Sunday, August 13, 2017

As U.S. and North Korea Tensions Continue

  • Last week, comments and tweets from U.S. President Donald Trump included, "North Korea best not make any more threats to the United States …
  • "They will be met with fire and fury like the world has never seen. He has been very threatening ... and as I said they will be met with fire, fury and frankly power, the likes of which this world has never seen before.
  • "Military solutions are now fully in place, locked and loaded, should North Korea act unwisely. Hopefully Kim Jong Un will find another path!
  • “There were no mixed messages,The people of our country are safe. Our allies are safe. And I will tell you this, North Korea better get their act together or they’re going to be in trouble like few nations ever have been in trouble in this world.”

  • A statement from the Government of North Korea said, “The KPA Strategic Force is now carefully examining the operational plan for making an enveloping fire at the areas around Guam with medium-to-long-range strategic ballistic rocket Hwasong-12 in order to contain the U.S. major military bases on Guam including the Anderson Air Force Base”  
  • Geng Shuang, Foreign Ministry spokesman for the People’s Republic of China said “The current situation on the Korean Peninsula is complicated and sensitive … 
  • China hopes that all relevant parties will be cautious in their words and actions, and do things that help to alleviate tensions and enhance mutual trust, rather than walk on the old pathway of taking turns in shows of strength, and upgrading the tensions.”
  • German Chancellor Angela Merkel said, "I believe that, am firmly convinced that an escalation of rhetoric will not contribute to a solution of this conflict,
  • "I do not see a military solution to this conflict, rather I see continuous work, like we have seen in the U.N. Security Council with members with resolutions in view of North Korea, and above all very close cooperation with affected countries, especially the United States and China, but also South Korea, of course Japan ...
  • "Germany will be intensively involved with potential solutions that we see, not of a military manner. But the escalation of rhetoric I hold as the wrong answer,"
  • Guam's Homeland Security Department released the two page handout “In Case of Emergency — Preparing for Imminent Missile Threat” with recommendations including 
  • Do not look at the flash or fireball — It can blind you …  
  • "Lie flat on the ground and cover your head. If the explosion is some distance away, it could take 30 seconds or more for the blast wave to hit … 
  • "If practical, place your contaminated clothing in a plastic bag and seal or tie the bag. Place the bag as far away as possible from humans and animals so that the radiation it gives off does not affect others.”
  • Notes: Guam is a U.S. territory with a population of about 162,000 people and is theoretically within range of a North Korean Hwasong-12 rocket.

MY TAKE
  • It seems in everyone's interest to reduce the heated rhetoric and pursue diplomatic channels.  
  • Over the years, Trump has made several comments about nuclear weapons, but his comments this week seem like a rookie presidential mistake which may diminish his effectiveness in engaging with North Korea in the future. Note: U,S. President Obama made a similar (drawing a red-line) mistake while addressing conflicts in Syria.
  • It is likely that Trump's "saber rattling" with North Korea, and comments such as "We have many options for Venezuela, including a possible military option, if necessary," are provided as a distraction from U.S. domestic issues and investigations.

Sunday, August 6, 2017

Investment Views: The Good, the Bad, the Impossible

  • Last week, Alan Greenspan, former Chairman of the U.S. Federal Reserve chairman said, “By any measure, real long-term interest rates are much too low and therefore unsustainable… 
  • "When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace … 
  • "The real problem is that when the bond-market bubble collapses, long-term interest rates will rise … 
  • "We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s. That is not good for asset prices."
  • Separately, Nouriel Roubini, a professor at NYU’s Stern School of Business and a Senior Economist at the White House during the Clinton Administration said, “the main puzzle is the disconnect between the performance of financial markets and the real [economy] ... 
  • "While stock markets continue to reach new highs, the US economy grew at an average rate of just 2% in the first half of 2017 – slower growth than under President Barack Obama – and is not expected to perform much better for the rest of the year ... 
  • "It is little wonder that actual and potential growth is stuck at around 2%. Yes, inflation is low, and corporate profits and stock markets are soaring. But the gap between Wall Street and Main Street is widening. 
  • "High market valuations that are fueled by liquidity and irrational exuberance do not reflect fundamental economic realitiesAn eventual market correction is inevitable. The only question is whom Trump will blame when it happens.”
  • Finally, Jim Paulsen, a Leuthold Chief Investment Strategist (formerly with Wells Capital) said the stock market "has an awful good gig going …
  • "We've got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We've got strong confidence among business and consumers … 
  • "The kick is we can do all of this without aggravating inflation and interest rates, If that's going to continue, I think the bull market could continue to forever … 
  • "Ultimately the bull market does continue until we aggravate some inflation, and until we have to raise bond yields and interest rates some more … 
  • "I think that's going to happen eventually, but it doesn't look like it's going to happen anytime soon. So I think the bull probably continues through the end of this year."

MY TAKE:
  • Regarding Greenspan’s comments -  Given that equity markets may have benefited from a multi-decade trend of declining interest rates, it is unclear that a rapid rise in interest rates could also be good for stock markets.
  • Regarding Roubini's comments – His concern that the stock market does not “reflect fundamental economic realities” is somewhat valid  but factors driving stocks include liquidity (which he says there is too much of) but also increasing corporate profits (which come from revenue growth, cost cutting, financial engineering and tax cuts).  However,  depressed wage growth can contribute to corporate profits while also widening the gap between Wall Street and Main Street.
  • Regarding Paulsen’s comments -  he is generally bullish on the U.S. equity market, but his comment that “the bull probably continues through the end of this year” seems more appropriate (but perhaps too bullish) than his enthusiastic comment that “the bull market could continue to forever.