The Independent Investor: Brexit: The Never-Ending Story
Back in 2018, the government of the United Kingdom and the European Union reached an agreement on exactly how the British exit (Brexit) would occur. Since then, despite countless meetings, discussions and votes, the UK Parliament has failed to approve that process. The new date for an exit is Oct. 31. Will this really be the end of the story?
The October extension was really a compromise negotiated by former Prime Minister Theresa May of Britain's Conservative Party. Some European countries were offering a much longer delay for as much as one year. However, Emmanuel Macron, the French President, insisted on a much shorter time period.
Macron and some other European leaders are worried that the toxic atmosphere within Britain, which has been building ever since the exit vote back in 2016, could spill over and infect sentiment within the populations of other European countries. The longer these exit negotiations go on, the more likely other European countries might be persuaded to follow the UK's lead and announce their own exit plans.
To further complicate matters, Boris Johnson, an outspoken critic of the negotiations (and a leading pro-exit populist), took over as prime minster from May for Britain's Conservative Party this month. One of his first promises was to accomplish the exit with "no ifs, ands, or buts."
Johnson has vowed to leave the EU by Oct. 31, regardless of whether or not a deal with the EU can be inked. In addition, he and his cabinet have demanded a change in the terms of the negotiated deal, which have surfaced before, and were rejected repeatedly by the EU.
Many Brexit watchers believe Jonson's tactics are simply a ploy to bring a no-deal Brexit plan to a vote in Parliament where it would be rejected. That's a safe bet, since the majority of MPs (Members of Parliament) are adamantly opposed to a no-deal departure. At that point, Johnson could then call for new elections, positioning himself as the self-styled champion of Brexit.
If Johnson's threat was to be taken seriously and the UK actually exited the EU on Halloween, the impact could be devastating. All the arrangements, pacts, treaties and trade agreements with the EU would come to an abrupt end. Everything from the free movement of people to policing and security would be called into question. Food, drink, data, finance, aviation, even the supplies of medicine as well as countless other day-to-day items would need to be re-examined.
There would be need for a great deal more government spending and planning immediately to deal with the short falls in all these areas if the exit were to occur over the next three months. Some of this preparation has already begun, but there is far more spending and planning required than time to implement it.
And even if a large and vocal segment of the population simply wants to "get it over with," regardless of whether or not a deal can be negotiated, that does not end the problem. In the immediate aftermath of a no-deal exit, the UK would be able to continue trading with the EU under the terms of an existing default agreement governed by the World Trade Organization (WTO).
Under the default agreement, tariffs on such things as agricultural goods would be able to continue for a limited time, but the UK would still need to negotiate a permanent deal with the EU. That would involve all the same issues that the UK Parliament is already facing (and failing to pass). The issue would be that a no-deal exit would require decisions on all of the above to be made quickly; something parliament and the country overall has proven to be incapable of doing. Given all of this, I believe the October deadline will come and go so the Brexit story will continue and continue and continue.
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@theMarket: All Eyes on the Fed
It was a week of chop. That was to be expected, given it was the first week of second-quarter earnings results. While some individual big-name stocks made substantial moves, the overall indexes traded up and down but ended the week about where they started.
It was largely what I predicted would happen. The same will apply to this coming week with all eyes intently focused on the July 31 meeting of the Federal Open Market Committee taking place next Wednesday. Investors expect the Fed to cut the Fed Funds interest rate by at least one quarter percent. Let's hope they do.
In the meantime, aside from earnings announcements, investors were confronted with some bad news out of Washington. After months of waiting, the U.S. Justice Department finally announced that the U.S. government has launched an investigation into the largest U.S. technology companies. Specifically, authorities will be trying to determine if the likes of Facebook, Apple, Google and Amazon are guilty of anticompetitive practices. If they are found guilty, that could lead to antitrust charges.
Actually, I was impressed with how well the markets held up given that the above named "FANG" stocks have been the market leaders for years. The four companies represent a substantial weighting in many of the U.S. indexes, such as the S& P 500 and NASDAQ indexes. While no one knows how long until, or even if, any of the companies will ever be charged, the investigation will cast a pall over the group for some time to come.
So, while investors grabbled with the bad news from this Justice department, over at the U.S. Treasury, Stephen Mnuchin, its Secretary, announced some good news. Both he and the White House's Chief Trade Representative, Robert Leigthizer, are off to China Monday to resuscitate high-level negotiations with their Chinese counterparts on trade.
While traders cheered the China news, my own belief is that talks are going to become even more difficult now that China's Trade Minister Zhong Shan has joined their negotiation team. Shan, while regarded as capable, knowledgeable, and professional, is also considered a "hard-liner." As such, he could make discussions even more difficult and probably will. That might fit into the president's game plan.
It is my own belief that Donald Trump does not want a breakthrough deal announced quite yet. One of the chief reasons investors are expecting the Fed to cut interest rates is the fear that an escalation in the U.S./China trade war would cause havoc with our economy. Until there is a deal, that China threat is hanging over our economy.
Trump is keenly aware of this. The president is also on the record in demanding that the Federal Reserve Bank cut interest rates now in order to grow the economy. But that does not mean a recession is looming in front of us. Friday's second quarter Gross Domestic Product (GDP) report came in at 2.1 percent which was above the expected growth rate of 1.8 percent. While consumer and government spending were strong, business investment slowed.
The probability of a U.S. recession over the next 12 months is less than 33 percent, according to research released by the New York Federal Reserve Bank. As such, the Fed's expected interest rate cut next week (if it occurs) is believed to be little more than monetary "insurance" just in case talks break down, in which case, Trump has threatened to then levy another 25 percent tariff on the remaining $350 billion of Chinese exports to the U.S.
If the Fed does cut rates, we will see what the president's next move will be. Of course, that is not entirely within his control, since China will have an equal say in what kind of deal is struck and when. As for the markets, enjoy the ride, but be aware that some time soon we could see another 5-7 percent pullback.
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The Independent Investor: Make Vietnam Great Again?
Funny things happen when our government starts tinkering with the economy in a big way. Unpredictable results, unintended consequences, and confusion often result. U.S. tariffs on China is a case in point.
Now to hear it from the White House, slapping tariffs on imports from China is going to change the entire equation of how companies do business. As it becomes more expensive to import from China, Donald Trump promised that other foreign countries were going to flock to the U.S. creating more jobs, more tax revenues, and generally become a big part of "making the U.S. great again."
So far, the president is half right. Over 50 multinational companies have announced plans to shift production out of China as a result of the 25 percent tariffs placed on $200 billion of Chinese imports. That trend is expected to accelerate if (and when) the U.S. levies even higher tariffs on China, since President Trump is threatening to add duties on another $325 billion of Chinese goods.
American computer makers such as Dell and HP plan to move as much as 30 percent of their computer notebook production out of China. Apple is assessing a similar move with 15-30 percent of their Chinese production. However, none of those companies intend to bring that capacity back to America. Vietnam, India, Thailand, and other Southeast Asian countries are the intended new centers of this manufacturing.
And it is not just non-Chinese companies that are re-thinking their production strategies. Several Chinese companies are also hedging their bets and shifting their businesses elsewhere, most notably to Vietnam. The Chinese government, in response, is doing all they can to retain and attract companies to their shores. Last month, the Chinese said they would ease restrictions on foreign investment in seven sectors, including the energy area. The financial sector is also an area that the government plans to open up to foreign investment.
Since Vietnam shares a border with China, it has benefited the most from the trade war. It is fast becoming a center for many manufacturers of electrical and electronic equipment. Two of the world's technology behemoths, Korea's Samsung Electronics and Japan's Kyocera, are making printers, smartphones and a variety of other technology products in the country.
The rush to establish new supply chains has been so huge, that it has boosted the GDP of Vietnam last year by almost 8 percent. The country's trade surplus with the U.S. has exceeded $20 billion since 2014,.and last year, it hit the highest level of surplus (almost $40 billion) in several decades.
Vietnam's windfall has not escaped the ire of the Trump Administration. The president has called the country "the single worst abuser of everybody" when it comes to unfair trade. The U.S. Treasury has recently added Vietnam to its watchlist of countries it is monitoring for possible currency manipulation. It is also looking into claims that Chinese exporters are routing their exports through Vietnam, then re-labeling their products with fake "made in Vietnam" labels to avoid the U.S. tariffs.
Vietnam is simply an example of what can happen when governments micro-manage trade and the economy. Our actions have succeeded in making Vietnam great again, something that doesn't sit well with me, a Vietnam Vet.
In response, sure, we can plug the leak in the dike by placing tariffs on Vietnamese imports, but then what? Diverting trade away from Vietnam won't mean more jobs or benefits for America. The tariff trade will simply be re-routed to other countries that can make them for less and have the skilled workers to do the job. Nonetheless, for those without a handle on how global economics and trade truly work, slapping tariffs on countries plays well with Main Street and that's what the president is counting on.
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The Independent Investor: Paid Family & Medical Leave Overdue
Paid family and medical leave are long-overdue in this country
What do the United States, Papua New Guinea and Oman have in common? Those are the only three countries in the world that do not legally obligate employers or taxpayers to pay for maternity leave.
Many American businesspeople will hide behind a knee-jerk response to the above statement: "We are a free-market society," they will argue, "and paid leave is paramount to just another form of socialism."
Good try, but that old argument is no longer based in facts. Free markets have given way to corporate socialism in this country, while corporations are now legally considered to have the same rights as individuals.
As such, individuals have a moral responsibility to protect and care for future generations. They have an obligation to society. Giving paid leave to American workers, not only to deliver and care for their young, but also to provide income during serious medical conditions, cannot be left to the whims (and greed) of our corporate community. As it stands, after decades of waiting, a mere 15 percent of companies have voluntarily instituted paid leave to their workers, according to a 2017 Bureau of Labor Statistic report.
The fact that for the last several years, corporations have banked stupendous profits and now carry more cash on the books than ever before just makes their failure all the more apparent, if not disgusting. To be fair, there are some companies such as Microsoft, IBM, Netflix, American Express, Citigroup and, of course, Berkshire Money Management that do pay for parental and medical leave.
Take my own case as an example. As many readers are aware, I have had some serious medical problems over the course of the last few years. Two knee replacements kept me out of work for about five months. And then there was that bout with prostate cancer in 2017. Not only did the company pay me while I was out, but management sat in the waiting room with my wife throughout my surgeries.
Can you guess how I felt when I returned to work? I have spent the last two years working like a maniac to not only make up for that time loss, but also to show my gratitude for all the company has done for me. And I'm not the only one.
Our compliance officer, Jayne, within her first year of employment at BMM, had her second child, Marigold. Once again, BMM not only paid for 13 weeks of maternity leave, but went the extra mile when Marigold refused to take the bottle. We hired a nanny to baby-sit in the office for weeks and weeks so Jayne could come to work with her child until she was over that hurdle.
"Both my morale and productivity took a great leap forward as a result," Jayne said. "Knowing that both I and my child were so well-supported reduced my worry dramatically and allowed me to work that much harder here."
As of today, only six states — California, New Jersey, Rhode Island, New York, Washington, Massachusetts — and the District of Columbia have passed paid family-leave programs. Massachusetts, which passed their legislation last year has delayed implementation of their program until October 2019.
Their law provides workers with 12 weeks of family leave and 20 weeks of personal medical leave. Workers on paid leave will earn 80 percent of their wages, up to 50 percent of the state's average weekly wage, and then 50 percent of wages above that amount.
The employer pays at least 60 percent of the medical leave contribution required for each employee, but none of the family leave contributions. The worker picks up the rest via a fund which will tax an employee's earnings.
Although the Federal government does have a Family and Medical Leave Act (FMLA) passed in 1993, it only protects the worker from being fired or excluded from a company's group health insurance coverage and then only for a certain time period.
The entire charade of hiding behind some mythical form of capitalism to justify this failure by our nation is inexcusable. Eighty-two percent of participants in a Pew Research Center poll believed new mothers should have paid time off while 69 percent said the benefit should apply to fathers as well.
Of course, simply because the majority of Americans want, even demand, something from their government is no guarantee that Congress or the president will listen. It's campaign season, so let's make this an issue for the candidates.
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@theMarket: Looking Ahead
Will the second half of the year be as good as the first half for the markets?
The S&P 500 Index finished up 18 percent for the six months ending June 30. That was the best first half since 1997. Historically, that kind of return is three times the gains investors can normally expect from the market in an average year. The chance of a repeat performance in the next six months is, at best, remote.
That doesn't necessarily mean this is as good as it gets for stock investors. My near-term target for the S&P 500 Index is somewhere around 3,050, which is a further 4 percent gain from here. From my vantage point, as long as interest rates continue to decline and the Fed stays at least neutral, we go higher.
For the time being, the China trade tariff worries are off the table. As I predicted last week before the G-20 meeting, Donald Trump adhered to his "speak loudly, but carry a little stick" foreign policy. He relented on a number of issues, including holding off on any further tariffs on China, at least for the time being.
While the markets rallied on Monday as a result, they quickly gave back their gains since investors are beginning to learn that not everything that our president says will necessarily be accurate, or when it is, his statements are almost always an exaggeration of reality. The Fed, on the other hand, is a different kettle of fish.
You might ask why the markets are continuing to rise when economic growth here and abroad continues to slow. First, recognize that the economy and the stock market are two different entities. What may not be good for Main Street (slowing employment gains, sluggish business investments, weakening quarterly earnings), in this case, increases the chances that the Fed will cut interest rates as early as this month and that would be good for the markets.
At this point, despite the Fed's refusal to confirm or deny an interest rate cut, the financial markets are convinced they will cut. The odds of a Fed interest rate cut by July 31 have surged to 100 percent. While 72 percent of traders are counting on a quarter-point cut, almost 28 percent of traders are expecting a half-point cut. That in itself is astounding, since the Fed has not cut rates by that much in many years. Over 60 percent of bond traders are also counting on another rate cut as early as September, according to CME Fedwatch.
Whenever the markets are unanimous about anything, I usually feel the hairs on my neck begin to tingle. Given that the stock markets are climbing, based on that interest rate assumption, it behooves the investor to ask what will happen if everyone has it wrong and the Fed doesn't cut? The short answer would be look out below.
And as we close out this holiday-shortened week, remember that when we get back second-quarter earnings season will be upon us. Right now, consensus for second-quarter earnings results for the S&P 500 is a scant 0.2 percent. Third quarter estimates are not much better ( 0.7 percent gains). What is concerning to me is how corporate managements are going to spin the impact of the existing tariffs on their bottom line.
In past quarters, analysts have ratcheted down their earnings expectations to such a low levels that investors were pleasantly surprised when companies announced better than expected earnings and sales guidance. It could happen again, so let's say I am neutral on earnings results until we see how many beats versus misses happen early on.
In any case, it appears the administration is bringing out the Big Guns to pressure the Fed into cutting rates this month. Don't underestimate Trump's ability to influence events in that area. Trump believes that the Fed should be his policy instrument and an extension of his presidential power in the financial arena. He has already threatened to fire, replace, or demote the Fed's Chair, Jerome Powell (his appointee), several times.
In a further attempt at bringing the Fed under his control, this week Trump has proposed two more additions to the Federal Reserve Board, Christopher Waller and Judy Shelton. Both candidates appear to be far less independent than past candidates for the job. One of the two (Shelton) has already expressed a desire to see interest rates in the U.S. at 0 percent within the next year or two. That should be music to the ears of the president.
In any case, enjoy the markets, enjoy the Fourth of July, and I'll see you after the holiday.
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