The Donald is about to cause some volatility

Tuesday, 29 January 2019
Melbourne, Australia
By Murray Dawes

  • Did the US President lay the foundation of the next recession?

The big news out today is the unveiling of charges against Huawei by the US government. With only days to go until we get an update on the progress of the US-China trade spat, it is becoming intriguing to consider how China will react to the screws being applied to them by the Trump administration.

Due to the sharp softening in growth coming out of China you would consider it to be in China’s interests to start playing ball with the US and give a bit of ground to ensure that something is agreed upon. But you could also make a case that China will not want to be seen as kowtowing to the US so they could possibly push back against the pressure that is being applied.

It makes for a fascinating week coming up, especially since markets are poised on the edge of a shift in momentum back to the downside. Any bad news could set of a quick chain reaction that could see the US equity market plunge 5% just for starters.

The Donald could be a catalyst for a lot of the upcoming volatility with Mueller also getting closer to finalising his investigation into Trump and his ties to Russia. My own view is that it is a politically motivated witch hunt but if there is more to it than meets the eye the markets could react very negatively indeed.

My colleague Phil Anderson and his team have been doing a lot of work analysing and forecasting the various factors that could affect the market going forward from a cyclical point of view, and his work in Time Trader may be of interest to you. So, I’ll pass the baton over to him following the markets to give you the rundown on how the past may not predict the future, but it can often rhyme.

Markets

Overnight the Dow Jones Industrial Average closed down 208.98 points, or 0.84%.

The S&P 500 lost 20.91 points, or 0.78%.

In Europe, the Euro Stoxx 50 index finished down 25.97 points, or 0.82%.

Meanwhile, the FTSE 100 lost 0.91%, and Germany’s DAX lost 71.48 points, or 0.63%.

In Asian markets, Japan’s Nikkei 225 is down 98.75 points, or 0.48%. China’s CSI 300 is down 0.10%.

In Australia, the S&P/ASX 200 is down 31.40 points, or 0.53%.

On the commodities markets, West Texas Intermediate crude oil is US$52.11 per barrel. Brent crude is US$60.04 per barrel.

Turning to gold, the yellow metal is trading for US$1304.18 (AU$1,818.93) per troy ounce. Silver is US$15.75 (AU$21.96) per troy ounce.

One bitcoin is worth US$3,421.88.

The Aussie dollar is worth 71.71 US cents.

Regards,
Murray


Did the US President Lay the Foundation of the Next Recession?
By Phil Anderson

In July of last year, we took our subscribers through all the good news that had come out over the past year to that point. All the good earnings news in particular should not have been a surprise to our subscribers, though it went against the mainstream’s predictions at the time.

If you have my Financial Timetable (part of the Time Trader service) and have worked out the TIME reasons that govern it, then you can also see why a strong US economy was expected. And there we were.

Here’s what the real estate cycle suggests is coming next — and what you should do about it.

Tallest, largest, longest…

You’ll continue to see projects announced on a grand scale. Xiaomi Corp, the Chinese smart phone maker, has filed for an initial Public Offering (IPO) in Hong Kong.

It’s expected to be the largest such offering since 2014. This will start the process that it is expected to raise at least US$10 billion and give a value to Xiaomi of US$100 billion.

The company is only eight years old.

Here’s a picture of how it was reported by Bloomberg, 3 May.



chart image

Source: Bloomberg
Click to enlarge

Xiaomi hopes to ramp up global expansion and has plans to displace Apple at the top of the market.

Who knows if they will achieve what they’re setting out to do, but the float will create quite a number of instant billionaires with lots of additional money to spend. This is productive capitalism at its best. 

Most very large floats only happen towards the end of each half of the cycle. Indeed, it helps you to work out where you are in the cycle.

You should know this already. And you can forecast it in advance.

It is in this period — 2019 especially — that you must ensure you do not overbid for assets.

Watch in 2019 for the probable floats of Saudi Aramco (oil) and Uber (tech) — very large IPOs, the two largest ever even — to complete the top of the first half of this current 18.6-year real estate cycle.

As the media begins to tell you how great these floats are for the world, that’s when you should begin to panic. Such floats almost always mark the peak.

There’s more (emphasis is mine)…

In CHIC central Bangkok, a foreign buying binge is fuelling a red-hot market for ultra-luxury real estate. At 98 Wireless, a new luxury condo there, a Hong Kong buyer snapped up a US$2.2 million apartment developed by Sansiri Pcl. It was an impulse buy.

For the price of a cramped studio back in Hong Kong, the investor landed himself an opulent two-bed room place with Ralph Lauren furniture, three bathrooms outfitted with Carrera marble, butler service and a chauffeured Bentley limousine.’

That’s a quote from Bloomberg, 3 May 2018.

Scenes like this are becoming more and more common right around the world.

In Thailand especially — because they allow ownership of land by foreigners — then accordingly, foreign money will be pushing up prices in the Thai capital. Australia allows the same, with the same results. (The land should be leased, so the rent stays in the country, but that’s another story.)

And so, the cycles roll on. It’s good for a mid-cycle peak.

You may care to note we’ve just seen the most expensive car sale ever. It was a Ferrari 250 GTO test car, at $45 million. You can read about that here.

Human resources firm Korn Ferry sought last year to uncover the extent of the talent shortfall (and labour shortage) in the 20 major economies around the world.

Their report suggests most of the world will be short 85 million workers by 2030 in the three largest knowledge intensive sectors.

The global skill shortage they believe could result in US$8.45 trillion in unrealised annual revenue by 2030. Hong Kong and Singapore are expected to be hit the hardest by the forecasted labour shortages.

You can read more of the report here.

Now this may or may not happen as Korn Ferry suggests. I just want you to watch how — as things heat up as we go into 2026 — such suggestions and forecasts will get ever more bullish. 

It’s also being suggested that Gross Domestic Product (GDP) in the Asia-Pacific region could potentially add another US$387 billion by 2021 — and grow by an extra 1% annually — if the region’s manufacturing sector embraces digital transformation. With China contributing almost 50% of that growth.

That’s the case according to a study by Microsoft, in partnership with research firm IDC Asia/Pacific.

The findings were based on estimates 615 business leaders provided to IDC about the impact of digital transformation on their business growth.

I’ve no idea if this is likely to be right or wrong. I merely point out that such a finding would not have happened in 2010. This is the cycle turning right in front of you. 

The Trump administration is delivering to the US a late-cycle fiscal stimulus — that’s the tax cuts — which one would expect to increase inflation modestly. It’ll be enough to put central bankers on notice to watch for this.

Central bankers raise interest rates when or if they perceive inflation getting too high. There is plenty of history to show you how this ends: in a yield curve inversion.

If you are a Time Trader subscriber, this is where your ‘2018 Roadmap’ comes in very handy. It’s been useful already for 2018. The 2018 Roadmap forecast an end of March stock market low point. Which is exactly what we got.

The easy money years after the 2008 financial crisis saw a lot of US dollar speculative capital flow from the West, into non-bank borrowers in emerging markets chasing higher returns. But there’s a rub to that, as always.

When the dollar (later) begins to rise again against emerging market currencies, as it always does (when US interest rates rise, for example) the cost of servicing the debts of those non-bank borrowers starts to rise. This puts emerging markets under pressure.

The currency problems you’ve been seeing in Argentina and Turkey are partly a result of what’s just been described above. (Although there’s also some self-inflicted wounds in there too.)

This will likely play out similar to what happened in 1998.

When the US raises interest rates, emerging markets have to do the same. It’s to defend their own currencies as all the speculative capital shifts out — chasing the higher returns available with higher rates in the US.

Pressure for higher interest rates is now being seen in Turkey, Argentina, Venezuela and Indonesia. It squeezes both business and the consumer in these countries.

I don’t have any figures on it, but I believe you can bet these interest rate rises in such developing countries will take place right at the worst possible time — when a whole heap of debt is coming up for renewal.

Pay close attention to this.

Consumers right around the world are now being squeezed through three independent, though ultimately related, sources.

One is via interest rates, described above. Two, is through higher oil prices.

You may care to note, that’s a 30-year repeat pattern developing that Gann speaks so much about. That’s rising oil prices into 2019, as they’ve been doing.

We wrote about the 30-year oil pattern for you way back in your Cycles, Trends & Forecasts 23 October 2014 issue. Note the chart on page 2 of this issue and the standout oil price spike into 1989/90. Just add 30 years, as we suggested to subscribers back then.

Do you see how you can get a rough — but very good — idea of how things will unfold in the future?

Note especially how rising oil prices were blamed for the subsequent 1991 recession. You know better than this of course. The real estate cycle had run its course back then — land prices had just gone out of all proportion in the US — and it was simply time for the recession.

(That was the end of cycle back then. Today we are mid-cycle.)

The third squeeze is now beginning from a source nobody sees or measures: higher land prices. The information does actually appear. It’s also easy to see. And perhaps it does get measured — sort of. But nobody gets the cyclical significance.

Fortune magazine, 15 September 2017, reported it this way, with some great graphs to go with it.

The U.S. Housing market is getting squeezed. In July, according to the National Association of Realtors (NAR), housing inventory declined for a 26th straight month on a year-over-year basis. Shrinking supply, in turn, is contributing to a sharp rise in housing costs. The median existing home price in July—$258,300 according to NAR—was 6.2% higher than last year. That marked the 65th straight month that prices have risen year-over-year.’ 

That’s five and a half years straight of rising land prices. You can see the three squeezes on consumers, right? It’s all coming at once. There’s every chance this will bring on the mid-cycle slowdown.

Right on time.

Now, there could actually be a fourth squeeze on consumers coming in the all-important US market. And that’s from tariffs. This one is not so large, but the timing could be significant.

By far the most enlightening comment about tariffs — and the only one you need to know — was made by Henry George, more than a hundred years ago. George observed that:

‘…Blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war.’

The US President has levied tariffs on imported steel and aluminium. That’s good for the US steel and aluminium industries, but it will increase prices in all US industry sectors that use steel and aluminium as an input.

That’s cars and anything that comes in a can. Beer and soda for starters. And Americans drink plenty of those products, as we all do.

You can see just how costly the tariffs could end up to the American consumer. Not to mention adding something to US inflation. Which may add something to why the Fed will lift interest rates yet again. Maybe.

In the downturn around 2020 and into 2021, this squeeze process will unwind with a number of bank mergers, and business acquisitions of the weakest and currently most highly leveraged, by the remaining fittest.

And house prices will stall, allowing all those who ‘waited for the downturn’ to buy in, at last. And they’ll convince themselves of how right they were to wait.

And then the world will be ready for the final phase of the real estate cycle — the second half.

Make sure you are prepared for the second half of the real estate cycle. Understand how, when and why it will happen.

For insights on that, and on how to use that knowledge to trade markets day to day, go here.

Regards,
Phil

Editor’s note: The above article is an edited extract from a previous report. In the time since its publication, phone maker Xiaomi, mentioned early in the piece, has now listed.

Xiaomi made its trading debut in Hong Kong 8 July at HK$17. In April, the founder, Lei Jun, awarded himself more than 630 million Class B shares, equal to around 28% of current total Class B holdings, making himself an instant billionaire. Much as Phil predicted.