Subscribe FREE to the Moneyball
Economics Newsletter

data

Trump Is Winning – Which Is Good For Stocks

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

It’s the start of the third quarter. The market ended slightly up for the first half.

We’ll see where it goes, but it’s promising considering the rising global trade war that Trump kicked off.

Apparently the market has decided trade wars aren’t going to be so bad for the U.S. after all. In fact, I would note that very few companies delivered downward guidance as trade war rhetoric heats up.

In fact, the U.S. market is a beacon of strength compared to others: it’s flat for the year.

China’s Shanghai Composite is down 25% since February (when Trump began his attack.) The German DAX is down 10% in the same period.

The U.S. market is resilient because investors are looking past the sabre rattling and the Kabuki theatrics and public histrionics by all players.  

Investors see that Trump can’t lose by attacking our trade partners. Worst case scenario is some farmers get bruised. Best case is real change to these trade deals. Investors are actually betting on Trump winning some battles.

Fall Market Surge?

I agree with the market. Remember, the market is forward looking. And I see the stock market surging again when Summer ends.

Let me explain.

To begin with, focus on timing: the market is pricing in what they expect from elections in November.

Is this good policy? Absolutely: patriotism sells at election time.

Trump’s base will love that he is following through on campaign promises to ‘fix’ NAFTA. Fix NATO spending. And stopping Chinese trade abuse. Even if he wins nothing but enmity from trade partners, the U.S. voter will love him for ‘sticking up for Americans.’

I would even argue this has been a two year plan.  

Everyone thinks he’s an idiot. But I see a plan of attack that is effective in its simplicity.  

The first stage was a tax cut that was, not coincidentally, passed right as the holiday shopping season started.  

Santa came early last year. This primed the economy such that it could absorb the economic blowback of trade wars, which he then initiated.

It’s a series of self-supporting economic initiatives, with one launching every six months. I suspect he’ll introduce more tax cuts after the trade wars settle down. Followed by an infrastructure bill. It’s a coordinated economic blitzkrieg that will run up to the 2020 Presidential elections.

But let’s ask another question.

Why did Trump initiate a trade war months before a mid-term election? Because he thinks he will win and results will be visible by September (any later and he loses ground in election momentum).

So why does he think he can show off results by then?

For starters, because the U.S. has a lot of leverage.  

First, because there is a certain high moral ground to his approach. NATO partners are shirking their military and financial agreements. China does abuse trade with the U.S., and so on. I am no expert on the details of trade agreements, but it is odd that German auto tariffs are 10% while the U.S. is at 2%.

The main source of leverage is we have the market everyone wants to access. Trump is cutting off that access precisely when other economies are struggling.  

Germany’s growth has fallen to a standstill. China’s is slowing fast.China’s PMI is pointing to barely expansionary. Exports have fallen 3 months in a row. Europe’s latest production data (PMI) fell to the lowest since December 2016. Its future expectations fell to 2015 levels. 

So on the one hand we have a booming U.S. economy and a stable stock market. On the other hand the U.S. has trading partners slowing down and stock markets falling. The only path out for them is access to the U.S. market – which Trump is starting to withhold.

Simply put, investors and businesses around the world agree: Trump really does have a lot of leverage and is willing to use it.

Another reason to expect success is the multi-front strategy: Trump is brawling with Canada, Mexico, the E.U., and China (plus a military battle with North Korea, Iran and Russia) – all at the same time.  

This makes sense: in this divide-and-conquer approach, he is waiting for one entity to bolt and that becomes leverage against the others.

(At this point, some might question the entire wisdom of initiating these battles. It’s a cardinal sin, they say, to pick a fight with friends and to add to the misery by doing so in public. And yet…Reagan confronted Japan over its horrible trade and mercantile tactics – which worked. Germany has had multiple Presidents take them to task for failing to meet the minimum agreements on NATO spending, but they did nothing. Now, confronted by Trump and in public, they will finally move. When politeness fails, it’s time to get serious. Threats made in secret will only backfire because markets and people get even more surprised.

I don’t believe antagonizing our allies over trade will lead to some permanent scaring. Quite the opposite: it can be very uplifting and reinforcing. It’s like an example of couple’s counseling, where we have to do a little yelling and airing of grievances in order to move forward to remembering why we are in a relationship to begin with. At the end of the day, the E.U. has no better partner than the U.S. The same goes for Southeast Asia, Asia and India.)

This is why Trump is winning this campaign. Germany and China are already scrambling to assuage him. Germany has quickly agreed – behind the scenes – to lower their auto tariffs. China is trying to figure a way to do the same.

This makes September the month this all comes to a head – that’s when the tariffs kick in. It’s also when Trump wants to show some gains for his efforts. (Which, by the way, is also his weakness. Everyone knows that he needs something soon.)

In any case, here’s a way to invest on the likelihood that it plays out in Trump’s favor:

  1. Military & Aerospace: The easiest way for the E.U. to get Trump off their back is to buy a lot of military gear. Buying a few billion dollars of U.S. military hardware is the easiest way to (1) move the spending dial fast and (2) meet NATO spending agreements. It’s easy to buy a few big ticket items and quickly rack up billions in spending. Germany could buy 50 new planes and stop Trump from talking.
  2. Long the dollar, short gold.
  3. Long bitcoin. It is easier to smuggle your wealth out with crypto than it is with bullion. The fear trade will favor crypto over gold.
  4. Long the S&P 500. Crazy as it sounds to buy the market when the dollar is rising, the U.S. will be a safe haven as other economies start to stumble. An end to the trade sabre-rattling will bring a relief rally.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

 

What Is Trump Up To With All This Tariff Talk

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

The market is really upset by the Trump Administration’s hawkish trade tariff talk.

But what he’s doing is simple. Trump is just playing for the midterm elections.

He has 3~4 months to pull a rabbit out of a hat and impress the voters with his ability to bring home the bacon.

Will it work? Maybe.

You see, Trump is in a position of strength from a negotiating standpoint.  

To begin with, Trump is mostly right when he says that U.S. trade agreements are imbalanced.

China does steal technology. It’s trying to acquire and steal more. European tariffs do exceed the U.S.’s.

This makes Trump’s timing for a trade war great: both China and Europe’s economies are slowing and both want and need access to the U.S. market.

Conversely, the U.S. economy is turbo-charged and looks to be able to weather short-term jitters.

But not China. Panic seems to have set in. Chinese KraneShares Bosera MSCI China A Shares ETF (NYSE: KBA) is down by about 15% in June. The Chinese stock market fell by $500 billion (B) last week alone. Money is flowing out.(The U.S. stock market fell a similar amount, but our market cap is ~3x that of Hong Kong and Shanghai’s).  

Regarding tariffs, Europe doesn’t have many cards to play. It’s why the rumor mill confirmed they will soon be rolling back tariffs.

I believe China will also capitulate. They have to buy agriculture products like soy and hogs. Banning U.S. products means they have reduced supply and will end up paying more for those goods elsewhere.

The U.S. farmer will then sell their soybeans on the global market at a higher price. Meanwhile, the U.S. can easily slow the purchase of smartphones without much pain (sorry Apple).

In a sense, Trump is spending the Summer ripping the band-aid off and letting things heal.

But he is also under the gun.  

He has to show results no later than September if he is to win votes in November. And that’s the leverage over him that China and the E.U. have.

There is a pot of gold at the end of the rainbow, but for now the market will be jittery.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

 

Gambling Shows Consumers Are Spending. Cannabis Trumps Alcohol.

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

(The chart above averages the rates of gambling growth for

Detroit, Maryland, Connecticut, Atlantic City, & Pennsylvania.)

Where We Are In The State Of Gambling.

Gamblers are back.

Money is flowing into consumer pockets.

The local casinos are seeing positive growth, and online gambling is jumping even higher. (Atlantic City saw a 10% jump in online gambling revenue.)

Lower income gamblers are particularly happy. Las Vegas adds a little bit of color.

Recall that the Las Vegas Strip caters to more upscale visitors. And downtown casinos cater to more lower income visitors. Strip year-over-year (yr/yr) growth is: 5% Downtown yr/yr is: 16%.

This is a reversal of sorts: the Strip saw double-digit growth in Q1 (Jan-March) whereas Downtown was in the low single-digits.

In other words, the upper income saw the tax cut benefits sooner. Lower income households began to feel the effect only recently.

Key point: U.S. Consumers have begun to spend again.

Where We Are In The Green Economy

Last year, Aspen reported $11 million (M) in cannabis revenues, compared to $10M for alcohol. In fact, pot sales are smoking alcohol sales across many other cities in Colorado (pun intended).

It’s most noticeable in tourism areas that cater to outdoor activities like skiing. Alcohol impairs skiing – not to mention leaving a hangover. But skiing while stoned is very common.

(Recall that back in 1998 in the first ever Olympic snowboarding competition, Gold medalist Ross Rebagliati was found guilty of having THC in his blood. Yes: he was stoned when winning gold medals.)

Other reasons consumers are favoring pot over alcohol start with the downside of driving under the influence: stoners are less likely to be caught because of testing mechanics.

Drunk drivers can blow into a breathalyzer as soon as they get pulled over. Stoners can’t: THC can only be measured reliably with a blood test.

Blood tests aren’t administered by police officers. So that means an average of 2~3 hours from the time a driver is pulled over to the time the blood is drawn by a nurse. That’s long enough for someone stoned to be measured below the legal limit.

Unlike alcohol, the THC metabolism varies incredibly. Generally speaking, studies are showing that a few puffs on a joint (or the equivalent) move the THC blood content to 100 ng/ml in the first few minutes, after which it rapidly metabolizes.

Within an hour, the concentration falls into the single digits.

Simply put, someone getting completely stoned can be pulled over and be far above the legal limits but, by the time they get measured, be comfortably legal.

So this is fueling the switch away from alcohol over to cannabis. In Colorado, it is illegal to drive with more than 5mg/mL.

Basically, pot smoking is cannibalizing alcohol drinking.

This is the trend: alcohol sales in  Colorado dropped (-15%) last year. MolsonCoors (NYSE: TAP), which is based in Colorado, reported sales were down 5% yr/yr in Q1 2018. In fact, North America sales have been falling $100M per quarter.

So here’s the problem: on the one hand bars are losing revenue while, on the other, pot dispensaries aren’t picking up the slack. It’s illegal to smoke pot in the dispensaries or in bars.

This means people buy and go home, instead of going out.

So last month a bill was presented to the Governor of Colorado: legalize ‘tasting rooms’ at cannabis dispensaries. He just vetoed it. Not coincidentally, the wine lobby has spent $100M over the last decade lobbying against cannabis. They know a threat when they see one.

The heart of the matter is and always will be money.

Given the choice between going out and drinking or staying home and smoking, consumers are voting with their feet.

In the spirit of if-you-can’t-beat-‘em, join-‘em, bars should be allowed to sell pot.

They can already sell cigarettes and alcohol, both controlled substances and both demonstrably bad for the health. The tax revenue is reliably collected (which is of paramount importance to the State).

Cannabis becomes just one more thing to sell.

The interests of the State, bars and cannabis producers are in alignment here, even if bars can’t see it.

Cannabis will continue to become even more mainstream.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

Is Trump Good Or Bad For This Market?

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

The market has been on a tear since Trump moved into the oval office. But is he good or bad for the market?

His style is combative and divisive. This brings on volatility. The opposite of what investors want. Investors prefer predictability.

However, his trade and economic moves are good for the economy. It should continue to drive the stock market higher.

(What I’m about to say is somewhat political, so please keep that in mind).

I believe that the role of domestic and foreign politics are playing a huge impact on the Trump agenda, so I’d like to start there.

First some historical context.

For nearly 20 years, U.S. foreign policy has been dominated by military campaigns in Iraq and Afghanistan.

In order to effectively prosecute two major wars, the U.S. required real foreign support. The U.S. needed on-the-ground support to move military material. (For example, we needed bases in Turkey.  Bargains and compromises were made.)

Also, fighting on 2 fronts weakened the U.S. ability to project military power because everyone knew that a 3rd front couldn’t be opened.

The wars demanded a lot of money, time and focus.

Our allies and adversaries took advantage of the U.S.’s distraction and military weakness:

  • Turkey attacked the Kurds because they knew the U.S. would value the air bases in Turkey over supporting the Kurds.
  • Russia annexed Crimea because they knew we wouldn’t intervene militarily.
  • China built island naval bases in order to expand their military presence

And so on.

But each of these countries also understood the window of opportunity was closing: at some point the U.S. would leave the morass and be less distracted.

Seeing the end game, Russia seized Crimea because they correctly calculated that Obama would not put U.S. troops into yet another battlefield. This would not be the case a few years hence. They were correct: Obama enacted sanctions but took no military action.

But the U.S. is more inclined to revert to their position as global leader – economically and militarily -with Iraq/Afghan war requirements winding down.

The controversy now is Trump shaking up the talks with our biggest allies (ie Canada, the E.U., Mexico). The U.S. needs other countries less, and other countries need the U.S. more.

So the quid pro quos change.

Instead of sacrificing foreign policy and trade in return for military support, the U.S. offers military support and trade access and expects foreign policy and trade support.

When Saudi Arabia recently petitioned the U.S. for military support, Trump told them to pay for it.

When the UN voted against U.S. agendas, Trump told them that the U.S. would review the support and money it gives to countries that consistently work against the U.S.

The message is clear: whoever pays the piper calls the tune.

In some way, shape, or form, the U.S. was going to return to a more U.S.-centric approach to the world.

It’s what happened after the U.S. left Vietnam. Trump has simply accelerated the process and his style is hardly diplomatic. Indeed, other countries have not adjusted to the new reality of an assertive U.S., much less the Trump combativeness.

Except…they are responding in exactly the way they must. China will buy more U.S. goods. The E.U. and Canada will change their tariffs and buy more U.S. goods.  Because Trump is very correct: the U.S. is the senior partner and forces change whether the world likes it or not.

As an investor, this is powerful stuff.  Trump will most definitely push for – and get – at least $100 billion in incremental annual exports from China and Europe.  The economic impact is huge.
And the market is waking up to the way Trump’s various moves are adding up to solid economic benefits

So to answer the question: Is Trump good or bad for this market?

My answer is yes – the bull market has legs.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

Why China’s Soft-Landing Isn’t Looking So Good

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

Over the past few months, I have been pointing to slower growth coming out of Asia (i.e. China) and the E.U. (i.e. Germany).

We can track the slowdown by looking at semiconductors and the overall supply chain. These two factors give us an insight into how it could affect future Central Bank decisions.

  • Part 1: Asia coping with China’s ‘soft’ landing
  • Part 2: EU growth is barely positive
  • Part 3: US macro remains robust

CHINA: ENGINEERING A SOFT LANDING

  • China is trying to engineer a soft landing
  • Slower growth will depress trading partners – especially Taiwan and South Korea
  • Cheap yuan a continued target – depending on U.S./China trade talks advances

China’s dependence on industrial production and exports

For over two decades, China has been following the post-World War II Japanese playbook for achieving economic growth: exports.  

It is achieved by dominating high-volume manufacturing and is enabled by (1) market protection, (2) intellectual property theft, and (3) currency manipulation.

At the same time, domestic infrastructure consumption is boosted.

Now comes the difficult part.  Multiple waves are hitting. The soft landing for such a big country economically will be tough.

Domestic demand is slowing – the big projects are done and the white elephant projects are limping along.  China has entered the Japan desperation stage where cementing over rivers is the only way to achieve growth.

Export growth is low and is set to slow. Exports from China to the U.S. are up a mere 5% in the past 4 years. And that’s after taking into account the surge in demand for smartphones. What this means is demand is actually dropping for other made-in-China products.

What’s worse for Chinese exports is demand for smartphones are now slowing. In a way, this could be China’s achilles heel as smartphones now account for ~30% of the growth in Chinese exports to the U.S.

China’s Debt Bubble

China’s bubble is huge.

China’s debt has gone from 140% of GDP to 280% over the past 10 years. It’s still growing. It compares with the U.S. and other mature economies, except that China lacks an equivalent purchasing parity. They borrowed trillions of debt, but the debtors can’t pay it off.

Soft or hard landing? Never in history has a country taken on so much debt in such a short time without there being a hard landing. China can do their best to try. The strategy underway is simple: pop the debt bubble but avoid a hard landing by boosting export growth.

That’s where the One Belt One Road comes into play: Chinese government loans will enable domestic producers to acquire growth in nearby countries.  It doesn’t matter if Pakistan can’t pay back for the roads and bridges and solar power stations. What matters is that for at least the next 5~10 years, the Chinese producers are kept busy.

A fragile soft landing. 

Part 1 is underway: slowing domestic growth.  

As the PBoC slows the credit growth (M1 supply is now growing in single digits), growth is slowing. For example, Imports and Exports have fallen from +15% year/year to -5% year/yr. It’s still falling.

The Trump Administration isn’t doing any favors either.  China is very exposed to smartphones, and this over-reliance makes them vulnerable to tariffs. (Which is why Trump hit them there with a proposed 25% tariff.)

In fact, the glory days for China exports are probably over for now. The squeeze by the PBoC is similarly cooling imports: Chinese iron ore demand continues to track the drop in credit growth.

Indeed, the cooling effect of the engineered soft landing is visible in domestic consumption. Home price growth continues to slow in lockstep with the tightening credit.

Another example of cooling growth: Retail spending growth has slipped from 12% y/y to 9% y/y.

Semiconductors Confirm Slower Growth Ahead

A couple weeks ago, Applied Materials (AMAT) guided down 2018 revenues. From an expected 20% to round 16%. Still healthy, but the market hates slower growth. I’d consider this the trickle in the dam.

Why slower semi sales matters: Semiconductors are the universal common denominator in all goods and services. Facebook runs on servers. Cars are made with chips inside. And APAC demand is at the center of global production.  APAC semiconductor demand is a proxy for global macro growth.

Growth is slower than appears. Thanks to crypto currency mining, the past year has seen a boom in demand for semiconductors. But it is still a slowing market. Strip out the crypto boost, and growth is much slower than perceived. Applied Materials (the world’s largest maker of semiconductor manufacturing equipment) essentially signaled that business is set to slow even faster.

Bottomline, it means that Q4 is looking shaky for delivering the goods on global growth.

China Sneezes – Taiwan & South Korea Catch Colds

Taiwan and South Korea depend on exports, especially high tech exports (especially to China). They have both collapsed as a result of China’s own problems.

For Taiwan, the impact on Industrial Production has been profound – IP growth has again started to stall.

What next for Central Bankers?

If macro growth is synchronized, then for APAC it is moving down in step with China’s slowdown.

Central Bankers in these countries must balance capital flow concerns with the impact of higher rates on macroeconomic growth.

  • China will move to unlock other forms of financial support.  Like relaxing reserve requirements. Or inviting foreign banks into the banking sector (the better to move bad loans off their books).
  • Korea and Taiwan will resist rate hikes as long as possible

 

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics