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.

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.

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.

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.

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.


Is the US Reflation Trade Over?

The flattening of the US yield curve, the weak relative performance of high beta stocks, and falling term premium suggest that equity investors may need to revisit their optimism over inflation (and reflation), writes Sean Darby, chief global strategists at Jefferies. But before doing that it’s important to examine all the facts, he adds. For instance, some other indictors are still pointing to reflation, or at least the end of deflation, such as the CRB industrials, inflation measures such as the PCE,  and import prices. It should also be noted that real interest rates and credit spreads are more stimulative today than when the Fed started hiking, says Darby. This is probably a classic case of the market getting too far ahead of itself, and being too far skewed for reflation. Patience is required. Jefferies clients can access the full note here.


Creditism In Crisis

Over the past half a century credit growth has been the dominant driver of economic growth for the US economy, to the extent that over the last 53 years, credit has expanded an incredible 66-fold to $66 trillion, says Richard Duncan from Richard Duncan Economics. But, as it has become very clear, the effectiveness of credit to generate GDP is in decline, and as Duncan tells us any time credit growth adjusted for inflation has grown by less than 2% over the above period, the US has had a recession. That’s the situation the US is facing now, and the most revealing fact from this video is that the Trump stimulus probably won’t save the situation. Click below to subscribe or take a trial to RDE. His video presentations are always illuminating, and his work is very competitively priced.

The Real Story Behind the C&I Loan Slowdown

There’s been a lot made of the contraction in the $2 trillion market for commercial and industrial loans (C&I), which peaked in December, and where this apparent credit contraction seems at odds with recent positive growth and financial market indicators. In this piece Goldman Sachs economist Spencer Hill provides an alternative explanation that is more sanguine than what the loan numbers are indicating. Goldman clients can read the full note via Goldman 360.

Trump’s Dilemma

Back in December, the world-renowned geopolitical analyst, George Freidman, wrote a piece that argued President Trump might turn out the be the least powerful President in the last 100 years, rather than the transformative leader that he, and many others touted him to possibly be, given his ‘populist’ disposition. In light of the Republican withdrawal of a bill that would have repealed and replaced the Affordable Care Act, it’s worth revisiting that piece as Geopolitical Futures, the firm Friedman founded, did last week, to fully understand the significance of last week’s defeat and the challenges that Trump now faces over his first term. Click below for the full piece.

What Legislative program? Watch Oil Instead

For all the attention that Trump’s legislative agenda gets, it’s important to maintain some perspective on what the key drivers of asset prices is. That’s why highlight a note last week from Neil Azous of Rareview Macro which reminds investors to keep their eye on the ball. He reckons the market currently underestimate the impact of crude oil as a driver of prices versus that of  the Fed or ECB policy, or US geopolitics. He cites principal component analysis (PCA), a quantitative technique used to emphasize variation and bring out strong patterns in a dataset. PCA currently tells us that oil has been the driver of ~70% of ALL asset returns since the US Presidential Election. The remaining 30% is the Fed, ECB, and President Trump. lick here for access to the piece, via the Rareview archive