As the Easter Weekend’s Geo-Political Tension Wanes, U.S. Consumer Data Weakens, Gold Rises, Oil Falls

China roared back with a 6.9% year on year Q1 GDP increase, it’s largest since 2015, as its retail and investment activity increased. China’s drivers were housing, infrastructure investment, exports and retail sales improvement. China’s target was 6.5%. China’s rebalancing away from heavy manufacturing and more towards services and consumer demand has not diminished the world’s second largest economy. Indeed, emerging markets are seen to benefit from China’s strong growth data. Rajiv Biswas, Asia-Pacific chief ecnomist at IHS Markit in Singapore stated that, “[t]he whole Asian manufacturing supply chain will get a boost from stronger Chinese growth.” Read more here.

Meanwhile, U.S. inflation took a step back in March simultaneously while retail sales dropped for the second month. So, another mid-year boost in interest rates by the Federal Reserve is now questionable. While the U.S. GDP ratio to national credit is little changed, China’s ration decreased somewhat, given its moderate credit growth since 2015. Still, China’s acceleration is still reliant on its old formula:  growth driven by credit-fueled investment in infrastructure and property. See here. This fact forms the basis for other analysts such as Carson Block, founder of Muddy Waters Research, to posit that China is a massive asset credit bubble risk. Cf. here. Block also warns that he has “never believed in the Chinese GDP data” and also sees a real risk of a U.S. default on its credit obligations.

In other markets, Gold has been climbing on Trump’s weakening dollar, leading analysts to believe that Gold will extend its rally. Jason Schenker, president and founder of the Austin, Texas-based Prestige Economics LLC, sees future U.S. interest rate increases already priced into Gold, and see equities declining especially amid increasing geopolitical risk. Schenker stated Gold broke out above its Bollinger bands, a technically bullish signal. Schenker warned that if the U.S. gets weak Q1 GDP number, equities “are going to take a big hit, the dollar is going to take a big hit, and gold is going to sky-rocket.” Read more here.

The longest rising rig count since 2011 in the U.S. is dropping West Texas Intermediate crude oil below $53/barrel as U.S. output is expected to offset OPEC-led efforts to cut a global supply surplus. Baker Hughes Inc. data shows an additional 11 rigs added just last week. That data plus the increase in shale oil production shows little promise to revive the price of oil in the near future–somewhere in the mid-$40s according to Michael Cohen, Barclay’s head of commodities research. See here.

 

Time to Leave Behind the 2008 Financial Crisis and Look Overseas Again?

Well respected analysts and market participants alike are behaving as if we’ve finally turned the corner on the worst financial calamity of this century, albeit barely getting underway. We are almost ten years post-crisis. Ergo, it may be time to reassess asset allocations. But, it could be a big mistake to merely extrapolate the cyclical trends of the past economic cycles. Some say that re-emergence from burst credit bubbles are different from cyclical recessions. If, as some believe, asset allocation is about finding market asymmetries—that is, areas where the consensus may be wrong and the cost of exposure is low, thus the investment opportunity is mispriced and tilted in your favor, then one such asymmetry is in those tame expectations for inflation. What if inflation exceeds those expectations? Perhaps economically sensitive equities are a way to benefit. Many are starting to look at dividend-paying companies and small to mid-size capitalized stocks to take advantage of high operating leverage to increasing growth and price trends. Many of these equities offering opportunity are appearing in overseas markets. But focus:  what worked in the past may not work again in the future.

New secular drivers may be at play as new nations entering phases of rapid development. Shorter-term changes in politics and policy that marked the current era may beg for a reassessment of one’s portfolio. Many anticipate new policies to spur global growth are in stark contrast to previous policy driven influences such as Quantitative Easing and negative interest rates from 2008-2016. Analysts at Bloomberg expect real GDP plus inflation to improve to roughly 6% growth over the next two years as inflation and real growth increase.  Deutsche Bank analysts think productivity is likely to decline. Well, if low-cost labor will no longer propel productivity and deflation globally, perhaps due to robots filling in every aspect of our economies globally, then one may investigate ways to benefit should inflation exceeds expectations. The natural place to investigate then, is China,manufacturer for the world. And, indeed the Chinese producer price inflation is back in positive territory for the first time since 2012.

So, if US long-term treasuries were the safe-haven for the 2008 deflationary cycle, Lord Abbett analysts suggest that “economically sensitive equities” are the place funds should flow out of bonds to benefit from a return of inflation. They like a focus on dividend-paying companies as dividends grow with inflation over the medium term. They also like small and mid-cap stocks as such tend to have high operating leverage to increasing growth and pricing trends.

They also suggest that assets positively correlated with inflation, negatively correlated with higher interest rates, and relatively low volatility may be another ideal hedge. But, Lord Abbett isn’t thinking of TIPS or commodities. Rather, a combination of inflation index forward contracts anda a short-maturity income fund would provide the best combination of those factors. So, if this strategy sounds appealing, then an inflation focused strategy may be a great approach.

Finally, a strong US dollar weakening, coupled with excessive pessimism caused by political turmoil in Europe and Asia could set the stage for another asymmetry to exploit. Recent economic indicators from overseas (China; Europe) have exceeded expectations and several leading indicators show a broadening of growth around the world, not a weakening. More than 90% of the world’s manufacturing purchasing manager indexes are above 50-showing they are in expansion.

If your portfolio is based on the trends of the past cycles, it may be time to reassess the new world dynamics and consider reallocation according to your risk appetite.

NOTE:  Small-cap and mid-cap company stocks tend to be more volatile and can be less liquid than large-cap company stocks. Due to market volatility, the market may not perform in a similar manner in the future. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

Financial Services offered through First American National Investment Advisors. Past performance is no guarantee of future results.


Third Week of March, 2017 Finds Investors Fleeing US Bond Funds

Mid-December, 2017 was the last most recent outflows from US Bond Funds. The Fed’s last rate-hike and conservative GOP Congress looking to impose new national debt ceilings, along with concerns the Fed will pull back on its holdings seem to be the drivers of these redemptions. But, it seems the majority of outflows derive from redemptions in US High Yield Bond Funds. Factoring out those, it appears this fund group woul dhave posted solid inflows. Seems drops in oil prices along with the flight from junk bonds also marked a rotation from Short-Term  to Intermediate Term Mixed Funds. Also gaining where Long-Term US Government Bond Funds, which posted their biggest inflow in over a year. Read more…

NOTE:  This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

Financial Services offered through First American National Investment Advisors. Past performance is no guarantee of future results.