Global equity markets surged early this week on the news that the Bank of Japan (BoJ) and the Japanese government will go all-in to stimulate their economy and stop deflation. Central bank funded fiscal stimulus or helicopter money is coming to Japan. Japan won’t borrow money or raise taxes for infrastructure spending nor send funds directly to taxpayers. Instead, the BoJ will create cash out of thin air and hand it over to the government. No interest, no repayment, no problem assuming they get past the legal issues with this practice.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on July 15, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
Bond and Stock Markets Both Reach Record Highs… The U.S. 10-year Treasury bond yield fell to 1.36%, a record low, while the S&P 500 and Dow Jones Industrial Average both moved up to record highs.
What it means – Both trends make perfect sense, but not from an investing point of view. For bonds, central banks around the world are printing currency and buying sovereign debt. As yields around the world go negative, the U.S. remains an attractive choice. Central banks aren’t doing this to earn a fair return. They print money to stimulate economic activity. Whether or not it works is beside the point.
As for stocks, companies are buying back their shares, shrinking the number of shares available for purchase. This drives up stock prices but doesn’t change the value of the companies. In a low-growth environment, it’s hard to justify the lofty levels of equities, but everyday investors don’t have much of a choice.
Do you take a bond at 2%, or a chance on a stock that’s been moving higher, but could suffer a steep drop any day? This is what makes investing fraught with danger right now, and why investors must remain disciplined in their investment approach by using a proven system.
Retail Sales Beat Expectations in June, rising 0.6%... Analysts forecast a modest 0.1% increase. The May figure of 0.5% was revised lower to 0.2%.
What it means – Auto sales slowed a bit. Without that, retail sales were even stronger, up 0.7%. The strength showed up in e-commerce, home and gardening supplies, and even department stores. For the moment, consumers are spending. If the trend continues, it could drive GDP higher, but given what we’ve seen over the last few years, that seems unlikely.
Consumer Prices Rose 0.2% in June, and are Up 1.0% Year-Over-Year… Inflation remains muted in the overall economy. Excluding food and energy, prices rose just 0.2% last month and are up 2.3% over the same period last year.
What it means – Consumers might be spending a bit more but, so far, retailers aren’t raising prices. This report was a bit weaker than expected, so it won’t give the Fed any cover to raise rates.
Buried in the figures was a split between the cost of services and the cost of goods. Services jumped 0.3% for the third consecutive month, while commodities, food, and apparel dropped. With companies like Starbucks raising wages, and then raising prices, there could be more pressure on service prices in the months ahead.
Atlanta Fed GDP Now Model Forecasts Second-Quarter GDP of 2.3%... The model estimated 2.8% growth in May, but the number has steadily declined over the past two months.
What it means – There’s an old term in business: “hockey-stick” projections. It refers to frothy growth estimates that will happen somewhere down the road and is common with new startups. The chart shows flat revenue for a few quarters, months, or whatever… and then suddenly an explosive growth trend where everyone gets rich. The graph resembles a hockey stick, and hardly ever matches reality. The U.S. economy is stuck in low-growth mode, but Fed officials tell us that robust growth is just around the corner!
If the latest GDPNow estimate is correct, then the average growth rate over the last three quarters will be a whopping 1.5%. At a cost of $4 trillion in new dollars and record low interest rates, I thought it would be bigger. At this rate, our GDP growth is dangerously close to falling below that of the Eurozone. Along with Brexit and a host of other worries, this should keep the Fed sidelined for a while longer.
U.S. Oil Inventory Fell, but Gasoline Inventory and Production Rose… Oil inventory dropped 2.5 million barrels to 521.8 million, well off the record highs of 541 million. At the same time, gasoline inventory rose 1.2 million barrels and average production increased to 10.2 million.
What it means – Even though oil inventory declined a bit, it remains well above the long-term average. What caught everyone’s attention was gasoline. Demand eased to 9.7 million barrels, so production now outstrips demand, even though we’re in high driving season. The news drove oil prices lower. It looks like drivers will get a break at the pump for the rest of the summer.
Japanese Officials Proposed a $100 billion Stimulus Program… The new stimulus package, combined with Prime Minister Abe’s big election win, sent the Japanese stock market soaring and devalued the yen.
What it means – The wheels are finally turning. With Japan’s economy stuck in the ditch and the yen getting stronger by the day, Japanese officials had to do something. The latest effort is just a redux of previous failed attempts to stimulate the economy. More stimulus just rearranges the pieces on the chessboard, cutting the value of the yen while pumping up the price of assets.
It won’t help Japan’s economy in the long run, but it gives investors a shot at short-term profits by taking a position in the Nikkei, shorting the yen, or both.
Chinese Social Security Fund to Buy Equities… The $300 billion fund, run by regional social security administrators, will hand over a portion of their wealth to equity fund managers, who will put the money into the Chinese stock market.
What it means – This can’t be a good sign. The Chinese stock market was off by more than 25% this year before retracing about 10% of that move. While many of the truly private companies listed on the exchanges suffer from over-expansion, the state-sponsored companies that litter the stock exchanges are bloated, money-losing sloths.
Putting workers’ retirement funds at risk just to shore up public confidence in the system seems like leading lambs to slaughter. The only good news is that $300 billion isn’t that much in an $11 trillion economy.
When, not if, a big chunk of the money evaporates, the Chinese government can come to the rescue with a multiyear plan to replace the funds.
Bank of England (BoE) Holds Rates Steady… Investors expected the BoE to cut interest rates by at least 0.25% following the Brexit vote, but the governors chose to stand pat, waiting at least until August to make a move.
What it means – How English of them. Instead of jumping on a perceived problem (falling British economy due to Brexit), the BoE chose to wait until the problem actually surfaces, if ever. Their reticence surprised the markets and gave the British pound a boost.
I think they will cut rates in August, but not because the vote to Leave the European Union caused upheaval. Instead, it will be a reaction to global economic woes.
Irish GDP Up 26.3% in 2015… The Celtic nation reported that its economy grew by over 25% last year, but it was fueled mostly by corporate financial maneuvers.
What it means – This is where corporate financial shenanigans make a difference. Ireland taxes business profits at 12.5%, about one-third the tax rate of the U.S., so companies move operations there, or at least they move their valuable intellectual property to the island. Then they pay “rent” to the subsidiary, which is taxed at the lower rate. Voila! The company suddenly pays less in taxes.
In addition to corporate inversions and aircraft leasing, this sort of maneuver is what led to such a large change in GDP. Of course, it meant little to the average Irishman. The standard of living in Ireland remains below that of Italy, even though the latter has been mired in a recession for most of the decade.
Ironically, after posting such a huge jump in GDP, Ireland is at real risk of falling into a recession. The country’s economy slipped by 2.1% in the first quarter, and the second quarter didn’t look much better. If GDP contracted again, it technically signals a recession.
Next Week – The week of July 18 brings reports on housing starts and existing home sales in the U.S., and the ECB will announce its monetary policy rate as well.
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