Americanpols

Sometimes it seems like the new definition of ‘Information Stream’ is to take any piece of data and make the immediate assumption that things will turn out badly.

That’s particularly true amongst the financial market punditry, where well-oiled stock market engines are seen as high mileage risks, yield curves signpost dangerous roads and everything Trump says or does will either turn out poorly or trigger the Apocalypse.

The Other Side...

But what if things just keep getting better?

And what of those other bits we don't read much about in the news?

You know; the good outcomes...

We only get the mainstream, much-hyped "Trump trade war" headlines, instead of any perspective that what’s going on might lead to something else entirely, like lower tariffs for America, less protectionism and maybe even greater global prosperity?

Maybe the deregulation wave rolling through business channels doesn’t end up producing a 2008-2009 disaster, but rather unchains the ineffective choke-points in a world of tech and unleashes the so-called "animal spirits of businesses."

How about the impact on smaller companies who are happier now about the future, hire the most people, and were arguably the most stymied by regulations during the recent decade?

On the latter point, though I might risk getting shot at for this, after all the chatter about how Trump hates the little guy it was indeed the previous US administration's regulatory attack that did far more harm to smaller businesses (the real engine of the US economy) than larger ones.

It's easy to forget that the big boys have lawyers who can fend off some of that garbage during those years…while the little guy gets crushed.

More Good Possible...

What if jobs, production and manufacturing actually do continue to come back to the US?

In recent days China has begun to make rumblings about how they may even do away with the two-child policy, which was only changed from a one-child policy late last year.

Could they be reading these notes? 

Do they see the demographic writing on the wall that says trying to control Mother Nature rarely works out very well?

Tech Changes it All...

Now, these days are not the same as the dark Tech days of 2000. 

Far from it – in fact it makes me choke on my tea when someone suggests we’re at risk of a "2000-style Tech Bubble" again.

The dynamics are completely different.

And what if the pace of technological innovation continues to increase, causes even more disruption in many business models, finds more ways to cap feared inflation pressures and continues to boost productivity?

As I’ve often said: “Money is not our problem.”

There are now massive pools of capital "opportunistically" standing in the shadows, waiting to "fix" (read: take advantage of those who panic) problems.

Given that fact, what if we see continued growth of massive distressed asset funds - which in turn creates a shock absorber effect sitting just under our economic cycle and within our capital markets?

If so, the severity of future credit crunches or equity setbacks would be greatly reduced.

Now, let’s think about the implications of a few of these more positive scenarios.

First, Trump’s Trade War…

Notice what was going on before Trump launched the so-called “Trade War" as Dr Ed Yardeni points out:

"Trump bolstered the home front’s economy with deregulation and tax cuts. He figures that strength will allow the US to win his wars without much, if any, pain at home. So far, the US stock market seems to be siding with Trump’s approach. The message from the markets seems to be: ‘What if Trump wins his trade wars and if his sanctions work?’ Investors are giving quite a bit of weight to the possibility that this all will lead to less protectionism and greater global prosperity. I agree with this prognosis.”

It’s actually quite simple folks: The US is pushing for fairer trade with fewer trade barriers, not higher tariffs - Trump is just using that as a tactical negotiating tool.

Nuff said.

But there's been more recently: Two days of low-level negotiations between the US and China in Washington concluded last Thursday with no concrete steps toward ending the bilateral trade war that started last month.

The trade war continued its escalation on Thursday, as the US enacted punitive tariffs of 25% on $16 billion of Chinese imports (following a similar move a few weeks ago on $34 billion of such imports, to total $50 billion), an action that was immediately mirrored by China.

But in the end result, the amounts mean little to nothing in a $20 Trillion+ economy.

Last week, the USTR held an unprecedented six-day public hearing ahead of further tariffs on $200 billion of Chinese goods, expected to go into effect in September.

Initially proposed at 10%, the duties could be raised to as much as 25% at Trump’s direction.

The additional tariffs effectively would slap levies on half of all Chinese exports to the US, or roughly double what China imports from the US.

There is a Good Side the Trade War Ledger...

The US and Mexico reached an agreement on Monday to enter a new trade deal, ending months of talks on a replacement for the North American Free Trade Agreement.

The talks with Mexico have been focused on creating new rules for the auto industry. Details remain scant and will likely be characterized badly by most of the press coverage.

The new trade pact will be called “The United States Mexico Trade Agreement,” Trump said when announcing the deal from the Oval Office, adding that the previous name would be scrapped.

(The US imported $329 billion from Mexico over the past 12 months through June.)

And then, lo and behold Canada quickly announced they would re-enter the discussion. 

Folks the pressure is now on to get these deals done. But don't get caught up in all the political antics negotiation tactics. Trump seems to be pretty good at getting under their skin. 

What’s Next - Trump’s Deregulation of Business…?

Small businesses feel great these days, better than they have in decades. 

Having been the most negatively-impacted by massive regulations it’s somewhat difficult to measure the specific earnings impact of Trump’s deregulation of business. 

But is has been effective as all can see. 

Combine that with the still filtering through benefits of tax changes and repatriation for the big boys - and you get much higher earnings foundations to build upon going forward.

By the time we reach 2019, even on a decelerating pace, data suggests S&P500 earnings landing somewhere between $172.00 and $177.00 a share for a 2019 P/E of roughly 16.1 to 16.5 versus a 10-year bond P/E of roughly 35.

Not too shabby huh?

Given all this it shouldn’t be surprising to see that the earnings component of the NFIB survey is the highest on record since the start of the data during 1974!

This series is highly correlated with the NFIB “expecting to increase employment” series, which also finds itself at a record high.

Sometimes you just have to turn off the information stream and ask youself, “What If?”

And then accept that the answers might not be all that bad.

Mike_williams
Author
Mike Williams
Founder and Managing Partner