The Enhanced Investor Weekly Macro
January 29, 2017
ENHANCED INVESTOR WEEKLY WRAP & UPDATE Market Wrap and Update Hey Guys. I’m back from a bad car accident that occurred last Friday, so this will be a brief report, with a much more comprehensive report coming next Sunday. First and foremost, in the week ahead, global financial markets will be busy with central bank meetings in the week ahead, with policy decisions due in the U.S., U.K. and Japan. Investors will also keep an eye out on key economic data, with the monthly U.S. employment report and euro zone inflation data in the spotlight. 1.
Federal Reserve Rate Decision
The Federal Reserve is not expected to take action on interest rates at the conclusion of its two-day policy meeting at 2:00PM ET (19:00GMT) on Wednesday. The central bank will also release its latest statement as investors look for any change in language which could point more clearly to a near-term rate hike. The Fed indicated last month that at least three rate increases were in the offing for 2017. However, traders remained unconvinced. Instead, markets are pricing in just two rate hikes during the course of this year. According to a recent Reuters poll, borrowing costs will remain on hold until the second quarter, when another 25-basis-point hike is likely. 2. Bank of England Policy Announcement The Bank of England will announce its rate decision at 12:00GMT (7:00AM ET) on Thursday, with analysts expecting no change in policy. The British central bank will also publish its quarterly Inflation Report.
If thinking is an intellectual response to a problem, then the absence of a problem leads to the absence of thinking.
Market experts expect the BOE to stick to their neutral stance on whether to cut or raise interest rates in future, due to the scale of uncertainty about the impact of last year's referendum decision to leave the European Union. Besides the BOE, traders will focus on a trio of reports on activity in the The Enhanced Investor Weekly Macro
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manufacturing, construction and services sectors for further indications on the continued effect that the Brexit decision is having on the economy. 3. Bank of Japan Monetary Policy Decision The Bank of Japan's latest rate decision and monetary policy statement are due during Asian hours on Tuesday. BOJ Governor Haruhiko Kuroda will hold a press conference afterward to discuss the decision. A Reuters poll showed on Friday that the Japanese central bank is expected to leave its monetary policy settings unchanged amid signs of a more sure-footed economic recovery. According to the poll, the BOJ will hold its short-term policy interest rate at minus 0.1% and the 10year government bond yield target at around 0%, while maintaining the net amount of Japanese government bonds it buys annually at around 80 trillion yen. 4. U.S. January Nonfarm Payrolls Report The U.S. Labor Department will release its January confirm payrolls at 8:30AM ET (13:30GMT) on Friday. The consensus forecast is that the data will show jobs growth of 171,000, following an increase of 156,000 in December, the unemployment rate is forecast to hold steady at 4.7%, while average hourly earnings are expected to rise 0.3% after gaining 0.4% a month earlier. An upbeat employment report will point to an improving economy and support the case for higher interest rates in the coming months, while a weak report would add to uncertainty over the economic outlook and push prospects of tighter monetary policy further off the table. Besides the employment report, this week's calendar also features U.S. data on personal income and spending, employment costs, Marketing efforts are still viewedconsumer confidence, manufacturing and as a necessary consequence of service sector growth, weekly jobless claims, the product - not vice versa, as confirm productivity and unit labor costs as well it should be. as factory orders.
Watch the companies that are closely working with customerrelated employment and service.
Despite the flurry of data, headlines from Washington could continue to dictate market sentiment this week, as traders focus on President Donald Trump for further details on his promises of tax reform, infrastructure spending and deregulation as well as trade policies. Earnings from tech giants Apple (NASDAQ:AAPL), Amazon
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January 29, 2017
(NASDAQ:AMZN), Facebook (NASDAQ:FB) as well as major drug companies Merck (NYSE:MRK) and Pfizer (NYSE:PFE) are also on the radar this week. 5. Euro Zone Flash January Inflation Figures The euro zone will publish flash inflation figures for January at 10:00GMT (5:00AM ET) Tuesday. The consensus forecast is that the report will show consumer prices rose 1.5%, rising back toward the European Central Bank's 2% target and accelerating from a gain of 1.1% in December. Core prices are expected to increase 0.9%, unchanged from the prior month. Despite the upward trend in inflation, ECB President Mario Draghi recently downplayed the significance of rising consumer prices, saying that underlying inflation pressure remains “subdued.” Besides inflation data, the euro zone will also release preliminary fourth-quarter growth figures on Tuesday, while the European Commission is scheduled to publish updated economic forecasts for the region on Wednesday.
Long-Term Stock Ideas and 2017 Preparation Again, after reviewing weekly stochastic data in energy, precious metals and financials, and given the inauguration this week, I’m placing Holds on all energy, Buys on precious metals, and Holds on financials. Pay close attention to the tech earnings this week.
Education A closer look at the macro picture and valuation dynamics of Gold & Debt: Continued Frankly, to some it's beginning to look like “Reagan, revisited.” But wait; not so fast. I beg to differ, from “A to Z.” Both the rule of law and property right protections are much weaker today than they were in January of 1981; just consider the cumulative corrosive effect of thousands of new, unconstitutional federal regulations spit out by the executive branch, year after year, and piled on top of each other, for decades. Or consider that self-proclaimed king of debt, taxpayer bailout supportive, “eminent domain”-abusing, litigious, crony capitalist extraordinaire Trump revels in transferring Main Street’s property rights to the “one percent.” To add insult to injury, instead of Trump “draining the (establishment) swamp,” too many of his cabinet appointments, such as Reince Preibus (chief of staff), Steven Mnuchin (Secretary of the Treasury), Mitch McConnell's wife Elaine Chao (DOT head), and even Rex Tillerson (Secretary of State), are the very “swamp monster” RINOs, cronies, and statists that have driven policy further away from constitutional fidelity and private property right/liberty protections -- to the delight of Wall Street and K Street, and at the expense of the private sector, free market capitalism, affordable power, coal miners, and the young generation. Did anyone say “hello again, status quo?” (Frankly, the positive implications of this on strategic PM prices could not be more favorable.) The Enhanced Investor Weekly Macro
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Is it any wonder, then, that vital (small) business formations, the engines of new job creation, inventions, and economic growth, have continued to wilt (related chart below)? This makes it harder to grow our way out of our over-indebted state.
Moreover, America’s toxic regulatory, tax, and litigation environment has fueled a three decade-long erosion of its manufacturing prowess, a pivotal sector of high value-added output and high paying jobs, making it harder to “export” our way out of debt, a fact best underscored by multi-decade growth in the US’s trade deficit as aggregated in the annual current account balance position: Annual current account balance: total trade of goods for US (bn of $) This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion of the author at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable, but is not a complete summary or statement of all available data necessary for making an investment decision. Liquid securities can fall in value.
Furthermore, constitutionalist Reagan at least attempted to return to federalism and to reduce the growth rate of non- defense-related federal spending (has anybody heard Trump speak about reducing the growing spending/intrusiveness/cronyism of the US government, or that “government IS the problem?”). Most importantly for investors weighing risks, Reagan began his first term in January 1981 with a 31% federal government debt to GDP and ran it up to 51%; Trump will be starting his first term at 105%. Reagan began with a 10.5% personal savings rate; Trump will be starting at 5.5%. Reagan began with a 12.7% yield on a 10-year Treasury; Trump will be starting with a sub-3% Treasury (based on current yield). Reagan inherited a nearly 12% inflation rate that had a long way to fall; Trump will be starting with “official,” now heavily gimmicked, consumer inflation at 1.7%
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(current tally) with nearly nowhere to go but up -- i.e., if central bankers have their way, and history strongly suggests that it is “only a matter of time.” Moreover, and very decisive from equity return and capital preservation determinants, secular P/Es expand (the definition of a bull market) thanks to sustained reductions in interest and inflation rates, as has occurred since September 1981 when the 10-year Treasury yield reached 15.84%. The converse is also true: secular P/Es contract (the definition of a bear market) thanks to long-standing increases in interest and inflation rates; just consider the stagflationary ‘70s featuring high interest rates, high inflation rates, and low (and progressively lower) P/Es for reference directly below: Shiller P/E ratio for the S&P 500 (current value at risk) US 10-year Treasury yield (current value at risk).
In other words, stock valuations or P/Es are largely determined by the discount rate used to derive the net present value (NPV) of estimated future earnings. The lower the discount rate (the 10-year Treasury yield plus a risk premium), the higher the NPV/stock valuation -- and vice versa. Thus, stock and bond valuations are tied at the hip, with stocks historically having to offer higher return prospects thanks to inherently less stable earnings and incurrence of losses; in contrast, bondholders’ economic claims are senior to shareholders,’ usually resulting in better nominal return and capital protection.
Additional Info For any newcomers who don’t know me, I’ve been contributing via the Enhanced Investor Weekly Macro Reports under #WatchList for almost a year. As I noted last week, given the recent market action and my in-depth knowledge of bubbles relative to political shifts and global economics, I’ve decided that it was simply not enough for beginners, or even intermediate traders because in order to The Enhanced Investor Weekly Macro
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have the ability to synthesize what’s truly happening - you need to be operating at the MBA/PhD level. Unfortunately, some PhD’s forget the basics. Anyway, as I said a few weeks ago, it’s not fair for me to assume that all of you have what those at investment banks call “financial sophistication”, but that’s why we’re working together here at Enhanced Investor. Combatting Wall Street and gaining the upper edge is why we do this. Anyway, I am more than happy to help, so if for some reason I don’t receive a tag in the #mainstockchat, or you don’t direct message me on Discord, please feel free to email here adamwood@fas.harvard.edu or you can tag me on StockTwits @ EILeadMacroAnalyst. Don’t fear the bubble. We do not fear bubbles here at Enhanced Investor. Why? Because we’re armed with the strategic, tactical, and historical knowledge of every major bubble that has ever occurred. From the Tulip Mania of 1637 to the Housing Crisis of 2008 and the current market conditions - we’re prepared.
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