With the U.S. dollar tumbling more than 1 percent, now trading near the 100 level on the USDX, and gold and silver surging, here is what you need to know about what is happening in markets and around the world.
But before we get to that, take a very close look at the remarkable commercial all-time record long position in U.S. 10-Year Treasuries (see stunning 23-year chart below):
Commercials Now Have All-Time Record Long Positions In U.S. 10-Year Treasuries!
And now here is what Peter Boockvar wrote today as the world awaits the next round of monetary madness: Days ahead of the inauguration I’d like to make a formal introduction. ‘Reality of governing,’ I’d like you to meet ‘Rhetoric of campaigning.’ ‘Rhetoric’, sometimes you would sound so exciting (tax cuts, regulatory relief) but also dangerous at times (constant tariff threats and bizarre tweets)…
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‘Reality,’ we’re about to hear more from you and I so hope you can get along well with ‘Rhetoric’ on the tax and regulatory side but I know that won’t be as easy as it sounds. On the topic of trade, hopefully you can teach ‘Rhetoric’ the dangers of ad hoc tariff slapping and that a 35% border tax on German cars is not a good idea. I hope this can be a beautiful match and one that works well together.
The beginning of this hook up though is on bumpy ground on the tax side. DJT in the WSJ said “Anytime I hear border adjustment, I don’t love it. Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.” He referred to it as “too complicated.” All readers know that a key component of the success of the border adjustment tax is the assumption of a 20-25% dollar rally. As I’ve been waiting for that tweet saying ‘the yuan is too weak’, instead we got this first in the WSJ: “Mr. Trump said the US dollar was already ‘too strong’ in part because China holds down its currency, the yuan. ‘Our companies can’t compete with them now because our currency is too strong. And it’s killing us.” Oh boy and remember that FX trades $5 Trillion notional per day. Getting it to where one wants it to go sometimes works and sometimes it doesn’t.
As the border adjustment tax is supposed to ‘pay for’ about half the cut in the corporate income tax, what will this mean for where the corporate tax rate will ultimately end up if it is not part of the bigger package? I wish for once there was discussions about cuts in spending to pay for it but I have not heard any talk about that.
The market response is obvious, it’s a bit of a reversal of the ‘Trump Trade.’ The dollar index is at 6 week low, gold is near a two month high, the 10 yr yield is near a two month low, and the S&P’s as of this writing will open around a two week low.
Last week I raised the question of “What should the right multiple be?” in light of changes in interest rates and earnings potential (maybe higher revenue, lower margins). In the weekend’s Barrons Roundtable, money manager William Priest had these interesting stats:
“In the past five years, the MSCI World Index was up 87%. Of that 87%, 74 percentage points came from P/E multiple expansion. Earnings were down two percentage points, and dividends were up roughly 15 percentage points.”
Thank you QE, NIRP and ZIRP. He went on,
“The S&P 500 rose 98% in the past five years…two-thirds of the increase came from P/E multiple expansion. The rest came from earnings growth and dividend payments. The P/E multiple went from 12 times forward earnings in 2011 to more than 18 times in 2016.”
I say, imagine if the P/E multiple goes back to its long term average of 15 and multiple that by the $130 consensus estimate for 2017. That equals 1950. I’m not making a call but just highlighting the importance of the original question.
The other important story of the weekend is of course Theresa May’s plans for leaving the EU. Putting immigration policy ahead of economic concerns and full access to the single market is what has people worried. The pound was down 1.1% yesterday on concerns but is spiking by 1.4% today after the alarming rise we are seeing in their inflation stats. Input prices rose 15.8% y/o/y in December, a touch above the estimate of 15.5%. Margins are in trouble as output prices rose just 2.7% y/o/y but we should expect that to move much higher. At the consumer level, headline CPI was up by .5% m/o/m and 1.6% y/o/y, both two tenths above the forecast and brings the y/o/y rise to the most since the summer of 2014. The core rate was also up 1.6%. The 2 yr gilt yield is up by 2.5 bps in response and I say to Mark Carney, what are you going to do now? Happy with higher inflation?
Lastly, the German ZEW investor expectations index on the German economy rose to 16.6 from 13.8 but that was below the estimate of 18.4. Current conditions though was 12 pts above the forecast at 77.3, the best since 2011. ZEW said “the slight increase of the ZEW indicator of Economic Sentiment is mainly due to the improved economic situation across European countries.” As for the markets response, they care more about the IFO business confidence index.
***KWN has now released the fascinating audio interview with the top trends forecaster in the world, Gerald Celente, who discusses the big surprises ahead in 2017, gold, China, and much more, CLICK HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: ALERT: Critical Update On The War In The Gold & The Mining Share Markets CLICK HERE.
***KWN has also recently released the extraordinary audio interview with the man who advises the most prominent sovereign wealth funds, hedge funds, and institutional funds on the planet, Michael Belkin, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***KWN also released one of Marc Faber’s greatest audio interviews ever and the overseas line was crystal clear for the recording. Faber covers the great danger facing the financial system in the coming year, what his predictions are in 2017 for global markets, stocks, bonds, gold, silver, mining shares, etc, what investors should be doing with their money right now, what has the wealthy so worried in 2017, how Trump will impact major markets, and much more, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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