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Weekly Hotline


John Dessauer’s market review and update as of Wednesday January 16, 2019

             Marilynn and I are home after another adventure and another transit of the Panama Canal. We went through the original Panama Canal, that was opened in1914, more than 100 years ago. Now there is a second Panama Canal, that is much wider and with locks that are much longer. It can handle much larger ships. The new canal runs parallel to the original canal.  From time to time as you travel through the original canal you can see ships in the new canal. Both canals are engineering marvels. I have been through the original Panama Canal several times, but the experience never grows old. The French started the Panama Canal but failed to complete it and literally bankrupted France in the process. The Americans, under the leadership of President Teddy Roosevelt, came up with the solution. They dammed a river, creating a huge lake that is the source of the water that lifts and then lowers ships through the locks.  The Panama Canal changed world commerce. No longer did ships have to travel thousands of miles around the end of South America, through some of the most dangerous waters on earth. After 1914, ships saved money and lives by using the Panama Canal.

The Canal is now operated by the people of Panama and they have been doing a very good job. Profits are up, running at about $3 billion a year. The money keeps taxes low in Panama and provides a source of funding for infrastructure projects such as the underground metro system in Panama City.  

            It was a relief to see the U.S. stock market post four consecutive up days last week. And on Friday instead of a plunge we got a selling whimper with the Dow Jones Industrial Average down slightly. Individual stocks were mixed on Friday with as many up, as down and all moves small. Hopefully this means the worst of the panicky selling is now behind us and investors will get back to focusing on earnings and economic growth. We will soon start getting reports on profits in the fourth quarter of 2018. Argus Research thinks fourth quarter profits for companies in the S&P 500 Index will be up 18% over the final quarter of 2017. That should help to improve investor sentiment.

            One reason last week was much better for stocks is that voting members of the Federal Reserve have been saying the Federal Reserve should pause, to assess economic conditions, before considering additional interest rate increases. Eric Rosengren, president of the Federal Reserve Bank of Boston told an audience that the Fed is puzzling through the divergence between strong economic data and faltering financial markets.

            He said: “At this juncture, with two very different scenarios – economic slowdown implied by financial markets; or growth somewhat above potential G.D.P. growth, consistent with economic forecasts – I believe we can wait for greater clarity before adjusting policy.”

            Charles Evans, the president of the Federal Reserve Bank of Chicago said in a speech last Wednesday: “I feel we have good capacity to wait and carefully take stock of the incoming data and other developments.”

            Last year both of these men spoke in favor of the Fed’s interest rate increases. These more recent comments are therefore significant because of the reversal of their policy positions. When these comments are taken in conjunction with recent notes from Federal Reserve meetings it seems likely that there will not be an interest rate increase this month and there may not be an interest rate increase in March either.

            The bottom line is that the pessimists are wrong again. The Federal Reserve is not going to push the economy into a recession. If there is a recession, its cause will be something other than the Federal Reserve.

            There also has been movement between the U.S. and China on the issues of trade and tariffs. China has cut tariffs on American cars, is buying soybeans again and for the first time ever has allowed imports of rice from the United States. There have been three days of negotiations by midlevel American and Chinese officials. The result has been real progress in narrowing the differences between the two. President Trump has set a deadline of March 2 for raising tariffs on roughly two-fifths of annual American imports from China. After a report show strong jobs growth in December, President Trump argued that the U.S. is in a much stronger economic position than China, implying that his tariff-trade tough approach will work. He is right that the Chinese economy is slowing faster than officials would like and that the tariffs are a big part of the problem. It seems likely that President Trump will get concessions from China, including a change in policy about intellectual property rights. Hopefully he will declare victory and back away from a trade war.

            There has been talk from some newly elected, left-leaning members of Congress about a 70% tax on “the wealthy.” Of course, “the wealthy” has not been defined. These high tax politicians should remember our own history. Taxing the wealthy has had adverse unintended consequences in the past. Current evidence from South Korea says that is still the risk with high tax ideas. South Korea is a wealthy country with a GDP per capita of $30,000 a year.  That is roughly the same as Italy and Spain. South Korea’s population is 51 million, so it is not a small country. After his election in May 2017 president Moon Jae-in undertook a sharp shift in economic policy. His goals were to improve economic growth, shrink the wealth gap and stimulate wage growth. He raised taxes on companies and high-income earners and increased the minimum wage. It hasn’t worked. Economic growth has slowed, unemployment has risen, and small business owners are complaining. This once widely admired economy, described as an Asian Tiger, has fallen prey to the siren song of redistributing wealth – tax the rich and let government dictate business practices for the private sector. That isn’t quite socialism. But it is a move in that direction and in South Korea is getting familiar, unpleasant results. Hopefully our politicians will pay attention.

 I will have the next market review and update for you one week from today on Wednesday, January 23, 2019.

All the best,

John Dessauer

© January 2019