Summary of today’s CNBC Squawk Box Asia interview

Summary of today’s CNBC Squawk Box Asia interview

October 1, 2014 0 Comments

It was a very good conversation. The anchor was in the CNBC Hong Kong office, just above the square where the protestors are gathering. We talked about global markets in light of Hong Kong, Iraq, Syria and other geo-political mess stories. Here are the talking points I send in to brief the anchor before the show.

-Growth. The Q2/GDP report was very strong (4.6%) but it came after a very weak first quarter (2.1). Some of the Q1 shortfall was weather-delayed activity. Together they show about 3% growth in the first half and 2.6% over Q2/2013. Pretty good but not exactly a booming economy.

-job report
The job report next Friday will be more slow and steady growth. 200-225K non-farm payrolls. Labor force participation is nearly 5% lower than pre-crisis and shows no signs of rising. This will be viewed as a mildly positive report.

-Profits. Corporate profits show the same story. Big Q2 (+8.4%) after a terrible Q1 (-9.4%) and just 0.1% over year earlier levels. Cash flow a little better, 5.5% above year ago.

The best news for profits is that current dollar GDP grew 6.8% in Q2. That’s a proxy for sales growth for the average US business. Higher because prices (+2.2%) are firming. The profit margin on the next dollar of sales os much higher than the reported number, which is measured across all sales. This is especially true for companies with big fixed costs. Nominal GDP growth is also the right number to tell us how companies are servicing their debt. This is a very good number.

We know certain things for sure now. 1) QE will end next month. 2) The Fed is not going to sell any of the securities they  bought during the QE era. That means the $3T bank reserve overhang will stay in place.

To date the Fed has printed enough money to triple the price level over the next decade. The only thing holding this back is the banks have been sloe putting the reserves to work. Why? Dodd-Frank has loaded huge compliance costs onto banks; they make lending impossible for small banks. Historically, small banks lend to small businesses, the source of new jobs. That’s why the jobs numbers are so sluggish,
The Fed will not be in a hurry to see rates go up due to the slow growth/jobs. To the extent Hong Kong and other geo-political sources of adrenalin matter, they will slow rate increases further.

The long-term direction of the market is still up–which is why each global crisis only pushes the market lower for 5 minutes–but I am uncomfortable with recent activity, especially the market’s increased willingness to swallow IPO’s and other risky security issues. Alibaba is the poster-child for this but there are other examples around the globe.

Essentially, asset prices (the balance economy’s sheet, which is what the Fed controls) are ahead of output and spending (The P&L statement, which we call the GDP report), which is what makes P/E’s look so high. The E will begin to grow faster but now has people worried.
Bottom line, I am increasing cash and reducing market exposure.

-Asset Allocation
For marketable securities I like the US over EU, Japan, and emerging markets; stocks over bonds; short maturities over long ones; dividend-payers over growth; $ over Euro; large caps over small. I like financials (especially private equity). And there is a case for defense stocks–it is spelled P-U-T-I-N.

I prefer private equity and property over marketable securities today, especially in lower middle market companies and other sectors where businesses have been orphaned by their banks.


John Rutledge


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