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What Should Stock Players Fear?

FYI | Nov 22 2017

By Peter Switzer, Switzer Super Report

Seriously, what should stock players fear?

US stocks couldn’t keep up last Thursday’s positivity and it was a case of what drives stocks up can pull stocks down. And yep, it’s all about Donald Trump’s tax cuts, with some doubts about the bill being passed soon, again worrying Wall Street.

In case you missed it, some nincompoop Republicans in the US Senate — supposedly the President’s allies — could stand in the way of the tax cuts. This not only means a delay of the cuts being passed but a possible delay of the starting date and some changes to the actual tax measures.

At this stage, the potential obstacles to the bill getting passed in the Senate have the capability of really hurting stocks and that’s why Wall Street was negative, though not dramatically, on Friday.

Back in October, President Trump said he wanted the bill passed by the Senate before Thanksgiving and that’s this Thursday. Last week his Treasury Secretary, Steve Mnuchin, reckoned it will be passed after Thanksgiving, for the President to sign it into law before Christmas.

Talk this week around whether this bill gets the nod from the Senate could have a big impact on stocks either way.

If it’s passed soon, I will bring out my Santa Claus rally call for stocks, but if the news remains negative on the tax bill, then Wall Street could deliver the overdue correction!

This comes as the boss of Goldman Sachs, Lloyd Blankfein, has told CNBC: “There’s economic anxiety in the US but no specific reason for it.”

He argued that 2017 had been a good year for the global economy, and 2018 will follow that trend.

Despite what Matt Barrie, the CEO of Freelancer.com, wrote last week, which too many newspapers gave exposure to, economic growth around the world is on a roll and will roll into next year with plenty of vigour.

As CNBC reminded us: “Germany — Europe’s largest economy — grew an unexpectedly strong 0.8 percent in the third quarter. In Japan, the economy has grown for seven straight quarters. Meanwhile, in the U.S., the economy grew 3 percent in the third quarter.”

Goldman Sachs analyst, Charles Himmelberg, is very positive on the economic story, which ultimately underpins profits and stock prices.

“2017 is shaping up to be the first year of the expansion in which growth surprises to the upside,” he told clients in a note last Thursday. “We expect 2018 to deliver more of the same.”

He and his team have global growth at 4%, up from the 3.6% predicted for 2017. Growth has underpinned many stock markets’ great years, with the US market up 14%, Germany’s 13% and Japan’s 17%.

Clearly, anything that threatens growth such as the failure of President Trump to get his tax plan up ASAP, or the Fed raising interest rates too fast, which I don’t expect will happen, could derail these market rallies.

Himmelberg agrees that the tax bill has to get up or it would KO his confidence about 2018. He’s also worried about President Trump’s protectionist trade policy promises and doesn’t discount these as another potential threat to the stock market.

If the President fails to win on tax and is facing an even worse popularity rating with the mid-term elections in October next year, then he could go hard on “America first” trade policies that could rattle the world economy. Stock markets would sell first and ask questions later.

Now on to Matt Barrie’s concern that China could be winged by huge debt and that would hurt our economy and therefore our stocks. His concerns rested on a couple of ‘experts’ who could be right or wrong. This is what he pointed to as a major concern:

Societe Generale's China economist Wei Tao said recently, ‘Chinese banks are looking down the barrel of a staggering $1.7 trillion?—?worth of losses’. Hyaman Capital's Kyle Bass calls China a ‘$34 trillion experiment’ which is ‘exploding’, where Chinese bank losses ‘could exceed 400% of the U.S. banking losses incurred during the subprime crisis’.”

Matt argues that “a hard landing for China is a catastrophic landing for Australia, with horrific consequences to this country’s delusions of economic grandeur.”

AMP Capital’s Dr. Shane Oliver answered Matt by writing a piece on Friday called: “Should Australia be concerned about a collapse in the Chinese economy as some are warning yet again?”

He says warnings of a Chinese collapse have been around for years but he continues to regard it as unlikely.

“The most common concerns about high and rising debt miss the reality that China’s high debt growth reflects its high savings rate, which in turn gets largely channelled through the banking system as its capital markets remain underdeveloped,” he explained.

“China does not rely on foreign capital (in fact, it’s the opposite) and to slow its debt growth its needs to save less and spend more!”

If you were ever worried about China’s ghost cities that spooked a lot of investors a few years back, Shane has an interesting take on this one.

“The ghost cities stories of a few years were literally just scary stories and much of China continues to have a housing shortage at the same time that many of the apartments built 20 years ago are now substandard and need to be replaced,” he said. “Similarly, much of China remains under developed in terms of infrastructure, so peak raw material demand from China is a long way off.”

He says a slowdown in growth to around 6% is possible but “there was no sign of any hard landing in China when I visited it again in the last week – things were just as frantic as ever!”

You could worry about commodity prices that have had a good 2017 but with growth ramping up worldwide in 2018 and a global infrastructure boom in train, I can’t see any significant price slumps. I expect higher prices across 2018.

To geopolitical risks and the wild card, which is North Korea’s Kim Jong-un, and recent Chinese promises to rein in their little buddy makes me think that he’s become a lower order risk.

There are two things I worry about for stocks. First, are the Trump tax cuts. And second, the black swan event that, by definition, I can’t easily see.

Keep the faith and stay long stocks. And if it comes to it, stick to my rewarding advice of the past nine years — buy the dips!

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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