PGM Capital – Blog
20Nov/160

Are we at the end of the 30 year Bond Bull Market?

By Eric Panneflek

Dear PGM Capital Blog readers,

Since the election for Mr. Donald Trump as the 45th president of the U.S.A., interest rates are rising in the USA and the rest of the world.

As can be seen from below chart, the yield of the USA 10-year note has increased from November 8 up to Friday November 18, from 1.862% to 2.335% an increase of approx. 25.4% in just 10 days.

Based on the inverse relationship between bond's price and its yield, we can conclude that since Mr. Trump has been elected as USA 45th president the bond market sold-off massively.

USA MORTGAGE RATE AT 17-MONTH HIGH:
Based on the fact that U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages, mortgage rates in the USA for the average 30-year fixed-rate mortgage hit 4.125% on Friday, November 18, the highest since July 2015.

That is more than half a percentage point higher than on election day as can be seen from below chart.

PGM CAPITAL ANALYSIS AND COMMENTS:
The main reason for the jump in the yield of the 10-year note and subsequently the 30-year mortgage rate, is the big promise of USA president elected Mr. Donald Trump, pledge to work with lawmakers to introduce legislation to “spur $1 trillion in infrastructure investment”, which is highly inflationary.

Mr. Trump plans also to reduce taxes in order to increase economic growth by government spending, remind most of us of a similar plan by president Ronald Reagan, in the eighties, which later on was called Reaganomics.

Below 100-year inflation chart of the USA, shows how Reaganomics has triggered, in 1980, the highest inflation rate in peace time in the USA.

As a consequence of this, the Federal Reserve board led by Mr. Paul Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981 as can be seen from below chart.

Based on this, the price of Gold, - the ultimate hedge against inflation - rose to US$ 850.00 an ounce in January of 1980, which corrected for inflation is equivalent to US$ 2,106.45, as can be seen from below chart.

screen-shot-2016-11-20-at-7-18-13-pm

The above chart shows also that the hyperinflation cycle of the 1980's has triggered a massive recession in the early 80's.

History normally repeats itself, if this is the case, we can expect Trumponomics to have a similar effect as the Reagonimcs had in the 80's, on the interest rates, and subsequently on the price of gold, global capital markets and state of the world economy.

Higher interest rates in the 80's lead also to a higher US-Dollar as can be seen from below chart.

History shows us also that higher interest have lead to; housing market, bond market and stock crashes, and that the combination of higher rates and US-Dollar had lead to bankruptcy of those developing countries, which has borrowed in US-Dollar in bonanza times to finance ambitious government plans.

For the sake of humanity let's hope and pray that history will not repeat itself this time and that Trumponomics will not become Reaganomics on steroids.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

13Nov/160

Welcome to a World of Uncertainty & New Globalization

By Eric Panneflek

Dear PGM Capital Blog readers,

On Tuesday, November 9th, the people of the United States, elected Mr. Donald John Trump, as the 45th president of the country.

INTRODUCTION:
In this blog article we want to provide a professional analysis, -without wanting to mingle into internal USA politics- of the possible implication for the World, International Trade and future of Globalization under a Donal Trump, presidency.

If Donald J. Trump, does during his presidency, what he said during the presidential campaign, he  is positioned to achieve the most radical reshaping of economic policy since Ronald Reagan.

Even under Reagan, Republicans never controlled both houses of Congress.

His election to the presidency of the United States makes Brexit look like a hiccup.

Of broader business interest are Trump’s proposals on trade. They have sometimes been dismissed on the grounds that the Constitution specifically gives Congress authority over international trade.

But this argument seems flimsy given the president-elect’s apparent impatience with constitutional limits on executive action. A president intent on transforming trade can find many ways to do so, especially if the same party — albeit one divided on this issue — also controls both houses of Congress.

Who should watch out for a reformulated Trump trade policy?

  1. Countries with which the U.S. runs the largest bilateral deficits are likely targets, starting with China and Mexico. Others in this inner circle include Canada, Germany, Japan, Mexico, and South Korea.
  2. Trump’s trade doctrine appears to propose tied trade. For instance, it mentions the possibility of persuading countries with the largest trade surpluses with the U.S.A. to buy U.S. hydrocarbons.
  3. U.S.A. and foreign companies will face increased pressure to demonstrate that they create jobs in the U.S.A.
  4. U.S. multinationals abroad and multinationals from elsewhere that seek to operate in the U.S.A. may find themselves caught up in larger tensions between home and host governments, so they need to think through how to deal with that ahead of time.
  5. U.S.A. exporters in particular have to watch out for retaliation by other countries.

PGM CAPITAL ANALYSIS AND COMMENTS:
Mr. Trump has promised an immediate attack on trade deals, at least with countries he views as manipulators.

International Trade, which has been proved to stimulate economic growth both here and abroad, has already been slowing, and Mr. Trump is determined to slow it further in an effort to protect blue-collar manufacturing workers, for which many of them are his supporters.

U.S.A. Presidents have significant authority to act unilaterally in this area, and Mr. Trump has insisted he would put 35 percent tariffs on imports from Mexico and 45 percent on those from China.

Based on reciprocity, in this case Mexico and China will then impose the same tariffs on imports from the U.S.A.

Trade War is a synonym for Economic downturn.

Below charts show an estimates of how trade-restriction scenarios would affect United States G.D.P. growth for the years 2017, 2018 and 2019.

  • Full trade war:
    The U.S.A. imposes a 45 percent tariff on non oil imports from China and a 35 percent tariff on non oil imports from Mexico. China and Mexico then impose the same tariffs on imports from the U.S.A.

  • Limited trade war:
    The U.S.A. tariffs are imposed for only one year, because China and Mexico concede to U.S.A. demands or that Congress overturns the action or President Trump loses in the courts, or the public outcry is such that the administration is forced to stand down.

Mr. Trump’s tariffs would raise the prices of imported goods in the U.S.A. sharply, cutting the purchasing power of every American. Lower-income Americans - including Mr. Trump’s core supporters - would be hurt the most because they disproportionately buy less expensive imported items.

For China, and particularly Mexico, the economic costs would be significant, which is why the Mexican peso had plunged after the election of Mr. Trump to a record low of MXN 21 to US$1 as can be seen from below chart.

Trump has also criticized the North American Free Trade Agreement, which Mexico depends on.

He also promised to build a wall between the two nations and suggested high tariffs on Mexican goods, and suggested that people who entered the United States illegally will be deported.

As Nigel Farage, the leader of the UK Independence Party, put it, the election of Trump is

Brexit times three.

This new reality will require businesses to rethink globalization, starting with the aspects Trump is most critical of.

Trump’s plans so far have focused on restricting two facets of globalization: trade and people.

As a consequence of these, there may even be implications for outbound flows, such as people who say they are willing to move at least as far as Canada to evade Trump’s presidency. These pressures will impact some firms more than others.

Restrictions on the inflow of people — not only illegal immigrants but also Muslims — have been one of Trump’s signature campaign themes.

The above implicates that Brexit and the Trump election as USA 45th president, being just the two most recent blows to free trade, -movement op people and globalization.

In a best-case scenario, they and their internationalizing missions will retain relevance in the new world as opposed to being entirely sidelined.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

5Nov/160

United States elections 2016 and Your Portfolio

By Eric Panneflek

Dear PGM Capital Blog readers,

The 2016 United States elections will be held (for the most part) on Tuesday, November 8, 2016, in which the President of the United States and Vice President will be elected.

INTRODUCTION:
The United States presidential election of 2016 will be the 58th quadrennial U.S. presidential election.

On the election day, the voters will cast votes for electors who will then form a electoral college which will then cast votes to select the next president of United States.

Currently, there are 538 electors, corresponding to the 435 Representatives and 100 Senators, plus the three additional electors from the District of Columbia.

With 538 Electors in the Electoral College, a Presidential Candidate needs 270 electoral votes to secure a majority, so whoever gets the most electoral votes wins the presidential election.

The number of electors from a particular state depends on its population size.

Below USA Election Map illustrates the voting power of each state during the 2016 election cycle.

In additional to the election of the next USA president en vice president the following elections will also be held on coming Tuesday, November 8:

  • All 435 voting-member seats in the United States House of Representatives (as well as all 6 non-voting delegate seats).
  • 34 of the 100 seats in the United States Senate.
  • Governorships of twelve of the fifty U.S.A. states and two U.S. territories.

THE 2016 PRESIDENTIAL CANDIDATES:
Although there are several presidential candidates competing on November 8th for who'll become the 45th president of the United States of America, the race will be mainly between the nominees of the two biggest parties and as can be seen here below:

THE DEMOCRATIC PARTY:

clinton-2016tim-kaine

Former US Secretary of State Hillary Clinton (New York)
Presidential Nominee

US Senator Tim Kaine (Virginia)
Vice Presidential Nominee

Hillary Clinton was officially nominated on July 26 at the Democratic Convention.


THE REPUBLICAN PARTY:

trumpmikepence

Businessman Donald J. Trump (New York)
Presidential Nominee

Governor Mike Pence (Indiana)
Vice Presidential Nominee

Donald J. Trump officially accepted the Republican party's nomination on July 22.

THE MOST IMPORTANT USA ELECTIONS IN 80 YEARS:
All presidential elections are not created equal. Some are important; some, considerably less so.

Once in a lifetime the fate of the nation rides on an election outcome for example:

  • Abraham Lincoln’s election in 1860 saved the Union.
  • Franklin Delano Roosevelt’s election in 1932 kept the USA afloat during the economic ravages of the 1930s.

The 2016 USA presidential election confronts the country's electorate with political choices more fundamental than any since 1964 and possibly since 1932.

A victorious Republican candidate would take office backed by a Republican-controlled Congress, possibly with heightened majorities and with the means to deliver on campaign promises.

On the other hand, the coattails of a successful Democratic candidate might bring more Democrats to Congress, but that president would almost certainly have to work with a Republican House and, quite possibly, a still Republican Senate.

The above implicate that political wars between the two mayor parties would continue in the future, and this in a time that the country's national debt - 4 days before election day - is at an all time high of almost 20 Trillion USD Dollars as can be seen from below image.

THE S&P-500 FALLS FOR NINE DAYS IN A ROW:
On Friday, November 4th, - as can be seen from below 3-month chart - the S&P 500 declined 3.48 points, or 0.17%, to 2,085.18, putting its nine-day decline at roughly 3%.  The last time the S&P 500 index fell for nine days in a row was the period ending December 11, 1980, when it lost 9.4%.

As can can be seen from below 3-month chart, the CBOE Volatility Index, or VIX, has surged in the past nine trading sessions—its longest-ever stretch of gains—and has risen above its 10-year average.

The “fear gauge” is based on S&P 500 options prices. Investors who buy VIX futures contracts are making a bet that stock-price volatility will go up in the next 30 days.

The election has unnerved many investors, causing them to either sit on the sidelines or move to products they perceive as less risky, such as gold or shorter-duration bonds, as polls have tightened between the candidates.

On the other-hand, the price of gold - the ultimate safe-haven - has gained more than 3% over the past nine trading sessions, rising 0.1% Friday to US$1,304.10 an ounce as can be seen from below chart.

PGM CAPITAL ANALYSIS AND COMMENTS:
With just 4 days to go before the upcoming election, many are wondering how the outcome - particularly the presidential election - will affect their investments.

Markets generally do not like uncertainty. With that in mind, presidential elections, by their very nature, create uncertainty.

How will a Clinton or Trump presidency impact my investment portfolio?
Markets have historically been more volatile in election season. In fact, volatility was more significant during an election season at the end of a two-term presidential era.

Just when it looked like Hillary Clinton was going to make it through election date without a nasty surprise, the FBI chief James Comey announced a new inquiry into her use of her private email server  -- and suddenly her healthy lead in the polls began to tighten both nationally and in some key battleground states and subsequent  investors are beginning to re-think their certainty of her victory on November 8th.

The news that the FBI has reopened its investigation into Hillary Clinton's use of a private server to send, receive and store government emails has handed Donald Trump an unexpected boost ahead of next Tuesday.

Results of a poll held on Saturday, November 5, shows how the numbers are tightening as we approach election day amid crises affecting both Democratic contender Hillary Clinton and her Republican rival Donald Trump.

In below interview with Yahoo Finance, legendary Investor "Jim Rodgers" gives his opinion on a presidency of both Mrs Clinton and Mr. Trump.

Based on his predictions, he warned investors for hard times ahead and said that he is Short US equities, particularly the large names and that he is bullish on the agriculture sector and Long; China, and some emerging markets like Russia, Kazakhstan, Nigeria and Rwanda.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek