Categories: world

Alarm clocks calling | Looking for Alpha

An aggressive monetary easing can disrupt the global economic slowdown while increasing the value of financial assets, but we really need extensive structural financial and legislative reforms and trade agreements to meaningfully accelerate global growth. We were not surprised that last week, the OECD lowered its growth forecasts for 2019 and 2020 to 3.3% and 3.4%, respectively, with the majority of cuts in the euro area. Inflation forecasts were also lowered. We have not changed our opinion, one we had since January, that global growth would end up in the middle of the year and begin to accelerate as we move in and until 2020. The main reasons for our optimism are: All Monetary agencies have now moved to more accommodating positions that we had expected. The governments are increasing their spending while reducing taxes, which means that budget deficits can increase. Trade Agreements Will Be Completed and / or Additional Charges Let's take a look at what's happening in the key economic areas that justify our opinion: The United States has become the leading country that influences our opinion. There is no doubt that the Fed will pause travel prices throughout the year and is likely to stop settling its balance sheet within a month or two. We're not sure if the Fed will cut prices to stop the dollar, but it would be a smart move if it were to be done. Fed's primary goal has been shifted to protect expansion rather than contain inflation. There were several…

An aggressive monetary easing can disrupt the global economic slowdown while increasing the value of financial assets, but we really need extensive structural financial and legislative reforms and trade agreements to meaningfully accelerate global growth. We were not surprised that last week, the OECD lowered its growth forecasts for 2019 and 2020 to 3.3% and 3.4%, respectively, with the majority of cuts in the euro area. Inflation forecasts were also lowered.

We have not changed our opinion, one we had since January, that global growth would end up in the middle of the year and begin to accelerate as we move in and until 2020. The main reasons for our optimism are:

  • All Monetary agencies have now moved to more accommodating positions that we had expected.
  • The governments are increasing their spending while reducing taxes, which means that budget deficits can increase.
  • Trade Agreements Will Be Completed and / or Additional Charges

Let’s take a look at what’s happening in the key economic areas that justify our opinion:

  • The United States has become the leading country that influences our opinion. There is no doubt that the Fed will pause travel prices throughout the year and is likely to stop settling its balance sheet within a month or two. We’re not sure if the Fed will cut prices to stop the dollar, but it would be a smart move if it were to be done. Fed’s primary goal has been shifted to protect expansion rather than contain inflation. There were several financial figures reported last week that need to mention. The rise in the trade deficit in December to $ 59.8 billion and for the year to $ 621 billion had much to do with our domestic economic strength, weakness abroad and fear of surcharges in January 2019. Not surprisingly, the trade war actually increased deficit last year. The tasks reported on Friday were a shock to everyone, including us. Without going into detail, we are convinced that the numbers were off-base. Instead, we focus on the ADP number that was reported on Wednesday, which shows that the number of jobs increased by 183,000 in February. The entire unemployment requirement remains close to record levels and over 7.3 million workplaces. We believe that the work report in December is an outlier to reality and that it is completely rejected. It is clear that GDP for the first quarter will be the lowest point for the US economy in 2019. Interest rate sensitive sectors such as housing already show improvements with the recent decline in mortgage rates. There is no doubt that consumer spending will remain strong (just look at Costco (NASDAQ: COST), Target (NYSE: TGT) and Walmart (NYSE: WMT) numbers) as well as capital spending on technology that will boost future productivity. And finally, there is the increased prospect that trading transactions will end with China, Japan and hopefully the euro area this year. 2020 may surprise on the upside. Don’t forget that Trump will do everything to increase the economy and stimulate the financial markets before the presidential election in 2020. And the Democrats are at great risk of moving too far to our left. The US stock market is still undervalued today, as we expect the S&P earnings to increase by at least 5% in 2019, with the 10-year government debt below 3.0%.
  • Last week, China’s national conference was very revealing, but not surprising to us. China lowered its economic growth target for the year to a range of 6% to 6.5% as expected. Premier Li Keqiang offered plans to stimulate domestic economy through a combination of tax cuts and major spending projects. Trade was an important topic for discussion, as it was clear that trade conflicts had seriously damaged China’s economy. Ironically, last week it was reported that exports from China had fallen by almost 20% in February from a year ago, while exports fell by 26% to the US. We take these figures with a grain of salt as well, because exports were unusually high in November and December added fees in January. Weak imports were affected for the same reason and do not reflect a deterioration in domestic demand in China. We are also convinced that China’s economy will improve as we review the year that favors the huge flood of added liquidity and tax cuts, including a sharp drop in VAT. And what if there is a trade agreement with the US that we predict? It is important to note that the Chinese government is trying to contain speculation in its financial markets by allowing a sales recommendation on Friday at one of the most prominent insurance companies.
  • Japan’s economy recovered 1.9% in the fourth quarter after declining by 2.4% in the third quarter. Private consumption increased by only 0.4%, as wage developments are still weak and net exports actually punished growth by 0.3%. Japan’s Cabinet Office reported only that the latest business terms composition fell during the third straight month to its lowest level since June 2013. Japan desperately needs global trade conflicts to quit. BOJ cannot do more than it already is and it is equally difficult for the government to increase the deficit from these high levels. Japan’s economy will accumulate until global trade improves. We expect Japan to enter into a trade agreement with the United States before the end of the summer, which will improve growth prospects in recent years, especially if China and the United States reach an agreement.
  • We are still negative about the euro area’s outlook despite the ECB’s change in the ECB last week. The ECB promised to maintain interest rates at current levels until the end of the year and will offer banks a new round of loans not seen since 2016. We do not believe that the euro area can grow by 1.1 percent by 2019 until the area can get its act together. Brexit, political problems in Italy and Spain, and most importantly, its trade conflict with the United States is a little cover for Europe’s prospects. Germany needs to relieve its neighbors, allowing for higher spending and lower taxes, even if it means rising deficits. It is no surprise that the region has a great need for structural reforms in order to better compete globally. Nevertheless, we believe that all European governments recognize the negative risks, including rising deflationary pressures, and will work together to promote growth, including trade agreements with the United States

. An aggressive monetary easiness has taken the risk of a brief recession from the board, but it will not lead to faster economic growth until trade is achieved. The companies keep their hands in their pockets until they have some certainty over the trade policy. We are convinced that commercial transactions will lead to more capital expenditure and employment. China, Europe and Japan are significantly damaged more than the US in trade issues and therefore have much more to gain when agreements are reached.

We have written since October in October that the risks for the disadvantage were unimaginable and that it was about time for the powers to be in the right things. Trump has disturbed the status quo in so many ways. While we disagree with many things about him, including his ways, we stick to many of his goals. Who can argue against no fees, no subsidies, no stolen IP and equal terms? Who can argue that the United States carries all the research costs for drugs?

Byte is difficult and hiccups occur along the way but the playoffs may be worth the trouble. Alarm clocks calling around the world increase the odds that trading will be reached this year, which will lead to an acceleration in global growth until 2020. It is important to note that no one believes it so that we do not pay for it either . We believe that the US markets are undervalued today even without trade agreements. We are less sanguine in other markets unless trade agreements are reached.

Our portfolios are more diversified than we can remember without an overall theme. Every investment is led by great management to win long-term strategies and resources to see it happen. While we continue to hear about too much leverage in the system, it is not really companies America whose balance sheet has never been better. However, we are concerned about the build-up of public debt everywhere.

We own many pharmaceutical companies that benefit from new product flow, rising margins and cash flow. industrial and capital goods companies with volume growth of 1.5-2 times GDP, rising margins and large free cash flow production; technology including semis at a reasonable price for growth that generates huge free cash flows; cable companies with content such as Comcast (NASDAQ: CMCSA) and Disney (NYSE: DIS); housing-related businesses are HD that will benefit from insufficient supply and low mortgage rates; low cost industrial raw materials companies generate huge free cash flow; and many, many special situations where internal development will close the gap between current price and intrinsic value. We do not own any bonds that we expect the yield curve to rise later in the year and we are the flat dollar even though we predicted its short-term strength.

Review all the facts; pause, reflect and consider tank shifts watch your asset allocation with risk control all the time; Editor’s Note: The summary pillars for this article were selected by Seeking Alpha editors.

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