“Wise men speak because they have something to say; Fools because they have to say something.”
-Plato
Reductio ad absurdum is a form of argument which attempts either to disprove a statement by showing it inevitably leads to an absurd or ridiculous conclusion, or to prove it by showing that if it were not true the result would be absurd. It means, literally, the argument to absurdity.
While the argument was primarily used in philosophy, it has also been used with success in mathematics. Euclid, the father of modern geometry, had a particular passion for this form of argument. The system of mathematical proofs that Euclid established, Elements, remains the basis of modern mathematics to this day.
The beauty of mathematics is that it is definite (for the most part). When a solution to a problem is found, that problem is solved and it is largely proven without doubt. The other beauty of mathematics, of course, is that there are many problems that remain unsolved, so challenges persist.
One of the longest standing problems in mathematics is the Riemann hypothesis. It was proposed by Bernhard Riemann in 1859 and “is a conjecture that Riemann zeta function has its zeros only at the negative even integers and complex part 1/2.” If that sounds complex, it should. This problem has remained unsolved for close to two centuries and remains one of the Clay Mathematics Institute’s Millennium Prize Problems.
The Millennium Prize Problems are seven problems in mathematics proposed by the Clay Mathematics Institute in 2000. A correct solution to any of the problems results in a cool $1 million prize being awarded to the discoverer(s). To date, only one, the Poincare conjecture, has been solved.
The moral of the story is that if any of you stock market operators want to take a few days or weeks off to be reminded that there are problems more challenging in life than outperforming the stock market, take a crack at the Millennium Prize. It’s not quite as lucrative as 2 and 20, but still a million bucks ain’t bad!
Back to the Global Macro Grind…
In economics, one of the perceived mysteries is the wealth effect and whether it is real or not. Recently deceased economist David Backus argued that the wealth effect is not observable in economic data in regards to the increase or decrease in home or stock equity. Economist Dean Baker, on the other hand, claims that the wealth effect is all but fact. He goes on to cite work by Carrol and Zhou that estimates households increase their consumption by 6 cents for every additional dollar of home equity.
Certainly, economics is more difficult than math in terms of establishing a proof. Economies, and the U.S. economy in particular, are extremely complex systems that change over time, so establishing a proof is inherently difficult. That said, we can probably all agree that rising home prices, rising stock prices, and rising disposable income are likely supportive of accelerating consumption and GDP.
In the Chart of the Day, we’ve highlighted a chart that supports our Q3 theme, “USA, USA! #QUAD1”. The chart is aptly titled, “the wealth effect remains supportive”. It highlights accelerating U.S. household wealth as a % of disposable personal income versus the U.S. household savings rate.
The key takeaway is that on an economy-wide basis, the “wealth effect” is poised to break out above its Q1 2015 peak. The implication of this is that the savings rate has room to decline 200 – 300 basis points and buoy consumption growth into the end of the cycle. Since personal consumption is roughly 70% of GDP in the U.S., this is probably a good thing for those of us who remain growth bulls.
The next phase of consumer confidence and growth, and therefore stock market returns, is increasingly likely to be impacted by policy. This morning there is news that the “Big Six”, Mnuchin, Cohn, McConnell, Hatch, Ryan and Brady, are actively engaged to overcome internal divisions to push through tax reform. While engagement is positive, a lack of progress and process is much less so.
Delayed implementation (i.e. the government not doing anything) may benefit in the short run. In the longer run and looking past the likely Q1 2018 peak in GDP growth, some form of fiscal stimulus will likely be needed to maintain economic and stock market momentum.
While we do have some and the economic data domestically continues to support our #QUAD1 (higher growth, lower inflation) thesis in the U.S., eventually the buck will pass to the policy makers, so hopefully they are making progress while breaking bread at Café Milano in Georgetown.
As it relates to #QUAD1, oil is another supporting data point this morning. WTI is down another 1% this morning and off more than 22% in the YTD and 19% Y-O-Y. The combination of another failed OPEC attempt at jawboning oil down (Kuwait’s oil minister is making headlines that Nigeria and Libya have been asked to join OPEC discussions) and U.S production up more than 11% from a year ago seem to support the idea of oil staying “lower for longer”.
To the extent political ineptitude shields us in the short run, we continue to feel good about the #QUAD1 thesis for the U.S. economy. But we never know what the policy makers / destructors will do next and whether we should believe them when they do. For as former Eurogroup leader Jean-Claude Juncker said in 2011:
“When it becomes serious, you have to lie.”
Indeed.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.12-2.42% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6059-6256 (bullish)
XOP 30.07-32.55 (bearish)
RMZ 1127-1157 (bearish)
Nikkei 195 (bullish)
DAX 121 (bullish)
VIX 9.60-12.55 (bearish)
USD 95.20-97.01 (neutral)
EUR/USD 1.12-1.15 (bearish)
YEN 111.72-114.31 (bearish)
GBP/USD 1.27-1.30 (bullish)
Oil (WTI) 41.97-47.08 (bearish)
Nat Gas 2.77-3.00 (bearish)
Gold 1 (neutral)
Copper 2.60-2.72 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
