Forecasts & Trends

Whether you are a Republican or a Democrat, conservative or liberal, you will want to be aware of what I write about below. The “Establishment” Republican leaders are quietly pushing for a huge tax increase that has yet to get much attention in the mainstream media.

This new tax increase is called the “Border Adjustment Tax” (BAT). In essence, the BAT would impose a 20% tariff on all imports to the US.  If enacted, it will mean significantly higher prices for imports and anything made in America that includes imported goods.

You probably haven’t heard about this trade-killing tax since its main proponents, House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady (both Republicans), have done their best to keep this effort quiet.

The good news is that if enough Republicans oppose Ryan, Brady and their backers, this anti-trade tax will not see the light of day. Like I said, whether you are a liberal or conservative, you need to know about this since it could mean a big cost-of-living price increase for all of us.

Sadly, the BAT is not the only bad tax being promoted by Republicans. Another group of Republicans is lobbying President Trump for a new “carbon tax” in exchange for a “significant” rollback in EPA regulations. The GOP promoters of this new tax claim it will help the economy and benefit working-class Americans. A closer look finds it will do neither and is another very bad idea. I’ll fill you in below.

Bond investors have had a rough ride in November. The Barclays Global Aggregate Bond Index plunged by 5% during the last two weeks just before and after the election – its worst such drop since March 2003, according to Dow Jones data. When yields rise, bond prices fall, and vice-versa.

As you know, interest rates have been falling for over 35 years since peaking in 1980. It has been a spectacular bull market for bond investors, that is until just recently. To say that the reversal over the last few weeks came as a surprise to bondholders around the world is an understatement.

More than $77 billion in assets are benchmarked to the Barclays Global Aggregate Bond Index, according to Morningstar, making it one of the most widely followed in the fixed-income world. It incorporates investment-grade debt denominated in 24 different currencies. Sovereign bonds have historically been the Index’s most heavily-weighted constituent, followed by asset-backed securities, corporate bonds and government-related debt.

Global bond yields have been edging up since falling to historic lows in late June/July following the UK’s vote to leave the European Union. But the selloff accelerated aggressively after Donald Trump won the US presidential election – an outcome that took most bond market participants around the world by surprise.

The sharp selloff was predicated on the notion that Donald Trump’s campaign promises to rebuild America’s infrastructure, cut taxes and raise trade barriers, would – if they become reality – drive up inflation, and possibly force the Federal Reserve to raise interest rates much more aggressively than had been expected.

In just the two days following Trump’s election, global bonds shed an estimated $1.1 trillion in value, the worst rout in a year and a half as investors sold bonds and bought stocks in many cases. The stampede out of bonds propelled US Treasury yields to their highest levels since January.

We will touch on several bases today. I must admit that it was so tempting to devote today’s E-Letter to a discussion about the presidential election one week from today, especially with all the recent twists and turns in this race.

But the fact is, these are two of the worst presidential candidates I can ever remember. So I’ll spare you my political thoughts today. I do have an interesting section below on which US presidents have been best for the economy dating back to President Eisenhower in 1953. Hint: President Obama ranks dead last!

Following that discussion, we’ll take a look at the global bond market which has taken a hit over the last couple of months. Bonds worldwide lost almost 3% in October alone, the largest monthly loss since May 2013. The question is whether this is just a “correction” or the beginning of a new trend?

Before we get into those discussions, let’s take a look at last Friday’s stronger than expected GDP report for the 3Q. The advance report showed growth well above the pre-report consensus. Most analysts concluded that the door is now wide open for the Fed to raise short-term interest rates in December. I’ll give you my latest thoughts as we go along today.

On Wednesday of last week, the Labor Department’s Bureau of Labor Statistics (BLS) reported that there were a record 5.9 million unfilled job openings in America as of the end of July. Unless you are a news junkie like myself, this number may well come as a surprise to you. And the reasons why we have such a huge number of unfilled jobs may also come as a surprise.

With our official unemployment rate at 4.9%, we know that the labor markets have improved significantly in recent years. It’s great that US businesses are hiring, but these record numbers of job openings are also a sign that business owners can’t find the skilled workers qualified to fill the jobs they have available. We’ll find out why as we go along today.

Before we get to that discussion, let’s briefly review two decidedly disappointing reports for August -- the ISM Manufacturing Index and the ISM Services Index. We’ll also look at another key report which significantly surprised on the upside. Let’s get started.

Former Secretary of State Hillary Clinton and New York billionaire Donald Trump both announced their major plans for the economy last week, if elected president in November. As you might expect, the two plans are very different. I will summarize both as we go along today, and you can draw your own conclusions.

Before we get to that discussion, I want to bring to your attention the fact that the Atlanta Fed is forecasting a significant improvement in the US economy for the current 3Q. As you may recall, the Atlanta Fed produces a real-time estimate of the US economy which is called “GDPNow.” As of last Friday, the GDPNow is forecasting a jump to 3.5% in GDP in the 3Q.

Keep in mind that US GDP was only 0.8% in the 1Q and 1.2% in the 2Q. A strong jump to 3.5% in the 3Q would be almost triple the anemic 1.2% in the 2Q. The obvious question is, what is the Fed seeing so far in this July to September quarter that is making it so confident? That’s what we’ll talk about just below.

The Commerce Department reported last Friday that gross domestic product, the broadest measure of goods and services produced across the US, rose only 1.2% (annual rate) in the second quarter. That was less than half the pre-report consensus of 2.6%. This was one of the largest misses by forecasters in quite some time. I'll break down the report as we go along today. I will also discuss what the Fed's reaction to the disappointing GDP report is likely to be.

At the end of today's letter, I will give you a link to a WALL STREET JOURNAL article on Sunday which claims that while Secretary of State, Hillary Clinton compromised national security by urging US technology companies to fund Russian research for military purposes. Assuming it’s true as the Journal claims, it will easily be the most serious scandal ever for Ms. Clinton. And it couldn't come at a better time!

Stocks as measured by the S&P 500 and the Dow have cruised to new record highs over the last week. Treasury yields on 10-year notes and 30-year bonds moved to all-time record lows last week. Historically, these two things rarely happen at the same time. In fact, the S&P 500 has hit a record high when the 10-year Treasury note yield was below 2% only once in the last 40 years.

The fact that stocks are at new highs and Treasury yields are at new lows is largely due to red-hot foreign demand for US securities. There are continued worries about the UK and Europe in the wake of "Brexit" and rising concerns about China's economy. With negative interest rates spreading around the world, foreign investors are gobbling up Treasuries which still have positive yields and adding US equities as well. Some say this is the "New Normal." But is it?

That's what we'll talk about today.