Manufacturing PMI Tanking Across The Globe – ValueWalk Premium
S&P 500 index

Manufacturing PMI Tanking Across The Globe

More than a year ago, we reported that the United States had unilaterally withdrawn from a nuclear agreement with Iran.

Q2 hedge fund letters, conference, scoops etc

Shortly after this decision, Americans began to impose sanctions on Iran. As a consequence, trade with this country has been prohibited.

More important countries of the European Union quickly began to indicate that U.S. sanctions are considerable obstacle. The problem was due to the SWIFT system (used for international settlements), which is controlled by the United States. Thus, Europe could not announce overnight that it would not comply with U.S. demands. Why? Because of lack of alternatives to the SWIFT.

In January, however, information appeared suggesting that some Western Europe countries (Germany, France, United Kingdom) are preparing to create a platform that will enable European companies to trade with Iran.

Now these announcements are coming into effect. The EU countries launched the INSTEX system, which is enabling European companies to further trade with Iran. INSTEX, however, does not work in the same way as SWIFT. Under the new platform, transfers between European and Iranian banks will not be carried out. The exchange will rather resemble barter. In this way, INSTEX is mainly to enable Iran to purchase key goods such as medicines, food and medical equipment.

As you can see, INSTEX is far from replacing SWIFT. We also do not know how many European companies will reject the INSTEX platform due to fears of U.S. sanctions. Either way, we observe a significant hit on dollar's dominance and the American SWIFT – and this does not come from the “enemies” of the U.S., but from the ally, i.e. the European Union.

Shares in the U.S. on symbolic tops

During this week the U.S. S&P 500 index has reached an all time high. This type of information slowly ceases to arouse greater emotions among investors, mainly because since January 2018 index has reached new highs three times. Each time market correction followed. In effect, despite the new high, the index has gained only 7% since the end of January 2018.

It seems that the new record of the S&P 500 index will not be reflected in the company's results. Let's start with the analysts' expectations. Over the last months of a given quarter (March, June, September, December), analysts make last forecasts revisions for individual companies before publication of official results. Usually, there are more companies for which forecasts are reduced rather than improved. All not to make investors disappointed during the results publication.

For example, let us assume that among the S&P 500 companies, 200 forecasts have been improved, 250 have been deteriorated and 50 remained unchanged. In this case, the net change is -50.

In June it amounted to -116. It was the second worst June since such measurements were carried out. Over the last 3 years, such negative changes just before the results publication has been recorded only once – in September 2017.

S&P 500 index

Furthermore, 113 of the largest U.S. companies announced their own profit expectations, 77% of enterprises reported that their results would be even worse than analysts' expectations. For comparison, the average level for the last 5 years is 70%. The recently reported result (77%) is the second weakest since FactSet started to collect this type of data. We dealt with the worse situation only in the first quarter of 2016 – at that time it was 80%.

Prospects for the stock market would obviously be better if the next months were to bring improvement in the companies' results. Will this happen? Global economic data described below suggests that this is unlikely. On the other hand, shares will probably be supported by more buybacks (companies purchases of their own shares) and growing hopes for re-introduction of asset purchases by central banks.

Dramatic economic data around the world

In January, economic data from Germany, China and Japan have been giving some alarming signs.  In the U.S. we have seen the beginning of slowdown.

While the global recession was only just looming on the horizon, today it is knocking on the door, and maybe even “standing at the doorstep”.

To start with, let us refer to the PMI, which to some extent reflects the economic situation of individual countries, if its value exceeds 50, then we can assume in a large generalization that the economy is growing. However, if it falls below 50, then the economy is shrinking. Below, the PMI indices for the industry are divided into two charts. On the left we can see PMI for key regions (USA, EU, China, Japan), and on the right – for the largest EU economies (Germany, France, Italy, Spain).

S&P 500 index

In the best case, PMI is 50, which indicates stagnation. At the same time, services PMIs are still slightly better.

Anyway, the direction in which we are heading is quite clear. You can see this in the table below, where manufacturing PMI of many different countries is included. Please note that the following data should be read from right to left (from July 2018 to June 2019).

S&P 500 index

source: Daniel Lacalle

As you can see, a year ago the green color dominated the table, that meant a good situation in the industry. Today, we have dominance of the red color. Only Greece and Vietnam recorded result more than 52. In the first case, we are talking about a country which has lost the last 10 years and its significance is negligible. In turn, Vietnam is gaining due to a trade war between the U.S. and China.

It is also worthwhile to look at the United States where many different indicators are published that work on a similar basis like PMI. Below you can see them gathered on one chart.

S&P 500 index

The trend is quite clear, and the scale of declines over recent months – gigantic.

Deteriorating economic situation is reflected, for example, in growing inventories of enterprises. Demand is decreasing, which will have to translate into lower production and layoffs (so far, we hear mainly about the mass job reductions in the automotive sector).

It is no coincidence that, despite the U.S. stock market has set a new high, everyone expects interest rate cuts (support for the economy). A well-oriented part of the market already knows that macroeconomic data for the United States will look poor in the coming months. In other regions of the world it will not be better.

Natural consequence of the current situation is the escape of investors' capital to safe assets, which we wrote about last month. We mentioned then that the U.S. dollar and U.S. bonds are expensive, but after a small correction they can grow further. Why? Because for most investors they are a safe haven. Our predictions have been confirmed – after the FED's release dollar index fell slightly, and bonds barely moved. Recently, however, they started to grow again.

What we've written right now does not mean that we encourage investors to invest in U.S. bonds. As of today, the optimism around them is too high.

At the end, a small curiosity. At the beginning of 2019, U.S. 10-year bond yields was around 2.7%. Albert Edwards decided to check how many economists asked by the Wall Street Journal in January predicted that the yields would fall to around 2%. No one. Not only that – nobody even suspected that the yields would fall below 2.5%.

S&P 500 index

source: Wall Street Journal

Remember that these experts were questioned in January and, like everyone else, they had macroeconomic data at their disposal. And yet, not one of them came up with the idea that a worse economic situation could bring capital fly to U.S. bonds (which pay higher interest than, for example, Italian bonds).

The UN sends spoiled food to starving Yemeni people

There is the ongoing war in Yemen and a humanitarian crisis with it. Tens of thousands of people have died of hunger, death of many more people in the following years is possible.

Country is regularly bombed by Saudi Arabia and its allies. Media are not willing to inform about the situation because the Saudis have good relations with the United States. Thanks to this, they do not have to deal with attacks of journalists (few exceptions confirm the rule).

Recently, the information has been released about the help that the United Nations provides to Yemeni citizens. As it turns out, over the last 4 years, the Consumer Protection Office in Yemen has returned a total of 24 thousand tons of “aid” which consisted of: spoiled food and supplements for pregnant women, as well as expired medicines.

If the UN wanted to effectively help Yemeni citizens, there would probably be a fuss around the blockade imposed on that country. Currently all parcels have to go to neighboring countries (e.g. Djibouti), where they are checked by the authorities most often related with Saudi Arabia. The United Nations, however, does not see a problem in the blockade. UN officials believe that the Huti movement (Yemeni rebels) is guilty of wasted food.

This way, in the era of globalization, where media allegedly reaches everywhere, the humanitarian crisis is maintained. In turn, people in the world know at most the concept of its scale, but they completely do not know the details.

Trump's defensive stance at the G20 summit

The last G20 summit in Japan was another meeting, where the world awaited a breakthrough in the US-China relations. Nothing extraordinary has happened, although President Donald Trump's defensive attitude is worth noting. One of its symptoms was the change of decision regarding the cooperation of American companies with the Asian company Huawei. Few weeks ago, Trump announced a ban on the sale of products to Huawei, while during the G20 summit the U.S. president withdrew from that declaration. He also admitted that the ban caused considerable dissatisfaction among U.S. companies.

It is difficult to say whether the withdrawal from the trade ban with Huawei was more to improve the atmosphere around US-China talks, or rather to build support before next year's presidential election.

During the G20, Trump was also kind to Turkey. Recall that the Turks are a member of NATO, and yet they are about to buy Russian S-400 missiles. Trump said that “he puts America first in all matters, but the unjustified treatment of Turkey by the previous administration can not be ignored.” In other words, the U.S. president decided that the purchase of Russian missiles by the Turks is the result of mistakes made by Barack Obama.

It is worth noting that tensions between the U.S. and Iran somewhat subsided. At this moment, what we wrote earlier has been confirmed. Both the U.S. military, industrial complex and the largest banks would be happy to see a new armed conflict and an opportunity to expand their influence. In turn, the current U.S. president is balancing in such a way to avoid initiating wars, while not losing credibility. Its priority is to properly play rivalry with China. Perhaps, this is also the reason why Trump decided not to make an argument about the purchase of Russian missiles by Turkey (this would worsen U.S.-Russia relations).

Gold is holding tight

After gold broke through key area of 1360-1380 USD, we published an article “When will the gold raise beyond 1500 USD?” We pointed out that banks are betting very hard on metal price decreases and may try to take advantage of the holiday period in the U.S. between July 1 and 5 (gold price drops often occur on holidays and Fridays). We also wrote that in our opinion the most likely scenario is that gold is going down to 1380 USD and then start to rise again.

We dealt with the first declines on Monday, 1 July, when the price fell around 1385 USD. In the following days, gold regained strength and again found itself above 1,400 USD. A big influence on the bounce of the metal prices was the information that Christine Lagarde, the current head of the International Monetary Fund, will become a new head of European Central Bank.

Lagarde announced several years ago that the introduction of negative interest rates is positive for the economy. There is no doubt that the new ECB president will continue Mario Draghi's policy (lowering rates and currency printing) or will apply even more radical monetary policy. Both the lower interest rates (especially negative ones) as well as the ECB printing in the past translated into increases in gold prices.

The former issue was recently explained by Mark Faber, who wrote: “one of the functions of money is to store value. Currencies are also treated by most people as money. However, if the cost of this “value storage” is too high due to negative interest rates, people will start abandoning currencies in favor of alternatives: gold and cryptocurrencies.”

Recent central banks announcements introduce us to the process explained by Faber. The same is the case with Lagarde nomination as the head of the ECB. It's not the fact that under her rule the ECB will cut rates significantly below zero, if this happens – it will be used by the Federal Reserve as an argument for loosening monetary policy in the U.S.. Market is already discounting these changes through gold strengthening.

Returning to the general market situation, we will be curious to watch what will happen by the end of this week. If there will be no sudden drops, the gold may start marching towards 1,500 USD in the following days.

Google interferes in American elections

Recently, Google director statements appeared in the network, who directly admitted that her company is trying to influence the outcome of the next year's elections in the U.S.. We wrote a short text on this subject, which has been published on Facebook. We completely understand that some people avoid Facebook, so we also put the text here:

A few days ago, in the network, we have spotted a movie called “Edward Bernays and the Art of Public Manipulation”. Edward Bernays was one of the pioneers of public relations and propaganda. As one of the first, he not only knew, but also used on a large scale the fact that in order to convince the crowd, one should appeal to human emotions instead of using facts.

One of the most characteristic quotes of Bernays are: “We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of.”

If it were to put the aforementioned video on Facebook, probably some people would write about “conspiracy theories” or paste photos of plastic caps. This is how the “displacement mechanism” works, which means that people do not want to accept the truth (they prefer to be cheated). These people need much more to be convinced.

Perhaps, the “something more” is a recent publication of conversation with Jen Gennai, the director of Google. Material was prepared by the Project Veritas website. Recall that Google controls 92% of the search engine market and is also the owner of YouTube. We do not, therefore, need to explain how great impact this corporation has.

In the conversation, Google director explicitly admitted that one of the important elements of her work is to ensure that situation from 2016 will not repeat next year. Of course, this is about Donald Trump's electoral victory.

According to Gennai, any antitrust proceedings against Google would be a tragedy, as smaller companies in the market do not have enough power to prevent Trump reelection. In other words, Google director claims that the corporation she represents knows best who should become the next president of the United States.

Now think about how many times you have heard about Russia's influence in the U.S. elections. No evidence has been provided in this case. Meanwhile, when Google admits to manipulate election results, it is difficult to find any material on the web at all (e.g., YouTube removes relevant videos).

Separately, the material also revealed how Google manipulates algorithms so that the content and hints displayed to users are in line with the company's ideology. Clear example is on the picture below. As you can see, after entering “a men can” you get a hint of “get pregnant”.

In summary, brainwashing is happening on a gigantic scale. Google is trying to shape the society, YouTube removes valuable channels. May this be met with a specific response from users.

S&P 500 index

Article by Independent Trader

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