Tuesday, March 27, 2018

Like I Said, Still in the Woods!

Like I suggested this morning, we're still very much stuck in the short-term woods. Here's the latest out of Washington:
"There will be limitations on foreign investment,” Commerce Secretary Wilbur Ross said Tuesday in an interview on Fox Business Network. Pending legislation in the Senate and House to bulk up the Committee on Foreign Investment in the U.S., the panel that currently reviews foreign takeovers, will be part of the response, Ross said, adding that Trump will take “other action.”
Stocks erased gains partly on concern about heightened trade tensions between the world’s largest economies. The S&P 500 Index was little changed at 11:08 a.m. New York time after earlier rising as much as 0.4 percent.
Foreign direct investment is hugely important to the U.S. economy, its companies and its markets! Remember, the U.S. owes much of its prosperity to the fact that it is (or, let's say, has been) the international commerce standard bearer for the world. Shrinking from that position poses multiple long-term challenges. 

The Nasdaq Index went from roughly up 60 to down 90 on the above news, and the Dow is about to turn negative, after being up 200 points earlier. 

Look for more big moves, in both directions, as this all gets sorted out...

As for those long-term challenges, here are a few snippets from yesterday's PWA internal log:

From a Bloomberg article titled "As Trade War Heats Up, Biggest Currency Whales Make Their Move"
"Bloomberg) -- For the first time in a decade, the world’s central banks are looking beyond the dollar to build their currency reserves"
"A lot of countries around the world are turning to Europe for increased partnership in trade,’’ said Jens Nordvig, who was Wall Street’s top-ranked currency strategist for five years running before setting up Exante Data a little over two years ago. “It’s not crazy to think that’s also going to be happening in the area of capital markets and reserve allocations. The bottom line is, this trade stance the U.S. has now is not helpful in terms of making the dollar attractive” for central banks that hold billions in reserves."
Key points from my own comments:
For now, a weaker dollar won't hurt the U.S. equity market, it'll likely help in fact. In the much longer run, however, if indeed the world is actively looking outside the dollar as its primary transactional currency, our ability to run big budget deficits will be hobbled measurably, and it'll make the accumulation of our very long deficit spending spree something extremely difficult, and expensive (read inflation [money printing] and much higher interest rates, and much lower government investment in the U.S. economy) to manage.
The above suggests that there's huge risk to my higher dollar in 2018 thesis.... All that said, if Trump and co. can get through NAFTA relatively unscathed, and somehow find closure in these tariff debates (without the tariffs), and onto infrastructure, etc.; while it won't undue the destructive global ill will toward the U.S., it very well might inspire capital to the U.S. and boost the dollar... Again, the fundamentals, on balance, make it easy to buy the dollar, for now... 
The problem with today's news is that it's somewhat defeating in terms of "inspiring capital to the U.S.." Which, in light of the President's more productive objectives, is somewhat problematic in the here and now.

Remember, the Administration just cut taxes and approved a massive budget (deficit) for 2018. We're going to need continued serious foreign investment into this country to make it all happen in any semblance of a cost-effective manner. 

In terms of current general conditions, which is our ultimate concern at PWA, per this week's message -- and despite all of the noise -- the overall setup remains quite constructive for equities going forward. I.e., thus far the noise has done little more than inspire short-term volatility. 

We'll keep you posted...

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