The Enhanced Investor Weekly Macro
January 15, 2017
ENHANCED INVESTOR WEEKLY WRAP & UPDATE Market Wrap and Update Sustained growth depends on how broadly a company defines their business model - and how carefully you gauge your customers’ needs. First and foremost, in the week ahead, global financial markets will continue to focus on U.S. President-Elect Donald Trump as he takes the Oath of Office and offers his inaugural address on Thursday. It’s going to be a wild week, and after reviewing the weekly stochastic’s on precious metals, I think it’s safe to say that they’re a Buy. In addition, there are a handful of Federal Reserve speakers on tap, including Chair Janet Yellen, as traders look for more clues on the likelihood of higher interest rates in the months ahead. Pay close attention to the rhetoric (hawkish or dovish). Meanwhile, in the U.K., market players will pay close attention to a highly-anticipated speech by Prime Minister Theresa May on Tuesday, at which she is expected to set out the approach her administration will take to Brexit. In the euro zone, traders will await the outcome of Thursday’s European Central Bank meeting for fresh clues on the future path of the region's massive stimulus program. Elsewhere, China is to release what will be closely watched fourth-quarter growth data amid ongoing concerns over the health of the world's second biggest economy. 1.
President-elect Donald Trump's Inauguration
Ten weeks after shocking the world by winning the U.S. election, Donald Trump will be sworn in as the 45th President of the United States at 12:00PM ET (17:00GMT) on Friday in Washington, D.C. Investors will welcome any detail he may give on his promises of tax reform, infrastructure spending and deregulation, as well as insight regarding policies on China and the domestic economy.
If thinking is an intellectual response to a problem, then the absence of a problem leads to the absence of thinking.
President-elect Trump has been credited with being a major catalyst behind the The Enhanced Investor Weekly Macro
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market's impressive rally since election day, although he has yet to outline his economic policies in detail. Markets were disappointed last week after Trump failed to offer details on his promises to boost fiscal spending and cut taxes at a highly-anticipated news conference on Wednesday. 2. Fed Chair Janet Yellen Speaks A handful of Fed policymakers are due to make public appearances this week that may offer insight into how divided they are about raising rates in the coming months. Tuesday sees New York Fed President Dudley, Fed Governor Lael Brainard and San Francisco Fed President John Williams make public appearances. On Wednesday, Fed Chair Janet Yellen is due to speak on the economy to the Commonwealth Club of San Francisco at 3:00PM ET (20:00GMT). On Thursday, San Francisco Fed's Williams and Boston Fed President Eric Rosengren are on tap. Later in the day, Fed Chair Yellen is scheduled to speak at an event at Stanford University at 8:00PM ET (01:00GMT Friday). Finally, on Friday, Philadelphia Fed President Harker and San Francisco Fed's Williams are scheduled to deliver comments. Markets remained unconvinced of the Fed's projection of three rate hikes in 2017. Instead, investors are pricing in just two rate hikes during the course of this year. 3. U.K. Prime Minister Theresa May Speaks on Brexit
Watch the companies that are closely working with customerrelated employment and service.
U.K. Prime Minister Theresa May is due to set Marketing efforts are still viewedout the approach her administration will take to as a necessary consequence of Brexit in a speech at the Lancaster House in the product - not vice versa, as London on Tuesday before an audience it should be. including foreign diplomats as well as Britain's own Brexit negotiating team and other senior officials. May has previously stated she will trigger Article 50, which starts the formal withdrawal process from the European Union, by the end of March, but has given little away about what deal she will be seeking, frustrating some investors, businesses and lawmakers.
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The Enhanced Investor Weekly Macro
January 15, 2017
Many think she will take a hard line on immigration at the cost of Britain's access to the single market, which would send the pound sharply lower. I agree. 4. European Central Bank Policy Meeting The European Central Bank's latest interest rate decision is due at 12:45GMT (7:45AM ET) on Thursday, with most not expecting any change in policy after the central bank surprised markets by saying it would trim its monthly bond purchases to 60 billion euros starting in April, down from 80 billion euros now. Most of the focus will likely be on ECB President Mario Drag’s press conference 45 minutes after the announcement. A recent Reuters poll found that the ECB's next policy move after April, when it is due to reduce monthly bond purchases, will be to cut the size of the quantitative easing program further, citing signs of economic stabilization and rising inflation. To date, the data doesn’t reflect this notion. 5. China Q4 GDP China is scheduled to release data on fourth-quarter GDP at 02:00GMT on Friday (9:00PM ET Thursday). The report is expected to show the world's second largest economy grew 6.7% in the final three months of last year. The economy grew by a similar amount in the third quarter and if confirmed, it could be a sign that growth in China is finally bottoming out. The Asian nation will also publish data on December industrial production, fixed asset investment and retail sales along with the GDP report.
Long-Term Stock Ideas and 2017 Preparation 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.
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, The Enhanced Investor Weekly Macro
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“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.) 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.
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January 15, 2017
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% (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 The Enhanced Investor Weekly Macro
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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 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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