The Dividend Cafe - Inflation Rate Scare, or a Non-Corroborated Story?

Episode Date: October 5, 2018

This week, [someone], [someone else] and [another person] cover [topic]..... Topics discussed: Bitter Fight with Canada Barely Avoided Will China Play Out Like Canada? Bonds, Short Duration Bonds Links mentioned in this episode: TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. And I am coming to you on Thursday, middle of the day. Market's down 250 to 300 points right now. And yet we're still up on the week, 150 points or so. No idea where the market will end up, of course. Kind of crazy volatility and a lot of just big good news earlier in the week. The market's absorbed around the U.S. trade deal with Canada.

I'm going to talk about that here in a second. And then right now, I think market dealing with Chairman Powell's speech last night, interest rates making new highs on the year and fears of inflationary data, things like that. Let me jump in. So like I said, driver of markets, big move higher to start the week was unquestionably the announcement of a trade deal between US and Canada, for a revised NAFTA agreement. It's with a different name, the USMCA. That really rolls off the tongue. It mostly followed the playbook that we've seen so far

with Mexico, with Europe. Further reinforces the narrative that has come out of Larry Kudlow and other free traders in the Trump White House, and that is that the White House threatening a trade war is done to avoid a trade war. And of course, the big question will be how this plays out with China. There are political benefits for President Trump in the deal. There's more auto parts production in this new NAFTA deal that will take place in Michigan. There's a better dairy deal for Wisconsin farmers. But the overall terms of the deal are really not substantially different than expectations.

But will China play out like this Canada deal? I think it's fair to say that the reforms the administration is pursuing in China will not be as easy as a dairy agreement with Canada. There's much more risk in terms of global economics around China and the cultural and hegemonic ramifications are categorically different. One of the key differences is that the trade deals with Canada were never that problematic to begin with. Whereas there are optical issues in many of the China deals that are going to be harder to budge on for the counterparty. Add to that the issue of intellectual property theft, it just has to be viewed as more complex. I expect a longer process with China played out over 2019 and an outcome

that no one can really predict at this time. If the Kudlow-Mannuchin wing wins out and the objective is merely improving the parity in some of the trade and IP matters, I believe it will have a happy ending. But if the Bannon-Navarro wing wins out and what we are really fighting for is to flat out take away U.S. business investments in China, then I think this thing gets much worse before it gets better. It is fair to say that the check back in markets Thursday today were related and are related to comments that Federal Reserve Chairman Powell made Wednesday night about inflation concerns. And across the whole term structure, we're seeing interest rates higher this morning. It's very difficult to find cogent analysis on what to expect from this, because the vast majority of analysis written on this subject is written from the vantage point that strong

economic data somehow and errantly implies higher inflation. It does not. The ability to separate productive economic growth from inflationary growth is the need of the hour. And I have little confidence in most purveyors of data to offer that differentiation. Payroll growth, improving manufacturing, these are positive developments that are not necessarily inflationary. More corroboration is needed otherwise we have nothing to go on whatsoever q3 okay u.s stocks led the way in the quarter primarily in large cap small cap slowed its growth it's still the leader of the year but has checked back here in the last few weeks gold and commodities besides oil were hit pretty hard in the quarter. Bonds were dead

flat and they were actually down on a price basis for the quarter. Emerging markets dropped, but not nearly as much as they did in Q2. On a sector basis, consumer discretionary and technology continues to stand out. The only sectors negative on the year are consumer staples and telecom. But you also have real estate, utilities, and telecom, excuse me, that are all up 1% to 3%. I said a moment ago consumer staples and telecom are the only negatives. I meant consumer staples and materials are the only negative. Let's see any other highlights. Basically you know that the market has a number of sectors that are priced the way

you would expect. Some sectors that are underpriced some that I'm quite confident are overpriced. the way you would expect. Some sectors that are underpriced, some that I'm quite confident are overpriced. Energy up 7.5% on the year means it's had an okay year, but it's still just deeply undervalued relative to where their traditional valuations would be. On the emerging markets front,

I'm going to continue to stand by my argument that the thesis against emerging markets right now is fallacious. The emerging markets bond area is indicating no crisis at all driven by currency or tariffs or anything else. To me, the fundamentals in the earnings growth of emerging markets are well intact. And the primary argument against emerging markets doing well in the future is that they just got done not doing well in the recent past. And that's an argument we don't find very valid. So crowd behavior is a contrarian argument.

And we confidently believe it will be in this case as well. By the way, on my CapEx front, S&P 500 companies spent $341 billion in the first half of this year alone in business investment. That's up 19.2% from the $286 billion they spent last year. But also the largest increase in over 10 years in research and development was up $147 billion, 14% increase year over year. And that CapEx number is the biggest increase in over 25 years. So bottom line on the markets right now is we're very excited for the next earnings season. We believe that asset allocation is the right way to go even when only one asset class is really driving most of the returns. You asset allocate

for risk management not just for return concentration. So we're going to continue doing what we're doing. I'm going to leave it there and as always I'm going to ask you to go to dividendcafe.com because there's a couple other nuggets covered, subject matters that we get into, and then a really, really nice array of charts I put together this week that I think you'll find interesting. concluding our comments on the key takeaways of the financial crisis, 10-year anniversary, what it means for investors, what investors can learn now, and what investors can learn in the future about that horrific event of the past. Hey, thanks for listening to Dividend Cafe.

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