The 40% Rule

Mar 16, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

With another shakeup in President Trump’s cabinet, the markets started the week on shaky ground.  Fortunately, the economic data proved enough to buoy investor sentiment and while the market will close slightly lower this week, it ends on a good note.

It is the end of an era.  After six decades of rule by the Castro’s, Cuba went to the polls last Sunday to select ruling party candidates.  The members will choose a successor to President Raul Castro when he steps down next month.  Perhaps this will signal a new chapter as this country moves on.  Similarly, ending a chapter is China which amended its constitution removing presidential term limits and paving the way for President Xi to remain in power indefinitely.  Much like Putin’s grasp on power in Russia, a consolidation of power in China could change the nature of our relationship, especially as the U.S. threatens tariffs on its largest trading partner.

Talking about ousters, we learned this week that Secretary of State, Rex Tillerson, no longer has a position in President Trump’s Cabinet.  The announcement was made on Twitter where Mr. Tillerson first learned of the news.  He is replaced by CIA Director, Mike Pompeo, who was a member of the House of Representatives from Kansas not long ago.  The move comes ahead of what could prove to be difficult negotiations with North Korea in the weeks ahead.  Along similar lines, it now seems H.R. McMaster may be next in President Trump’s crosshairs.  He currently serves as the President’s National Security Advisor but has been at odds with the president over strategy in recent months.

In economic news, the February Consumer Price Index was in-line with consensus estimates and eased some of the recent anxiety over the growth of inflation.  Similarly, the February Producer Price Index rose in-line with expectations.  Given the recent economic releases, both Goldman Sachs and JPMorgan economists expect continued job growth of more than 200K per month for the next couple of years, which will take the unemployment rate below 3% – a level the economy has not experienced in 65 years.  In light of the consistent job growth and rising wage pressure, many on Wall Street are beginning to agree that four rate hikes are coming this year as opposed to the previously expected three.

Pressing for fewer rate hikes is Mr. Lawrence Kudlow who was announced as Gary Cohen’s replacement on the President’s economic council.  Mr. Kudlow last served in the Reagan administration as head of the Office of Management and Budget (OMB).  As a proxy for the President, he quickly went on the offensive explaining that the President’s positions on tariffs is “not what people think.”  He defends the President’s position that China has not been playing by “the rules.”  Later in the week, he went on record pressing the newly appointed head of the Federal Reserve, Jerome Powell, to leave the economy alone by not raising interest rates.  He said, “the market is going to take care of itself.  The whole story’s going to take care of itself.”  The Fed has long been an independent agency, however, with these latest appointments it is to be seen just how independent it remains.

In company news, Exxon announced this week that it has formed a partnership with Synthetic Genomics for the purpose of advancing biofuels made from algae.  The company now believes biofuels could grow rapidly in the late 2020s and are aiming to set up one or more demonstration plants by 2025 to produce 10K bbl/day of diesel and jet fuel from genetically modified algae.  Electric vehicles may have some competition after all.  Microsoft made a breakthrough of another type this week.  It announced the company has created the first machine translation system that can translate sentences of news articles from Chinese to English as well as a person.  Researchers believe the system has achieved human parity in translations.  This is a big step and another breakthrough in artificial intelligence (AI).

In closing let’s talk about pundits.  You know, the people you see on TV channels such as CNBC, MSNBC, and the like?  Do you ever wonder how pundits never get it wrong?  I learned this week that the trick is called the 40% rule.  It is a forecasting tactic that makes a bold call without being too bold.  The nice thing about 40% is that you never have to say you were wrong.  If the prediction comes true you look smart, but if it doesn’t then we can say the odds were against it.  The nice thing about the 40% rule is that you never have to say you were wrong.  With that in mind, I believe the Dow Jones Industrial Average has a 40% chance of hitting 30,000 before year-end.  Now you know.

March 16, 2018

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