December 18, 2018

“Yes, forward to the foe, on we go” – The Police in “Pirates of Penzance”
“Yes, but you DON’T GO!” – The Major General, in “Pirates of Penzance”

It’s now almost 30 months since Britain voted to leave the European Union on June 23, 2016, but they haven’t left yet. The Keystone Kops in Parliament (650 in the House of Commons and 800 in the House of Lords) and the 27-nation European Union can’t figure out the terms of divorce from the bureaucrats in Belgium. There’s even a huge new bureaucracy in Britain, “The Department for Exiting the EU.” The resulting soap opera makes the bumbling police in Gilbert & Sullivan’s Pirates of Penzance look efficient.

It’s the same in many other nations. I’ll run down a few of these political soap operas in another pop quiz.

Question #1: How many British Prime Ministers will it take to divorce from the European Union?

Answer: At least three. David Cameron quit, since he couldn’t do it. Theresa May has proven inept at the task for 2-1/2 years and barely survived a vote of confidence last week. If she fails in the next few months (highly likely), a third post-Brexit PM will need to step in to figure out how to “just say no” to Brussels.

A leading European law professor, Michael Dougan, said, “The overwhelming consensus is that these things do not take two years to negotiate; the rough guide that we are all talking about in the field is around 10 years.” My prediction: Britain will never leave Hotel Europa – it’s like “Hotel California”:

Back in 2016,
We were looking for the door.
We had to find the nation
We were living in before.

‘Slow down’ said all the lawyers.
‘Despite what you believe,
You can check out any time you like,
But you can never leave!’

OK, let’s cross over the Channel to France:

Question #2: When you have the highest tax rates in the world and a restless, poor immigrant minority, what’s the dumbest thing you can do?

Answer: Raise taxes on the poor! The OECD (Organization for Economic Cooperation and Development) released its annual Revenue Statistics report last week. France topped the list with a total tax rate at 46.2% of GDP in 2017 (The OECD average is 34.2%). Rates in Paris are even higher, with payroll, property and sales taxes that hurt the middle class and poor the most. So what did Prime Minister Emmanuel Macron do?  To make a point about his solidarity in fighting global warming, he raised taxes on already heavily-taxed fuels, hitting the poor and middle class the hardest, causing riots that left Paris in flames.

Now for some hard questions about America’s leadership:

Question #3: How many years and how many prestigious lawyers does it take to find one incident in which a Presidential candidate talked with a Russian leader about influencing the 2016 election?

Answer: 30+: According to Wikipedia, over 30 high-profile lawyers on the Mueller team and likely lots of support personnel have searched for over 19 months to find collusion with Russians over tampering in the 2016 elections. So far, they have succeeded in luring several witnesses into a perjury trap to secure their testimony, resulting in some prison sentences but no announced discoveries of election collusion.

Question #4: How many Grinches does it take to shut down the government at Christmas time?

Answer: Just one: We have 435 Members of the House and 100 Senators, but the leader of either Party can shut down the government. In practical fact, either President Donald Trump or Speaker Nancy Pelosi can shutter the government. More likely, there will be a costly compromise, with barrels of pork flowing as they give in to the demands of 435 home districts in exchange for each other’s requests, ballooning the federal deficit. This is what happened at the previous threatened government closure in March. At the time he signed that Omnibus Spending Bill (on March 23), President Trump said, “I will never sign another bill like this again.” If he stands by THAT promise, it looks like the government may shut down.

Question #5: How many economists does it take to raise the Fed Funds rate by a quarter point?

7 of 12: The Federal Reserve in Washington DC employs over 300 economists, but they all have their specialties. There are 12 on the Federal Open Market Committee (FOMC), which meets eight times a year. The FOMC consists of seven members of the Federal Reserve Board, the President of the New York Fed and four of the other 11 regional Fed Bank presidents serving one-year terms on a rotating basis.

A more important question is: How many of the 12 are watching stock prices fall, inflation fall, long-term interest rates fall, housing prices fall, and many global GDP growth rates fall, while they RAISE rates?

The Market is Fixated with Politics & is Disengaged from the Economy

As you can see, I have tried to add a dash of humor today, since serious analysis doesn’t resonate in this market. Bloomberg explained the divergence between economic data and the market like this on Friday:

“The divergence is getting to be historic. Data Friday showed retail sales excluding autos and gasoline grew by more than economists expected in November, prompting Scotiabank Economics to declare – in all caps – that ‘the U.S. consumer is alive and kicking.’ That sent the Atlanta Fed’s fourth-quarter GDP prediction to 3% from 2.4%. Meanwhile, the S&P 500 careened lower by 1.5% and is down 10% for the quarter. If the Fed predictor proves accurate and Santa Claus skips Wall Street, it’d be the first time since 2010 that the economy grew by 3% and the S&P 500 fell at least 10% in the same quarter.”

Truly spoken: With the Dow’s big drop last Friday, each of the three major indexes has now fallen 10%:

Stock prices follow earnings, generally, but stocks have trailed earnings badly this year. How about the longer-term? It depends on how you scale your chart. Mark Perry of the American Enterprise Institute picked a scale of 4:5 for the ratio of S&P profits (in billions, after adjustments) to the S&P 500 (below).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Over the long term (since 1990), this chart shows stocks becoming overvalued from 1997 to 2001, then undervalued from 2008 to 2015. The chart shows earnings catching up to stocks now, but that’s based on a randomly-chosen 4:5 ratio of profits to price. An adjustment to that ratio could show stock fairly valued.

The market may indeed be looking at fundamentals – for instance, fearing a slowdown in global growth in 2019, or an erosion of benefits from the tax cut, or a failure to find solutions to the tariff & trade standoff, but most market fears of the last decade have proven to be wrong, and these fears may be overblown, too.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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