The big story of the last 24 hours is evidently the OPEC agreement (including some non-cartel members) to cut oil production, ostensibly to rebalance what is currently a market swimming in excess inventory. The crude market took the announcement extremely well, posting even bigger gains than those observed after September's production cut.
Macro Man will leave it to others to tease out the intricacies of supply and demand and what this means for the equilibrium oil price. He will observe, however, that recent history has demonstrated that a) crude above $50/bbl tends to elicit a supply response from marginal US producers, and b) the euphoria resulting from the previous production cut didn't last very long. Indeed, it took barely a month for prices to reach levels lower than those prevailing before the production cut.
Elsewhere, like many of you Macro Man is shocked, SHOCKED that yet another Goldman alum has found himself in a position of political and financial power, in this case the post of US Treasury Secretary. While working at GS should clearly not be an automatic disqualifier- after all, there are a lot of smart people working there, and generally speaking it's nice to have smart people in positions of responsibility- by the same token it shouldn't be an automatic qualifier, either. Either way, it doesn't exactly scream "positive change for the little guy".
While it seems that some sort of tax cuts are a foregone conclusion when the new administration comes to power, it will be interesting to see exactly what form they take. Much of the rhetoric thus far has centered around corporate tax cuts, including a potential amnesty on overseas earnings. The wishcast, of course, is that this money is repatriated to be invested in capex or hiring. (Unlike the proceeds of record bond issuance, which has been used for dividends and buybacks.)
That's all well and good, but is it really the right recipe for the country? After all, both pretax and after tax corporate profits as a percentage of GDP are well above their long-term averages. Wage and salary income, on the other hand, is not. While there is certainly something to be said for growing the pie rather than fighting over divvying up the slices, there's a pretty clear negative correlation between corporate profits and labour income in recent decades.
A large part of that represents the fruits of globalization, which Trump evidently abhors. It would be ironic, then, wouldn't it, if his policies as president merely served to exacerbate the problems that emerged under the watch of the established political elite.
Macro Man will leave it to others to tease out the intricacies of supply and demand and what this means for the equilibrium oil price. He will observe, however, that recent history has demonstrated that a) crude above $50/bbl tends to elicit a supply response from marginal US producers, and b) the euphoria resulting from the previous production cut didn't last very long. Indeed, it took barely a month for prices to reach levels lower than those prevailing before the production cut.
While it seems that some sort of tax cuts are a foregone conclusion when the new administration comes to power, it will be interesting to see exactly what form they take. Much of the rhetoric thus far has centered around corporate tax cuts, including a potential amnesty on overseas earnings. The wishcast, of course, is that this money is repatriated to be invested in capex or hiring. (Unlike the proceeds of record bond issuance, which has been used for dividends and buybacks.)
That's all well and good, but is it really the right recipe for the country? After all, both pretax and after tax corporate profits as a percentage of GDP are well above their long-term averages. Wage and salary income, on the other hand, is not. While there is certainly something to be said for growing the pie rather than fighting over divvying up the slices, there's a pretty clear negative correlation between corporate profits and labour income in recent decades.
A large part of that represents the fruits of globalization, which Trump evidently abhors. It would be ironic, then, wouldn't it, if his policies as president merely served to exacerbate the problems that emerged under the watch of the established political elite.
26 comments
Click here for commentsNot sure I am with you here. Yes, corporate profits have been high and no Capex as not seen the benefit so why would it on funds repatriated? However, corps are being asked a question here. Do they prefer the outsourced costs structure found in emerging markets or after a very appreciable rise in dollar strength do they perceive that benefit to have now been marginalised? I think if there is any perception that the dollar may be turning into a secular bull market then the question is real. Such a market promises years of fighting revenue growth diminished by the dollar BS transmission and of course implicit in dollar strength is increasing purchasing power for the domestic consumer. At least a couple of implications for revenue growth in there that may well be persuasive for dollar repatriation and investment.
ReplyI think the real question being asked here is do those companies perceive a secular change in the fortunes of both the dollar and the US consumer? I don't have the answer to that question.
I might add if I really wanted to create a reflationary environment this is the way I would have gone about it, not via monetary policy. So , on that basis I find it persuasive for the longer term viewpoint.
Reply"there's a pretty clear negative correlation between corporate profits and labour income in recent decades"
ReplyThe negative correlation (as shown in the chart) is between corp profits and labor income as a % of GDP, not as absolute figures. But isn't that almost a tautology? Split anything two ways and the percentage of one share will be negatively correlated to the percentage of the other.
Hey Washed,
ReplyI've been busy moving house so have taken a holiday from trading for a month or 2. Have elected to move over a 1 month to spread out the disruption etc.
On the dollar. Not too excited about much at these levels. I think the dollar is due for kick in the nuts, but it's not something I would take a punt on.
US Bonds are getting to interesting levels and I am pretty tempted to buy at these levels. Consensus seems to be pricing in Trump driven reflation, so I would be inclined to lean against that.
I tend to think the steepening and backup in long term rates will have a much bigger effect on the U.S and global economy than any effect Trumps policies are likely to actually do in the next year. The Trump move appears to have magnified an overdue correction in bonds and caused some short covering in equities. Equities I wouldn't fade into the expected Santa rally but bonds are starting to look very tempting here.
@ Unknown no, because the two variables combined amount to just slightly more than 50% of GDP.
ReplyI think you're getting confused re oil - there was NO cut in September; merely the announcement of the intention to cut yesterday. As doubts about the likelihood of this being followed through crept in, prices sold off. Yesterday, OPEC surprised the market by not only adhering to their intention to cut, but by also including Russia in the cuts.
Replyjdc, I guess it will be surprising when they go over cut quotas. What's surprising is it took so long and that people are still surprised. The play is for oil aficiondo's only. Everyone else can ease back into a nice afternoon nap.
ReplyMacro Man, as a tax lawyer can I say, with all respects, you are all wet on tax on US corporations bring dollars "back home". First, US should go to territorial system where earnings overseas are not taxed again when a dividend is paid to home country. This is one time where I would say if territorial system is good enough for rest of world it is good enough for US. Also might stop or slow US corporations trying to become non US corporations. Second, any "tax holiday" will not result in any actual dollars brought back to invest or buy back stocks or anything else. If a US corporation with earnings outside the US wanted to us money in US, the non US sub made a loan to the parent. The tax holiday simply gives US corporation a chance to clean up their books and unwind all the methods they used to avoid the tax on dividends rule over the last 10 years or so since the last tax holiday.
ReplyMay try to post later on oil and corporate profits as % of GDP, but got to go now. Enjoyable bog as always, so thanks Macro Man.
Good post MM. I take the point of all the commenters who note that the tax issue is more complicated than MM lays out, but I think the following is a key point.
Reply"It would be ironic, then, wouldn't it, if his policies as president merely served to exacerbate the problems that emerged under the watch of the established political elite. "
Wouldn't it indeed! When I peer across the world, politicians of all stripes in power (populists, establishment etc) are engaged in a race to the bottom in corporate tax, which I find quite odd. But hey ... there is way to adjust for this of course. It has Marxism written all over it though ... i.e. you could force firms to pay out more to labour out of their after tax profits, before distributing to shareholders. Don't ban me guys! I am just saying that if the Bernie Sanders of the world take over at some point with very low corp tax rates, that could be the end product.
Quick question that is similar to one someone else asked a week or two ago but I didn't see a response to:
Replyis there any particular reason that a US company doesn't use overseas earnings to buy its own ADRs? Is this a function of exchange rate risk? Or some sort of legislation against it? Or just typically volumes for ADRs tend to be lower than for the ORDs in the US so it is less cost effective?
Nice thoughts Flowthrough, though I do think the suggestion of a tax holiday is still a positive signal for US multinationals. Lets them know Uncle Sam maybe isnt so dogmatic. Or maybe not
ReplyOnto oil, while we can debate about whether the cut will really work or not, physical markets are slowly rebalancing and non US, non OPEC production will be declining significantly, according to most models in the coming quarters. So this announcement really helps, essientially giving markets breathing room. And while some may assume for oil markets, really only the dollar matters, take a look at Zinc, Tin, Rebar, Iron Ore, etc CRB Raw Industrial commodity index is going up and up. Also not that the divergence between industrial and agg commodities is at historical levels going back decades. HMMMMM
"While there is certainly something to be said for growing the pie rather than fighting over divvying up the slices...."
ReplyWhere have I come across that thought before...oh yes....every day for the last 34 years, since Maggie and Ronnie started holding hands.
If we take nothing else out of the unfolding socio-political ructions we should surely recognise that a growing number of people in a growing number of countries no longer believe they'll get a meaningful slice of any incremental pie. What they want instead is a bigger chunk of the apple and pastry that's already out there but not coming their way.
After that weak bonds EOD yesterday it was probably a real pain in the nether regions today to get left in the dust which really only looks now like a continuing trend. Lean against that if you like ,but there is certainly nothing on a chart that tells me you would get paid for it here.
Reply@Flowthrough, I thought there is a regulation that the non-US loaning money back to its US parent would trigger a taxable event.
ReplyBetween US long bond and equity, it looks like that equity is going to be the first to reverse, and a shallow correction at most. The large correction will come when there is a concrete policy proposal and when expectation meets reality.
- Isn't Apple's 200bn in "overseas investments" sitting in a Nevada shell corp?
Reply- Aren't they already "investing at home" as the largest buyer of short term US corp notes?
- This repatriation garbage is about accounting, not flows.
Hey all. Well, stopped out of USDJPY yesterday and out of USDTRY this morning. Time for a cooling off period for me as I've just not been in sync with markets since the election. I'm happy that MM has been in good form though :)
ReplyInteresting comments Flowthrough re the repatriation not affecting buybacks. If that's the case, the most important macro effect of the repatriation would seem to be on the eurodollar market, no? Not the dollar directly as these funds are already in USD, but by bring them out of the eurodollar market and into the domestic dollar market, corporates would be tightening overseas dollar liquidity. That tightening could have a second order effect of strengthening the dollar.
Good to see Booger posting again. Actually, I am closing on a house today (my first and hopefully last purchase). Somehow the mind conjures the image of Major Kong riding the bomb from Dr. Strangelove ... yee haw.
The dollar is weak, equities too. Is there a big reversal day in the works? Jeff Gundlach is already calling one:
Replyhttp://www.reuters.com/article/funds-doubleline-gundlach-idUSL1N1DW1HU
OK, so we are at that level in oil...
Reply1. Break higher
2. Break higher and fake out
3. Consolidate above 50
4. Retrace and shake out
5. Tanks
Not much of an oil-head, so be interested to hear from the more knowledgeable.
Despite much more supply coming through than most thought, it looks to me like supply and demand for oil is pretty close to a balance. 1H2017 event if the global economy hangs in. Oil has the potential to get to $70 pretty quickly if the market gets tight given the lack of capex in recent years. I don't see it staying above $70 for any period of time, but I would expect to see $70 in 2017. OPEC has as much market share as they are going to get so I suppose it was easier to agree to a cap now (Monday morning quarterback). Oil should be at $50 and moving up regardless of OPEC.
ReplyK vs. L indeed. The problem is that it is a global fight not a U.S. fight. The 2nd largest economy in the world, China has an even more serious imbalance. I feel that this is the reason growth is slow... low income, relative to GDP, among those people who actually consume the output of the economy (apparently my 7yr old can understand this but a PhD cannot). If the U.S. tips the scales back to L so that demand goes up, who is to say that other economies won't siphon of that demand through a higher dollar? U.S. labor has been the whipping boy of the globe for too long. It is good to see L get the handle of the whip instead of the crack. I just worry that you can't fix this global problem with unilateral domestic policy. However, maybe China's reaction (and Germany's) to the U.S. prioritizing it's citizens instead of it's businesses will be a revelation that their only hope is to stoke their own demand. I suppose it is possible (see China's reaction to Trump and the Paris Accord). One can hope... I am not even sure Trump will favor L over K.
that 'what why exactly did i buy over 2200' market feeling
ReplyHmm I agree with LB in spirit on bonds, I just think we have to tag 3% first. Once the bond bears are on Christmas holidays in a few weeks, it will be time to go to work.
ReplyInteresting discussion on K vs L. My take is that at current unemployment rate, demand/supply determines that L's share in economy should go up. Government regulation or policy helps a bit, but not much. Have you noticed all the "Help Wanted" signs in retailers and restaurants?
ReplyAnd when Trump focuses on deregulation, it is mainly to help K but not L.
Now, on China. It is clear to me that China is facing another capital flight event now, just like last December which caused the mini-crash in January. I assumed that the history won't repeat itself and China's crashing theme had already been played twice in the past 18 months. And everyone has already assumed that Trump is a bearish event for China, at least in short term. So far, Trump's election is bullish to China's local stock market and flat for Chinese stocks in the US (FXI).
My question is: would another China capital flight story finds its way back to the US financial market?
Looking at my crystal ball, I see.
ReplyIWM hit a top on the 28th.
SPY,QQQ hit a top on the 29th.
TLT, GLD, IYR may be hitting a bottom today.
I think the Trump Trade is done until we get some clarification from Congress regarding their enthusiasm for going along. Will they really expand the deficit dramatically or will they just rotate spending to their preferred industries?
Rising yields are going to pull down housing, refis, and autos.
I'm still long bonds & some reits + short equities.
One more prediction: XLF + KRE + ITA + CAT are hitting a top today.
ReplyIn particular, CAT's presentation today suggested that 2017 isn't going to be peaches and cream. The fact that the stock didn't materially drop afterwards in interesting.
mr beach agree completely on CAT - basically:
ReplyCAT management:
'um, guys, you sure you want to be buying us? We basically just come to work every day and hide under our desks - Zhou from China hasn't been returning our calls'
thad and brad: 'f yeah, what do you know? didn't you hear we will be needing a lot of machinery to build bridges?
Seriously?
Or,
Replythad and brad: 'f yeah, what do you know? this is not about fundamentals, but Momo of the Trump Trade. And you know what? that's probably the reason the stock didn't materially drop after CAT suggested that 2017 isn't going to be peaches and cream.
There still seems to be a strong underlying bid to equities ... a small correction may be in the offing or occurring already, but it may be short and shallow.