China is down over 7% today.  It’s true that the “Wuhan virus” – the previously unknown and deadly strain of “Coronavirus” that also produces flu- and cold-like symptoms – is spreading. As we write, at least 81 people have died in China from the virus. And more than 2,700 others have reportedly been infected in more than a dozen countries – including five confirmed cases in the U.S.

Officials believe the virus was transmitted to humans from snakes sold at a food market in Wuhan, a central Chinese city of roughly 11 million people. Wuhan and 15 other cities in China were on lock down today, as the government sought to stop the spread of the virus.

In all, more than 50 million people in China are under travel restrictions.

Stansberry put together a chart showing what happened with the 2003 SARS outbreak – and important announcements from the World Health Organization (WHO) – compared to this latest scare, which began with the first reported case of the Wuhan virus on December 8, 2019. Take a look:

 

 

This time may be different than SARS since as percentage of global GDP, China is 4x the size it was in 2003.

As it turns out, Wang Guangfa, a doctor who was infected with the Coronavirus after visiting Wuhan to inspect patients, tried AbbVie’s HIV drugs on himself… and they worked. So he passed along the information to the Chinese government.

 

 

 

The share price of Kawamoto, a Japanese manufacturer of face masks:

 

 

 

Good News

 

“We’re just in the craziest monetary-fiscal [policy] mix in history.

It’s so explosive, it defies imagination. It reminds me a lot of early ’99 [when inflation was low and stock markets were soaring].

The difference is the fed funds rate was 4.75% — today it’s 1.62%.

Then we had a budget surplus, today we have a 5% deficit — you can’t make it up. … It’s crazy times.”

– Paul Tudor Jones

 

  • The stock market is pricing in a substantial rebound in housing price appreciation.
  • Americans are increasingly comfortable with their personal finances. See chart below:

 

 

Americans are ready to go shopping. The Buying Climate Index hit a record high.

 

 

Is the Economy Slowing?

 

The Conference Board’s index of leading economic indicators has been surprising to the downside.

 

 

 

Germany’s factory employment remains soft:

 

 

The index of industrial metals has dropped.

 

 

According to Oxford Economics, one should expect to see copper outperforming stocks in a global industrial rebound. Just the opposite is happening.

 

 

Consumer confidence has been softening over the past year.  The US-China phase-1 trade agreement is expected to lower China’s imports from the EU.

 

 

Japan’s leading index continues to deteriorate.

 

 

Dry bulk shipping costs hit the lowest level since 2016, which means shipping volumes have declined.  The Baltic Dry shipping index (dry bulk, such as iron ore) dipped below 500 for the first time in four years.

 

 

The 10yr Treasury yield:

 

 

Gold:

 

 

The Fed cut rates three times last year, which, in combination with easing trade tensions, steepened the yield curve. But the yield curve is approaching inversion again. Now what?

 

 

Copper futures continues to sink.

 

 

Here is Bloomberg’s industrial metals index.

 

 

Debt Solutions?

 

Keynesian strategies recommend debt to help a weak economy recover, NOT to further expand a strong economy.  We are running $1T deficits in STRONG economies, thus ADDING to the $23T in total debt each year.  At some point we have to pay the piper.  Are you ready for solutions being discussed so that you can get an idea of what may be coming? I am NOT saying that these are good ideas:

Lawrence Summers provided a list of specific policy changes he recommended to make the tax system fairer, reduce inequality, and boost the economy:

  • Improve tax compliance to capture a significant proportion of the hundreds of billions in taxes that go unpaid every year. Sanders said better IRS enforcement could produce more than $1 trillion in revenue over 10 years.
  • Crack down on international businesses that are evading billions in corporate taxes by moving profits overseas.
  • Reform capital gains taxation by eliminating the step-up in cost basis at death, taxing gifts to charity and real estate transfers, and eliminating the carried interest tax break.

Once those policy changes are in place, raising the capital gains tax rate to income tax levels would raise billions in new revenue, Summers argued, without weighing on growth. But the full set of policy changes are necessary, Summers said, in order to close off as many avenues for tax avoidance as possible.

All told, Summers estimated that his proposals could raise more than $4 trillion over 10 years — without imposing a politically contentious and economically uncertain wealth tax.

A menu of policy options: Other participants in the conference discussed a variety of options for raising revenues.  Some highlights:

  • VAT: William Gale of the Urban-Brookings Tax Policy Center proposed a value-added tax similar to that in most other developed countries. A 10% VAT would raise roughly $10 trillion over 10 years, Gale said.
  • Financial transaction tax: Antonio Weiss, a financier and senior fellow at the Harvard Kennedy School, said a tax of 10 basis points on trading in stocks, bonds and derivatives would raise $60 billion a year without hindering market efficiency.
  • Corporate tax reform: Jason Furman, who led the Council of Economic Advisers in the Obama administration, recommended a variety of tweaks to the tax code, including raising the corporate tax rate from 21% to 28%. He said the proposals would raise more than $1 trillion over 10 years, and boost GDP by about 1%.
  • Taxing inheritances: Lily Batchelder of New York University Law School proposed more stringent inheritance taxes that would raise $340 billion or more over 10 years (more on that below).

The elephant in the room: While the conference provided plenty of ideas for improving the federal government’s fiscal situation, much less was said about how to enact the proposals in such a politically divided country. With one of the two major parties rejecting the very idea of using taxes to increase revenues, reaching a compromise to shore up Social Security and Medicare will likely be quite difficult. “We’re the sound of one hand clapping,” Geithner said, adding that he didn’t see a political coalition dedicated to fiscal reform coming together anytime soon.

A 2.1% “Inheritance Tax” has been discussed also. I bet you my house that the inheritance tax, if initiated, STARTS at 2.1%… and goes MUCH higher!

I personally believe that we need to handle the deficit. However, there are TWO parts to the deficit: SPENDING, and taxes (income).  Why not cut spending as part of the solution?  I wanted you to see what is being discussed above as solutions.

 

Market Valuation

 

 

2020 Predictions from Louis Gave

 

Louis Gave succinctly describes the five pillars on which today’s investment environment rests, then considers whether each one could change in 2020. Three of the five look highly possible.

Key Points:
  • Pillar #1: Interest rates will stay negative in many places.

The Swedish Riksbank’s recent move away from negative interest rate policy (NIRP) should force other central banks to at least consider rate hikes. Odds they will do it are low, but not zero.

  • Pillar #2: The US dollar is the world’s least ugly currency.

China is bucking the central bank trend sending the Renminbi mildly higher. The Fed is also unlikely to risk a market meltdown by stopping its liquidity injections. Odds that USD (US Dollar) will roll over are high and rising.

  • Pillar #3: Global growth will remain anemic.

With the US, Europe and Japan all stuck in low gear, any 2020 growth rebound will have to come from emerging markets. Between a Chinese growth surprise and weaker USD, Louis Gave sees strong odds for fairly decent growth this year.

  • Pillar #4: Inflation is dead and buried.

Inflation has been picking up and Gave thinks it will continue, but the market doesn’t seem to care. So he sees low odds this will change the zeitgeist.

  • Pillar #5: Tech is really the only place to find growth.

Stock prices for companies like Apple are well ahead of their fundamentals. Gave sees high odds the tech sector will break this year.

Bottom Line: Gave concludes, “2020 should be an interesting year marked by US political uncertainty, a weaker US dollar, a stronger Renminbi, decent Chinese growth, stronger global growth, stronger inflation, a possible breakout in US labor costs and in oil prices, and perhaps even the start of discussions at the ECB (European Central Bank), the BoJ (Bank of Japan) and the SNB (Swiss National Bank) on leaving the NIRP disaster behind.”

 

Market Data

 

  • Investors have moved more than $15 billion into bond mutual funds and ETFs in each of the past three weeks.
  • Energy extremes. The energy sector has been seeing some stiff selling pressure, and it’s starting to register some panic-level extremes among those stocks.
  • Muddy metals. Industrial metals like copper, aluminum, lead, nickel, and zinc have been steadily dropping and just hit a multi-year low.
  • Copper collapse. Among industrial metals, copper has had one of the most dramatic falls. It went from a 6-month high to an 11% loss over only 10 days.
  • More warnings. A Hindenburg Omen triggered on both the NYSE and Nasdaq.
  • Big Four warnings. With an increasing number of stocks “splitting” this week, all of the “Big Four” stock indexes have triggered technical warning signs.
  • End of calm. For the first time in months, implied volatility is “not low.” The old “fear gauge,” the VXO index, jumped above 20—the first time it’s been above that level since October.
  • Momentum rollover. Tech shares are showing slowing momentum, with the McClellan Summation Index for the Nasdaq rolling over from a high level.

 

Are tech shares overbought?

 

 

All content is the opinion of Brian Decker