The latest auto sales numbers act as a warning sign for the underlying weakness of the US economy, say analysts such as Keith Grindley from MacroThoughts. For sometime these data points have been flashing orange, and today they started flashing red. We include some interesting research from Deutsche Bank that looks at the historical patterns of auto excess. We counter this with a piece from Wells Fargo that argues that the US credit cycle, though very mature, still has some juice in it. We also include a great video from Neil Howe, author of The Fourth Turning, a body of work that is getting more and more attention amid a time of great social and economic change.
Substantive's Top Themes - Best of the Broker Notes
1. US Autos: Poster Child of US Credit Excess
Somewhat ominously, today’s market increasingly resembles one that veteran Deutsche Bank auto analyst, Rod Lache described in “A Triple Threat,” a report he wrote way back in early 2004. Lache revisits this today following the latest data on US auto sales, where he concludes that the sustains deman at current levels is going to require stronger economic growth, at a time where auto sales are roughly flat. In reference to the 2004 report, Lache highlighted the risks to the industry from rising rates, rising negative equity in vehicle loans, and used vehicle price deflation. This could lead to deteriorating affordability, delayed trade-in cycles, consumer shifts from new to used, diminishing credit availability, and deteriorating mix/pricing.The auto bubble is not news, but are we closer to the bubble bursting? DB client can view Lache's reports via the research portal.
2. US Tax Reform: Tax Ingredients, No Recipe
The key to getting anything meaningful done on US tax reform will be determined by the revenue it gain generate to offset the planned tax cuts. Glenn Reynolds, chief strategist at CreditSights reckons the biggest threat to the tax reform process is the lack of a reliable revenue line with so much opposition mounting against the border adjustment tax. Reynolds assesses the revenue lines contained within the various proposals being put forward in the tax reform debate. He makes some particularly interesting points on the interest deductibility proposals and its impact on debt issuance (A key growth driver via credit creation), which Reynolds expects would likely find a lot of opposition. If you would like to view the the full note, contact the provider directly.
3. Japan, Robotics and Collaborations
CM Research continue to impress with their extensive series of thematic reports on emerging investment themes in the technology sector. This report researches the state and thrust of Japan’s leading technology companies over the next five years and what it implies for global technology investors against the backdrop of Japan’s still risk averse, thrifty, rigidly conservative culture. But things are changing, and more flexibility around Japan labor laws will certainly be more beneficial for this sector as there's a growing trend for the large Japanese firms to collaborate with smaller start ups bring innovation to the table. As yesterday's Tankan showed, there is an increasing shortage of labor. CM Research happy to provide complimentary access to this report on a case-by-case basis.
4. The Late Credit Cycle; Can it Be Prolonged?
Wells Fargo's Chief Economist John Silvia has put this succinct piece out on the US credit cycle in the context of US non-financial corporations. The key question being whether at this late stage in the cycle, with expectations for growth and higher rates having risen, how will these new expectations mix with the credit cycle for corporations? Silvia is sanguine, and thinks there is more juice in the credit cycle before it turns. Click below for the full note.
5. The Fourth Turning; How Historical Cycles Could Impact Markets
Neil Howe is an historian, economist, and demographer, and a leading authority on generational trends. He coined the term “Millennial Generation” and is the bestselling author of over a dozen books, including The Fourth Turning, which he co-authored with William Strauss in 1997. The book explains how modern history moves in cycles, each one lasting about the length of a human life, each composed of four eras, or ''turnings.'' Last year Howe joined the fast-growing investment research firm, Hedgeye, to lead their demography sector research. In this 15-minute video presentation Howe breaks down the generational theory behind The Fourth Turning, and explains the rise of a figure like President Trump. The Fourth Turning is also significant for the fact that Trump’s influential chief strategist, Steve Bannon, has used this book as the basis of of his world view. This theory is not as extreme as one might assume, it is about history, cycles and renewal, and it has massive implications for the global economy and world markets. Recommended viewing if you don't have time to study the book. Click below to view the video.