George W. Bush and His Two Black Swans
I just listened to George W. Bush being interviewed by AT&T CEO and Chairman, Randall Stephenson, and it was an interesting experience.
For example, I’ve heard Bill Clinton speaking and Mikhail Gorbachev (twice), but this event was clearly far more security conscious than those. I mean we’re at an event with lots of corporate bozos who have been handpicked as AT&T customers to fly from around the world and join the conference. So, I was surprised when I saw the signs going up in the morning that, for those who come to George’s speech, there would be no filming, no electronic devices allowed and even no note-taking.
Equally, the area was cordoned off beforehand, with secret service people everywhere. It amused me at this point to think they were secret service, when they were so darned easy to spot. Then we all had to be in our seats 15 minutes before the former Commander in Chief took the stage, and announcements regularly to turn off all communication devices. I was tempted to try to get a snap, but the guy with the earpiece breathing down my neck made me think twice. Hence, this blog is from memory and has no photographic evidence of me being there apart from this shot from the agenda …
… and this shot of the crowd a few minutes before Mr. Bush walked on stage.
There you go. Luckily, there was not a sign saying, ‘no listening and no memorising’ so here’s my take on what he had to say.
First and foremost, he is Presidential. I find it surprising that I say that, as for the eight years he was in office I, along with most of the world, was lamenting the loss of the hugely diplomatic and globally liked womaniser Bill Clinton. Following in his big footsteps would have been hard for anyone, but George W. sneaked in to the Oval Office at the expense of Al Gore, and managed two terms as president. This was because, back in the 2000s, George W’s presidency was pretty much defined by two big moments: 9/11 and the financial crisis. Not great moments in history. There was Hurricane Katrina and other big events, but those two doozies take the prize.
So, there was a lot discussion about Saddam Hussein, Iraq, the War on Terror and those big decisions. Those decisions were easier to make on Capitol Hill when the decision makers saw $1.4 trillion of wealth wiped out in five days however. In fact, it was noted that Bush’s presidency saw more bipartisan acts pass through Washington than ever before. George said that it was because they had to find a way for democrats and republicans to work together, and singled out Ted Kennedy as a particular contact. He said that they just found areas they had in common, and then worked out how to deal with the areas they disagreed. It took a lot of personal diplomacy, but they got there. In fact, it may surprise some, but George Bush senior and George W. are good friends with the Clintons, and I guess that this is the power structure that Donald Trump wants to break.
Talking of the Middle East, he is optimistic for the future and believes that women will make the difference to achieve peace. You cannot ignore half the population of a country, and women are getting emancipation more and more. As they do, they will tell their fathers, sons and husbands that peace is the answer, is George’s hope. He also talked about writing the book about his father, 41 (George senior is the 41st President and George W. the 43rd). He noted that his father, along with 1000s of Americans, fought the Japanese in World War II as the enemy and yet, one of the first calls he received on September 12, 2001, was from the Japanese President saying that Japan stands side-by-side with its ally, the USA. Enemies can become allies, and vice versa.
George didn’t make any specific comments on Donald Trump, but did make some statements that give away how he feels. He feels that the Office of the President is more important than the occupant of that office; that President’s should be recognised by their record, and not spend time being rude about or to others; that the Office should have a dignified presence, which is why George W. would never have used Twitter to communicate; and more. Each time such comments were made, a big round of applause from the appreciative audience.
He is also very humorous and has humility. For example, he has written three books and made the comment that this might surprise some people, as they didn’t think he could read. In another anecdote, he was due to play a round of golf with the press corps one day, when a big explosion had happened in Baghdad, killing many US soldiers. He didn’t play golf. It was not right. He did state that the press corps are critical to a Presidency as a follow-on, another note for Trump. He believes there needs to be a strong press corps to air policy with, as how can a President tell another world leader they disapprove of their actions if a 1,000 fake news sites can hide that message.
I didn’t realise that he now runs a veterans programme for US soldiers, and he said that this was to deal specifically with Post Traumatic Syndrome (PST). He pointed out that it’s not PSTD, as a Disorder implies you’re ill and you’re the problem. It’s a disease that can be cured, not a stigma you have to hide.
I guess that this was part of the reason why AT&T got George to be there, as they have a stated objective of hiring 10,000 veterans by 2020, having hired 10,000 already over the past three years.
Related: How American Is the US Dollar?
It was the discussion of the global financial crisis I was most keen to hear about.
As George W. stated several times, he likes to surround himself with smart people and Hank Paulson and Ben Bernanke were the two smartest guys around on September 15, 2008, when Lehman Brothers collapsed. Hank told him that he needed to bail the banks out, but George W. wasn’t sure. He wanted to let them go. Let them fail. Bernanke then said: “you let them fail, and we have another Great Depression”. Remember, this was the guy who wrote his post-graduate degree thesis on the Great Depression. That was the convincer and led George W. to approve the Troubled Asset Relief Program (TARP) where all the big American banks got a shot of billions of dollars of support – $450 billion to be exact – just when it was needed.
Bernanke was right. Looking back, the US economy recovered far faster from the crisis than Europe, specifically because of TARP. The trouble is that taking citizen’s taxes and giving them to the banks that citizens owe their mortgages and debts to, is not popular. As one counsel told him, “you’ve just been pulled into the swamp of Wall Street”.
The real issue is that it led to millennials challenging the whole idea of democratic capitalism. That’s what worried Bush the most, that kids would reject the whole system that makes America great. When they challenge that view, he tells them to go look at Venezuela or Zimbabwe and see if they prefer state-controlled capitalism. That got a big applause too.
So, there you go. I did no note-taking or recording during the speech, and this is all from memory. My walkaway is that Bush had a tough act to follow. Clinton was amazingly charismatic, and Bush was not. He appeared to be some dumb, Southern Republican, who got into office and didn’t know what to do. That’s how the Oliver Stone movie W. portrayed, and it’s what many might believe. But Bush in hindsight is actually a very funny, engaging speaker, who some would say achieved a lot during a very difficult Presidency that suffered two big black swans.
You can make your own mind up, and it might do you no harm to read his books, so that you can form an informed opinion.
All the Talk of an Accelerating Economy and Rising Inflation Just Doesn't Add Up
The biggest news for the markets this week came from the Federal Reserve. On Wednesday, it released the January Federal Open Market Committee meeting notes and they were interpreted as dovish by some and hawkish by others as analysts raced to divine insight from the text.
The recent data isn’t supporting the narrative of accelerating global growth and inflation while equities continue to experience higher volatility. What does it mean for stocks, bonds and yields? Glad you asked! Here’s my take on why all the talk on an accelerating economy and rising inflation just doesn't add up when you look at the data.
Equity Markets — A Relatively Narrow Recovery
The shortened trading week opened Tuesday with every sector except technology closing in the red. The S&P 500 fell back below its 50-day moving average after Walmart (WMT) reported disappointing results, falling over 10% on the day, having its worst trading day in over 30 years.
Walmart’s online sales grew 23% in the fourth quarter, but had grown 29% in the same quarter a year prior and were up 50% in the third quarter. We saw further evidence of the deflationary power of our Connected Society investing theme as the company reported the lowest operating margin in its history.
Ongoing investment to combat Amazon (AMZN) and rising freight costs — a subject our premium research subscribers have heard a lot of about lately — were the primary culprits behind Walmart's declining numbers. To really rub salt in that wound, Amazon shares hit a new record high the same day. This pushed the outperformance of the FAANG stocks versus the S&P 500 even higher.
Wednesday was much of the same, with most every sector again closing in the red, driven mostly by interpretations of the Federal Reserve’s release of the January Federal Open Market Committee meeting notes. In fact, twenty-five minutes after the release of those notes, the Dow was up 303 points . . . and then proceeded to fall 470 points to close the day down 167 points. To put that swing in context, so far in 2018, the Dow has experienced that kind of a range seven times but not once in 2017.
Thursday was a mixed bag. Most sectors were flat to slightly up as the S&P 500 closed up just +0.1%, while both the Russell 2000 and the Nasdaq Composite lost -0.1%. The energy sector was the strongest performer, gaining 1.3% while financials took a hit, falling 0.7%.
The recovery from the lows this year has been relatively narrow. As of Thursday’s close, the S&P 500 is still below its 50-day moving average, up 1.1% year-to-date with the median S&P 500 sector down -1.0%. Amazon, Microsoft and Netflix alone are responsible for nearly half of the year’s gain in the S&P 500. The Russell 2000 is down -0.4% year-to-date and also below its 50-day moving average. The Dow is up 78 points year-to-date, but without Boeing (BA), would be down 317 points as two-thirds of Dow stocks are in the red for the year.
Fixed Income and Inflation — the Coming Debt Headwind
The 1-year Treasury yield hit 2.0%, the highest since 2008 while the 5-year Treasury yield has risen to the highest rate since 2010, these are material moves!
What hasn’t been terribly material so far is the Fed’s tapering program. It isn’t exactly a fire sale with the assets of the Federal Reserve down all off 0.99% since September 27 when Quantitative Tightening began, which translates into an annualized pace of 2.4%.
As for inflationary pressures, U.S. Import prices increased 3.6% year-over-year versus expectations for 3.0%, mostly reflecting the continued weakness in the greenback. The Amex Dollar Index (DXY) has been below both its 50-day and 200-day moving averages for all of 2018. The increase in import prices excluding fuel was the largest since 2012 and also beat expectations. Import prices for autos, auto parts and capital goods have accelerated but consumer good ex-autos once again moved into negative territory.
Outside the U.S. we see little evidence that inflation is accelerating. Korea’s PPI fell further to 1.2% - no evidence of rising inflation there. In China the Producer Price Index fell to a 1-year low – yet another sign that we don’t have rising global inflation. On Friday the European Central Bank’s measure of Eurozone inflation for January came in at 1.3% overall and has been fairly steadily declining since reaching a peak of 1.9% last April. This morning we saw that Japan’s Consumer Price Index rose for the 13th consecutive month in January, rising 0.9% from year-ago levels. Excluding fresh food and energy, the increase was just 0.4% - again, not exactly a hair-on-fire pace.
The reality is that the U.S. economy is today the most leveraged it has been in modern history with a total debt load of around $47 trillion. On average, roughly 20% of this debt rolls over annually. Using a quick back-of-the-envelope estimate, the new blended average rate for the debt that is rolling over this year will likely be 0.5% higher. That translates to approximately $250 billion in higher debt service costs this year. Talk about a headwind to both growth and inflationary pressures. The more the economy picks up steam and pushes interest rates up, the greater the headwind with such a large debt load… something consumers are no doubt familiar with and are poised to experience yet again in the coming quarters.
The Twists and Turns of Cryptocurrencies
The wild west drama of the cryptocurrency world continued this week as the South Korean official who led the government’s regulatory clampdown on cryptocurrencies was found dead Sunday, presumably having suffered a fatal heart attack, but the police have opened an investigation into the cause of his death.
Tuesday, according to Yonhap News, the nation’s financial regulator said the government will support “normal transactions” of cryptocurrencies, three weeks after banning digital currency trades through anonymous bank accounts. Yonhap also reported that the South Korean government will “encourage” banks to work with the cryptocurrency exchanges. Go figure. Bitcoin has nearly doubled off its recent lows.
Tuesday the crisis-ridden nation of Venezuela launched an oil-backed cryptocurrency, the “petro,” in hopes that it will help circumvent financials sanctions imposed by the U.S. and help improve the nation’s failing economy. This was the first cryptocurrency officially launched by a government. President Nicolás Maduro hosted a televised launch in the presidential palace which had been dressed up with texts moving on screens and party-like music stating, “The game took off successfully.” The government plans to sell 82.4 million petros to the public. This will be an interesting one to watch.
Economy — Maintaining Context & Perspective is Key
Housing joined the ranks of U.S. economic indicators disappointing to the downside in January with the decline in existing home sales. Turnover fell 3.2%, the second consecutive decline, and is now at the lowest annual rate since last September. Sales were 4.8% below year-ago levels while the median sales price fell 2.4%, also the second consecutive decline and this marks the 6th decline in the past 7 months. U.S. mortgage applications for purchase are near a 52-week low.
Again, that’s the latest data, but as we like to say here at Tematica, context and perspective are key. Looking back over the past month, around 60% of the U.S. economic data releases have come in below expectations and this has prompted the Citigroup Economic Surprise Index (CESI) to test a 4-month low. Sorry to break it to you folks, but the prevailing narrative of an accelerating economy just isn’t supported by the hard data. No wonder that even the ever-optimistic Atlanta Fed has slashed its GDPNow forecast for the current quarter down to 3.2% from 5.4% on Feb. 1. We suspect further downward revisions are likely.
Looking up north, it wasn’t just the U.S. consumer who stepped back from buying with disappointing retail sales as Canadian retail sales missed badly, falling 0.8% versus expectations for a 0.1% decline. Over in the land of bronze, silver and gold dreams, South Korean exports declined 3.9% year-over-year.
Wednesday’s flash PMI’s were all pretty much a miss to the downside. Eurozone Manufacturing PMI for February declined more than was expected to 58.5 from 59.6 in January versus expectations for 59.2. Same goes for Services which dropped to 56.7 from 58 versus expectations for 57.7. France and Germany also saw both their manufacturing and services PMIs decline more than expected in February. The U.K. saw its unemployment rate rise unexpectedly to 4.4% from 4.3%
The Bottom Line
Economic acceleration and rising inflation aren’t showing up to the degree that was expected, and this was a market priced for perfection. The Federal Reserve is giving indications that it will not be providing the same kind of downside protection that asset prices have enjoyed since the crisis, pushing markets to reprice risk and question the priced-to-perfection stocks.
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