Note Précis May 2,2018: Uncomfortable Light of Being Belligerently Brusque – In geopolitics over North Korea and Iran policy, the risks are those of lost credibility in being belligerently brusque and then being weak in follow through. Iran especially is far more diverse than North Korea. In appearing capricious in both the claims and the application of its tariff claims, the U.S. administration would risk inadvertent fallout from retaliation from allies and competitors alike, such as Europe and China as well as crucial smaller powers. Being hectored and sent packing after all is a strange negotiating tactic with powerful figures also with domestic imperatives.
From the central banks, the commentary appears enigmatically obtuse from both the ECB last week and today May 2,2018 in the Federal Reserve’s FOMC statement , perhaps due to uncertainty. The uncomfortable light is that central banks missed systemic risks at the cusp of the unfolding of credit crisis in 2007. They then received little scrutiny amid massive quantitative ease. Now, from reports of insider flipping in Vancouver of incipient new condominium completions (with shades of Miami in the mid-2000s also on supposed foreign interest) to the expansion of subprime lending in the U.S. and globally to low coupon, lower covenant fixed income, conditions seem boisterous. In the FOMC statement of May 2 2018, we believe the Federal Reserve missed raising rates by 25 basis points and needs to have measured Fed Funds rate increases in place, not least due to strong growth and large deficits in the United States. We target Fed Funds at 3.50% and 10 year T- Note yields at 4.50% as appropriate by Q1/2019.
At present S&P 500 P/E multiples, there seems little margin for error in expectations or slippage in corporate delivery. Internationally, emerging markets have outperformed on growth, with the U.S. at mid-point. Despite lower multiples, Japan and Europe sway back and forth on relative performance. Furthermore on interest rate stress, while U.S. Treasury, emerging country and BBB corporate fixed income yields are close to 12 month highs with more to go, those of CCC corporate fixed income are still closer to 12 month lows. Uncomfortable light is needed over the summer of 2018 on both political economy risk and also on whether central banks are behind the curve. Equities worldwide would benefit from a catch up overall in earnings as well as specifically, in a shift from a momentum and quantitative ease gorged investment phase to one driven by more selectivity.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.