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Why Trump Didn't Kick-Start the U.S. Economy

Why Trump Didn't Kick-Start the U.S. Economy - trump hat making

 

Wall Street is betting that Donald Trump can kick-start the U.S. economy. The story goes that tax cuts and infrastructure spending will unleash a boom of pent-up economic activity. But let's not give the President-elect too much undue credit. Before he even takes office on January 20th, Trump will inherit an accelerating U.S. economy. Consider the evidence.

The market already sniffed out An Accelerating U.S. Economy

 

Sure, since Election Day, investors have been betting on Trump by buying the Russell 2000. It's up 14.8% since then, as a pure play, domestic-oriented stock index. But the market started to front-run U.S. growth accelerating back mid-2016. 

 

Check out the sector performance from June 30th until just before Trump's victory in the chart below. Utilities (XLU), the classic outperformer when U.S. growth is slowing, was lagging while sectors tied to U.S. growth accelerating, like Industrials (XLI), Financials (XLF) and Materials (XLB), started to lead the pack. Note: This was a complete reversal of the trend in which Utilities led the sectors and Financials lagged.

 

Treasury bond yields, another important barometer of economic activity, also bottomed around this time. (Falling bond yields generally portend slower growth and conversely yields often rise during acceleration.) On July 6th, the 10-year Treasury yield hit 1.32% and have backed-up to 2.5% today.

 

Why Trump Didn't Kick-Start the U.S. Economy - S P 500 Sector Performance

U.S. Growth Expectations Were Confirmed by Economic Data

 

Data collected just prior to Trump's win, rubber stamped the market's prediction that the U.S. economy had bottomed.

 

  • Durable goods and Retail Sales data for the month of October began improving.
  • Then previously recessionary Industrial Production data started to look up.
  • U.S. GDP for the third quarter stopped slowing, after five quarters of deceleration from 3.3% year-over-year growth in March 2015 to 1.3% in June 2016, .

 

Now that U.S. growth is so clearly accelerating, the U.S. dollar is ripping to the upside. As you can see in the Chart of the Day below, in the fourth quarter alone, the dollar was up +8.5%.

 

(Note: When U.S. growth and inflation are accelerating, we call this Quad 2 in our proprietary GIP model [Growth, Inflation, Policy]. To learn more check out, "A Closer Look At How We Actually Model The U.S. Economy.")

 

Why Trump Didn't Kick-Start the U.S. Economy - 01.03.17 EL Chart

 

Now, to be fair, Trump can be credited with instilling a countrywide euphoria (i.e. Trumphoria) that has been spilling into recently reported November economic data. Time will tell whether it's justified but for the time being the data corrobates Wall Street's #TrumpTrade.

Bottom Line

 

To be sure, we're in for an interesting 2017 under President Trump. This morning's mainstream media freakout is over Trump's tweets related to the ongoing tit-for-tat trade battles with China, the nuclear armament of North Korea, a border tax on General Motors and the wholesale repeal of Obamacare.

 

But a lot can happen in between Trump's 140 character tweet storms and the signing of actual legislation. In terms of market implications, we'll have to wait and see how this all shakes out. (Hedgeye's Washington Policy research team offered up their Trump policy predictions in a recent HedgeyeTV special, "Our Top Five Trump Administration Investing Themes.")

 

For now, we remain bullish on U.S. stocks as the economy continues to accelerate, at least until Inauguration Day.


8 Videos: What's On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1. Dale: Strong Dollar = Strong America (12/30/2016)

 

 

Here’s an obvious statement: The U.S. is a consumer-driven economy. Duh, right?

 

So that’s why we’re scratching our heads over recent mainstream media headlines suggesting a rising dollar is going to handicap U.S. industries. It’s illogical. A strengthening dollar means Americans have more purchasing power (i.e. they can buy more goods).

 

2. A Deep Dive Into Our 4 Favorite Healthcare Shorts (12/30/2016)

 

 

The worst (let’s repeat… worst) sector in the S&P 500 this year has been Healthcare. It’s not even close. Here are some of our favorite Healthcare shorts via CEO Keith McCullough and Healthcare analyst Andrew Freedman. 

 

3. Sell This Cyclical Stock (12/29/2016)

 

 

Sell Wabtec (WAB)? Yes.

 

The $7 billion rail equipment manufacturer is not a growth stock. After a major investment cycle in rail equipment, over the last ten-plus years, the industry is slowing explains Hedgeye Industrials analyst Jay Van Sciver in the video above. 

 

4. Sell HCA: Here’s Why The Stock Has 30% Downside (12/29/2016)

 

8 Videos: What's On HedgeyeTV - Healthcare Sell HCA 12 28 16 TT

 

As an investor, what do you do with a company whose core business is slowing and has low quality assets? Simple. You sell it. That’s the gist of our Healthcare analyst Tom Tobin’s outlook for HCA Holdings (HCA).

 

5. Did Trump Change the Republican Party Forever? (12/28/2016)

 

 

Donald Trump’s Election Day victory will go down in history for many reasons.

 

“This is probably the most incredible election ever in that we’ve never had a time when someone lost the popular vote by so much, and won the presidency without going to a vote in the House of Representatives,” says historian, author and Hedgeye Demography Sector Head Neil Howe.

 

6. ‘A Great Deal of Illusory Risk’: Sell Broadcom | $AVGO (12/28/2016)

 

8 Videos: What's On HedgeyeTV - Technology AJ AVGO 12.15.2016

 

Broadcom (AVGO) is a Wall Street darling. That might not last much longer.

 

7. What The Media Missed: Strong Dollar Doesn’t ‘Threaten’ U.S. Economy (12/27/2016)

 

 

The U.S. Dollar just hit a 14-year high against the Euro. While the mainstream media thinks this is cause for alarm, the facts belie this convenient narrative. 

 

8. 3 Reasons to Sell Wabtec | $WAB (12/27/2016)

 

8 Videos: What's On HedgeyeTV - Industrials JVS WAB 12 9.16.2016 b

 

The $7 billion rail equipment manufacturer Wabtec (WAB) is fighting a cyclical downturn in its business. The company has tried to plug the gap with an acquisition that hasn’t lived up to the hype. Now, the Chinese politburo has set some very aggressive goals that will directly compete with Wabtec’s business.

 

Click here to subscribe for free to our YouTube channel.


Cartoon of the Day: Happy New Year!

Cartoon of the Day: Happy New Year! - New Years cartoon 12.30.2016

 

A happy New Year to you and your loved ones from all of us here at Hedgeye.

 

 

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Thank You

"When you rise in the morning, give thanks for the light, for your life, for your strength. Give thanks for your food and for the joy of living. If you see no reason to give thanks, the fault lies in yourself."

-Tecumseh

 

Dear Friends,

 

To say it has been interesting year would be an understatement. Whether it be the U.S. election, the E.U. referendum in the U.K., or various other global Marco surprises, it has been a tough year to manage and interpret. 

 

On some level, all we can really manage is what we and our teams do from day-to-day. In 2016, there were a lot of changes at Hedgeye and most of them involved adding more content to better serve you. 

 

Early in the year we added Potomac Research's policy team to our platform. Then we added Neil Howe, the demographics legend. And finally, into Q4, we added Ami Joseph, who will lead our technology research efforts. 

 

As the dust settles on 2016, we will have grown our revenue year-over-year by almost 40% and our head count has grown to nearly 80 people. It feels like a far cry from 9 years ago when a small group of us were in New Haven touting the idea of Wall Street 2.0. 

 

Regardless of how successful a year it has been for Hedgeye, we realize it is all due to our friends, partners and subscribers. We are lucky to say that in many instances a good portion of you fit into all three categories. 

 

So as the year winds down, we wanted to take a quick opportunity to thank you. We look forward to working with you in 2017 and beyond. 

 

Best regards,

 

Daryl G. Jones

Director of Research 

 

Thank You - 12 30 2016 9 29 21 AM


Dale: Strong Dollar = Strong America

 

 

Here’s an obvious statement: The U.S. is a consumer-driven economy. Duh, right?

 

So that’s why we’re scratching our heads over recent mainstream media headlines suggesting a rising dollar is going to handicap U.S. industries. It’s illogical. A strengthening dollar means Americans have more purchasing power (i.e. they can buy more goods).

 

Here are a few reports we’ve seen recently:

 

(Note: The U.S. Dollar hit a 14-year high against the euro recently and the U.S. Dollar index is up 7.5% quarter-to-date.)

 

All of this postulating misses the mark. Think about it. Exports account for just 9% to 10% of U.S. GDP. Sure, a stronger dollar hurts exporters because companies are forced to sell their goods to foreigners whose currencies are relatively weaker against the dollar.

 

But, conversely, U.S. consumers can buy more goods with their stronger currency. And since consumption makes up roughly 70% of GDP, explains Hedgeye Senior Macro analyst Darius Dale, when the dollar is strengthening American consumers get a boost and so too does the U.S. economy.

 

There’s more. “If you think about U.S. exports, 50% are capital goods. In other words, we export production,” Dale explains in the video above. Here’s what that means in using a real world example, according to Dale:

 

“So we send China the stuff they need to make iPhones and they send us back more iPhones that we can buy in the Apple store. Now, if we’re buying more iPhones in the Apple store, well guess what? We’ll probably need to ship more capital goods to China.”

 

BOTTOM LINE: Strong Dollar = Strong America.


Stronger Dollar = Emerging Market Carnage: A Brief History of Emerging Market Debt Crises

Stronger Dollar = Emerging Market Carnage: A Brief History of Emerging Market Debt Crises - em debt crises

 

The U.S. dollar just hit a 14-year high against the Euro. So, as the world's reserve currency, dollar strength will have implications for investments around the globe, particularly for emerging markets.

 

Here's what you need to know.

What the Media Missed

A stronger dollar has caused a mainstream media freakout that's been largely misdirected. The focus has been on the impact to the U.S. The story goes that corporate profits particularly in the manufacturing sector could take a hit and this weakness may spill over into the broader economy.

 

(**Note: In theory, a stronger curency does make purchasing U.S. exports less attractive to foreigners whose currency and buying power weakens versus the dollar. But U.S. exports aren't the primary driver of our economy, consumption is. We've outlined before, in more detail, why we think the media's attention is misguided, here and here.)

 

Establishment media is missing the more important implication of the dollar, Emerging Markets. In the fourth quarter-to-date, the U.S. dollar index is up almost +8%. Emerging Markets (EEM), meanwhile, have taken it on the chin, -5.9% over that same period.

 

The U.S. Dollar/Emerging Market relationship is fairly simple to understand. The problem is two-fold. Most Emerging Markets are commodity exporters. Since commodities are priced in dollars, prices typically take a hit when the dollar strengthens. Also, developing countries account for one-third of the $9.7 trillion dollar debt held outside the U.S. as of the end of 2015. As the dollar strengthens against these developing country currencies, it becomes harder to service that debt which is priced in dollars.

Here's a brief recap of Emerging Market crises

As you can see in the Chart of the Day below, a decade of Emerging Market crises are typically preceded by a decade of easy money from the U.S. federal government which seeks to perpetuate a weaker dollar for one reason or another.

 

The developing crisis typically follows these stages:

 

  1. Flooding the world with dollars sends cash-flush investors in search of opportunities abroad.
  2. Developing economies pig out on the money pouring in. 
  3. New debt is then issued but becomes increasingly difficult to pay back as the cycle turns and dollar heads higher.

 

Below is a timeline of the U.S. Dollar index with Analysis...

 

Stronger Dollar = Emerging Market Carnage: A Brief History of Emerging Market Debt Crises - StrongDollar vs.  WeakDollar Cycles EM Crises

Click image to enlarge.

1960 – 1979

The Federal Reserve and U.S. government tag team to weaken the U.S. Dollar through abandoning the Gold Standard and Fed easy money policies. Latin America goes on dollar-denominated debt binge.

1982 – 1989

  • Mexico Default (1982)
  • Latin American Debt Crisis (and IMF imposed austerity, 1982 – 1989)

1980 – 1989

The Plaza Accord (1985): The governments of France, Germany, U.S., U.K. and Japan agree to manipulate foreign exchange markets by depreciating the U.S. dollar relative to the Yen and Deutsche mark. The U.S.’s resulting easy money policies caused money to flow into emerging markets.

1990 – 1999

  • Mexico’s Tequila Crisis (1994)
  • Contagion in Argentina and Brazil (1994 – 1995)
  • Asian Financial Crisis (1997 – 1998)
  • Russian Default (1998)
  • Brazil Currency Crisis and devaluation (1999)
  • Turkish Financial Crisis (2001)
  • Argentina Debt Default (2001 – 2002)
  • Uruguay Banking Crisis (2002)

2000 – 2009

A secular growth slowdown and two recessions in the U.S. (Dot Com bust and the Great Recession) cause Presidents Bush and Obama and Fed chairmen Alan Greenspan and Ben Bernanke to implement a variety of fiscal and monetary easing policies. The U.S. Dollar hits all-time lows in April 2011.

 

Money flows into Emerging Markets once again, in search of higher growth and higher interest rates. At the same time, the invention of ETFs greatly reduces barriers to investing in Emerging Markets. Chinese demand for raw materials quintuples bolstering these commodity export-driven economies.

2010 – Present

  • India and Indonesia Currency Crises (2013)
  • China Mini Banking Crisis (2013)
  • Argentine Currency Crisis (2014)
  • Russian Currency Crisis (2014)
  • Turkey and Brazil Currency Crises (2015)
  • Mexican Currency Crisis (2016)

Why This Matters Today

The post-financial crisis trend of dollar weakness is clearly over. The dollar has been strengthening for the better part of three years now. The Federal Reserve is tightening monetary policy, which will cause further dollar strength. Simply put, expect further carnage in Emerging Markets as this trend sets off a deleveraging of the $9.7 trillion in dollar-denominated debt held outside the U.S. 


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