Thanks to Dent Research, provided here is our weekly information roundup ending the week on December 9, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news
Trump Team Expects 3% to 4% Growth… Incoming Treasury Secretary Mnuchin reiterated the Trump campaign’s economic growth target of 3.5%, even though the U.S. hasn’t grown that fast consistently since the 1990s. Somebody is smoking some bad stuff.
What it means – I think this will be a recurring theme as the next administration gets settled in office and the Republican majority decides on where to focus its efforts. Tax cuts and infrastructure spending are great, but they don’t “trump” an aging population and slow productivity gains. Let me say it again, Father Time and Mother Nature remain the real “trump” cards.
The population – and the markets – are setting up for major disappointments. The current euphoria is unsustainable. As John Del Vecchio at Dent Research said on December 8, 2016, “The U.S. market remains overvalued with excessive sentiment.” He sees “no reason to join the fray and buy overvalued stocks.” But at this time, “there is no point in shorting small cap stocks if they continue to run higher until the end of the year.” So there could be a market reversal in “the first 100 days of the next administration when it becomes apparent that very little actually got done and the benefits to individuals and the economy are not what was hoped for.”
U.S. Factory Orders Grew 2.7% in October, Just 0.7% Excluding Aircraft… Non-defense spending excluding aircraft, a proxy for business spending, increased 0.2% after falling 1.5% in September.
What it means – The story remains the same. As a society, we’re spending money, but not at a speed that gets the economy humming along with 3% to 4% growth, and obviously not at a speed that encourages businesses to spend. So we’re stuck with companies using excess funds to buy back their own stock or pay dividends.
Suburbs Growing Faster than Cities… Contrary to popular belief, suburbs of the 50 largest U.S. metropolitan areas accounted for 91% of the growth in those areas.
What it means – It’s all about cost. Hop on the internet and look up apartment and home prices in Manhattan, or downtown San Francisco, or even Dallas and San Antonio. Then check out neighborhoods 45 minutes away. The difference is astounding.
Young professionals in glamorous jobs that pay $250,000 can afford posh urban cribs, but most people aren’t in that group, so they live in the suburbs. The attributes that attracted people to the suburbs for years – lower cost of living, higher quality of life – are still attractive today.
Italian Voters Soundly Rejected Constitutional Changes, Delivering a Blow to Prime Minister Renzi… The Prime Minister will resign, putting the country in limbo.
What it means – The constitutional changes were meant to streamline political changes and make businesses more efficient. The government wanted to make the Italian economy more responsive, with companies able to hire and fire more quickly, while changing the review and approval process of projects and regulations. All of it would mean leaner, more competitive Italian companies. Populists railed against the changes as just another way for ordinary citizens to pay for austerity that benefited the elite.
While Italians keep fighting over politics, their banks burn. Several have more bad loans than capital, and one needs a bailout immediately. If banks in the third-largest economy in Europe start failing, it could set off a chain reaction across the region.
Greece is Still Broke, and Everyone is Still Mad… Greece won’t reach a budget surplus in two years, so its European creditors want to find a way to help the country survive. So far, no one has a plan for how the country can move forward without major debt relief.
What it means – Remember in 2010 when the Europeans and the IMF rescued Greece the first time? Or when lenders told private investors they would lose money on Greek debt on the second bailout? Well, it looks like European central bankers are finally admitting they’ll lose money too, and they’re not happy about it. Part of the plan was for Greece to run a budget surplus for years and use the extra cash to pay off debts. But of course, the country still has a budget deficit, and probably will never achieve a surplus. So what to do with the pesky debt?
This question must be answered because Greece needs yet another round of cash. The European creditors want the IMF to join in the fun, but the international bank won’t get involved if Greece isn’t financial viable. I think that ship sailed a long time ago.
The guess at Dent Research is that they employ some accounting gimmick so they can pretend that Greece will survive, which gives them cover to lend more money. The hope is that when Greece finally defaults for good, it will be at a time when other European countries are stronger, so that the single currency can survive the hit.
European Central Bank Extends QE After March, But Lowers Amount… The ECB will cut its bond buying from 80 billion euro to 60 billion euro from April through December of 2017. The central bank also expanded the types of bonds it can buy.
What it means – The ECB both gave and took away with this announcement. Everyone expected them to extend the program, and even expand what they’d buy, but no one saw the bankers trimming the amount of bonds they purchase each month. Initially the euro popped, but as investors got comfortable with the announcement, and ECB leader Draghi reiterated that he wasn’t signaling an end to QE, the euro trended lower. It just goes to show that Europe still needs the economic crutch of central bank intervention.
Japanese Third-Quarter GDP Growth Estimate Cut from 2.2% to 1.3%... The revision confirms that Japan is not expanding quickly after the central bank set interest rates below zero.
What it means – They still can’t get out of their own way. The first estimate for the third quarter was high enough to get some people excited. Maybe there was a spark of growth, which might possibly lead to some inflation, and could potentially cause wages to inch higher… or maybe not. The Japanese are old and getting older, with few kids, restrictive employment regulations, and tough immigration laws. They can’t add a bunch of young Japanese to the economy, but they could make it easier to hire and fire, as well as bring in foreign workers. I think they’ll go down that road eventually.
Dallas Mayor Sues Dallas Police and Fire Pension (DPFP) to Stop Withdrawals… Mayor Mike Rawlings sued the fund to stop it from issuing lump sum payments. He took the action as a private citizen and is paying for the suit personally.
What it means – The DPFP suffers from investment losses, inflated valuations, and overly generous benefits. The fund manager lost 30% or so on risky real estate, but did not mark down the assets. All the while, beneficiaries enjoy 4% annual cost of living increases and current workers can retire on paper, take a lump sum distribution that earns 8% in a separate account, and keep working.
It’s easy to see why such a pension would fail. It’s harder to get anyone to agree to take a hit. Should the city pony up the $1.1 billion the pension is requesting? Should beneficiaries take a hit to payments? Should previous benefits be clawed back? Everything is on the table.
Expect the lump sum payments and cost of living increases to go away, but after that, the citizens of Dallas should watch their mailboxes for an ugly tax hit.
Real Estate Fails to Shine as Separate S&P 500 Sector… After splitting off from financials in mid-September, the S&P Real Estate sector fell 7.9% while the overall index rose 2.5%.
What it means – I didn’t see that coming. I thought that as money managers added to their holdings to match the weightings of the index, prices would climb. But any such activity was more than offset by the incredible jump in interest rates over the last two months. That depressed all interest-rate-sensitive stocks.
On the flip side, I don’t think rates will remain high. Just like last year, once the Fed raises rates and the economy clocks another mediocre quarter of growth, rates will most likely roll back over… sending real estate higher.
College Graduates Filled 11.5 Million New Jobs Since 2008, While High School Graduates Captured Only 80,000 New Positions… The difference explains much of the frustration among middle- and lower-income workers.
What it means – OK, time for a curve ball. This might appear to highlight the growing complexity of employment, and that workers need more education to complete their tasks and bring value to a company. Or, it could show that a lot of people are getting degrees and will take whatever work they can find. This allows employers to fill their workforce with better-educated employees even when the job doesn’t require education.
Unfortunately, in any case, this situation hands even more power to colleges and universities. It’s time for a revolution in education, where we highlight certification as well as degrees.
Starbucks CEO Schultz to Leave Post, Focus on New High-End Offering… Schultz will develop Starbucks Reserve Roasters, where locations will roast and serve exotic and small-batch coffees on the premises.
What it means – If you thought $2 coffee seemed pricey, just wait for $12 coffee. Really… $12 for 12 ounces. Apparently, Schultz tested the concept and found a receptive market. Given that Starbucks’ earnings have disappointed in recent quarters, the company has to do something to shake things up.
Next Week – The week of December 12 brings reports on retail sales, consumer prices, and housing starts, but all eyes will be on the Federal Reserve, which announces its monetary policy on Wednesday.
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