Is Chairman Powell the new Columbo?

I thought FED Chair Powell played his role perfectly today. He had little margin of error after others and the market painted their red lines. He came across a bit like Columbo – not cocky, a bit hesitant and threading his words carefully while making it look accidental. The US markets neither jumped nor fell but the jury’s out for the next 24-36 hours to see how the global markets digest his best presser yet (imho). One easy inference from the FOMC today is the intermediate horizon (at least from FOMC’s spokesperson – the chair) is not signaling a change in strategy – yet.

IT update from Taiwan /S Korea / Japan

A new author for me on Seeking Alpha, posted a pretty good ‘trip report’ – a visit to Taiwan and Japan IT businesses.

While the key focus of the report is Huawei impact, there are some real gems in this report on anticipated demand – the cloud server business (contrasted to enterprise) is definitely worth watching. The ODM and component suppliers are critical in that supply chain – but I fully acknowledge that the recent Huawei issues are disrupting the predictability of the supply chain with more false positives than negatives. There are also a slew of assumptions in this piece that one has to wade thru … mostly wrt Apple in China.

There are also a few nuggets on 5G component manufacturers, e.g., SWKS, QRVO.

It’s worth a read … I love this approach of anticipating down-stream growth by upstream component supplier health / growth.

Try to answer this question wrt China

Heisenberg quoted an interview from Goldman with a Chinese think tank / policy influencer (not government), and the post ended w/ a question – quote: “So my question is: why try to kill the goose that lays the golden eggs? The whole world will benefit from China’s contributions and should not feel threatened by them.

Threatened economically makes sense – like competitors who also have to collaborate and partner as other business do every day. Existential threat makes no sense unless we convince ourselves its true for tribal political advantages.

Here is another statement – quote: “The biggest misperception is that China poses a threat to the United States. It is not unusual for a dominant power to feel threatened by a rising power, especially given the exceptional pace of China’s growth and its achievements; it now has the fastest train network, the biggest 5G network, and is set to overtake the US in terms of GDP over the next 10-15 years. These concerns are exacerbated by China’s different system, which is not well understood. China is often viewed as a state-run economy that poses a risk to the liberal world order. But, in fact, 80% of the Chinese economy is private with 10% of that comprised of foreign multinationals in China. Without this mixed economy, China would not have been able to achieve the same level of innovation, or have lifted 800 million people out of poverty, which is unprecedented in the history of mankind. In reality, China is a substantial contributor to the world. It contributes over 30% of global GDP growth, is the largest trading nation for over 130 countries, and is one of the largest donors to the United Nations. China has embraced the Paris accord, taking a global leadership role in combatting climate change. And it is on the way to becoming the largest consumer market in the world, with its middle class of about 400mn people set to double within the next couple of decades. In all of these ways, China is a supporter of the current world order.

Will our manufactured fear frame decisions that deliver insufficient and counterproductive results?

Mr Duy’s FED update

If the title doesn’t get you – Still Less Transitory Than Persistent

the summary will – quote: “Bottom Line: My read is that at a minimum inflation remains a nonissue with the risks weighted toward the possibility that recent weakness is more persistent than transitory. In addition, the slowing pace of job growth should take more pressure off inflation in the months ahead. The combination gives the Fed room to cut rates. Assuming this data flow continues to hold, I anticipate the Fed to signal a rate cut at next week’s FOMC meeting and follow through with that cut in July.

Great graphic

I am data devil and i love great data graphics that tell a story … Heisenberg posted something from Goldman today that was just classic great.

The Heisenberg post itself quotes other experts with the following conclusion – quote: “

“Since March 7, the five-year yield has been lower than the three-month Treasury bill yield. If it stays that way for a full quarter – not merely a few days or a few hours – then the model predicts recession will follow”, Harvey wrote, on March 12. “I consider the yield curve the last of four horsemen of the recession to rear its head”. Draw your own conclusions.”

This makes sense …

Quote: ” I think investors need to keep their eyes on the ball. The rate of economic growth is slowing dramatically from last year and it has tempered the rate of inflation as demand slows. The declining rate of job growth is confirming that fact. The stock market is not discounting this reality. A rate cut by the Fed takes months to have an impact on real economic activity, and it would be largely ineffective in 2019. It would also signal that the economy is in dire straits, as it did 2007 and 2001, as can be seen in the chart above. “

Lawrence Fuller (no relation) posted that summary at the conclusion of his weekly update

Nothing has changed from my perspective and I remain fully in capital preservation mode and vulture-like adding capital when value unicorns pace the street.

Mr Duy – Fed update

His conclusion: “To be sure, I can’t rule out a June rate cut.As I often say, when the Fed shifts gears, it shifts quickly. Still, the reasons outlined above suggest to me the path forward is to use June to signal a high probability that the next move is a cut and to deliver that cut in July (assuming of course the data continues to support that move).”

Mr Toad’s wild interest rate ride – June 7

Not so much of a roller coaster ride but a descent faster than gravity’s pull

From early May this year to Friday … and FED cuts 3x in ’19 seem to be the crowded projection … what could happen?

Here’s another way to look at it for the graphically challenged

May 1Jun 7change
30 yr2.9202.570-0.350
10 yr2.5202.090-0.430
2 yr2.3101.850-0.460

Seeking Alpha’s last SA for FA podcast covered some possible risks to these changes and i found it succinct and aligned with my concerns

What we have is a failure to communicate …

Heisenberg Report posted a fabulous post on current trade issues – leveraging source material from Goldman.

This quote is priceless – a combo of Heisenberg and Goldman: quote –

“The bank does an admirable job of dancing around the punchline in the interest of not coming across as overtly snarky, but the bottom line is that there isn’t even an agreement on what’s being negotiated. In fact, it doesn’t appear that the two sides agree on what Trump and Jean-Claude Juncker actually said at the famous Rose Garden press conference last July. Here’s Goldman:

A divergence of opinion on what should be included in the trade deal appears to be the main stumbling block for negotiations. When the European Council passed its two negotiating mandates in May, it limited the scope of the negotiations to ‘non-auto industrial goods’ and ‘non-tariff barriers’. Agriculture is unambiguously excluded from the mandates. Conversely, the Office of the US Trade Representative (USTR) published negotiating objectives that specifically include the reduction or elimination of EU agricultural tariffs and the establishment of “specific commitments for trade in products developed through agricultural biotechnologies”.

Who’s FED?

Mr Duy’s points are all good and worth reading … quote: “Bottom Line: The Fed stands ready to adjust policy as needed to respond to unexpected shocks; this is true even if the shocks emanate from the White House.

The Heisenberg Report has another good read on the topic“Meanwhile, GOP lawmakers are pondering the possibility of trying to push through a veto-proof version of the bipartisan resolution nullifying Trump’s border emergency. Trump says that won’t happen. He’s probably right. Trump is also probably right to assume that eventually, the Fed will cut rates in order to ensure the trade war doesn’t completely derail the economy. At that point, assuming any easing is accompanied by more days like Tuesday, the president will feel like he has more scope to push his hardline trade agenda, which is increasingly inseparable from the rest of his agenda, whether it’s immigration or national security.”

Eric from EPB who has also had a good bead on rates over the last 12-18 months … a snippet quote (disclosure -> you should read the full article) “For now, the outlook for economic growth remains one of deceleration in which lower interest rates over time are likely.”

My concern is that this action, if a rate cut, will prove difficult to discern if monetary, political or social engineering.

Thought provoking article – ‘should read’

Eric B posted an article this weekend that I found one of the most provoking reads in several weeks.

Here was my comment to the author

Eric … one of the most thought provoking article I have seen in the recent up-roar of tariffs and inverted yield curves. One of your key elements here is to expand our analysis horizons from days / quarters (typical) to decades using the JPN / EU patterns. The other point you made but did not hammer too hard – is that the employment trend (older people working longer) and the financial insecurity of the younger cohorts (especially 25-35 yrs) – think low income and high debt – is a vicious cycle (or virtuous) – that younger cohort will enter their later years worse off than the current older cohort, so … older folks work longer than boomers; and the cycle continues with greater values at each spin. These are important long term trends for us investors and I applaud your effort to extend our analysis horizons.

Btw … this is not important for investors, but business folks working on longer term product roadmaps and strategic plans. Many of our future growth variables and assumptions need to be challenged in the context of these demographic and debt pressures building across the globe.

Potential tariff impacts

Another great graphic of all the ‘suggested’ tariffs and what will be impacted by both Mexico and China – this says nothing about India (… yet). Sourced from Goldman via Heisenberg Report – who will escape the financial impact?

Farmers’ risk

Jeff Miller (WTWA) posted this graphic and once i understood how it’s structured, my jaw hit the desk.

This is a risk-filled planting season as both the weather and trade tirades converge with a vengence.

Mr Toad’s wild interest rate ride – May 19

Could it be … China?

Could it be … Mexico?

Could it be … Brexit or Italy?

Could it be … slowing economy?

If you know, would you let everybody know? I am working to figure out if I just buy 3m Tbills or wait for Mr Toad to ascend to grab longer durations.