Updating each Saturday. The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month. You can always scroll down a few weeks and find the latest “Long Term” update.
ISM’s manufacturing index had a very strong December. The composite index hits Econoday’s high estimate at 54.7, up a sharp 1.5 points from November for the best score in 2 years. Motor vehicles sold at a much stronger-than-expected 18.5 million annualized rate which is a new cycle high. U.S. consumers set nine-year high for December spending according to Gallup’s consumer spending measure. The $105 daily average for the month tops December 2015’s $99 and is the highest for any month since $114 in May 2008. The small handful of chain stores that continue to report monthly sales are reporting mostly lower sales in December (The belief is that their loss is Amazon’s gain, not that retail sales are slowing). Seven states had to be estimated and holiday weeks are always difficult to adjust for, but initial jobless claims in the December 31 week are strikingly low, down 28,000 to 235,000. Hiring is less active but new orders are unusually strong in December’s ISM non-manufacturing report where the index, at 57.2, matches November as 2016’s best. Factory orders fell 2.4 percent in November but were actually up 0.1 percent when excluding transportation equipment and a 94 percent monthly downswing in commercial aircraft orders.
In the employment report, nonfarm payrolls rose a lower-than-expected 156,000 in December but, in an offset, revisions added a net 19,000 to the two prior months (November now at 204,000 and October at 135,000). But the big story is another outsized 0.4 percent rise in average hourly earnings, the second such gain in three months. The year-on-year rate is now at 2.9 percent which is a cycle high. A 3 percent rate and above is widely seen as feeding overall inflation.
The reports the last few months have shown improvement in all aspects of economic activity so my characterization is the economy has improved from consistent slow growth to consistent moderate growth, which I consider ideal. Too slow, and an economy can slip back into recession, too fast and things can get overheated which is followed by a bust. This has all been aided by abnormally low interest rates, and now that the Fed is raising rates, has the economy healed enough to walk on its own two feet without the crutch of low interest rates? What will happen to home and auto sales when rates normalize? There is a challenge ahead.
Trump on China:
“So far, Trump has publicly criticized Beijing for unfairly manipulating its currency, applying insufficient pressure on rogue nation North Korea, taxing U.S. products, and militarizing the South China Sea. He’s also questioned the decades-old “One China” policy, which stipulates Taiwan is a part of China, prompting criticism in China.
“The relationship between the U.S. and China is simply too big to fail, Trump needs to figure out how to take it forward,” Christopher Hill, former U.S. ambassador to Iraq and South Korea, told CNBC.
Indeed, many have warned that a severed U.S.-China relationship would only result in a ‘lose-lose’ situation for both parties.
U.S. companies and consumers would lose access to China’s low-cost workers and cheap Chinese imports while Washington would be unable to borrow from China, which holds more U.S. debt than any other country. Meanwhile, China’s economy would get hit if Trump slaps higher tariffs on Chinese goods and places restrictions on Chinese investors from doing business in the U.S.”
My take: Anyone can stimulate an economy in the short run, just print some money and spend it. But, it also has long term consequences that are not so obvious, like a longer term devaluation of the currency.
Anyone can change the balance of trade in the short run by applying tariffs, but that will come with longer term consequences as well. The protected nation will become less competitive because it is not in fact “competing” in the real world. We will pay more for goods, increasing inflation. If we pay more for goods and then use them to build our products to sell, those products will go up in cost and make us less competitive internationally. Eventually this will come home to roost, people will stop buying our expensive goods and we’ll declare that protectionism has failed. It’s just a matter of timing. We can compete in the real world and accept the consequences of a slow erosion of our standard of living as other nations catch up to us faster than we make progress on our own (since we already were so far ahead), or we can try to live in a fantasy world created by artificial protectionism until the system breaks down and reality crushes down on us. This is basically what happened to England, which was the world’s superpower for several hundred years, with its large navy and military supported by its colonial empire. It’s “subjects” wanted to be free and when England gave up its colonies, it lost its artificial position as a superpower. It can take a long time for these artificial constructs to fail, but eventually the reality of the world will assert itself.
This is from a late 1980’s study published in the Harvard Business Review:
“Moreover, while trade shelters may temporarily slow the shrinkage of a particular industry, it can lead to fewer jobs for those distributing protected goods as well as those using such goods in their own manufacture. This is especially true for “linkage” industries. By raising domestic prices for steel, for example, quota protection undermines the competitiveness of the car and machinery industries, heavy users of steel.
So protection is an extremely costly, unpredictable, and inefficient device for saving jobs. Indeed, by encouraging relocation and automation, by screening domestic producers from competition, and by raising production costs, it may actually reduce the number of jobs in some industries. And even if protection temporarily preserves jobs, the effects wane with time while workers elsewhere in the economy may actually be harmed.”
The entire article makes for great reading if you are interested in the effects of protectionism; I just posted the Cliff Notes conclusion.
I added the two black lines which define a new up-channel, less steep than the 2016 rise from the February lows. This is good, as a rise that is too steep is not sustainable for the longer term.
You can see the market is near the top of this new up-channel, having enjoyed a great run on Trump’s promise of tax reductions, tariffs on imported goods, and infrastructure spending. The first week of the new year rebounded from the 2% correction during the holiday week. Technically, the market has neared overbought again with RSI (upper right) at 64, and MACD (momentum, lower right) is trying to turn positive (the histograms are shrinking back to zero which is neutral). The odds favor some profit taking which I will do this week. For money on the sidelines, I will wait for a better entry point. On the chart, the 200 day moving average is the red curvy line, the 50 day moving average is the blue curvy line, and we can see the market is extended pretty far above both of them (the legend for the curvy lines is on the left hand side of the chart), and as that distance becomes greater, the tendency to “revert to the mean (average)” increases. Reversion to the mean will occur, it is just a question of when.
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Rich Comeau, Rich Investing