December 2016 Newsletter
Two newsletters this month. This is our best distillation of the forward look at the amazing transformational event of Trumpism
Next week a few SPECULATION trades to ride the Trump market wave. I can tell you from a ton of conversations with NY and London money managers: they are WAY behind their index bogies and the melt-up is not over. SO much money is so behind the Dow...when has that ever happened?
NBT Investor PRO Macro Market Index: OFF the Chart. New record 18.8...which is 3.2% GPP growth in looking forward to Q1 2017. As I will get to in a moment...sentiment about the U.S. economy and capitalism in general has made a significant transformation with Trumpism and Trumponomics.
Look at the real time Atlanta and NYC Fed GDP numbers...amazing.
Amazing in that their 3.55 number will be close to our 1Q number when they factor in BIG change in economic sentiment.
We have had a stock market melt-up as the world has come to conclusion that every dream investors have had (in the short term) has come true with Trumonomics. More important...every hedge fund $7 trillion of buying power) is lagging the overall stock market. They HAVE to outperform this year...or lose another $trillion in assets under management (AUM).
Here is our 72.5% performance vs.12%% S&P 500...no other way to say it..we earned our $97 a year subscription fee again eh?
S&P 500 Return 2016: 12.2%
Thanks to our whole team for almost 7X better performance! But I think we have a few more tricks up our sleeve.
Here is our analysis of Trumponomics..
Trumponomics Potential for 4% GDP is Already in Place
- Economic confidence/”animal spirits” are the keys to growing the US economy, and the potential for 4% GDP growth and >2% inflation under Trumponomics now seems feasible to me and lot of investors
- Labor force participation and productivity rates have collapsed making them ripe for recovery when real aggregate demand spikes.
- Growing aggregate hours worked with some improvement in overall productivity AND the multiplier effect of real fiscal spending (and not Fed based monetary stimulus) would take the economy to 4%.
I now believe 3.5-4% annualized GDP is very possible… and that a new version of “Goldilocks” economy emerges with the Trumponomics wrecking ball swinging into many status quo pillars that have restrained American GDP.
Confidence Is Key To Making This Happen
If the American consumer is confident enough about the prospects of the economy to go out and spend, then businesses will respond to that confidence and invest in capital and labor to meet the demand. In order to make those investments, a good deal of capital will have to come from the credit markets AND from repatriated Eurodollars by large global companies.
Key point: Animal spirits aka investor/consumer sentiment is CRUCIAL to the success of Trumponomics. If credit markets anticipate that demand for money will be high, then interest rates should rise and the dollar should rise too. This is happening now. I believe American confidence has got a shot in the arm from the economic hurricane I call El Trumpedo.
The only piece of the equation that needs to take hold is for more Americans to rejoin the workforce and for the labor force to work more hours in general. Domestic GDP is simply total hours worked/total goods and services delivered or produced and consumed in the US and not exported (including-agriculture goods).
Why this is telling is due to the reactions thus far in the credit markets with the rising inflation expectations and higher interest rates for credit.
Five year forward inflation
There has been a big jump in the expected rate of inflation over the next five years, especially since the election of Trump. Interest rates on the 10-year Treasury for example are now 2.43%, up from 1.83% on November 7th, a day before Trump was elected president.
So much of this I imagine is due to the expected monetary inflation that will come about from aggregate credit growth AND fiscal stimulus in a 4.6% unemployment rate economy. I'll explain below.
We're looking at about $64.827 trillion in total debt outstanding when you add consumer, government and business debt all together in the US as of Q2 2016. There are two sets of figures I use to help me determine the future rate of inflation. The first one is the percent change in aggregate credit growth adjusted for population growth.
The second figure is the CPI rate + the rate of change in output per hour or productivity. Historically, these figures match up pretty well. The only other factor that is worth noting is the currency. A strong dollar will help keep a lid on inflation where as a weak dollar will prove to be more inflationary.
Key point: 2% ish inflation with a LID built in from strong currency IS the real “Goldilocks” economy: i.e.pricing power for business but inflation limited by the rising dollar/lower import prices that come with it.
Higher rates of credit growth have historically led to higher rates of inflation. So, if we are to see higher rates of credit growth, then we can expect to see higher inflation rates too.
The productivity rate or output per hour rate offsets the monetary inflation impact. So if credit growth per capita is 4% and productivity was 0%, the inflation might be 4%. However, if productivity rose 2%, then inflation may only rise 2% vs. 4%.
Productivity has been a big drag on economic growth and will probably continue to be. Investments need to be made and training needs to happen in order to see the productivity benefits reached. These take time, so in the first year or two, productivity may remain subdued I'm estimating.
But we have a LOT of room to improve productivity and job creation.
- #1 BLS reports there are @355,000 jobs open for labor with “Advanced Manufacturing” skills. Today’s manufacturers depend on skilled technician to run/troubleshoot/fix their automated manufacturing lines. More certificated training in “Advanced Manufacturing” or AM skills will certainly help productivity in the right-to-work states that are offering AM training.
The golden triangle of Alabama is a great example of sponsoring AM skills training and certification that are tailored to the needs of the new AM plant owners and builders. The success of their AM Certification training is HIGHLY replicable in other areas of the country.
- #2 We continue to have 5.5 MILLION job openings in the United States. Most of those openings reflect a miss-match of labor skills to job skill requirements. The other reason is lower than needed compensation.
A 4% growing GDP creates real end user aggregate demand and that demand induces business to invest in modern production technology AND advanced training for existing and new labor.
Productivity is one of two factors where economic growth comes from. The other is aggregate hours worked. With services now 74% of the US economy, economic growth will come without much higher inflation because of lower overall economic productivity.
Growth From Aggregate Hours
Real GDP growth closely matches that of aggregate hours worked X output per hour. See the chart below:
Key Point: Since we can't expect to get much growth from the productivity part of the equation in the short term, the growth is going to have to come from aggregate hours worked.In essence, America needs to work more to grow its economy.
Where there is tremendous hope for the US economy is in its subdued labor force participation rate. This is especially true for American men.
We have 5.6 million job openings in America now…800,000 construction jobs continue to be unfilled…and 350,000 advanced manufacturing jobs unfilled.
Simple example? Consider an anecdotal example. A local bus company in Ithaca NY had to cut services last summer because it couldn't find enough drivers. The job paid $19 an hour to start with full benefits and training but it couldn't find drivers. Confidence is contagious…and FOMO or “fear of missing out” on the Trump boom would bring back millions of working class men currently out of the labor pool IMHO.
The math is conclusive: higher levels of consumer confidence and optimistic capital markets create the animal spirits and FOMO that gets more Americans working more hours. Ramping up our labor force participation rates to just historic norms easily swings the rate of economic growth to 3-4% annual GDP growth and economic expansion.
If president-elect Donald Trump can inspire Americans to sow more so that they can reap more, then we're off to the races.
The big loser in Trumponomic rise is animal spirits? Gold prices (NYSEARCA:GLD).
But really…after years of hibernation, will the U.S. economy rouse itself for a big comeback over the next couple of years just because of the excitement caused by the Trumponomics wrecking ball?
Well at least 60 million who voted for Trump are already more optimistic about their chances in the new Trumpian world order. And our economy already is already growing at a 3% annual clip. And even steadfast opponents of President-elect Donald Trump’s economic policies would have to admit they are staunchly pro-business (with the notable exception of trade).
The final piece of American 4% GDP is lower rates of Federal and State regulation. Under President Obama, labor regulation expanded significantly (almost exponentially actually) not to mention the dramatic increase in environmental legislation. And then there is the huge shadow that Obamacare casts on the health-care system, which alone accounts for 17% of the economy.
Businesses will be ecstatic over just a moratorium of new regulation… that alone for some is enough to start really investing again. The boost to confidence is already palpable.
Then there is the prospect of a massive “New Deal” like infrastructure stimulus, featuring a huge expansion of badly needed infrastructure spending. (Trump will presumably bulldoze GOP congressional opposition to higher deficits.)
Ever since the 2008 financial crisis, economists across the political spectrum have argued for taking advantage of ultra-low interest rates to finance productive infrastructure investment, even at the cost of higher debt. High-return projects pay for themselves.
Key Point: In Keynesian jargon, there is still a large multiplier on fiscal policy i.e., each dollar of fiscal stimulus/investment really DOES create 1.3-1.5 times a dollar of fiscal investment.
Final Point: The boost to business confidence is already palpable. With the wrecking ball of Trumponomics there will be unintended negative consequences without question. But add in real economic multiplier effects, 2-4 million working class males returning to the workforce, a New New Deal infrastructure work program and corporate pricing power and increased aggregate demand and 4% GDP IS DOABLE even with 10,000 Baby Boomers reaching age 65 everyday for the next 13 years.
Final Word: This May Very Well Be a Shit Show in the End...but Let's Bet on Positive Sentiment Simply Because the World Has Not Seen this Act for 70 Years.
This political environment is like nothing we have ever seen. BUT..it is very pro-business.
We will add some year end bets next week.
But at the end...Trumponomics is a bizarre Frankenstein kluge of the mind of a mad man. However...he just might unleash mad levels of animal spirits unlike anything we have ever seen.
We just may have the wealth building opportunity of our lives...so lets keep the peddle to the metal until it blows up eh?
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