pictures of children, a website called 4chan then claimed it was used by prominent Democrats to arrange child sex. Protesters gathered at the store and their selfies appeared on YouTube.. They claimed the pizzeria basement was used for assignations, although Comet Ping Pong has no basement. “Sometimes and innocent picture of a child in a basket is just an innocent picture of a child in a basket, and not proof of a child sex trafficking ring, Alefantis told the BBC.
Nonetheless, the conspiracy theory moved into the Internet news mainstream when a Reddit posting on the alt-right pro-Trump part of the site posted a long document of “evidence” a few days before the US election. LC picked it up there and her remarks made it into my blog, with my skeptical commentary.
Today we have moderate news feeds to deal with about our funds, some heavy industry, drugs, and financial stocks.
Central bank independence is under attack around the world, but the Bank of England has endangered its status not only by backing Britain remaining in the European Union, but by its meaty new currency issue. Elitism has again led to an unacceptable policy choice by the central bank and a PR disaster.
The longer-lasting “Guardian” £5 note made of polymer plastic pellets offers greater security and durability and should have been popular with Britons. The new notes can survive being left in pockets in the laundry, unlike paper ones. But the Old Lady of Threadneedle Street made a major error with the new currency. The polymer in the new notes is rolled in tallow, beef fat, to keep the notes flexible.
This is offensive to Hindus, who venerate cows and do not eat them. It is offensive to Muslims, because the animals were not slaughtered according to the halal rules. It is offensive to observant Jews, including some of my relatives who live in Britain, because tallow is not kosher. It is also offensive to vegetarians like my sister-in-law and one of my husband's cousins. It is also offensive to vegans like my nephew, a London bobby (cop) and to Buddhists and Jains, admittedly quite minor parts of the British population,.
The inventor of the polymer notes, Australian Prof. David Solomon, has a Jewish sounding name, so it is astonishing that the banknotes not being kosher or halal was never considered. The Innovia banknotes are already being used in Australia, New Zealand, Singapore, Canada, Poland, Malaysia, Vanuatu, Mauritania, and Nicauragua. The attempt to sell the technology to India, which has recalled its currency to block “black money” led to the revelation that the banknotes contain beef fat.
How could the BoE have proceeded with its new notes without considering all these elements of the population? Of course people will not eat £5 notes, but they will handle them and get tallow traces on their fingers.
Oops. I misstated the Opec oil production cutback yesterday. It was not a 32.5 mn barrels/day cutback, but a cutback to a level of 32.5 mn bbls/d.
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Unneeded Trump Policies
Pres.-elect Trump's programs become less urgent because of two things reported today. China is cracking down on its companies' foreign investment push, fearing that this is nothing but a cover for capital flight. Big deals worth outside the sector where the Chinese firm operates will be scrutinized closely by the Beijing authorities. Earlier, China cracked down on its citizens buying annuity insurance policies during trips to Hong Kong, a way to hold non-renminbi assets.
Both moves will reduce the chances of Chinese currency becoming a global one, cutting Beijing's hopes of becoming a major trading power.
But they also undermine the threat by future US Pres. Trump to sanction China for allegedly keeping its currency too cheap. The new rules boost the RMB exchange rate rather than manipulate it down.
Meanwhile the US Commerce Dept reported that US GDP grew at an annualized rate of 3.2% in Q3, much better than the 2.9% estimated earlier, thanks to higher household spending. That means GDP last quarter rose the fastest in 24 months. This reduces the need for new measures to make America great again, if anyone is listening.
More for paid subscribers follows from Brazil, Canada, Britain, Germany, Singapore, The Netherlands, Colombia, Finland, and Denmark. I am offering lots of tech news to prove I am not really a Luddite despite my qvetch against Cyber Monday.
Today the cyber world kicked back hard at your editor for writing negatively about cyber Monday yesterday. It appears that there is an administrative account on this computer which is inaccessible to me and stops me adding programs to my system. It was created when I bought this laptop with the good techies of Staples who set things up for me to use Windows 8. It then was updated by Macrohard to allow me to upgrade to Windows 10, but I never let the Gates gang control my email or my programs.
Because I was having problems inputting a trade with my broker, I rather stupidly tried to get a better pricing system with a nice female techie there called Ashleigh.
Big mistake. I cannot add a program to my laptop although Microsoft can so so as it installed Windows 10 without my cooperation.
I will have to track back to the shop to gain access but before that I will file my daily dose of blog, which is very late because of the back and forth plus several quarterly and one annual report after verification of the radiators in my apartment.
Tomorrow I will cut short my blogging to attend a meeting on smart beta by Herb Blank, one of the fathers of exchange-traded funds, who created “country baskets”: when he worked for Deutsche Bank some decades ago.
More for paid subscribers follows from Finland, Sweden, Denmark, Israel, Canada, Thailand, Mexico South Korea,, Brazil, Britain, South Africa, Switzerland, the Netherlands, and Canada. We have two final reports (one for a Q4) and another normal quarterly report. Plus info on our trades.
Cyber Monday Blues
No, I will not celebrate Cyber Monday today. I've got the Cyber Monday blues,
The trouble with the 21st century is crossed wires. I ran into lots of this over the last few days. The first crossed wire was an attempt by the company to get us onto an earlier bus back to NYC from Boston, as it was very empty. The staff wanted to get us and a few other early birds away a half hour earlier, but I recalled that the last time this had happened we were billed about $20 each for changing our reservation even though it was the bus company that initiated the change. So I asked about the fee and of course we and all the others would have been billed. So we hung around a bit longer.
Then we took my husband's photos of our visit, showing grandparents' day and Thanksgiving shots, to Staples for printing. The process of setting up the billing was long and painful and again I had to stop things midway because there was an unnecessary $8 charge for cutting the borders around the pictures, which we are perfectly capable of doing ourselves. Now my card is being billed twice, once for the prints and once for the prints plus cutting.
My new answering machine recording system produces inaudible messages. All the paperwork coming with the device fails to tell you how to fix it. There is no telephone number for help.
Some update installed on the old desktop computer overnight has disabled it with Sysfader, whatever that may be. Restarting did not help; I had to go back in time and restore the system to last month to get rid of google chrome which doesn't work anymore in the windows XP desktop, which forced me to us yahoo rather than google as a search engine. Surely that was not the point of the ha-ha upgrade.
You may wonder why I keep it in Windows XP. The reason is that my corporate accounts going back to when I started this newsletter in print form are on that computer in lotus 1,2,3 and cannot be retrieved in a more modern version.
The last round of 21st century confusion is terrifying. My mammogram requires a rerun according to the provider. I could not book an appointment from Boston because my cellphone kept running out of juice while I was trying to book an appointment. The telephone system was blocked by many people trying to do the same thing and there was no alternative method.
I called early this morning on the land line to book a date. My attempt to get it done quickly for my peace of mind was defeated. Despite what he had told me, they require another prescription from the doctor to run the tests again. So I can stew for a few days, even though I offered to pay cash and collect from the insurance company later.
For the record, all these supposed labor-saving complications were run by Americans speaking English right from the USA. Bad programming leads to crossed wires. Cyber Monday my foot.
I hope my screed last week about frothy dry bulk carrier stocks persuaded you not to get into that thicket—or to sell out if you had been lured in. The group, led by Dryships, which we sold ages ago, duly crashed. Unlike Alan Greenspan, sometimes I can spot a bubble.
More for paid subscribers follows from Thailand to Brazil, from Cuba to South Africa, with a few stops in between. We have two news items from Malta, a first. We have two company reports, plus a new buy, and a sell.
Black Friday won that name because it was historically was a big shopping day which put vendors' accounts into the black for the Christmas Season. As I set out for New York from Boston I fear that the blackness among the top shops will be the non-accounting kind, meaning black moods. So many shoppers are deterred by the city and federal police from hitting the stores at the key bit of Fifth Avenue around the Trump Tower.
New York high rises are not like the Paris Rue St-Honoré which was cut through the Embassy quarter by the Baron Haussman to carefully separate their President's house behind high gates on the south side from the smart boutiques and galleries on the north side. There are public pavements running along the eastern side of Fifth Avenue and there are doors leading into the Trump Tower with its high-rent high-price shoppes.
Making matters worse as the Christmas season begins is the higher US dollar which discourages foreign shoppers, and perhaps the perception among some of them, like Mexicans or Arabs, that we do not like the color of their money. More and more even the poshest trade is moving to the Internet.
Worst of all with the first lady planning to let the youngest Trump son finish his school year in the family penthouse, with the president coming to spend weekends with him and her until June, the jewelry and couture shoppes will suffer more lost business for months because of the top Trump Tower tenant.
While we were eating turkey, Turkey the country upped its repo rate by half a percent to protect its embattled currency.
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