Investor Intelligence Report: Trump, the Market Gatsby?
Investor Intelligence December 2016
The “money chart” this month seems to us to be the second chart on page  which shows S&P Quarterly Earnings (USD$ Inflation Adjusted to current prices) and it’s impressive indeed. It look like lift-off time but then read in the context of other charts that are peaking or flatlining it is difficult to imagine a “to da moon, Alice” scenario here. If the new Zeitgeist is reempowering the white working class and the spinning-the-wheels middle class then the redistribution away from these groups since the 1980s has to be reversed, in part, and that mean taking away from the share of capital in the economy and redistributing the other means of production. And it took a billionaire to get us dusting off our copies of Marxist dialectic!
For those that still smart at FDR’s New Deal (and its associated WPA) of the 1930s there might be some bitterness at the concept of a massive publicly funded infrastructure binge under the incoming Administration. Be that as it may, the new trend would dictate a change of direction for the US economy with greater investment into heavy capital goods and less into services and technology. How long has it been since big mining, metals, construction and other materials stocks ruled the roost in the US capital markets? The 1960s? Most of the mining sector has vaporized and only a few construction companies are household names anymore (Fluor, Bechtel). Who gets hot and bothered over producers of gravel, cement or asphalt. Brace yourself…
That leaves an interesting question. With interest rates rising secularly after a long period of super-low levels, and the infrastructure ramp-up promising to put new demands upon credit markets, then where goes the US (and global) housing markets in an age of rising rates? Our charts on page [23} show an interesting trend. The area that has fared best since the 2007-8 swoon has been the Midwest. In Light of the new emphasis on the heartlands, maybe this outperformance will be even more pronounced. Is now the time to go Short Greenwich, CT and Palo Alto, CA and Long Louisville, KY and Akron, OH? Higher rates will crimp the highest priced and least affordable properties more than the more reasonably priced. Indeed the fact that the Midwest didn’t take the same bath that the coastal markets took in the Great Recession just reinforces that it’s all about affordability.
The global housing situation on page  shows that tapering off is the trend of the day, particularly in developing markets with Brazil looking very queasy showing what happens to those countries that go from boom to bust on a short timeline. The US economy will be sucking back capital to the mothership through a combination of rate rises and profits repatriation changes which will make developing markets the relative losers for the rest of the decade. Housing in those markets is the canary in the coalmine and the canary has stopped singing.
Just when China thought they were the Masters of the Universe along comes a new US president elect and throws decades of careful grooming of the US political class out the window. In fact he throws the US political class out of the window as well. The phone call from the Taiwanese president has had an electrifying effect upon the international trading community somewhat akin to the old chair at Sing Sing.
Despite the bravura of the Chinese response the boot still is on the US foot with the trade balance massively in China’s favour and thus massively to their disadvantage in any sand-throwing competition. Moreover the US tends to buy a lot of “wants” rather than “needs” from China. However, it could be very bad news for those hyperdependent US corporates like Apple, who both source in China and have sizeable end demand in China. Householders might need to steel themselves for the Great Plastic Bucket shortage of 2017 but that will scarcely be the end of the world, except maybe for the US companies that offshored to China when the “going was good”. If anything it will accelerate the trend for US corporates (and retailers like Walmart) to seek out the next “best and cheapest” producer as China in many categories was no longer fulling the “cheap” part of that equation anyway.
With all of the trade talk on the airwaves and the mooted infrastructure boom, one should spare a thought for the implications for the metals sector. The US has been an almost static (i.e. low to no-growth) player in global metals markets for decades now. This should be no surprise with infrastructure spending and with China taking away all the incremental growth in manufacturing demand (and particularly eating everyone else’s lunch in the steel industry). Any trend towards bringing back production from China or imposing punitive tariffs on dumping and predatory pricing should see a pickup in US demand for base metals, specialty metals and steel alloy metals.
In particular if there is to be a war on distortive behaviour as practiced by the Chinese then an obvious candidate for attention would be Rare Earths. This hot topic of five years ago faded from the front pages but is still a troublesome subject with the Chinese exercising a brutal grip on the pricing of these metals to maintain dominance in their trade and usage. We reached out to Ian Chalmers the CEO of Alkane Resources Ltd. (ASX: ALK | OTCQX: ANLKY), the Rare Earth developer and his comment was “Supply constraints will be further seriously exacerbated by the incoming US Administration’s rumoured tariffs on rare earth and rare metal products coming into the US from China. These Western companies may be forced to make a decision on whether they will accept Chinese dominance of downstream products (ie for electric motors, refrigeration, air-conditioning, wind turbines) or if they are prepared to pay the higher prices for materials sourced outside of China”.
Its early days yet, but a sign of seriousness would be restrictions on exporting strategic metal “scrap” to China.
The Coming Month
Usually transitions consist of announcements of dull cabinet secretaries, key ambassadors and minor flunkies and functionaries. This transition could best be described as “never a dull moment”. The message that is coming through though is somewhat akin to Calvin Coolidge’s dictum that “the business of America is business” with key positions going to business people and the few politicians in the mix must show their pro-business credentials to get past the guards. The interesting issue now is whether the US will manage to trigger a proper recession in China and if it does than will the rest of the world be able to avoid catching the same cold. Our PMI charts on page  seem to indicate that the West and developed economies are actually looking a lot better than the developed economies and that now it is time for the party that has raged for twenty years in the small houses in the neighbourhood to move back into the Big House and maybe Trump is the Gatsby to make it happen…to access the full report, view the below PDF or click here