Bull and bear: Are US equities set to tumble? Deflation threat looms, and Germany trade surplus surges while US deficit shrinks. - The Share Centre Blog

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Michael Baxter

Bull and bear: Are US equities set to tumble? Deflation threat looms, and Germany trade surplus surges while US deficit shrinks.

Written by: Michael Baxter on January 8th 2014

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Are US equities set to tumble? US Trade deficit falls to four year low. German surplus in near record high, and even emerging markets see exports rise. Emerging markets export more in November. Deflation risk not gone away in Europe, inflation set to fall in the UK. China opens door to video games

Are US equities set to tumble?

US equities are 65 per cent overvalued. Oh woe is us.

Bear:     Right now the CAPE, that is to say the cyclically adjusted price earnings ratio, which compares stock market capitalisation with average earnings over the last ten years for the S&P 500, is a fraction over 25. Compare this with the average showing since 1851 – 16.5. According to Capital Economics, the geometric average of the CAPE since 1960 is 18. If you compare the CAPE today with the average since 1851 it is 65 per cent too high; compared to 1960 it is 40 per cent too high, and even 4 per cent too high if you compare it with the geometric average since 1990. Apologies for shouting at you today, but doesn’t that spell BUBBLE?

Whoa there, hang on a moment.

Bull:       Bear in mind first of all that in the late 1990s, the CAPE was around 40. In any case, there are lots of other factors at play here. Lower interest rates and taxes on equity could justify the higher value of CAPE.

But isn’t there another point?

The last ten years were not good for the economy. Assume the next ten years will be better. Is it not reasonable to expect the value of stocks to average earnings over a very troubled ten years to be high? Indeed, Capital Economics worked out that if you strip out earnings in 2008 and 2009 from the ten year cycle, the CAPE is 20, rather than 25.

To decide whether US stocks are overvalued you really need to ask yourself whether the last ten years was unusually bad, or whether it has in fact become the new normal.

If it’s the latter, then bubble may indeed be a danger, but if it’s the former, then it may all be a great exaggeration.

US Trade deficit falls to four year low

More evidence was revealed yesterday pointing to an improved economic performance in the US.

Latest data on US trade revealed that exports rose 0.9 per cent in November, while imports fell by 1.4 per cent. The overall deficit for the month was $34.3 billion, the lowest in four years.

When you think about it, this is rather encouraging,

The US economy is recovering, the US consumer is more confident and expected to increase consumption by around 4 per cent, and under normal circumstances you might expect imports to rise.

Capital Economics reckons the data suggests the US may have grown by 3.0 per cent or more in Q4.

So this begs the question: why?

Shale gas was a major factor. Imports of crude oil fell, with the 12 month average down to a 17 year low.

The hope is that re-shoring may be helping too, but it is too soon to say for sure.

German surplus in near record high, and even emerging markets see exports rise

Wouldn’t it be good if everyone’s favourite football team could win. No losers, just smiles all around.

A cursory glance at the latest economic data suggests the equivalent of this may be happening in international trade. And yes, you are right, there must be a mistake.

Above it was told how the US deficit has shrunk to a four year low. You may know that the US government has been very critical of the German economic model; it wants to see German wages rise, and consumer spending increase.

Oddly, though, in the month when the US trade deficit shrunk to a four year low, the German surplus rose to a near four year high. The three-month rate of growth exports was up to 2.3 per cent, its highest since July 2012.

Imports fell 1.1 per cent in the month and the resulting trade surplus, at €17.8bn was one of the largest seen since comparable data were first available in 1990.

Chris Williamson, chief economist at Markit, said: “The widening surplus is likely to put increasing political pressure on Germany to rebalance its economy away from export-oriented growth towards domestic consumption; a policy some other Eurozone member states hope will help fuel faster export-driven growth in their own economies.“

But how is this possible? How can the US see its deficit fall and Germany its surplus rise?

Drill down, and it gets more confusing. Mr Williamson said: “German export gains, especially to non-euro countries, helps boost business activity at companies within the euro area that are suppliers to German firms. Importantly, in this respect, the Federal Statistics Office reported that trade to non-euro EU countries had been particularly strong. Over the year to November, exports to Eurozone countries rose just 0.1 per cent while exports to non-euro EU countries increased by 4.9 per cent. Exports to other countries were flat.”

So Germany’s success is good for the Eurozone, and the US is exporting more despite German’s performance.

It isn’t possible for all football teams to win, and neither is it possible for all countries to export more and import less. So the give  must lie elsewhere.

Emerging markets export more in November

Well we may need to look elsewhere, but it ain’t in emerging markets.

Exports from emerging markets increased 4.9 per cent year on year in November.

The five countries that are now being referred to as the fragile five – Brazil, India, Indonesia, Turkey and South Africa – have seen their trade deficits fall, and their combined trade deficit is now almost 40 per cent since June.

Emerging markets that export commodities have not done so well, however, with exports from the Middle East and Africa down. So that goes some way to squaring the data on the US.

Nonetheless we are left with a story as follows: German surplus up, US deficit down, emerging markets exporting more. Emerging markets with big deficits have seen their deficit shrink.

Imports to other countries elsewhere in the world must be rising. Watch this space.

Deflation risk not gone away in Europe, inflation set to fall in the UK

Inflation in the Eurozone was 0.8 per cent year on year in December. That was low, but it was not really headline news. After all, it was 0.8 per cent in October too.

But core inflation – that’s with volatile items such as food and energy taken out – was just 0.7 per cent, a record low for the euro region.

Meanwhile, in the UK, a survey from the British Retail Consortium has revealed that its shop price index pointed to high street inflation of minus 0.8 per cent in December. To put it another way, there was 0.8 per cent deflation. It was the eighth month on the trot in which the index was negative.

The breakdown was as follows

Shop price inflation in per cent         source: BRC
  December November
Food 1.7 2.3
Fresh Food 1.5 2.3
Clothing and footwear Minus 9.9 Minus 10.1
Furniture and Floorcovering Minus 1.7 Minus 1.6
Electricals Minus 3.5 Minus 3
DIY, Gardening and Hardware 0.3 1.6
Books, stationery and home entertainment Minus 1.4 0.4
Health and Beauty 1.2 1.7


The runes seem to suggest that UK inflation is set to fall further.

This is the reason why it has been suggested here that the consensus that rates will rise this year may be wrong.

China opens door to video games

Are video games good or bad? There are two sides to this one. An ultra-realistic video game in which you are killing things hardly seems to encourage a feeling of brotherly love. On the other hand, we were once told books were bad for us, and indeed television.

China was worried about the violence in video games and feared that they promote moral decay. As a result they were banned, or at least they had been banned since 2000.

Well, the ban has been lifted. To begin with the ban will only be lifted in the Shanghai Free Trade Zone as a test.

But to say this good news for Nintendo, Sony and Microsoft is an understatement. In fact, it is wonderful news.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Brazil, cyclically adjusted price-earnings ratio, deflation risk, Emerging markets exports, Eurozone inflation, German trade surplus, India, Indonesia, S&P 500 CAPE bubble, shop prices, South Africa, Turkey, UK inflation, US Trade deficit, video games Nintendo Sony and Microsoft

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