Thoughts on Trade

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

   When the report on international trade came out earlier this month, protectionists were up in arms.  Through February, the US’ merchandise (goods only, not services) trade deficit with the rest of the world was the largest for any two-month period on record.  “Economic nationalists” from both sides of the political aisle, think this situation is unsustainable.

   Meanwhile, some investors ran for the hills when President Trump started announcing tariffs on steel, aluminum, and other goods, thinking this was the reincarnation of the Smoot-Hawley tariffs that were a key ingredient of the Great Depression.

   We think the hyperventilating on both sides needs to stop. In general, nothing is wrong with running a trade deficit.  Many states run large and persistent trade imbalances with other states and, rightly, no one cares.  We, the authors, run persistent trade deficits with Chipotle and Chick-fil-A, and we’re confident these deficits are never going away.

    Running a trade deficit means the US gets to buy more than it produces.  In turn, we have this ability because investors from around the world think the US is a good place to put their savings, leading to a net capital inflow that offsets our trade deficit.  Notably, foreign investors are willing to invest here even when the assets they buy generate a low rate of return.  As a result, this process can continue indefinitely.

   It’s important to recognize that free trade enhances our standard of living even if other countries don’t practice free trade.  Let’s say China invents a cure for cancer and America invents a cure for Alzheimer’s.  If China refuses to give their people access to our cure, are we better off letting our people die of cancer?  Of course not!

Imposing or raising tariffs broadly would not help the US economy.  Nor would imposing tariffs on specific goods, like steel or aluminum.Giving some industries special favors will
only create demand for more special favors from others. It’ll grow the swamp, not drain it.

   All that said, we understand the frustration policymakers have with China, in particular, which has been levering access to its huge market to essentially steal foreign companies’ trade secrets and intellectual property.  It has a long-term track record of not respecting patents or trademarks.

    In theory, letting China into the World Trade Organization was supposed to stop this behavior.  But no company wants to bring a WTO case against China when it thinks China would respond by ending its access to their markets and letting in competitors who are more willing to be exploited.

    In addition – and this is very important – China is unlike any of our other trading partners in that it is a potential major military rival in the future.  There is a national security case to be made - even if one takes a libertarian position on free trade in general - that the US could accept a slightly lower standard of living by limiting trade with China, if the result is a lower standard of living for China as well.

   And China doesn’t have much room to fire back at recent US proposals (none of the tariffs targeted specifically at China have been implemented, by the way).  Last year, China exported $506 billion in goods to the US, while we only sent them $130 billion.

   That gives our policymakers room to raise tariffs on China much more than they can raise them on us.  If so, China would generate fewer earnings to turn into purchases of US Treasury debt.  Yet another reason for fear among bond investors.  However, don’t expect China to outright dump Treasury securities in any large amount.  They own our debt because it helps them back up their currency, not as a favor to the US.

   We’re certainly not advocating a trade war.  But an approach that focuses narrowly on China’s abusive behavior could pay dividends if it moves the world toward freer trade.    

"Click here to read more"

 

$15 Account Fee Credit for Going Paperless

 

April 16, 2018

Dear Client & Friends,

When you choose to go paperless and stop receiving your Raymond James statements, trade confirmations and account communications by mail, you’ll be doing more than just reducing clutter and saving trees – you can also save money. Beginning May 2018, you can get a $15 account fee credit when you choose online document delivery for accounts subject to any of the following:

·         Annual Account Maintenance Fee (charged annually in August)

·         Capital Access Fee (waived the first year, then charged annually on the account opening anniversary month)

·         Retirement Account Fee (charged annually on the account opening anniversary month)

How to get the credit

If your account is subject to one of the fees above, it can be eligible for the credit if it meets the following criteria:

·         You maintain online delivery for all account documents.

·         The account contains a minimum of $5,000 in cash or securities on its billing date.

·         At least $600 in deposits have been made in the account in the 12 months before the billing date.

How to elect paperless delivery

To elect paperless delivery of all documents, log in to Investor Access, visit the Account Services tab and select “Online viewing only” as the document delivery option for the account.

·         If you do not have an Investor Access login, visit raymondjames.com/investoraccess and click “Enroll in Investor Access” or contact me for assistance.

·         Note: If your account meets the criteria and you have already elected paperless delivery of your account documents, you will automatically receive this credit provided you maintain eligibility as outlined above.

Additional information

·         You can receive multiple $15 credits (one per account) if you elect paperless delivery on more than one eligible account.

·         Credit(s) will automatically renew and be applied annually if you continue to maintain eligibility.

·         It is important that you regularly check your document delivery email address in Investor Access to ensure it is current, valid and spelled correctly.

·         For your protection, Raymond James will reset your document delivery elections to all paper if you do not log in to Investor Access for more than six months, or if notifications sent to your email address are returned undeliverable more than once within 30 days. If the account is reset to paper delivery, you will not receive the credit.

·         This program does not apply to accounts already receiving fee waivers.

Just imagine – no more paperwork piling up or documents getting lost. Going paperless will mean better organization, greater security and saving money. And if you find that you need something on paper, just print it on demand.

 

 

Thank you, as always, for being a valued client. If you have any questions or would like to discuss this in more detail, please do not hesitate to give me a call.

Sincerely,

                                

Matt Goodrich                                                  Larry Goodrich, CFP

President, Goodrich & Associates, LLC.         Vice President, Goodrich & Associates, Inc.

Branch Manager, RJFS                                      Branch Manager, RJFS                        

 

Raymond James Financial Services does not accept orders and/or instructions regarding your account by e-mail, voice mail, fax or any alternate method. Transactional details do not supersede normal trade confirmations or statements. E-mail sent through the Internet is not secure or confidential. Raymond James Financial Services reserves the right to monitor all e-mail.

Any information provided in this e-mail has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Raymond James Financial Services and its employees may own option, rights or warrants to purchase any of the securities mentioned in this email. This e-mail is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and delete the material from your computer.

Ignoring the Invisible Hand

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

     One of the most important questions we have about our country’s future is whether prosperity itself will make the American people lose sight of where that prosperity comes from; whether we’ll forget to cultivate the attitudes about freedom, property rights, and hard work that have made not only us great but also all the other places that have followed the same path.

     To be clear, this has nothing directly to do with who is president or which party controls Congress.  It has nothing to do with the tax cut passed late last year, or recent tariffs, or increases in federal spending, or red tape being cut or added.  Instead, it runs much deeper than that and will affect all of these issues over the very long term, multiple generations into the future. 

     The issue comes to mind for personal reasons, as a couple of us travel around the country with our high school juniors looking at colleges, hither and yon.

      We’re not here to shame any particular school, so we’re not going to name any.  But here’s what we notice on our visits:  at some point, the college admissions officers in charge of the meeting will talk about great accomplishments by students or recently-graduated alumni.  Invariably, the accomplishments are volunteer efforts of various sorts that help people in some far off land or, sometimes, here in the US.

      Don’t get us wrong, stories like this deserve to be told.  They’re important and worthy of honor.  But, not once, in all our collective college tours have we ever heard a school bring up someone who, say, grew up in tough circumstances, was maybe the first in their family to go to college, and has since gone on to become a very successful entrepreneur, investor, or key officer at a large company, like a CEO or CFO,…someone who has gone on to create wealth for their own family and others as well. 

     Not once. 

     Which is odd because we know these colleges must have tons of these stories to tell.  You can tell when you’re taking the tour after the admissions sessions when you walk through the campuses and see the dorms, classrooms, and athletic centers many of which are named after alumni who’ve cut enormous checks.

     Maybe stories of business-oriented success are just not on the radar of the kinds of people who run admissions offices.  Or, worse, maybe they think it’s embarrassing or that there should be some sort of shame associated with striving to generate wealth.  

     Either way, they seem out of touch with why so many of their students want to go to college in the first place.  “Making the world a better place” is not just about volunteer work; it’s about personal ambition and desire mixing with the invisible hand to raise the standard of living for everyone.         

     Capitalism isn’t a dirty word and the long-term success of our civilization means making sure our children know it.

"To read more please follow the link below"

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/4/2/ignoring-the-invisible-hand

 

When Volatility is Just Volatility

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Economist

     Stock market volatility scares people.  But, volatility itself isn’t necessarily bad.  Only if there are fundamental economic problems, something that could cause a recession, would we think volatility itself is a warning sign.

      So, we watch the Four Pillars.  These Pillars – monetary policy, tax policy, spending & regulatory policy, and trade policy – are the real threats to prosperity.  Right now, these Pillars suggest that economic fundamentals remain sound.

     Monetary Policy:  We’re astounded some analysts interpreted last Wednesday’s pronouncements from the Federal Reserve as dovish.  The Fed upgraded its forecasts for economic growth, projected a lower unemployment rate through 2020 and also expects inflation to temporarily exceed its long-term inflation target of 2.0% in 2020.

      As recently as December, only four of sixteen Fed policymakers projected four or more rate hikes this year; now, seven of fifteen are in the more aggressive camp.  Some analysts dwell on the fact that the “median” policymaker still expects only three hikes in 2018, ignoring the trend toward a more aggressive Fed.

     But all of this misses the real point.  Monetary policy will still be loose at the end of 2018, whether the Fed raises rates three or four times this year.  The federal funds rate is about 120 basis points below the yield on the 10-year Treasury (which will rise as the Fed hikes), and is also well below the trend in nominal GDP growth.  Meanwhile, the banking system still holds about $2 trillion in excess reserves.  Monetary policy is a tailwind for growth, not a headwind. 

     Taxes:  The tax cut passed last year is the most pro-growth tax cut since the early 1980s, particularly on the corporate side.  Some analysts argue that the money is just going to be used for share buybacks, but we find that hard to believe.  A lower tax rate means companies have more of an incentive to pursue business ideas that they were on the fence about.

     And there is a big difference between who cuts a check to the government and who truly bears the burden of a tax, what economists call the “incidence of a tax.”

      Cutting the tax rate on Corporate America will lift the demand for labor, meaning workers and managers share the benefits with shareholders.  Yes, some of the tax cut will be used for share buybacks, but that’s OK with us; it means shareholders get money to reinvest in other companies.  Buybacks also move capital away from corporate managers who might otherwise squander the money on “empire building,” pursuing acquisitions for the sake of growth, when returning it to shareholders is more efficient.

     Spending & Regulation:  This pillar is a little shaky.  On regulation, Washington has moved aggressively to reduce red tape rather than expand it.  That’s good.  But, Congress can’t keep a lid on spending.  That’s bad.

      Back in June, the Congressional Budget Office was projecting that discretionary spending in Fiscal Year 2018 would be $1.222 trillion.  (Discretionary spending doesn’t include entitlements like Social Security, Medicare, or Medicaid, or net interest on the federal debt.)  Now, the CBO says that’ll reach $1.309 trillion, a gain of 7.1% in just nine months.

      Assuming the CBO got it right back in June on entitlements and interest, that would put this year’s federal spending at 20.9% of GDP, a tick higher than last year at 20.8% - despite faster economic growth.  This extra spending represents a shift in resources from the private sector to the government.  The more the government spends, the slower the economy grows.

     Trade:  Trade wars are not good for growth.  And the US move to put tariffs in place creates the potential for a trade war.  We aren’t dismissing this threat, but a “full blown” trade war remains a low probability event.

     The bottom line:  taxes, regulation and monetary policy are a plus for growth, spending and new tariffs are threats.  Things aren’t perfect, but, in no way do the fundamentals signal major economic problems ahead.  The current volatility in markets is not a warning, it’s just volatility.  

"Please follow the link below for further information"

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/3/26/when-volatility-is-just-volatility

COMPARISON OF PRIOR TAX LAW WITH THE TAX CUTS AND JOBS ACT

After making its way through Congress and seeing numerous last-minute tweaks, the tax reform bill was approved by Congress and then signed by President Trump on December 22, 2017. The new tax rates and countless other provisions generally took effect on January 1, 2018. The charts beginning on the following page, aimed at individuals and businesses, provide insight into changes made and provisions left intact. They provide brief explanations of past tax law and the Tax Cuts and Jobs Act of 2017, as well as insight from Raymond James thought leaders.

"Click Charts to see the  following illustrate the difference in the 2018 income tax brackets for the various filing statuses under the new tax laws versus what it would have been without these tax law changes: "

"Pullbacks, Indicators, Barometers, and Fear"

Jeffrey D. Saut, Chief Investment Strategist

So most know we took one of our South Florida speaking tours last week.  Such tours consist of meeting with portfolio managers, presentations to clients of Raymond James, branch visits with our financial advisors, doing the media thing, well you get the idea.  To all of those emailers/callers we were unable to respond to – apologies – but, the fact of the matter is we were doing five or six events a day, interspersed with a massive amount of phone calls, and then drive to the next event.  While there were many questions about the bond/stock/commodity markets, the economy, earnings, etc., by far the most questions were about the December Low Indicator, because we broke below the December low last week.  Recall, we brought this indicator to the attention of Jeff and Yale Hirsch decades ago and they have published it in The Stock Trader’s Almanac ever since.  Since then it has been quoted by many Wall Street pundits, yet Lucien Hooper’s December Low Indicator would likely have been lost if not scribed by us a long, long time ago.  We like this story:
It was back in the early 1970s, when I was working on Wall Street that I encountered Lucien.  At that time Lucien, then in his 70s, was considered one of the savviest “players” in this business.  While known for many market axioms and insights, the one that stuck with me was Lucien’s “December Low Indicator.”  It seems like only yesterday we were sitting at Harry’s at the Amex Bar & Grill having lunch when he explained it.  “Jeff,” he began, “Forget all the noise you hear about the January barometer; pay much more attention to the December low.  That would be the lowest closing price for the Dow Jones during the month of December.  If that low is violated during the first quarter of the New Year, watch out!”
Now the track record of Lucien’s indicator over the past 50 years is pretty good, especially when taken in concert with the January Barometer (“So goes the month of January so goes the year”).  In the more recent history, however, Andrew Adam’s comments of last Friday are worth repeating.  To wit:
One potential red flag, however, is that that the Dow Jones Industrial Average did close below its December closing low of 24410 to give us violation of the "December Low Indicator" we referenced last month.  . . . The last time it happened was only two years ago back in 2016, though the situation was very different considering January 2016 began almost right where the December 2015 low sat, and the Dow ended up closing beneath it on the third trading day of the year.  That, of course, culminated in the January/February correction that ended on February 11 and saw the Dow ultimately fall about 14% from its previous trading high of early November 2015.  After that, though, the market went almost straight up to finish the year comfortably higher.  Overall, the December Low Indicator has a rather mixed history going back to 2000.  It is actually not uncommon at all to get a violation, with 12 occurrences since 2000, and the forward returns have been surprisingly encouraging.  From the point of the December low being broken, the Dow was up after three months 8 out of 12 times, up after six months 7 out of 12 times, and up after 12 months 9 out of 12 times.  So, while it does bear watching, we don't think the indicator, by itself, is enough to be overly concerned about, especially with stocks already near downside extremes.
Speaking to “downside extremes,” the envisioned February Flop came three sessions before our February 1 target, but it was within the +/- three-session window our models allow.  Subsequently, we got the anticipated selling climax last Tuesday, as related on CNBC that day.  Then, as is the typical pattern, the indices experienced a sharp throwback rally that we chatted about on that same CNBC appearance and said that it should fail, with the indices sliding to lower lows.  “The textbook chart pattern,” we said, “would be for an undercut low of Tuesday’s selling climax low.”  Well, that’s pretty much what has happened. What we find interesting is that pundits that NEVER saw this decline coming have been rushing out over the past few weeks touting various support levels; you pick the index, as well as their various stock buy ideas, all of which are pretty worthless until the equity markets exhaust themselves on the downside.  Ladies and gentlemen, when the stock market gets into one of the selling stampedes, all such comments are pretty useless!  So what now?
Well, while normally our mantra of “never on a Friday” should have applied to last Friday’s Flop, meaning stocks in a selling skein rarely bottom on a Friday, that mantra probably doesn’t play this time.  Indeed, the bottoming process we laid out weeks ago was almost textbook, punctuated by last Friday’s undercut low.  As written:

What should happen here is a selling climax low today followed by a throwback rally that fails, leading to a retest of the recent intraday lows.  The perfect chart pattern would be for a marginal undercut low downside test of this early week's trading lows, which would turn EVERYBODY bearish looking for another huge leg to the downside, yet we would BUY it, believing the worst has been seen in a continuing secular bull market.
And then there was this over the weekend from Canada’s savviest oracle ever, our pal Leon Tuey:
What a tumultuous week!  Don’t sweat and be happy as the correction is over and the great bull market has resumed.  On Tuesday, what investors saw was a classic selling climax, which comes at the end of a selling squall.  A selling climax is an emotional catharsis when investors “throw the baby out with the bathwater.”  Besieged by fear, investors are willing to sell at any price.  They fear that their holdings will go to zero.  Consequently, stocks move from weak hands into strong hands.  How fearful?  On Monday, my phone rang off the hook and it didn’t stop ringing until 9:30 p.m.  Most of the callers were  practitioners in the business, retired or active, and they came from Europe, Asia, and local.  That was the most phone calls that I’ve fielded in one day for more than 35 years!  They were all very calm and collected.  I am flattered that they called, but the calls were instructive.  Globally, investors panicked, which is very bullish.  Remember what Warren Buffett advised: “Be fearful when others are greedy and be greedy when others are fearful!” 
The call for this week: Well, it’s Saturday and we are still on the road.  Since we are writing this from Orlando, a fitting title for the last few weeks would be “Mr. Toad’s Wild Ride” (Toad); but we digress.  Speaking to yet another ubiquitous question from last week was, “Did we get a Dow Theory sell signal?”  The answer, at least by our interpretation of Dow Theory, is a resounding NO!  So, as stated, the bottoming process was picture perfect.  We called the downturn, last Tuesday’s selling climax, the subsequent failed throwback rally, and Friday’s undercut low (the print low below last Tuesday’s selling climax low).  Indeed, “picture perfect!”  Our energy models are calling for an upside energy whoosh this week, so we think the selling stampede is over!  

To see graph and read more please follow the link below:

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=f44853a4-3c56-4acf-a917-93aef2edefea&mime=pdf&co=RaymondJames&id=Matt.Goodrich@RaymondJames.com&source=mail