Trade

Drinking the UnKool-Aid

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It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

Hard Brexit in a Tweet

Sometimes perspective on a No Deal Brexit is this simple. Nary a Leave voter wanted to have any political ties or rules set in Brussels. That’s kind of what “Leave the EU” on a ballot means. There were no other interpretations.

Despite PM May’s warning that changing Conservative leaders would “put our country’s future at risk and create uncertainty when we can least afford it given the deal she has managed to achieve many Brits would welcome it all the same. CM has been a huge seller of May since she called an early election.

Time to put a leader in charge that will throw it back at Brussels. No Deal for the EU is a disastrous outcome for the continent. It is the deal they least want because it would reveal how impotent Juncker and Tusk are. Time to find a spine and tell the hostage takers their ransom demands won’t be met.

Brexit – Jonathan Pie does it again

Whether you’re a Remainer or Leaver, Jonathan Pie explains in his trademark profanity-laced way why the Brexit deal of UK PM Theresa May is such a dud. What is the point of having a referendum which garners the highest ever voter turn out only to throw it back in the faces of both sides? In what world would a collective constituency want their parliamentarians to vote for a deal that makes everyone worse off? Why did May fold to every EU demand? She should have channeled the leader across the pond as to how to negotiate with Brussels.

Last week the Bank of England (BoE) ditched its independence charter to aid-and-abet the PM by producing a document stating a “No Deal” Brexit would hit UK economic growth by 8%.  What a joke. Would the EU seriously try to stitch up the economy of the second largest car market for German auto makers? It is preposterous in the extreme. Obama threatened in 2016 that the 5th largest economy would be at the back the queue when it came to trade deals. Trump would happily move it to the front. Canada and Australia too…can the BoE honestly come up with credible reasons why the ROW would spurn the UK in unison to get to an 8% slump?

Why only now has the BoE discovered this potential economic apocalypse? After all, the scare stories leading into the referendum about how the UK would plunge into the abyss should “Leave” succeed have simply not manifested. None of it. Why believe it now when its forecasts have been so off reservation? After all it did not advise the HM Treasury not to dump all of its gold at the very bottom.

Yet the Brits aren’t so stupid to see the deal being offered is the only one going. They have heard Minister for European Parliament (MEP) Guy Verhofstadt demand that member states hand over more sovereign powers to the EU. They saw EC President Juncker stagger blind drunk across a NATO stage BEFORE the dinner. There was little doubt in their minds when they checked the ballot square as to what was at stake. A No Deal Brexit is the one that should be pursued. The EU has so many disaffected member states that it is the one that needs to play nice with the UK, not the other way around.

 

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Take this chart, which shows the level of apathy member states have to show up and vote at European Parliamentary elections. Were the Brits so gung-ho to stay in the EU, why have only one-third of Brits ever shown up to express their love and affection for federalism? Is it any surprise that Italy, Spain, France & Greece have shown similar disdain over time as the EU fails to deliver for them? Surely the trend since 1979 has shown the underlying mood of member state constituents about how they value EU membership.

Perhaps Verhofstadt put the Brexit discussion into perspective (from 6:20) – after member states ratified the May plan in 38 minutes (a sure sign it is a great deal for the EU) – when he stated the hope that in the not too distant future, “a new generation of British…decide to come back into the great political European family

Tells us all we need to know. This week will show beyond a doubt about whether the island nation will have the very democracy it has shed so much blood to defend will be protected.

As Baroness Margaret Thatcher said of Europe,

 “During my lifetime most of the problems the world has faced have come, in one fashion or other, from mainland Europe, and the solutions from outside it.”

Do arms suppliers have a moral compass?

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40 murdered children in Yemen.  The Saudi logic behind the attack was that the Houthi rebels were training these kids as soldiers. A far-fetched claim. Yet where has the condemnation of Saudi’s role on the UN Human Rights Council been? Countless civilian deaths in Yemen at the hands of the Saudi military are nothing new. Where was the outrage then? The decades long proxy war has only accelerated since the assassination of former Yemeni dictator President Ali Abdullah Saleh in December 2017.

CNN looked to put the blame of this latest tragedy at the feet of US defence companies. Surely the Europeans are just as blameworthy for selling the Tornado or Eurofighter aircraft that likely dropped the American ordinance on these kids? Mattis has openly criticized the Saudi attack in this instance.

Arms deals are a dirty business. Let’s not pretend otherwise. Unfortunately these dangerous toys rarely come with a “please use responsibly” section inside the box of instructions. Some might argue that in certain cases users are not of the appropriate age bracket to play with them. Bribery scandals (aka incentives) are often more notable than the weapons deals themselves. Yet have there been incidences of arms suppliers turning down multi-billion dollar contracts?

If we go back in history, the Americans refused to release the source codes to the Saudis in a potential multi-billion dollar US jet fighter sale that would have allowed certain weapons (the US weren’t prepared to supply) to be fired. Even if the Saudis bought the US jets and sourced the banned weapons on the black market they wouldn’t be able to be fired.  Instead the Saudi’s bought the Panavia Tornado because the Europeans were happy to sell a similarly capable platform that the US refused to sell. UK defence contractor BAE Systems won a long term maintenance contract known as Al-Yamamah as a result of this Tornado deal. Why not bash the Brits for taking advantage of the US putting regional security ahead of arms sales in Saudi Arabia?

Perhaps we could question the moral fibre of the US refusing to sell the F-22 Raptor attack fighter to the Japanese. The Japanese top brass pleaded for the plane but US Congress refused to approve it claiming the billions required to redo all of the computer systems and source codes to ensure it had a lower capability than the USAF plane. The reality was more likely to prevent a leakage of its capability (something that had occurred when the Japanese ordered Aegis destroyers). The result was Japan didn’t get them even given its peaceful history post WW2.

Should we bash the Russians for supplying military hardware has been behind the deaths of over 100,000 Syrians? Or Ford for making the car that ran down people in Westminster?Or should we question the operators of these tools?

If we really want to get petty the Paveway Mk-82 bombs responsible for killing these kids were sold to the Saudi’s in a deal made in 2013 under the Obama administration. Was it Obama’s fault in allowing the sale? CM doesn’t believe he is but interesting that CNN left the period of sale out. Easier to attack the $110bn arms sales going forwards.

40 dead children is a tragedy. Arms deals are far from if ever holy. The instruments of death are sadly not always deploy in manners which are either moral or ethical. The Iranian backed Houthi almost sunk a French made Saudi frigate in the Red Sea at the beginning of last year. Several Emirati patrol boats have been severely damaged by the Houthi in the same area, the most recent incident occurring  last month. There are countless skirmishes along the Yemeni/Saudi border.

Unfortunately the Saudis and several other gulf states are key allies of the US in the proxy war against Iran/Russia. Do not expect a wholesale change in US arms deals with Saudi Arabia for the foreseeable future.

In closing perhaps people might question China’s new interest in the Middle East? Many may have missed it has deployed 5,000 troops (including special forces) in Syria since 2017. Geopolitics seldom look to protect the rights of anyone other than the home side. Don’t pretend it does otherwise.

Juncker deserves a stiff drink after that

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President Trump strode into the Rose Garden with EC President Jean-Claude Juncker where, together, they announced the elimination of tariffs on industrialized goods.

No stranger to slapping people in the head, Juncker understood that when the leader of the strongest nation in the world slaps you back it is often worth paying attention to. There is much left to be desired about the unorthodox methods used to achieve such outcomes but if such deals are achieved that should be hailed as a success.

On top of that, Trump received commitments from Juncker to increase purchases of soybeans from American farms and to purchase large amounts of LNG, something likely to upset the puppet-meister.

So NATO members have promised to get their act together on honouting commitments to spending to display their new bonafides and the EU has seen that they are no longer dealing with a pushover.

Undoubtedly the mainstream media will overlook this and devote coverage to a tape recording instead of acknowledging that sometimes bluster works when the counterparts are truly pushovers in the end. Theresa May, are you listening?

Indian Motorcycles upbeat on 2018 outlook at 2Q stage

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Indian Motorcycles – owned by Polaris Industries –  saw a mid single digit bump in unit sales in 2Q18. Gross profit was up 17% in the m/cycles segment although some funnies in the like for likes with the wind down of the Victory brand. Slingshot soft. Polaris Off Road Vehicles strong. Group 2Q ahead of market expectations, even factoring in the buyback and retirement of around 2.2% of outstanding shares in 2Q.

Exciting new launches like the Indian FTR1200 flat tracker next year will keep the registers ticking over. Scout series continues to do well. Heavier Indians finding it tougher going which is in line with market trends. Doing well with limited editions.

Polaris see the Indian brand performing strongly in international markets and expect momentum to improve over the year. Indian market share growing in domestic (at the expense of H-D) and international markets including Europe. Expect a $40mn impact from tariffs across all Polaris lines.

Share Buyback Activity: During the second quarter of 2018, Polaris repurchased and retired 1,429,000 shares of its common stock for $177 million. Year-to-date through June 30, 2018, it has repurchased and retired 1,562,000 shares of its common stock for $192 million. As of June 30, 2018, the company has authorization from its Board of Directors to repurchase up to an additional 4.9 million shares of Polaris common stock equivalent to c.10% of outstanding.

Indian had a contrasting set of results vs Harley. Both complaining of sluggish domestic market in big bikes but Indian remaining the more agile of the two with innovation. FTR1200 will hit it out of the park.

EU tariffs the least of Harley’s worries

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Two weeks ago CM wrote, “Harley-Davidson (HOG) is the classic case of a divine franchise. While still the world’s largest maker of cruiser motorcycles, it is being swamped by new competition. HOG’s EBIT performance has slid for the last 4 years and is even below the level of 2012…Sadly for HOG, 1Q 2018 has revealed even worse numbers. Global unit sales were 7.2% down on the previous year and 12% down at home.  Japan and Australia were soft. Looking at the strategy it looks like throwing spaghetti at a wall and hoping it sticks.

There is a touch of irony in that Harley was starting to do better in EMEA markets in Q1 2018 (+6.8%). Now EU tariffs are likely to sting the maker some $2,200 a unit average on motorcycles sold there. The company is seeking to bypass this in the short term by sucking up the cost of the tariff to help dealers before arranging (one imagines) for final knock down kit assembly outside the USA. A downturn in EMEA is a nightmare that exacerbates the weakness elsewhere around the globe. H-D Japan shifted 16,000 units at the peak. It will be lucky to do 9,500 this year. The business has lost its compass.

At the moment it seems the brand is stuck in an echo chamber. Harley announced at the start of the year it was closing a Kansas City plant for a net loss of 350 jobs. The rot has been in since before the tariffs. Trump lambasted Harley Davidson on Twitter for waving the white flag too soon but it is probably more evidence of the scatterbrain negative spiral approach to dealing with the predicament it finds itself in. Harley may want half of sales to come from overseas markets but it may not come through growth outside of America, rather a decline from within.

In closing Harley’s are a cult. There aren’t many brands where customers are prepared tattoo it to their bodies. Sadly this mentality means that Harley is still committed to conduct $700mn in buybacks which smacks of denial for a company seeing EBIT dwindle at 40% below peak. Then again, we shouldn’t be surprised when buybacks have made up 72% of all S&P500 earnings growth since 2012!! A recent survey that showed 75% of asset managers have not experienced the tech bubble collapse in 2000. Sure it is nothing to be worried about! Experience is a hard teacher. You get the test first and the lesson afterwards!