Michael Kantrowitz of Cornerstone Macro joins the Financial Sense Newshour to explain why they think the market is likely to improve in the second half, what a stronger dollar means for the economy, and what sectors of the market they favor moving forward in lieu of their forecast. Here we present a partial transcript of the interview airing for subscribers Thursday, June 6th.
Why has the Fed been talking about tapering QE even in the face of weakening economic data?
That’s a great question and certainly there’s stronger parts of the economy, and that’s definitely been housing over the last year. If you think about it, the Fed was initially targeting housing because of the massive wealth effect it has on our consumer-based economy. And, yes, they’ve certainly begun to move in the right direction on that—I don’t know if you can say they’ve achieved it yet—but housing prices are up double digits, home sales, the NHIB home builders sentiment index, are all up; so certainly there’s a recovery or a healing taking place in the US housing market that’s been going on for a year, and typically if you look at leading indicators of housing they give you a pretty good heads up as to where policy is going to be for the Fed—in other words, which direction they’re going to be leaning—with about an almost 2 year lead. So, housing began to recover late 2011, early 2012, and we’re about a year and a half past that so it’s typical of the Fed to begin to change their tone once they see housing recover usually because housing is the first industry to recover out of a recession or a slowdown and that has a tremendous effect on other industries. It really creates many jobs…unemployment claims continue to trend lower. So, there are a lot of good things in the US. There are some pieces of soft data; a lot of them are in manufacturing, but something we have to remember in that data is that there is an export component to it and other countries are far weaker in Europe and in Asia than the US is. So, we do expect that data would lag some of the domestic data, which is why we’re more bullish on domestic cyclicals and the US economy and do believe the Fed will continue to talk about tapering as that data improves.
As you look at the market outlook with cyclicals starting to outperform, what would lead you to believe that the leading economic indicators are about to improve?
What has done the best job by far at explaining the leading indicators moving up and down has been the rate of inflation, and more specifically commodity prices. So, every time, going into 2010, 2011, 2012, and, again, 2013, we’ve had this reacceleration in the economy and oil and gasoline prices went up. So, if you remember in January and mid-February oil prices were back at $115 on Brent, gas prices were at new seasonal highs, and that eventually led to this small soft patch in the data in the US and around the world, and what you’ve seen since then though is that commodity prices have melted alongside the dollar, which has strengthened, and that’s really creating a lot of stimulus. It’s the reason you’re seeing consumer confidence so high right now is because inflation has gone away. In the last six months, maybe nine, the US has managed to create something we call non-inflationary growth, which is something we haven’t seen since the 90’s. That’s thanks in part to slower growth in China, the energy renaissance that Nancy Lazar has spoken so much about here at Cornerstone, and [as mentioned previously] the stronger dollar. Those three things allow the US economy to improve without the sight of inflation. So, 2013, while it initially looked similar to the past three years, the big difference is that oil prices weren’t going up with the market and the dollar has strengthened. So, we’re now going to enjoy a strong second half in the US economy because commodity prices have come down.
In the rest of this interview, Michael explains which sectors should do well with a strong dollar and strengthening U.S. economy, along with a number of other topics, including:
- How much does the downturn in commodity prices have to do with the stronger dollar?
- Why a stronger dollar will be a headwind for commodity prices but good for US consumer and the financial market
- 3 “gifts” the US economy has received from overseas
- Why there is such skepticism by US investors on the current market and how this represents fuel for a stronger second half
- Why this market resembles the 90’s when the dollar and stock market rose simultaneously
- Why the high correlation between global markets are decreasing and why this is good news for investors
- Why the private sector is strong enough to weather a drawdown in stimulus
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