Profit Loss

The early days of January remind me of that hazy feeling you get right after the summer break; you know your brain needs to be working at full speed, buuuut you just can't quite get there…

I guess we’ll find out how awake everyone is on the first 200-point down market movement.

In fact, just typing that out makes me realize how long it’s been since the market ink ran that red.

And boy do we need it, especially as this first short stretch of the New Year has thus far lit up only green lights.

Seeing Into the Future

I enjoy the year-end projection game.

The inflation theme landed big over the holidays - Barron's, CNBC, Bloomberg…

In short, it’s being suggested that full jobs markets, surging service sectors and rising industrial activity will result in the arrival of our long-lost inflationary pressure.

Well, if that’s the basis for this conclusion don’t you think it should have already got here?

Think about it. Technology is collapsing multiple channels of cost. And just when the experts tell us we’ve reached the limit that line in the sand disappears.

And in sync with the slow and steady integration of Generation Y into the work-force we should continue to see lighter than expected inflation.

Folks, Generation Y is a very deflationary force – they’re all tech-savvy, seamless, short-cut driven and dine on efficiencies and cutting out waste.

And while inflation will certainly show up somewhere and in steady doses during certain parts of the year, it won’t be anywhere near the ballistic levels suggested.

In perspective, if we US interest rates rising from 2.40% to say, 3.75%, would that really be the end of the world? Likewise, getting to 2.50% inflation is a good thing, not a bad one. 

What’s Solid?

The latest data shows manufacturing ended the year on a nice uptrend, along with the PMIs:

PMI Manufacturing Signals Strongest Manufacturing Growth Since March 2015

  • U.S. PMI Manufacturing Index 55.1 vs. 55 consensus, 53.9 prrior

The latest Chicago PMI showed compelling strength going into 2018 as well. While similar to the national ISM Manufacturing indicator, the Chicago Purchasing Manager's Index looks at a more regional level of activity.

It’s also seen by many as representative of the larger US economy, comprising a myriad of important elements, like; production, new orders, order backlogs, employment, and supplier deliveries compiled through surveys.

Note below that values above 50.0 indicate expanding manufacturing activity, and that the latest Chicago PMI for December rose to a value of 67.6 from 63.9 in November. 

That’s a tad higher than forecast - with experts coming in at a forecast of 62.0.

"Sentiment among businesses started 2017 in good shape and only impressed more as the year progressed. December's result secured the MNI Chicago Business Barometer's first full year of expansion since 2014, and with New Orders ending the quarter in fine shape there is every chance this form could be carried over into 2018."

That's pretty positive.  

Chicago Business Barometer

The above shows data from way back in the 1970s, when the US economy was $2-3 Trillion and not $20 Trillion plus.

And there’s a hidden item of interest here.

Note that the grey recession periods tend to come after extended periods of weakening PMI readings. 

We’re nowhere close to that in our current numbers.

So relax and pray for that correction to start the year off with a, well, bang.

The Bigger Picture?

The Holiday Season chatter about the death of retail became a very good contrarian indicator.

MasterCard (NYSE:MA) reported that its credit card sales between November 1 and December 24 rose 4.9% compared to a year ago, the fastest annual pace since 2011.

And in America, December 26 was revealed as the fourth strongest shopping day of the year, as many retailers offered post-holiday discounts that re-energized shoppers.

As 2018 dawns, with nearly 80% of US taxpayers having less tax withholding going forward, we can likely expect a continued, healthy consumer confidence reading as well.

Back to Inflation...

Most of the recent chatter about inflation has been focused on the slow pick-up in crude oil. 

Demand is growing as synchronized global expansion spreads.

Remember back in early 2016, while the world was panicking over $30 per barrel oil we suggested "the new range for crude likely falls in the $40-$80 price band" which at the time seemed very profitable for technology in the drilling fields, and for reasonable costs at the pump. 

We still suspect that range will hold true for years to come. 

The recent price rise has merely perked up the inflation indicators, and as that trickles into the numbers we can expect a rippling effect, followed by cost cutting efficiencies elsewhere that drive those pressures back down. 

Competition is fierce on all fronts.  That won't change with the New Year.

But the bigger point here is that all those experts telling us how the rising dollar was going to pinch margins and hurt earnings missed (again). The dollar did not strengthen after all.

Ya gotta love it when a bunch of experts all come to the same conclusion.

Make no mistake folks, the rare US Barbell Economy is upon us and is set to unfold for the next 30 plus years.

Of course, there will be lots of stops along the way up this mountain where it will feel like the world is ending.

Just keep in mind that long-term thinking always wins out over short-term trading, and worrying about the next setback may sell lots of adverts but it won’t do anything for you.

Mike Williams
Founder and Managing Partner