Financial Adviser Outlines Uncertainties About the Direction of the Economy

Financial Adviser Outlines Uncertainties About the Direction of the Economy

David Kotok, the chairman and chief investment officer at Sarasota’s Cumberland Advisors, recently shared his insights into the global economy.

Excerpt below:

According to business leaders Kotok spoke to, many endorse the Trump administration’s policies on taxes and deregulation, but are concerned about the possibility of future trade wars.

Read the short blurb at Sarasota Magazine or read the recent commentary they link to here: www.cumber.com/western-trip-part-1/




Western Trip-Part 1

We’re back. During travels in four states (CO, ID, UT, WY) and participating in the Rocky Mountain Summit public conference, two private roundtables, client meetings, and prospect presentations, I encountered hundreds of business-people, econ and financial types, legal and accounting professionals, and others.

Cumberland Advisors - Takeaways

They mostly leaned Republican; most were Trump voters; and most were high-income and high-net-worth individuals.

My Takeaways:

1. They like tax cuts, repatriation, and deregulation.

2. They don’t like uncivil, personal-attack politics.

3. They don’t like attacks on constitutional freedoms like religion or assembly or press. They resent the use of the term fake news.

4. They nearly all fear trade wars and believe they are real. They didn’t, however, fear Trump’s blustering trade war rhetoric.  They worry Trump’s trade war is giving back all the benefits of item 1.

5. Peter Navarro is seen as a powerful influence who has Trump’s ear, and people fear he is sinking the president.

6. They watch Fox, Bloomberg, CNBC – few watch CNN. However, they trust neither Fox nor CNN, which are viewed as polar opposites, and many think neither of them are neutrally honest.

7. They use electronic devices and newsfeeds to glean information, but they increasingly realize how seriously social media and machine learning are manipulating and distorting their information flow. And they don’t like it.

8. They are family-oriented, communal, and charitable. This is Western territory – you help people who need help.

9. They love the outdoors, the environment – horses, fly rods, hiking. They fear global warming, and most believe climate change is the result of human behavior, not just natural weather cycles.

Now to some direct business notes:

1. Some businesses employ undocumented labor, because they have to. The average among privately owned businesses seemed to be about 20% of total hires in the hospitality, maintenance, and construction sectors. Many of these businesspeople will not bid federal jobs because they cannot comply.

2. They are watching cost increases accelerate. This is a theme I heard repeatedly.

3. Those who are subject to global supply chains are starting to see trade war effects.

4. Foreign investment is being delayed or deferred, both outgoing and incoming. I learned of two foreign owned manufacturing facilities in Idaho whose construction has been canceled because of the Trump-Navarro trade war.  Other American owned are repositioning abroad.

5. Many travel to China or have supply-chain business with China. They say Navarro doesn’t get it. Here is a link to a Peter Navarro interview with Maria Bartiromo on Fox. All of his forecasts are now proven wrong. http://video.foxbusiness.com/v/5743778657001/?#sp=show-clips

6. They fear Trump’s ignoring input from political leaders in his own party. Here is a Bloomberg report on Kevin Brady, chair of the House Ways and Means Committee. https://waysandmeans.house.gov/chairman-brady-calls-for-trump-xi-face-to-face-meeting-to-craft-fair-trade-deal-with-china/

My conclusions:

1. Economic growth peaked in the just finished second quarter and after trade war rhetoric became trade war actual. The next six quarters will see the growth rate decline.  Decline in growth was a dominant view.  Some see recession in less than two years.

2. Inflation risk is rising due to the trade war.

3. Failure to solve immigration, DACA, and the status of 12 million undocumented people working in the US is a political failure that is now translating into an economic cost with rising uncertainty premia.

4. The flatter yield curve suggests the bond vigilantes agree with the prospect of a slowing economy.

5. I agree with many economist colleagues that it is going to take a considerable shock to jolt America hard enough that we make a political policy change.

6. The political direction of the country is at a crossroads. The Pelosi–Schumer–Maxine Waters Democrats are not getting traction. The Republican hard right is scaring other Republicans who are seeking solutions, not confrontational combat.

7. I end my four-state Western trip with reinforced deep respect for the many local people I met who are caring and patriotic and are genuinely worried about the behavior of their president but who are not being given an acceptable alternative.

8. An emerging alternative is Mitt Romney, who will win the Senate seat in Utah and be his own national voice. He owes nothing to Trump. He is becoming a deficit hawk.

For investors, Bonds are telling three stories. The Treasuries curve is flattening, the muni curve less so. High-yield and junk spreads are too tight and have no room for error. We would counsel to Avoid junk credit: You are not getting paid for the risk it involves. Avoid long Treasury debt: You are not getting paid for term-structure risk. Use barbells, not ladders, in munis. The middle of the curve is very expensive.

Stocks: Watch out for FAANMG. Stay domestic and exercise caution on internationals. Favor banks, biotech, and staples. And remember, trade war risks are rising every day.

It is nice to be back in Sarasota.

David R. Kotok
Chairman & Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Trump Trade War, Soybeans, Danielle DiMartino Booth, Bill Poole

Former St. Louis Fed President Bill Poole who also was an economic adviser to Ronald Reagan has written about Trump-Trade policy and published this profoundly instructive commentary on July 2. He reveals the money conflict of interests that lurk behind some of the tariffs and he proposes a simple solution.  Here is the link: The New Tariff of Abominations?

The Trump-Navarro trade war is only just starting to bite, and the growing list of casualties spans Americans from businessmen, investors, bankers, and lenders of all types to beleaguered US farmers and workers in impacted industries. With Danielle DiMartino Booth’s permission, we are featuring her excellent analysis. She recently devoted a full research note to soybeans. If you are in Iowa or Illinois or other ag states, you are now seeing the start of the damage.

If you are in Maine or Massachusetts, you see it in lobsters. If you are an auto dealer or provide dealer software support, you see it nationwide. If you are building a pipeline and need certain steel, you see it. If you are a healthcare service provider, you see it. If you are administering a college or university, you see the drop in revenue as your student headcount declines. Add cheese and diary products.

The list of impacts grows daily. Trump-Navarro took punches at China and Canada and Europe and landed those punches on the US farmer and consumer. The fallout will get worse. We see GDP growth peaking right now. The next few quarters are likely to see sequentially slower growth. Fiscal pressures are likely to intensify in many states.

How quickly collateral damage mounts and what the resulting suffering will mean for the November midterm elections remain to be seen. Over 40 House Republicans are retiring. But those who observe markets also worry when they realize that Congresswoman Maxine Waters is the ranking Democrat on the House Financial Services Committee and wants to chair that committee if the House Democratic Caucus achieves a majority after the midterms.

Let’s get to Danielle and her brief on soybeans. Danielle has developed a national persona as a regular commentator on CNBC, Bloomberg, and Fox Business and is the publisher of Money Strong, an acclaimed weekly investing newsletter. Danielle is also CEO and Director of Intelligence at Quill Intelligence LLC, where she writes the Daily Feather, a daily briefing on the economy, market trends, inflection points, and transactions. This letter offers 5-minute daily briefings like those she used to prepare for Richard Fisher during the Great Recession, when Fisher served as President of the Dallas Fed and she as his advisor. The Daily Feather is incisive, substantive, and reasonably priced. It is a designed for investors, financial advisors, investment managers, CEOs, CFOs, corporate strategists, policy makers, academics, and indeed anyone who follows the global economy. You can learn more about it here: https://quillintelligence.com/welcome-cumberland-advisors/.

Here is Danielle DiMartino Booth on farmers and soybeans and trade war damage with who wins (Brazil and Argentina) and who loses (you, my dear reader, and me) in the recent Quill Intelligence Daily Feather, “Fireworks Over the Farm Belt”.

VIPs

• By the summer of 2012, top quality Iowa farmland that traded hands for about $4000 an acre in 2006 soared past $15,000 while farm income more than doubled from 2006 to 2013.

• In 2017, China took in 57% of US soybean exports. Early this year, the USDA estimated that within a decade, China would absorb 70% of US soybean exports.

• Accumulated exports of US soybeans to China for the marketing year have fallen 27 million metric tons, 20.5% less than this time last year.

• U.S. soybean prices have now fallen from about $10.50 per bushel in late May to $8.60 as of last Friday’s close.

• Call the U.S. farmer, and Illinois and Iowa in particular, collateral damage in what is now becoming a broader trade battle.

• Next, tariffs will begin to stifle U.S. economic growth as the price of affected goods begins to bite into household paychecks.

As if Illinois didn’t have enough fiscal fireworks to contend with this Independence Day, with market weakness further crippling the state’s pensions, budgeting in Lincoln’s home state will be crimped further by the 25% tariff on U.S. soybean exports to China, which becomes effective July 6th.

Illinois is the top-producing soybean state and exports about 60% of its crop. Half of that goes to China, which equates to $7.5 billion of the state’s economic output. Craig Ratajczyk, CEO of the Illinois Soybean Association, recently warned that smaller and rural communities would be hit the hardest and that the lower-tax-revenue “multiplier effect” would cut beyond lost industry into school and hospital funding.

Though its state’s finances aren’t nearly as fragile as those of Illinois, farmers in the second-biggest soybean-producing state, Iowa, would suffer a similarly damaging setback. Life across the farm belt is already volatile enough with the whims of Mother Nature. Though they are a boon to several South American mega-soybean exporters, tariffs are the last thing American farmers need.

While it’s always been feast or famine for the American farmer (pun intended), farming has been a particularly wild ride these past few decades. By the mid-1980s, the commodity bull market of the 1970s had faded to recession. Crop prices crashed, and farmers folded under the weight of too and $10 per bushel. Imagine the challenge of your main crop’s either doubling in price or halving with zero predictability.

The tables turned in 2006, a year that marked the advent of a glorious era in farming. Soybean prices recovered and by 2007 had broken free of a 30-year price range. A bonus: the price of farmland went haywire. By the summer of 2012, top quality Iowa farmland that traded hands for about $4000 an acre in 2006 soared past $15,000 amid wildly overheated auctions. As per the USDA, farm income more than doubled from 2006 to 2013.

It’s no chronological coincidence that China’s appetite for every natural resource on the planet, including food and grain exports, skyrocketed over the same period. This was especially the case for soybeans, a robust source of nutrition with which to feed a vast population that powered a historic industrial revolution. In 2017, China took in 57% of US soybean exports. Early this year, the USDA estimated that within a decade, China would absorb 70% of US soybean exports.

Did someone mention the vagaries of Mother Nature? As welcome as the Chinese demand no doubt is, it’s been anything but a smooth ride for American soybean farmers. First came the summer drought of 2012, which sent soybean prices to historic highs. The snapback was equally vicious. By 2016, prices had sunk to 50% of their peak levels. And that same prime acre of farmland in central Iowa now goes for about $9000. Farm income has been cut in half.

As for this week’s tariff imposition, it’s apparent China has seen no need to wait out the deadline. Last month, CNBC reported that, “China canceled 136,000 metric tons of U.S. soybean purchases in the week ended May 24…. That brings accumulated exports of US soybeans to China for the marketing year to 27 million metric tons, 20.5% less than this time last year.”

While beleaguered Brazil and Argentina count their blessings as China’s new “it girl” soybean exporters, U.S. soybean prices have fallen from about $10.50 per bushel in late May to $8.60 as of Friday’s close.

Call the U.S. farmer, and Illinois and Iowa in particular, collateral damage in what is now becoming a broader trade battle. If the result is a more level playing field on trade, we can optimistically conclude that American farming communities are taking one for the team. But good sportsmanship won’t pay the bills come harvest time this fall.

In the coming weeks, as second-quarter earnings roll out, we’ll likely hear countless lamentations about the implementation of tariffs on hundreds of products by not just China, but Canada, Mexico, the EU, and others. We hope this too shall pass, and soon.

In the meantime, the tariffs will begin to stifle U.S. economic growth as the price of affected goods begins to bite into household paychecks. You are correct to deduce that the stock market will not like any combination of these factors – lower earnings, slower economic growth, and rising inflation.

But just imagine how much worse it could be. You could be the state comptroller of Illinois where it “Ain’t That America” for residents of this textbook example of fiscal dysfunctionality. Given its broken pensions and reliance on Chinese soybean exports, the state will soon sustain not one, but two fiscal body blows.




USA walks back China tech investment restrictions

Excerpt from Along the Boards’ article, USA walks back China tech investment restriction:

Cumberland-Advisors-David-Kotok-In-The-News

The Commerce Department is still looking into enhanced export controls, which would stop United States firms from shipping certain technology to China.

“We have a confusing message coming from our government”, said David Kotok, chief investment officer of Cumberland Advisors, which manages $3 billion in assets. The list of restrictions and controls will be announced by June 30, 2018. “#China is strategically buying up USA companies specializing in cutting edge technology”.

Those reports triggered a sell-off in tech stocks.

Read the full article here: US walks back China tech investment restrictions


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Is The U.S. Headed For Recession?

Excerpt from NPR’s article, Is The U.S. Headed For Recession?:

Cumberland-Advisors-David-Kotok-In-The-News

Just about all economists agree there is one thing that could eventually drive the economy into recession: a trade war.

David Kotok, chief economist with Cumberland Advisors, says Trump is playing a dangerous game. “Who wants to play a game where everybody loses?” Kotok says.

Already Kotok says he’s lowered growth forecasts for the second half of the year. Beyond the angry trade rhetoric, he says, the White House lacks a coherent approach to trade policy.

“You don’t invite compromise when you scream at the other guy,” Kotok says. And, beyond that, he asks: “What’s the policy of the United States? Is it Navarro? Is it Mnuchin? Is it Wilbur Ross? Is it Larry Kudlow? Is it the president, who changes his mind back and forth every day? How do you proceed?”
Read the full article here: NPR: Is The U.S. Headed For Recession?




How Trump’s travel ban undermines a key US export: Higher education

Excerpt from Politico article, How Trump’s travel ban undermines a key US export: Higher education:

Cumberland-Advisors-David-Kotok-In-The-News

The loss of international students will hurt the bottom lines of colleges and universities. David Kotok, the chairman and chief investment officer of Cumberland Advisors, which manages $3 billion of fixed income and equity accounts, expressed his concerns around the decision.

“We are seeing the deterioration of a great American export. The U.S. is squandering a competitive advantage. And the buyer comes here to make the purchase and pays cash. We don’t have to ship a higher education anywhere. And school by school by school, we see a shrinking population of foreign students applying and coming to the U.S.,” Kotok told Yahoo Finance.

 

Continue reading David’s comments here: Yahoo Finance




Trump can’t figure out what he wants from China

Excerpt from Washington Post article, Trump can’t figure out what he wants from China:

Cumberland-Advisors-David-Kotok-In-The-News

Some business executives — pleasantly surprised by the president’s change of course — and administration officials said they feared that criticism of Trump for going soft on China could cause the president to swing back toward the hard-line camp at any moment.

“We have a confusing message coming from our government,” said David Kotok, chief investment officer of Cumberland Advisors, which manages $3 billion in assets. “If policy evolves in a week, and it’s based on what somebody sees on Fox News, then you’ve got a problem.”

Fears of a trade war are starting to affect financial markets, especially shares of the largest corporations that are exposed to global trends, he said. The Dow Jones industrial average, which fell more than 165 points Wednesday, is down more than 9 percent from its January peak.
 

Read the full article at Washington Post




The dangers of Trump’s immigration crackdown

Excerpt from Politico article, The Dangers of Trump’s Immigration Crackdown:

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VIEW FROM WALL STREETCumberland Advisors’ David Kotok emails: “The Trump-Navarro confusion worsens daily. Harley is just the tip of iceberg as we shall start to see sequential notices and announcements. Navarro should know he has disturbed cap-ex plans and created a deferral of decision environment.

“We already see it in early discussions with clients and consultants. No intelligent business person would advance a project in the midst of the risk raising rhetoric. Prudence says wait, defer, delay. The benefits of tax bill and repatriation and deregulation are being replaced or muted with higher uncertainty premia and more cost. Navarro has already induced a slowing of growth in H2. If the Trump-Navarro drumbeat continues, they are inviting global growth slowdown and maybe even recession. American policy has become chaotic and unpredictable. A real and shameful disservice to our nation.”

 

Read the full article at Politico.com




Dow dives as trade war angst boosts investor anxiety over growth, earnings

Confusion over the administration’s China trade policy related to technology caused a sell-off that pushed the Dow Jones industrial average down nearly 500 points before it recovered and finished down 328 points, or 1.3 percent, at 24,253.

Cumberland-Advisors-David-Kotok-In-The-News

Wall Street fears that economic growth is slowing around the globe as a result of the trade friction. Investors are bracing for lower GDP numbers when second-quarter growth numbers are reported by Europe, China, Japan and other countries.

“A trade war slows growth, raises prices and lowers productivity,” says David Kotok, chief investment officer at Cumberland Advisors, a money-management firm in Sarasota, Florida. “Markets are worried about a worldwide growth slowdown because of a trade war.”

Read the full article at USA Today.


NOTE: Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.




Dollar May Have Not Peaked Yet, Cumberland Advisors CIO Says

Watch at Bloomberg.com: https://www.bloomberg.com/news/videos/2018-06-24/dollar-may-have-not-peaked-yet-cumberland-advisors-cio-says-video

See a related video here: Turkey to Face More Volatility, Cumberland Advisors CIO Says


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.