Market Watch - June 14, 2019
Our economy has now officially become the longest economic expansion in U.S. history. Bad deals for U.S. taxpayers have been renegotiated (NATO, UN, NAFTA, tariffs, etc.). The result is an expanding stock market, and booming economy, that is favorably affecting all stratus of American workers. Most importantly, family income has increased 6.5% since 2016 (U.S. Census Bureau).
There are no short-term difficulties in this economy; however, intermediate problems over the next 3-5 years include our relationship with China, which is currently leading to military confrontation, and the Federal Reserve Bank.
Not only is China difficult now, but if we do not continue to restructure our relationship with them, they will become a greater problem. They do not apply the same rules to their behavior that is required of ours. They cheat on almost every deal they make; they lie about everything; they consistently steal secrets, and pay large amounts of money to employees of U.S. companies who deal with sensitive information; and, most importantly, they are our enemy and the only country in the world that can pose a threat to American power.
Question: What evidence is there that China has any military intentions?
Answer: One-third of the world’s maritime commerce passes through the South China Sea. A look at the map indicates only 1,000 square miles, which would fit into the continental United States, represents most of the sea. U.S. manufacturing plants located in China have many alternate suppliers around the sea’s basin; specifically Vietnam, the Philippines, and Indonesia, all historical enemies of China. Countries bordering the sea have about 2.2 billion people, or 30% of the world’s population, so an enormous amount of the world’s international commerce passes through those waters.
Since 2016, there have been 18 close military encounters in the South China Sea. In November of last year a Chinese naval vessel purposely came within 45 meters of a U.S. battleship group; in May of this year, in a neutral zone, the Chinese used infrared targeting on Australian fighter pilots; and China recently held a 10 nation naval exercise so close to Taiwan that it was obviously threatening. This is USSR 1960s and 1970s, behavior.
Question: What are the Chinese trying to do? The U.S. is such an important economic factor in their economy? Last year we purchased $560 billion of goods from China, 4.2% of their GDP.
Answer: They are trying to get the best deal they can at the expense of America’s taxpayers. Last year we only sold $180 billion of goods to China because of their exorbitant tariffs on goods we sell to them. That is unfair and strictly because of high tariffs.
China knows we have working relationships and manufacturing plants in all of the countries that boarder the South China Sea. They also know that we are continuing to sweeten trade agreements with Taiwan, the Philippines, Indonesia and Vietnam. To the extent China can control the South China Sea, they can disrupt commerce with allies of the U.S.
Last year China spent $250 billion on their military. For comparative purposes, Russia only spent $60 billion and the U.S. spent $650 billion. China’s $250 billion of expenditures are skewed towards hardware because, unlike U.S. military personnel, Chinese military are paid poorly. It is important to remember there are 40 million more men in China then women, a population of men equal to California. That alone is a difficult situation that can lead to military conflict.
A look at the general economy
The media is consumed with China, the Federal Reserve, and “it’s about time for a downturn”. China will improve the unfairness of their trade relationship with America because they have to. America will continue to finance alternate U.S. suppliers outside of China because we have to.
The Federal Reserve has done an amazing about face. This time last year rates were on the rise. The administration complained for about three months until the Fed backed off talking about future rate increases. The Fed also quit extracting $70 billion monthly from the U.S. money supply which was creating a shortage of cash available for transactions. A high-ranking Fed governor said just a few days ago that the Bank would consider reducing interest rates next year. The market responded favorably with the DJIA increasing 500 points the day after the announcement.
Measured by dividend yield, the DJIA annual dividend is currently $586.72, and the yield is 2.36% (586.72 ÷ 24,820 points *). A 2% yield on the DJIA would move the market 4,500 points to more than 29,000. Based upon that, and with interest rates going down significantly, potential future price increases in the Dow are promising.
The news continues to be consumed by a “pending” recession. Europe and the Far East both have economic problems and a rate of growth that is going down. U.S. GDP growth has climbed back to an anticipated 3.2% this year. Our exports are at an all-time high, and due to other troubled economies, where investor returns are less certain, cash continues to come into the U.S. looking for stability, thereby providing our economy cheap investment capital.
Conclusion
There are three phases to a Bull Market. In the first phase, investors start buying quietly and the market creeps up in value. The second phase is a rapid increase in stock values followed by a lengthy period in which the market trades in a relatively narrow range. This is the stage we appear to be in now. The third phase of a bull market discards the trading range of the second phase and establishes significantly higher values. Those values are maintained until the economy is overcome by some crisis, which is always caused by too much debt. There is currently no recession in sight and no pending crisis. With interest rates going down, and consumer spending strong, there is every reason to believe in continued business expansion.
The recent sell off in values has only created buying opportunities. If this is the 2nd phase of a bull market, there are some nice gains to be made in the third phase. Positive June 30thquarterly earnings reports could stimulate an aggressive increase in stock market values.
George Rauch
June 14, 2019
(*) Dividend equals cash paid annually for each share of stock. Dividend yield (or just “yield”) equals the annual cash dividend per share of stock divided by the price of the stock. If a stock sold for $35/share and paid a dividend of $2/share annually, the yield would be 6.7% ($2 ÷ $35 = 6.7%).
