Opening Statement from the September 2016 Dividend Gems
Originally published on September 18, 2016
In late 2010 we reported our view that there would be a significant meltdown in the commodities market in coming years. We provided additional analysis in February 2011. Our timing was spot on, as it turned out to be the peak period in commodities (the Continuous Commodities Index made a high of around 660 in January 2011). Since then, the commodities market has declined by around 50%.1
As we first discussed in early 2010, the global economic stimulus released in early 2009 was expected to be depleted by the first half of 2011. This was one of the factors we considered prior to concluding that the commodities bubble would deflate in coming years. By mid-2011 the currencies of resource-exporting nations peaked and had begun a downward trend. Weakness in these currencies was largely mirrored by pricing in several commodities.
For several years during the commodities bubble price correction we have been warning about global disinflation leading to deflation. We believe the globe continues to face the growing threat of deflation. Specifically, we continue to believe Europe and Japan are headed for even lower interest rates.
In late 2014 (Intelligent Investor) we warned investors about a new period we expected to begin within one to three years. Since then we have witnessed several historic events strengthening the argument that this new period has commenced. A brief list of these events is as follows:
Key Historic Events (Updated)
Soaring Dollar (late-2014 to current)
Collapse in Oil Pricing (mid-2014 to current)
Soaring Interest Rates in Russia (overnight in November 2014)
Swiss Depegging the Franc from Euro (January 2015)
Weak & Delayed Response by Oil Industry (2014 to current)
Greece’s Bailout Events (2010 to current)
China’s Stock Bubble (late-2014 to current)
Chinese Government’s Market Interventions (July & Aug 2015)
China’s Devaluation of the Yuan (August 11, 2015)
China’s Financial System Issues (mid-2013 to current)
ECB Extends QE by 6 Months to Oct. 2017 (Dec. 2, 2015)
Federal Reserve Raises Rates by 25bp (Dec. 16, 2016)
China Devalues the Yuan Suddenly Again (Jan. 4, 2016)
China Halts Stock Market Twice in 1 Week (Jan. 4 & 8, 2016)
Japan Moves to Negative Interest Rates (Jan. 28, 2016)
UK Voters Decide to Exit the EU (Jun. 23, 2016)
In response to China’s sudden and drastic devaluation of the yuan in August 2015, the capital markets sold off hard. In our view, this confirmed the beginning of the new economic period we had been warning about. By January 2016 we experienced a similar situation.
Throughout our research we have also been discussing the importance of monitoring the impact of critical events that have already occurred as well as ongoing risks that could have widespread impact on the global economy and capital markets.
Ongoing Risks & Events (Updated)
Problems with Chinese Economy
China’s Stock Bubble
European Union Economic Issues
European Union Banking System
US Interest Rate Changes
Lingering Low Oil Pricing Impact on Earnings Growth
Further Devaluation of the Yuan
Continued Dollar Strength
Spillover Effects from China (contained/SE Asia; EM vs. global)
Profit Margins Peaking in US Firms
Weak Sales Growth from US Firms (esp. multinationals)
More Member Defections from the European Union
Earnings Growth Decline (5 quarters, yoy, as of Sept. 4, 2016)
Although there have generally been no fundamental improvements in the economy or corporate earnings picture, many equities markets have rallied since the selloff sparked by the results of the UK referendum, including UK’s own equities market. We have not been surprised one bit by this global rally, as we previously downplayed the significance of the UK’s decision to exit the European Union.
In addition to the compensatory response expected after an overreaction by investors to the “Brexit” vote, we believe the equities markets have also rallied due to lowered expectations for interest rate hikes by the Fed. This has enabled the stock market to absorb higher valuations during this period of heightened risk. Meanwhile, the realization of lower interest rates for a longer duration continues to push commodities pricing lower.
Although the US economy is exhibiting elements of weakness, we believe a recession is only a very small possibility in 2016 and 2017. Rather than
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