Archive for May, 2016

The Global Economic Doctor

May 31, 2016

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The Global Economic Doctor – Click link for a quick checkup.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Goodbye May, Hello June!
Step with care and great tack, and remember that Life’s a Great Balancing Act!
— Dr. Seuss

Summary: As May winds down, June looms.  It has great potential to be one those memorable months for investors, corporate chiefs and economic policymakers. Just to provide the high points: OPEC meets and US ISM manufacturing index reports both occur on June 2th; the FOMC meets June 14th-15th; the UK goes to the polls on June 23rd to vote on whether to remain in the European Union (EU); the European Central Bank begins its corporate bond buying program; and Spain goes to the polls to hopefully undo the deadlock from the December 2015 parliamentary elections.  Heading into the month, there has been a considerable build-up by Fed officials that rates are going up in June or July. A relatively forgettable G7 meeting in Tokyo in late May achieved little (probably pointing more to the preoccupation of leaders trying to cope with populist movements). And, there is a growing sense of disequilibrium in parts of the developing world (Brazil, Venezuela and Thailand come to mind). China’s growing debt burden is becoming more of a market focus as investors and policymakers ponder the ability of Beijing to manage it through a slowdown. In securities markets, what has been noticeable is the outflow of money from equities into fixed income and cash.  According to Lipper Fund capital flows, for the week ended May 25th, equity funds saw a net outflow of $4.8 billion, while there was a net inflow into investment grade bond funds of $873 million and $7.3 billion net inflow into money market funds. Another data provider, EPFR Global, indicates that equity funds have seen total outflows of over $100 billion year-to-date.  The VIX index (which measures volatility) ended last week at a low 13.12; we don’t expect that to last the month. Considering the economic and political landscape for June, there is a strong likelihood that volatility is going to return. It is probably a good time to put on the seatbelts.

 

 

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The Global Economic Doctor

May 20, 2016

Global Economic Doctor_thumb

 

 

The Global Economic Doctor – Click link for a quick checkup.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

The Witches Gather
Double, double toil and trouble;
Fire burn, and caldron bubble.
— From Shakespeare’s Macbeth

Summary:
Three narratives are likely to dominate global markets in the next several months: mixed economic signals are likely to maintain an elevated level of uncertainty about U.S. economic growth and how the Federal Reserve responds to it; uneasiness about macroeconomic direction will reinforce the quiet flow of money out of equity markets and into cash, gold-related funds and the investment grade corporate bonds; and the ongoing importance of political risk (i.e., Brexit, terrorism, South China Sea and Russia) which could be disruptive to markets.  The tone of the narratives depends on upcoming data, such as U.S. housing starts, manufacturing numbers and consumer activity as well as real GDP numbers for Japan, China and key Emerging Market countries.

Along these lines, we believe that the Federal Reserve will make at least one more raise in 2016, but it will most likely come in December.  Considering the release of the minutes from the April FOMC meeting, chances have probably increased for a rate hike at the June 14-15th FOMC meeting, but we would have to question why U.S. central bankers would want to act only days before the June 23rd Brexit vote.  Polls indicate a close vote in the UK and if the British opt to cut their ties to Europe, markets are more than likely to take a tumble.  That would not exactly make the Federal Reserve look on top of their game.

At the same time, Chinese geopolitical issues (and there are a lot) will remain in the headlines, Russia remains a major geopolitical factor on Europe’s eastern borderlands and Brazil’s as well as Turkey’s politics remain in flux.  We also have our concerns over the wobbly nature of Italy’s banks and the ability of the government to gain any more traction on reforms.

The cauldron is bubbling and if you listen hard enough you can them chanting, “Double, double toil and trouble….”

 

The Global Economic Doctor

May 9, 2016

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The Quick and Dirty

May 9, 2016

Summary: Another busy week ahead with plenty of headline risk – China, Greece and oil stealing the front pages.  Add in Donald Trump’s comments last week on US debt (there is too much and it should be reduced possibly via negotiations with creditors), Puerto Rico’s debt epic, Greece’s ups and downs with its creditors (including this past weekend’s vote to pass new austerity measures), China’s economic data, and earnings and we have the potential for greater volatility in markets in the short term.  The lineup of potential event risk increasingly points to a long hot summer – Brexit, more fun with Greece, a new government in the Philippines, and elections in Spain.  Never a dull moment.

* China’s trade numbers spooked markets overnight in Asia. In April exports contracted by 1.8%, a real downturn from March’s 11.5% expansion.  Imports marked their second month of contraction coming in at -10.9%, on the heels of March’s 13.8% upswing.  This is a point of concern for those who worry that China’s economy is stalling out or sitting on the brink of a credit-fueled collapse. Real GDP growth in Q1 was 6.7% and the government is looking to 6.7% for Q2, with growth being driven by services, consumer spending and infrastructure spending.  While we share the concerns over China’s financial system and the build-up in debt, this remains an economy that is still controlled by the government.  This functions as a brake to a hard landing (for now) and provides cover for the government to continue to push on structural reforms.  All the same, China is an ongoing point of concern and investors need to closely watch data and official announcements.

* Oil prices are driving markets, caught between change of Saudi oil minister (one of the Kingdom’s most powerful positions) and Canada’s wildfires hitting the North American country’s oil production.  Although Canada’s production hit posibly impacts supply, it is probably being overstated at this stage.  Oil is down from last week’s $45 to around $44.  Nigeria and Venezuela really need oil prices to rise, considering the troubled state of their economies and fiscal situation, though the Latin American country is in far worse shape.  The new Saudi oil minister Khalid al-Falih, a Texas A&M University graduate, is regarded as a highly competent technocrat and faces major challenges with depressed oil prices, economic diversification efforts, and the Iran-Saudi Cold War.  In other news, oil discoveries have fallen to a 60-year low as companies have drastically cut their budgets.  This raises the question of a potential oil shortage, but that would be down the road by two decades.

*Real estate news in the US: Home prices climbed in 87% of U.S. metropolitan areas in the first quarter as buyers competed for a tight supply of listings, the National Association of Realtors said. This points back to the issue of a shortage of housing for middle income families, which remains a concern vis-à-vis more fulsome US economic expansion.

* Brazil is near the senate’s vote to start the impeachment investigation for President Dilma Rousseff this week, which means that by week-end, the country could have a new leader, Vice President Michel Temer.  He faces big challenges – the economy is in its worse recession since the 1930s, inflation is on the rise, parts of the corporate sector are in disarray, and Brazil’s political landscape is polarized.  Temer’s first actions have to be forming a new cabinet, regaining public and investor confidence, and creating a working majority in Congress.  Temer’s rise is probably a positive step for markets and the country, but the action certainly leaves Rousseff supporters feeling as though there was a constitutional slight-of-hand of questionable constitutional legality. Stay tuned as there is much more to come.

* “Dirty Harry” and the Philippines:  The Philippines presidential election appears set to result in the victory of the law and order populist mayor of Davao City, Rodrigo Duterte, known for his vulgar comments and staunch nationalism. The Philippines had made considerable strides in structural reforms, strong real GDP growth and infrastructure improvements under outgoing President Benigo Aquino.  However, many Philippinos have felt left behind by the economic changes and the hard-charging Duterte (also know as Dirty Harry) has struck a responsive chord, though he has admitted that he really doesn’t understand economics and would copy the plans of his opponents. His election could have a negative impact on this Southeast Asian economy with a GDP of $290 billion.

Puerto Rico on the Mind:  US Secretary of the Treasury Jack Lew is off to Puerto Rico to see what he can do for the debt-troubled island.  Good luck with that.  Sadly the $72 billion debt issue has entered the Twilight Zone— I mean the US Congress, where most pressing issues are responded to with a glacier-like sense of urgency (on a good day).  This crisis has several more steps down before resolution.  Republicans are expected to come up with a bill this week for managing the Commonwealth’s debt, but that has yet to be seen.

This week’s headlines:

Tuesday

Earnings – Walt Disney and Hertz Global (equals mice in rental cars)

West Virgina and Nebraska hold primaries

Wednesday

Earnings – Wendy’s, Aramark, and Ambac Financial

Brazil’s Senate votes on the President’s status

Thursday

Earnings – Kohl’s, Ralph Lauren, Nordstrom and Symantec

The Bank of England meets

The World Gold Council publishes a report for Q1 global demand

Friday

Earnings – J.C. Penny

The University of Michigan Consumer Sentiment reports

Standard & Poor’s reviews Italy credit rating

Dr. Scott B. MacDonald

Chief Economist

MacDonald Scott b

      Dr. Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings.
      Prior to this, he was Senior Managing Director and Chief Economist at KWR International, Inc (KWR). Prior to KWR he was the Head of Research for MC Asset Management LLC, an asset management unit of Mitsubishi Corporation based in Stamford, Connecticut (2012-2015) and Head of Credit & Economics Research at Aladdin Capital (2000-2011) and Chief Economist for KWR International (1999-2000). Prior to those positions he worked at Donaldson, Lufkin & Jenrette, Credit Suisse and the Office of the Comptroller of the Currency (in Washington, D.C.). During his time on Wall Street, he was ranked by Institutional Investor magazine as one of the top sovereign analysts.
      He did his Ph.D. in Political Science at the University of Connecticut, Masters in Asian Studies at the University of London’s School of Oriental and African Studies, and BA in History (Honors) and Political Science at Trinity College (Hartford). He has written 18 books and numerous articles. Areas of expertise are macroeconomics, international finance and geopolitical risk.

The Global Economic Doctor

May 6, 2016

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Quick Market View:

Markets Searching for Direction – Caution Is the Word of the Day

May 6, 2016

Summary:  Global equity and debt markets continue to seek a clear direction, but economic data and earnings are sending contradictory signals.  This leaves a situation in which investors want to assume risk and push markets up, but they have one eye to the door in case bad news disrupts shallow confidence and starts a nervous stampede.  The reasons for this state of affairs are numerous – uneasiness over the strength of global economic growth, yet another poor earnings season (the 4th in a row), geopolitical risks, and big questions over Fed policy (will it raise rates in June or not?).  The US April jobs report did not help matters: unemployment stayed at 5.0% and the 160,000 print on jobs was below expectations. We think this leaves the Fed holding off at their June meeting, but moving later in the year, possibly in September.

We expect investors to remain cautious, adding risk strategically. One indicater of caution about direction is that gold prices (and gold miners like IamGold, Kinross Gold and Yamana) have been on the rise. They have benefited from growing uncertainty over the global economy and the geopolitical calendar. Caution is also mirrored by U.S. 10-year Treasury yields remaining low at around 1.78%. Consequently, caution is the word of the day and this sentiment is likely to increase as we shift gears past the earnings season to the political season beginning in June. (See last item below)

  • US employment data: Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 274,000 for the week ended April 30.  This was the largest increase since February 2015.  However, the next day’s April jobs report disappointed as the U.S. economy added the fewest number of jobs in seven months. Nonfarm payrolls rose by 160,000 jobs last month, with a marginal increase in construction and a downturn in retail employment. Unemployment remained constant at 5.0%, but that was due to Americans dropping out of the work force. Furthermore, employers added 19,000 fewer jobs in February and March than previously reported.  One of the few bright spots in the April jobs report was a slight uptick in wages. Based on this report and other mixed data as well as a looming Brexit vote two weeks (June 23rd) after the scheduled June FOMC meeting, it appears that the U.S. central bank might put off a rate increase to September.
  • Fitch Pans negative interest rates: Fitch rating agency released a study in which it noted that the almost $10 trillion of negative yielding government bonds are costing investors about $24 billion annually.  This situation is raising challenges to investors, such as pension funds and insurance companies that rely on sovereign debt as a core area for their portfolios.  If nothing else, the adoption of negative interest rates forces investors to take on riskier assets or provide their clients with poorer returns.  At the same time, negative interest rates punish savers and retirees.  Moreover, it is dubious that negative interest rates are encouraging economic growth.  It does not seem to be working in Japan. More to come on this.
  • Markets and US Politics:  Now that Donald Trump and Hillary Clinton have emerged as their respective parties candidates, there is growing talk about how the two will impact markets. The dominant view (at least based on opinion polls and a lot of talking heads in the financial press) is that the Democratic candidate is likely to win and would probably be more market-friendly as she represents the least amount of change in policies. As this line of reasoning goes, markets hate uncertainty and Trump represents uncertainty.  The American Banker has been up front saying it does not know what a Trump presidency would mean for the financial industry, while exporting companies are deeply worried that protectionism and efforts to re-write trade treaties (like NAFTA) would be highly disruptive.  At the same time, Washington has been highly dysfunctional over the past 8 years and change is badly needed, which would probably play more to Trump than Clinton. Markets have yet to factor in the outcome of the US November election, but that will change once we move past the conventions and head into the fall season. Stay tuned.
  • Japan Weaker, Weaker: Japan’s economy continues to be a weak patch. The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) fell to 48.9 in April from March’s 49.9.  This is significant in that services account for roughly 65% of Japan’s GDP as opposed to 21% for manufacturing. The recent spate of bad economic data indicates the pressing need for more fiscal policy and structural reforms as opposed to the heavy reliance on monetary policy to lift the economy.
  • Turkey’s Power Plays: Turkey’s Prime Minister, Ahmet Davutoglu, announced that he would be stepping down from his position.  The Prime Minister and President Erdogan have been bumping heads over how much power their respective offices have.  In the past, the constitution gave greater power to the prime minister, with the president serving in largely ceremonial role.  However, Erdogan has increased the authority of the presidency and dominates the political landscape.  It has been reported that the two leaders increasingly held differences over the opening of talks with Kurdish separatists, the appointment of an independent central bank governor, and relations with the European Union.  With Davutoglu out, Erdogan remains the undisputed power in Turkey, which means that Turkey’s policies could be less friendly to the European Union, more hardline vis-à-vis the Kurds and even less tolerant of opposition voices. Last, but hardly least, the ongoing political drama undercuts Turkey’s attractiveness for investment.
  • Brazil’s Ratings Down, Again: Fitch downgraded Brazil from BB+ to BB and maintained a negative outlook.  As the rating agency noted: “The continuing deep economic contraction reflects the high level of political uncertainty, depressed confidence, deteriorating labor markets and strong external headwinds. Medium-term prospects also appear subdued, as the country’s investment rate has fallen in recent years and microeconomic reforms to improve competitiveness and the business environment have not made material process.”  More political drama looms ahead as the Senate moves next week on whether to investigate President Dilma Rousseff for a possible impeachment, an action that would suspend her from office.  Brazilian ratings remain under pressure and one should approach the country’s securities with a degree of caution.

The Looming Political Season:  Looking for uncertainty, look no further than the following votes:

May 9, 2016   Philippine Presidential elections

May 11, 2016   Expected date for the Senate vote in Brazil to advance investigation into whether or not to impeach the President

May 15, 2016   Dominican Republic – Presidential, congressional and local elections

May 22, 2016   Turkey – the ruling AK party will hold an extra-ordinary congress to select a new party leader and prime minister

June 23, 2016   UK – Referendum on whether or not to remain in the European Union

June 26, 2016   Spain goes to the polls again after the last vote (December 2015) failed to result in a government

June 30, 2016   Iceland presidential vote

September 18, 2016   Russian parliamentary elections

November 8, 2016   US presidential and congressional election

 

Dr. Scott B. MacDonald

Chief Economist

MacDonald Scott b

      Dr. Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings.
      Prior to this, he was Senior Managing Director and Chief Economist at KWR International, Inc (KWR). Prior to KWR he was the Head of Research for MC Asset Management LLC, an asset management unit of Mitsubishi Corporation based in Stamford, Connecticut (2012-2015) and Head of Credit & Economics Research at Aladdin Capital (2000-2011) and Chief Economist for KWR International (1999-2000). Prior to those positions he worked at Donaldson, Lufkin & Jenrette, Credit Suisse and the Office of the Comptroller of the Currency (in Washington, D.C.).
      He did his Ph.D. in Political Science at the University of Connecticut, Masters in Asian Studies at the University of London’s School of Oriental and African Studies, and BA in History (Honors) and Political Science at Trinity College (Hartford). He has written 18 books and numerous articles. Areas of expertise are macroeconomics, international finance and geopolitical risk.

The Global Economic Doctor

May 2, 2016

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The Global Economic Doctor                                       – Click link for a quick checkup.

 

We are proud to be able to offer the thoughts and written works of Scott MacDonald, Ph.D. as the Chief Economist at Smith’s Research & Gradings.   Dr. MacDonald has U.S. government, investment bank, and asset management experience as well as keeping a finger in the academic world.  He’s refreshingly honest, while being intelligently sophisticated – we cannot promise that you will always agree with his opinions, but we are confident that you will find it is time well spent.

Yes, the Global Economic Doctor is “In”.  He dissects three major bodies in the inaugural edition: Brazil, the U.S. Economy and Coal.  Topics so toxic that most chief economists resort to babbling platitudes designed to assuage the fears of the great unwashed masses.  He won’t insult your intelligence by telling you the U.S. Treasury is triple-A rated and everything is going to be “okay” in Brazil because China is a willing buyer of all commodities.

Think of Scott MacDonald as the consummate professional to add depth to your bench of investment professionals. We like to think of him as the engaging dinner companion you bring along for an evening out in New York or London with prospects or long-term clients.

Smith’s Research & Gradings provides the intelligence gathering, cogent analytics, and knowledge-based event risks that support the Doctor’s work and can nourish your understanding.  Moreover, Smith’s Sovereign Gradings can provide radical transparency into cross-border decision making.