GLOBAL MARKET COMMENTARY

August 11, 2016

GLOBAL MARKET COMMENTARY EXECUTIVE SUMMARY

2. India’s tax reform: bullish for growth. India has passed a landmark tax reform, replacing much of its business-killing tangle of federal, state, and interstate taxes with a single nationally administered GST (goods and services tax). Business is cheering, and analysts believe the reform could add 1.5 to 2% annual GDP growth to India’s economy when they are implemented. Near term, we see signs that credit conditions in India are weakening, so we are watching economic data closely. However, in the intermediate and long term, we remain very bullish on India, as long as the reform process initiated by Prime Minister Narendra Modi continues to make progress. 3. Digital insurgents are remaking the media and political landscapes. In the cur-

rent election cycle, digital insurgency is reaching a new height. Old elite gatekeepers of information, opinion, and political power -- the media and the established experts and powerbrokers -- are being upended by online activists and grassroots social media campaigns. Popular opinion is that in spite of any knowledge or expertise they have had, the elites have become corrupt and can’t be trusted. This may be true -- nevertheless, elites serve as stabilizing forces, and when their power is reduced, the result will be disruption. This process is just getting started -- but when we look back from future election cycles, we may see that 2016 was a watershed. 4. Market summary. The U.S. stock market is moving sideways and slowly upward. World markets vary. Our favorites -- Brazil and India -- are doing well, while some other countries stumble. We remain bullish on gold and silver. Buy the dips. The U.S. dollar is maintaining its sideways pattern, which is a positive for the U.S. economy and U.S. stocks. If the dollar remains in a sideways band, the U.S. stock market can move slowly higher. If the dollar returns to the very strong status that it had until early 2016, we can expect diminished corporate profits and lower stock prices. A further concern for U.S. stocks is the election of 2016. Historically, new presidents like to take economic medicine in the first year of their new terms so that they can be riding along with positive economic growth data by the fourth year, when they face re-election. This time, the U.S. economy is growing so slowly that taking medicine will be hard to do. But both parties are proposing big changes in trade policies, which could have unexpected consequences.

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1. Where the candidates agree, we know what we’ll get. Despite a looming electoral slugfest and a polarized political environment, we have some clarity about the upshot of the election in policy matters where the candidates are on the same page. One of these areas is trade. Clinton and Trump differ in the tone of their rhetoric -- but no matter who wins, we see a shift away from the past several decades of devotion to the free trade mantra, and towards a greater attitude of protectionism. Many are pessimistic as a result of these changes; some are optimistic. Depending on how this new trend plays out, it could have a chilling effect on U.S. multinationals and their plans for future growth. It could also mean a new day for the most flexible and adaptable of the multinationals as they go their own way in negotiating new relationships with customers, possibly engaging in more joint ventures with foreign companies to enter and supply foreign markets.

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EDITORS

MONTY GUILD Chief Investment Officer

Clinton’s and Trump’s Common Ground: Trade

The United States faces what is apparently one of the most polarized elections in its history. Forecasting is a dangerous business, but that doesn’t stop commentators, economists, and analysts from modelling and extrapolating every shred of policy the campaigns produce. Their predictions of the effect of a Clinton or Trump administration on U.S. capital expenditures or GDP growth five or ten years down the line are unlikely to be particularly helpful or accurate, so we don’t give them much credence.

certainly, like Trump’s, combine concrete policy proposals with withering criticism of her opponent. Therefore, we find it more practical to look at where the candidates converge than at where they differ. There are places where the candidates agree, even though they couch their policies in different language to appeal to their different political bases. As the election draws nearer, markets will begin to sense and price in these points of agreement… because even though voter anger may mean a better year than usual for third-party candidates, we know that at the end of the day, it will be a victory for one of the two major parties.

Rolling Out the Economic Policy Speeches RUDI VON ABELE Senior Research Anaylist

CONTACT INFO 1-310-826-8600 [email protected]

Mon-Fri 6:30-4:30

On Monday of this week, Donald Trump made a substantial economic policy address to the Detroit Economic Club -- choosing the city as a symbol of American industrial prowess that has been ground down, he believes, by decades of bad trade deals and poor policy decisions. Detroit will also be the backdrop for Hillary Clinton today as she makes a similar significant economic policy statement -- which will almost

To the chagrin of more established Republican figures, Trump has set himself up as a skeptic -- not of free trade, but of the deals that the U.S. government has cut or has in the works, for example, NAFTA (in the existing category) and the Trans-Pacific Partnership or TPP (in the prospective category). He promises to renegotiate existing bad deals and kill bad deals that are in the works, as well as label China a currency manipulator, bring cases against China to the World Trade Organization, and apply tariffs to imports from “countries that cheat.”


ANTHONY DANAHER We don’t know whether we will get a President Clinton administration creating complex new tax structures and advisory bodies to try to strengthen small businesses, or a Trump administration issuing a moratorium on new regulations So here is a policy direction that from day one in an attempt to achieve we can expect the victor to push a similar goal by polar opposite means. -- no matter who that victor is.

August 11, 2016

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Common Ground, cont’d Skepticism About the TPP -- Something the Rivals Share

Source: Office of the United States Trade Representative

In short, whoever wins, we can expect turmoil in the structure of existing U.S. trade deals -- and uncertainty about forthcoming deals like the TPP and its cousin, the Transatlantic Trade and Investment Partnership (TTIP). These deals have been under negotiation for years -- the TPP in various forms since 2006 -- and a sudden shift will upset many participants’ expectations. Further, whoever wins, we will see the country’s mood shift away from one that has embraced laissez-faire international trade, and towards a more protectionist attitude. Both candidates take pains to indicate that they are in favor of trade; they just want good deals. But the protectionist turn will still sound a note of

restraint and caution for multinational businesses (which these days, really, is almost all businesses) as they think about future growth and deployment of their capital. Investment implications: Despite a looming electoral slugfest and a polarized political environment, we can have some clarity about the upshot of the election in policy matters where the candidates are on the same page. One of these areas is trade. Clinton and Trump differ in the tone of their rhetoric -- but no matter who wins, we see a shift away from the past several decades of devotion to the free trade mantra, and towards a greater attitude of protectionism. Many are pessimistic as a result of these changes; some are optimistic. Depending on how this new trend plays out, it could have a chilling effect on U.S. multinationals and their plans for future growth. It could also mean a new day for the most flexible and adaptable of the multinationals as they go their own way in negotiating new relationships with customers, possibly engaging in more joint ventures with foreign national companies to enter and supply foreign markets.


Clinton also singles China out for special mention as a country that needs to be “prevent[ed]… from abusing global trade rules” and says she will “reject trade agreements that don’t meet high standards,” specifically mentioning the TPP. (She opposes the deal now, which Trump claims is disingenuous because of her previous support for it.) She does not mention NAFTA, but the tone of her position papers on manufacturing and jobs suggests that in broad strokes, she and Trump are on similar pages.

August 11, 2016

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India: Tax Reform Is a Victory For Growth

Since he took office amidst great market optimism and enthusiasm, he has fought to meet those high expectations as he has struggled to move reforms through India’s fractured and contentious political environment. News coverage has faded, of course, as it has become apparent how slow the process will be. However, Modi has just made a major accomplishment: he has succeeded in passing a tax-reform bill that has been in the works far longer than he has been prime minister -- nearly a decade. India has historically been a difficult place to do business; its arcane and tortuous tax system is one of the primary sources of the red tape for which the country is infamous. India does not have a central system of taxation, or even a rationally structured system of federal and state taxes as the U.S. does. Instead it has had a patchwork of maddening complexity, including interstate taxes. Tax compliance is a nightmare even for those inclined to be honest -- so compliance has been low. Logistics has also been a nightmare for manufacturers, wholesalers, and truckers, who often must create cumbersome structures to avoid the headaches posed by the tax tangle. Now Modi has cut the Gordian knot, replacing much of this welter of taxes with a single, centrally administered GST (goods and services tax). Indian business is rejoicing, to put it mildly. Consumers will also be big beneficiaries, as the goods they consume will no longer be subject to multiple layers of taxes that hike the final prices they must pay.

All in all, this watershed reform, which now must go through a period of negotiation in the lead-up to its implementation in April of next year, will be a boon for the Indian economy -- according to analysts, adding between 1.5 and 2% to annual Indian GDP growth after it comes into effect. Thus, we remain long-term bulls on India’s economy. In the near term, however, we have a note of caution: the Indian domestic credit cycle, which showed signs of picking up in the second half of 2015, has turned down again. We will be attentive to other macro data in India that are indicative of economic activity -- for example, auto sales and import volumes. We will also watch the Reserve Bank of India to see whether it responds with more accommodative policy to stimulate lending. Our bottom line: near-term we are watching developments closely, and intermediate and long-term we are very bullish on India’s prospects for growth -- as long as Modi’s reforms remain on track. For now, we have gotten a strong signal that they are.

Investment implications: India has passed a landmark tax reform, replacing much of its business-killing tangle of federal, state, and interstate taxes with a single nationally administered GST (goods and services tax). Business is cheering, and analysts believe the reform could add 1.5 to 2% annual GDP growth to India’s economy when they are implemented. Near term, we see signs that credit conditions in India are weakening, so we are watching economic data closely. However, in the intermediate and long term, we remain very bullish on India, as long as the reform process initiated by Prime Minister Narendra Modi continues to make progress.


Since Narendra Modi took India’s helm two years ago, we have been bullish on the country’s longterm growth prospects. If Modi can achieve the same success for India that he did for the state of Gujarat during his tenure as chief minister there, he could help the country follow the well-trodden path of export manufacturing that has led other Asian nations to economic development and higher living standards.

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Think It’s Crazy Now? Just Wait -Digital Insurgencies Will Upend Politics Even More In Coming Years The phenomenon of the “meme” is typical of the age of digital disruption. Most of the electorate now uses social media, and according to Pew Research, a majority of those users turn to Twitter [NYSE: TWTR] and Facebook [NYSE: FB] as news sources. When they scroll through their feed on these platforms, they see news from the old, established media sources, but they probably also see a stream of these memes -- witty confections of partisan conOn the Republican side there is the Trump “meme sciousness that insert themselves almost inarmy.” (A “meme” is typically a funny image, of- stantly into the viewer’s mind with a chuckle. ten linked to some pop culture theme, and overlaid This is an example of how the digital age is breaking with a pointed observation; the term was originally down the power of the old gatekeepers. Research coined by biologist Richard Dawkins to refer to any shows that most voters are taking less and idea that spreads “virally” from one mind to an- less time to do deep reading -- instead they other. Trump’s followers have become adept at this are forming their opinions through quick new “art form.”) bites of information and humor. That takes power away from those who used to produce and publish thoughtful analysis -- and Trump’s Grassroots Online Support Leverages Self-Produced “Memes” puts it in the hands of any creative person with an internet connection and a social media account. It’s not just elite media gatekeepers being challenged; the ease of “digital insurgency” applies also to the gatekeepers of the established political parties. It took centuries for our political system to evolve -- but less than a decade for internet technology to really begin to upend it. Digital insurgency means that deals that used to be done in smoke-filled backrooms are likely to end up plastered all over TWTR, FB, and the “blogosphere,” where they will increasingly be found by voters who are no longer tethered to old-line media. The upshot? This process is highly disruptive. In some sense, elites are a boon; in reality, few of us have the knowledge (let


“Digital disruption” isn’t just a factor in business and economics. The last three election campaigns have already been deeply marked by popular digital insurgencies, such as those that helped Obama to victory in 2008 and 2012. In the current election season, we’ve seen the WikiLeaks dump revealing the backroom dealings of the Democratic National Committee, and the strong get-out-the-vote capabilities of the Democratic Party internet gurus.

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Digital Insurgencies, cont’d alone the wisdom or temperament) to decide on weighty policy issues. But there is a strong popular sense that the elites have abused their power and become corrupt, and with the power of digital in their hands, the insurgents are going to continue disrupting the political process for years to come. When we look back on the 2016 election from the future, we think we’ll see that this process was just getting underway. Investment implications: In the current election cycle, digital insurgency is reaching a new height. Old gatekeepers of information, opinion, and political power

-- the media and the established experts and powerbrokers -- are being upended by online activists and grassroots social media campaigns. Popular consciousness is that in spite of any knowledge or expertise they have had, the elites have become corrupt and can’t be trusted. This may be true -- nevertheless, elites serve as stabilizing forces, and when their power is reduced, the result will be disruption. This process is just getting started -- but when we look back from future election cycles, we may see that 2016 was a watershed.

Market Summary

A further concern for U.S. stocks is the election of 2016. Historically, new presidents like to take eco-

nomic medicine in the first year of their new terms so that they can be riding along with positive economic growth data by the fourth year, when they face re-election. This time, the U.S. economy is growing so slowly that taking medicine will be hard to do. But both parties are proposing big changes in trade policies, which could have unexpected consequences. We live in very interesting times. Our job is to monitor and draw a roadmap ahead… stay tuned. Thanks for listening; we welcome your calls and questions.


The U.S. stock market is moving sideways and slowly upward. World markets vary. Our favorites -- Brazil and India -- are doing well, while some other countries stumble. Gold and silver remain positive. Use dips to add to positions. The U.S. dollar is maintaining its sideways pattern, which is a positive for the U.S. economy and U.S. stocks. If the dollar remains in a sideways band, the U.S. stock market can move slowly higher. If the dollar returns to the very strong status that it had until early 2016, we can expect diminished corporate profits and lower stock prices.

August 11, 2016

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GLOBAL MARKET COMMENTARY

GLOBAL MARKET COMMENTARY

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