This Week in Barrons – 12-27-2015:
“The more violent the storm, the quicker it passes.” … Paulo Coelho
Dear Ms. Yellen:
I hope that you and your family are having a happy holiday season. I wanted your thoughts on a discussion that SF and I were having last week on GF’s ‘The Exporting Crisis.’ It seems many of the top exporting nations are worried about the currency ‘race to the bottom’. Countries like South Korea and Germany are extremely efficient exporters – to the tune of exporting about half of their GDP. And at one time this ‘export’ ability was an asset, but now customers are holding exporters hostage. You’ve no doubt heard the saying: “If I owe you $1 – it’s MY problem, if I owe you $10m – it’s YOUR problem.” Currently customer problems have become the exporting country’s problems – because an exporting country’s economic, political, and social lives depend upon their ability to continue to export.
Recently, the lack of appetite for Chinese goods (specifically in the U.S.) became an exporting crisis for China. That, in turn, created an exporting crisis for those fueling China’s economic growth, including oil and other raw material exporters. China had assumed that the U.S. and European economies would recover, and would resume importing Chinese goods. South Korea assumed that China would resume prior levels of production, and would resume importing their goods. Even now, the world is assuming that the collapse of oil prices and of secondary exporters like South Korea will recover and return to previous levels.
Putting these assumptions aside, there are additional, critical exporting and currency related issues. Germany (for example) is the world’s fourth largest economy, exporting just under 50% of its GDP.
Germany needs to maintain the European free trade zone at all cost, and is therefore leading the Euro lower in the ‘currency devaluation race’. Germany is the most effective economy in Europe, and also the most insecure. It is incredibly vulnerable to any reduced demand for its products. Its prosperity and full employment depend upon its export system. However in a ‘no or low growth’ world, the appetite for exports has become less than robust. There are enormous pressures on German exporters to seek new markets. Now it becomes even clearer why the Eurozone/Germany needs to continue to devalue its currency. A cheaper Euro allows German suppliers to be the ‘low cost provider’ and to more easily penetrate new markets.
In contrast, the U.S. only exports 13.5% of its GDP, but is the producer of almost one-fourth of the world’s GDP. The U.S. has relatively high domestic consumption, and therefore relatively limited exposure to foreign dysfunctions.
It comes down to the exporting economies being extremely vulnerable to their existing customers during ‘no or low growth’ environments. Europe and Asia (due to their natural ‘exporting’ nature) are currently in chaos. So insulating ourselves from them economically via an interest rate hike was a good thing. Also the ‘export-based economies’ are beginning to experience lower-priced competition from East African countries and from some neglected parts of Asia. These countries are developing production capabilities in garments and cell phones, and are proving to be worthy competitors to the Europeans and Asians.
I worry that we are entering an era of European and Asian economic and social instability – where no amount of QE or currency devaluation can save their economies from real export competition and reduced consumption. History tells us that the only solution for a downturn in an export-based economy – is war. The only solace is: “The more violent the storm, the quicker it passes.”
- Existing home sales fell 10.5% in November – making it (arguably) the largest November drop ever.
- If you chart the S&P for the past 6 months, you will see is a series of lower highs attained on various bounces. After the August lows and then the September retest of those lows, we charged higher – running out of steam at 2109. Then we pulled back, and another push higher to 2102. Then we faded again, followed by another run-up to 2091. Then we plunged, only to be followed by a snap back rally to 2073. Each high number has come up slightly shy of the previous one: 2109 to 2102 to 2091 to 2073. That's not a tremendously bullish omen.
We just came through a powerful 3-day bounce, followed by a pause on Thursday. So what’s next? We are in the time slot for the ‘Santa Claus Rally’, and many are hopeful that the next 8 trading days will bring us back to the year's highs. It certainly could. After all, markets no longer require fundamentals to go higher.
We're coming into the last 4 trading days of the year, and two out of my three predictions have come true.
1. China was accepted into the IMF's SDR reserve currency basket.
2. The FED did NOT do any more QE, but did increase rates.
3. And, in May I said that the market had ‘topped’ and without any new stimulus or QE, we would not see new highs this year. So far so good.
To see new highs by yearend, the S&P needs another 70+ points and the DOW needs 760 points. And even for these banksters, 760 points in 4 sessions is a stretch.
For 2016, I’m hearing rumblings that Central Banks would like to do a ‘Helicopter Drop’. What’s a ‘Helicopter Drop’? The idea is that when all else fails to stimulate an economy, Central Banks will find ways to get cash directly into consumers pockets – bypassing the idea of ‘trickle down’. For example, what if you woke up Monday morning to a ‘Treasury Tax Rebate’ where $10,000 dollars had been wired into everyone’s bank account. Some might save it, but the U.S. (being a consumption society) would see most people busting down doors to get to the malls and car dealers as quickly as possible. Instantly ‘Business would be Boomin’, and for a short period of time the surge in the economy would be epic.
This is exactly what's being talked about as a serious suggestion for the Eurozone, and eventually the U.S. Remember, exporters need consumers to survive. But can you imagine the idiocy of such a decision? First of all, the money would be printed out of thin air, and therefore the value of that currency would be crashing. Secondly, all of that printed money would end up on some ledger as being more debt that could NEVER be repaid. And finally, think of the shortsighted nature of that decision. Just like the trillions in QE over the past 6 years has ‘drawn forward’ demand, and now that QE is dwindling – the demand is drying up along with it. The same thing would happen with a ‘Helicopter Drop’. Uncle Sam would give every citizen $10K to spend. Millions would rush out and buy every gadget they ever wanted. The gadget suppliers would ramp up production to meet demand. The suppliers of the raw materials to make the gadgets would be hiring, and everyone would be happy – until the last person spends his $10K.
Then instantly demand goes back to where it was BEFORE the $10K hit everyone's pockets. The effect would be over. All those extra miners, refiners, assemblers, trains etc. would sit idle (as they are now). Refresh my memory, but wasn’t this what QE was supposed to do – jump-start a slowing economy? I fail to comprehend the idea that doing MORE of something that FAILED is going to give us a better outcome. From my view (in the cheap seats), we would just fail BIGGER. But that's the very idea that Draghi is trying to get accepted by other Central Banks and our FED – over in the Eurozone.
It’s too early for my 2016 outlook; but you can bet that it is going to be a fairly ‘ugly’ read. Big changes are coming too quickly for economies to pro-act. For example, consider the job market. Just two years ago petro-engineers were in high demand – writing their own paychecks. The shale oil companies were competing against each other for their services. Now, many are laid off, and more will be hitting the unemployment lines as sub $40 oil will put a halt to many of those operations. With that in mind, please be careful out there. It's a very strange time in the markets, in politics, and in the world. Try and be safe.
I am looking at:
- Allergan (AGN) has a deal with Pfizer (PFE) that is heating up. AGN is potentially range bound to the upside – so we may be able to do a Diagonal or a Broken-Wing Butterfly.
- Restoration Hardware (RH) is setting up nicely to the upside for a January or February Diagonal or Broken-Wing Butterfly.
- Other names (like the above) that are setting up to the upside are: IBB, AAPL, CRM, COST, LMT and NKE.
- Boston Beer (SAM) for a JAN, 185 / 190 to 220 / 230 Iron Condor,
- Polaris (PII) for a JAN, 75 / 80 to 95 / 100 Iron Condor, and
- Cracker Barrel (CBRL) for a JAN, 115 / 120 Put Credit Spread.
- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
- Long an oil supplier: REN @ $0.56, and
- SPX – Jan – Iron Condor – 1945 / 1950 to 2125 / 2130.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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