Happy Inauguration Day
Here are some Bubble or Trouble foreign policy outcomes facing the new Administration. Harvard Government Professor Alaisdair Ian Johnston wrote in its November Epicenter blog:
“Trump’s expected China policies may have a direct bearing on [American] welfare.
“Taken at his word, he wants to impose high tariffs on Chinese imports to compel Beijing to appreciate its currency, stop stealing US intellectual property, and open its markets to more US investment and exports. Many economists expect that China will react—at least initially—by raising tariffs on US goods, further restricting US investment, while shifting imports to alternative markets. The result will be a trade war in which US consumers are harmed by inflation, with no concomitant regrowth in traditional manufacturing jobs, and possibly a reduction in critical exports to China, such as aircraft.
“The Chinese may even engage in cost-imposition of their own by dialing up conflict on a range of other issues (North Korea sanctions, counterterrorism, international health, cyber commercial espionage, Taiwan, maritime disputes) to remind the US that China can impose costs too.
“Trump may change his mind about the wisdom of high tariffs as he listens to corporate advisors, and as he contemplates the costs to Chinese partnerships he seeks for his own personal wealth. Instead he may simply impose some symbolic cost on China and then sell this as a major policy victory.
Then Warning on Global Warming
“Any decline in cooperation with China on global warming may not be considered a welfare cost for Trump, given his apparent belief that anthropogenic climate change isn’t happening. But it will make China, [not] the US, the 'responsible stakeholder' on climate change. Other countries will look to Chinese leadership.
“The unintended or unpredictable effects of his policy preferences, personality traits, and personal economic interests may be even greater if, as his initial appointments suggest, his China policy team reflects the gamut of GOP factions—moderate Asia specialists, Tea Party-leaning advisors who support tough economic and military policies toward China but are less interested in exporting US values, and neo-cons who want to be more proactive in undermining the legitimacy of the Communist Party.”
His colleague in the Government Dept., Jorge Dominguez, wrote on:
“Trump has the opportunity to advance policies to promote interests that the US and Latin America share. The US does not encounter in Latin America many of the challenges elsewhere. No terrorist attack has been launched on the US from anywhere in Latin America. There are no US troops in combat in the region. There are no nuclear-weapons states in Latin America, nor are there interstate wars. The last revolutionary insurgency is likely to be ending in Colombia.
“[Regional] governments are looking for ways to cooperate with the US. Mexico has been, for many years, a far more important destination for US exports than China; and Mexico and Canada are a key part of the explanation why there are still automobiles manufactured in North America. (US auto companies would have gone bankrupt without their NAFTA partners or without the US government’s rescue of these firms.) Here’s a critical fact that was overlooked in the US election: net Mexican migration to the US has been at zero (yes, zero!) for the entire current decade. There is an opportunity to think constructively about immigration policy.”
These are risks beyond the messy divisions in the new Administration also on tax policy and exchange rates. But the impact on stock markets will be great. We are continuing to look for new postions or ones to add to, and there is one today.
More for paid subscribers follows from the Dutch Antilles, Canada, Japan, South Korea, Mexico, Israel, Brazil, and Panama. Read more »
Our Trump Portfolio part I
Today we begin our Trump portfolio to gain from the geopolitical and economic changes expected under the new president. For the record, I am not trying to forecast how US stock markets will behave over the next year or years, because so many of the policies of the new Administration can have ambiguous impact on stock prices. This is discussed below for paid subscribers.
We also have news about various companies, which doesn't stop just because there will be a regime change in Washington, with news from Britain, India, Ecuador, Colombia, Israel, Mexico, Canada, Brazil, the Dutch Antilles, and Switzerland.
Contagious Conflict of Interest
The Trump team seems pretty disunited to me with one exception—contagious conflict of interest seems to mark the selected Administration nominees. I wrote yesterday based on Bloomberg articles about Anthony Scaramucci of Skybridge Capital who in Davos engaged in deal talk with a banned Russian sovereign wealth fund. I am relieved to report that Mr Scaramucci has now opted to exit the hedge fund he founded although it will take about 3 months. Better late than never.
But other conflicts of interest among the nominees which were not as flagrant do not appear to have resulted in similar divestitures. This creates a dangerous precedent not only for future Republicans taking government jobs but also for Democrat who do.
More today on Ireland's outlook and the boost to the American Depositary Receipts market your editor anticipates with news from Brazil, Mexico, the Dutch Antilles, Canada, Israel, Sweden, Australia, Thailand, Belgium, India, Sweden, South Africa, Britain, and Ireland.
The Manchurian Candidate?
From Bloomberg from Davos, a note about the possible Manchurian candidate who is about to take the oath of office as president of the US:
"Anthony Scaramucci, aide to President-elect Donald Trump and founder of SkyBridge Capital, discussed possible joint investments in a meeting in Davos with the head of a Russian sovereign wealth fund that the U.S. sanctioned in 2015, the fund’s press service said.
"The meeting with Kirill Dmitriev, head of the Russian Direct Investment Fund, a $10 bn state-run investment vehicle, is the first public contact between the incoming administration and Kremlin-backed business. Scaramucci confirmed the meeting in an interview with the Russian state news agency TASS, saying that Trump’s view is that 'there’s probably shared values or shared interests, that we can align ourselves with each other and this could be mutually beneficial'." Oy.
Wall Street's Best Investments sent me this note from my blog, www.global-investing.com, asoit is now in the public domain:
“The CEO of this global insurer recently remarked that the company was interested in ‘big takeovers’ in the U.S. This stock is a play on rising rates.
“Allianz SE (AZSEY 17)
“From Global Investing
“Allianz SE (AZSEY) has taken its time recovering from the walkout of Bill Gross, which was our motive for purchase. But with the global economy shifting gears after the shocks of 2016, for 2017 there is much to be said for the corporate bond market where Gross was rainmaker, then based at the Allianz sub in California.
“AZSEY of Germany still is the largest shareholder in Pimco, which is likely to benefit as US and global bond prices reverse as interest rates rise. Since the Brexit vote and the US election, the bond market has begun this switch to higher yields and lower prices, spooked by fear of inflation. This made interest rates rise more than expected above all in the US. The result is that after experimenting with low and even negative interest rates, the world is returning to normal. Normal means yields are positive and rising again. It also means that using stock dividends as a way to earn money with your money is no longer a slam dunk victory.
“It is uncertain if the reversal will continue long and high because of secular changes. Global debt levels are up and aging population in the industrialized world means they will be retiring and spending less. That will nip growth and inflation in many countries but probably not in the USA (given the Trump plans) nor in Britain (because of the fall in sterling post-Brexit.)
“Bonds will also become scarcer if the US tax report program of the new administration will include an end to the tax deductible corporate bond, widely used lately for share buybacks and paying dividends rather than for capital expenses. With fewer bonds available and the need for yield remaining, getting bond manager fund help will become crucial to investors.
“The bond market, unlike that of shares, does not work well with indexes and exchange-traded funds. You need real experts examining the market for the best returns at the lowest risk. For US investors, that probably means entrusting their pensions and assets to San Diego-based Pimco again. It won't be Bill Gross but we will need another bond king. The new ruler of the bond market will have to be able to invest in multiple markets, not just in the USA where Gross flourished. With greater integration with the insurance arm of Allianz in Frankfurt, Pimco is well-placed to rise to the challenge.” (Vivian Lewis, Global Investing, www.global-investing.com, December 30, 2016.)
More follows, if briefly, for paid subscribers today with news from Sweden, Finland, Denmark, Canada, Australia, Britain, Chile, Spain, and Mexico.
Sunday Tables Posted
Here are my Sunday tables, updated with the latest news and views for paid subscribers and showing our closed positions for those of you who are still holding off on coming on board. Please visit www.global-investing.com to view the tables, remembering to click printer friendly to view on small screens or cellphones. Now I am off to buy my Chinese carry-out. More for the paid among you follows:
Friday the Thirteenth
Not only is today the dreaded Friday the 13th, but also Monday is Martin Luther King Day when US markets will be closed. So Wall Street's tendency will be down, not helped by generalized worries about the future “Apprentice” President getting in over his head. Think Jimmy Carter.
Learning on the job is not usually the mark of a successful US Administration, and cabinet members digging distance between their view of the world and their supposed leader is a bad omen because Trump famously is a know-it-all who won't listen and learn.
More for paid subscribers follows from India, Brazil, Canada, Finland, Sweden, Israel, Ireland, Japan, Britain, Chile, Denmark, Swizerland, the Cayman Islands, and Germany.
Legendary investor John Templeton stated in 1994 that bull markets are "born on pessimism, grow on scepticism, mature on optimism, and die on euphoria." While Sir John was the original global investor, his comments are likelier to apply to Wall Street than to global markets in 2017. They also die from unintended consequences when the powerful speak off the cuff as Donald Trump did yesterday.
What's sauce for the goose is not sauce for the gander.
It is much harder to manage the corporate ethics of an Amercian Depositary Shares from a financially serious country, like Germany, than from a country considered to be a global lightweight, like Portugal. To say noting about holding companies from a tolerated haven like Luxembourg. This is the lesson from the imposition on Volkswagen of securities fraud fines over its diesel emissions “defeat mechanism” last week.
Meanwhile outright fraudulent acts by the board at Portugal Telecom were not prosecuted under US securities laws and the perps went scott free. Yet Volkswagen shares traded only thinly on the over-the-counter pink sheets. Meanwhile PT stock was an NYSE-listed and regulated ADR easily purchasable by any US investor and many pension and investment funds.
Moreover the board of the German automaker which included representatives from German auto-maker trade unions and the local state government was not directly involved in fiddling its US share price, from all the evidence adduced to date, and barely aware about how it misled diesel car-buyers. Meanwhile members of the PT board representing its 15% shareholder, the Banco Espirito Santo, were directly implicated in its misrepresented acccounts, deliberately bled of cash for its publicly announced Brazilian purchase plans, absconded through a series of obscure Luxembourg family holding companies.
Under normal securities law standards, the PT “scandal” should have had greater American stock market repercussions in Lisbon than VLKAY faced in Wolfsburg. But in fact the reverse occurred. The American watchdogs let Portugal off the hook while Berlin was forced to pay up, even on behalf of the unions and local state government which had Volkswagen board seats but were probably totally unaware of the diesel emissions testing fraud. One reason the German firm was targetted for more severe penalties is that nobody could expect to raise $4.3 bn+ from Portugal.
The ball is now in the US court as Fiat Chrysler faces its own diesel emissions scandal with the US Environment Protection Agency accusing it of falsifying diesel emissions on 100,000 vehicles. FCAU, Dutch-incorporated with operations in Italy and North America, is the latest environmental sinner. It has less cash than VLKAY but is hardly Portuguese poor. We owned it until about a year ago, much more recently than any involvement in Volkwagen, sold in the 1990s.
More for paid subscribers follows from around the world today on regulatory matters and more news about the auto industry, aviation, real estate, heavy industry, and, alas drug-makers, the sector most badly hit yesterday by the rambling Trump so-called press conferences.
Nancy Zambell writes today in Wall Street's Best:
“The 2016 markets were terrific. The Dow, the S&P 500, and the Nasdaq all made double-digit returns. But our contributors blew the doors off with their 2016 Top Picks! Congratulations to all of our experts, and special kudos to our top five winners:
Joseph Cotton, Cotton’s Technically Speaking, whose pick gained 118.5% ;
Vivian Lewis, Global Investing, saw her recommendation rise 83.6%;
Russ Kaplan, Heartland Adviser, third with a 57.3% return;
Alan Lancz, The Lancz Letter, saw his choice soar 52.7%;
Roger Conrad, Capitalist Times, chose a stock that gained 38.3%.
“Many thanks to our contributors for helping our subscribers add to their wealth last year!” Read more »
Another day, a lower pound and a higher FTSE for the ninth day in a row, an all time record. Another day and another uncertain run at a Dow-Jones round number of 20,000.
There is an increasing trans-Atlantic disparity between how markets are reacting to foreign exchange movements. The US is suffering spillover into stock trading as the dollar is taken down from its 2017 starting peaks. Meanwhile in other countries, like Britain, on the contrary, the currency's fall is boosting share prices. In both countries, political uncertainty is a factor, as untried leadership is set to deal with major economic changes. This probably means a “hard” Brexit for Britain which will focus on controlling immigration rather than maintaining special access for its financial sector. In the USA, a revival of protectionism coupled with deregulation may mark the end of post-World War II US global leadership of the nominally free world.
In my jaundiced view, both the excessive optimism shown by UK markets and the loss of zing by Wall Street, are based on misconceptions. PM Theresa May will not be able to ignore the demands of the UK's City—the globalized banking, insurance, and related sectors. And future President Trump will not have a free hand disengaging from relationships, commitments, alliances, and treaties, however much he may want to dump them, with Nato and other defense groupings; peace negotiators not just in on Israel-Palestine and Iran, but in other areas; Nafta and other trade overseers; organizations working on cooperation over taxes; market oversight, fighting corruption, counterfeiting, and just plain theft. To continue the cooperation it wants against terrorism, the Trump Administration is going to have to accept a lot of other global links.
It will also have to stop calling for a ban on Muslim immigration and give up plans to use torture on terrorist prisoners—according to Sen. Jeff Sessions, future AG. Similarly it will not be able to craft a border adjustment tax to penalize imports and favor exports under existing treaties, as the future Secy of State will have to tell his confirmation hearings. No Rio Grande wall paid for by Mexico. Neither will get the full reform packages they want out of their legislatures. Mrs May and Mr Trump will both have to compromise to achieve their main growth and nationalistic goals. Neither is likely to enjoy the gritty and boring details.
More for paid subscribers follows from Canada, Sweden, Brazil, Finland, Mexico, India, Trinidad & Tobago, and the USA.
First New Year New York Letter
Brown Brothers Harriman currency specialist Marc Chandler titled his article today “Backing into Smoot-Hawley,” raising the parallel between the proposed Trump discriminatory tariff plans and the way the world went into a self-defeating retaliatory tariff wars during the Great Depression. Chandler winds up reminding us that the international liberalization measures and the domestic regulatory ones of the New Deal remain in force. He writes:
“We are bullish the dollar but are concerned that border adjustment may spur other countries to do the same thing, inadvertently spurring protectionism and further weakening international trade, which has not yet recouped the decline associated with the Great Financial Crisis. In a similar vein that some of the lessons of the Great Depression, like those embodied in Glass-Steagall, were either repealed, diluted, or unenforced, so too are the lessons of protectionism seemingly lost and now hidden in mental gymnastics based on an automatic adjustment of currency values and an outdated understanding of PPP” [purchasing power parity—which doesn't really function in pricing currencies.]
Our return journey to the US was surprisingly rough as both my husband and I got tummy trouble from the supposed wholesome Icelandic cod served at lunch on our first leg, London to Rejkyavik, admittedly while both suffering bad colds. We were so ill we took a taxi rather than a subway home from snow-covered from JFK.
Then I nearly disinherited my daughter who had stayed in our NYC apartment over the Christmas holiday because the dingbat on the top of the coffee machine which tells it that the pot is in place had gone missing. High and low search failed to turn up the little pot cover with a prong into the filter holder. So I made our necessary daily drug with my smaller office coffee pot. Only when I cleared the breakfast dishes did I find the dingbat in the dishwasher for some reason. She is very keen on sterile but is now my heir again. (My husband was very firm that we have to accept our grown children and half-grown grandchildren as they are rather than setting an excessive Jewish mother standard and I had already resolved to try this in 2017. So now it was justified. The dingbat was found and our daughter is back in my good graces.)
No sooner had we left Britain than Mrs Theresa Maybe opted to tell the world that Britain was more interested in halting immigration that operating a single market with the European Union, aka “a hard brexit”. The result in London this morning was a crashing pound but good performance from UK stocks expected to benefit from more foreign sales as a result. Our leftover pounds don't amount to very much but I'm glad to say my two pairs of British boots and a stockpile of Christmas puddings, among other goods we declared to US customs last night will prove to be a better investment than cash.
Meanwhile the FTSE 100 index ran up its longest winning streak in 33 years! (NB: Of course the FTSE index is calculated in pounds sterling.More for paid subscribers follows from Britain, Ireland, Israel, Mexico, Sweden, Denmark, Finland, China, India, Colombia, and Canada.