So Much To Write About In So Little Time 5/4/18

There is so much to write about in so little time. –

This is a busy week as I have multiple appearances on Fox, CNBC and the BBC. They are all going to want to talk about Trump, North Korea and Iran. There will be some thinly veiled threats with pointed questions at the markets but all in all they usually end up being interviews on public policy – which I am more than happy to oblige but it gets of subject a little bit at times.

Interesting to note that on our desk and in various circles we are seeing and hearing more and more about a retail rotation out of stocks. I bring this up as last week I spoke about the equity market and what it might look like in a world of a 3% 10-year yield and $3.00/gallon of gas. The market has found it harder and harder to gain its footing and expectations continue to stay fairly high. Another big reason for the shakiness and the volmageddon that we saw earlier in the year is that we now have government paper that is beginning to compete with some of these dividend stocks. So this rotation that everyone has been talking about is beginning but the talking heads really haven’t mentioned it. I just got off of Fox and all they wanted to talk about was Apple earnings. They could be market movers but when you look at the FANG stocks, that comparison looks to be getting a little long in the tooth. Ha.

Facebook and Google have been struggling. They have been perennial high fliers but have had their own issues as of late. Apple, going to press is still down on the year. When you turn over and look at Amazon and Netflix you might think that everything is all right in the world. This group of tech stocks is no longer trending together. There will have to be some new entrants or the whole FANG moniker will have to be put out to pasture.

Another question we get a lot is how far do we think interest will rise. I would have to say that I feel the same about interest rates as I do about crude oil. I have lived through the runaway equity markets of the late 1990’s and early 2000’s. I have seen the housing market in the States catch on fire almost 20 years ago (and there are reports it’s happening again) but I just don’t see these things getting away from us like they did in the past. Housing, for one, would have taken off when interest rates were zero but it couldn’t lift its head above water. I think oil struggles and the only reason we have seen a recent bump is with some geopolitical ramblings and the moves out of OPEC. There are headlines almost monthly of new fossil fuel finds and the finds are not small. The more the world goes to electric cars (with coal used to make electricity by the way) the demand looks weaker and weaker again. It would have to be something pretty big to get those oil prices really going. And then, guess what happens to the economy if for some crazy reason oil prices spike? Yep, it comes crashing down. So with that in mind it is hard for me to get excited about oil.

Now if interest rates start to really take off, and we have a lot of the pundits talking about more and more inflation sneaking into the pipeline, that too would or could be an interesting g scenario. When we talk about interest rates and their recent moves, in the scheme of things they are relatively small, but when you look at the percentage move, it begins to be a different story. That is where I think the people that say that a move from 1.5% to 2.5% is no big deal, I think in percentage terms it is a huge deal. There are a lot of small businesses out there with borrowings that are very much on the high side. They were taking the free money under QE in the hopes of being the next Starbucks or Facebook. As they continue their ways and slowly but surely realize that may not be the case and see that their borrowings are way too high they may decide to shut the doors and pack it in. I think there are a lot of small businesses out there that are very receptive to the Trump tax cut but equally wary of any large rises in their borrowing costs.

The flip side to that argument for argument’s sake is that with a huge tax cut, regulatory cuts and a massive infrastructure spending bill, there has to be some price rises somewhere in that pipeline. Which I would tend to agree with, but I also thought we would see wages increase a lot more than they have so things don’t seem to be jiving like they used to. Something in the system is amiss and all the economic pundits are struggling to find out what it is. That is why I think things will ultimately be tepid and nothing really will run away from us. We couldn’t catch things on fire when we had zero percent interest rates, why do we suddenly think things are going to catch fire while we are raising interest rates. This path to normalization has been an interesting one. I talk about wanting to get there but the world is still such an abnormal place. We are still in a stage of re-calibration and until the world gets more comfortable with rates and prices where they are it will be a while until things are ‘normal’.

Remember it wasn’t that long ago that we had the Trump administration touting plans for a cheaper dollar and the talk of Europe strengthening was rife. Well, just to show you how much and quickly things change, despite the administration’s efforts to keep the dollar cheap – it has strengthened. The EU does not look as rosy – or at least parts of it still need Draghi’s free money.

If you are confused just wait a minute because I am sure things will change quickly again.


About Scott Shellady

Mr. Shellady has a broad and strong range of technical and trade experience in both commodities and financial products in the three main geographies of North America, Europe and Asia.