From U.S.-Sino trade clashes to the absence of a UK Brexit agreement with the EU, the geopolitical environment remains unsettled. But equity markets seem to have assumed these trade matters will soon be resolved and that global expansion will continue. But will they? Kim Parlee speaks with David Prince, founder of Harbinger Capital Markets Research.
Hello, and welcome to the show. It is great to have you with us. Markets have been bombarded with mounting uncertainties-- US-China trade war, Brexit, on again, off again US government shutdowns. If there's one thing that markets do not like, it's uncertainty.
Joining me now to dissect what some of these uncertainties could mean for markets and economies is David Prince. He's founder of Harbinger Capital Markets Research and publisher of the weekly Harbinger Notebook. It is great to have you back.
Thank you very much for inviting me.
Happy new year. This is the first time we've had back, actually, since the beginning of the year.
Yeah, that's true.
So we're going to ask you just to guide us in terms of what you're seeing and what's going on. Where would you like to start?
Well, I think the first place I'd like to start is what caused that chaos that we went through in Q4 of last year. And what I think is really important is that people were so fixated on what was going on in the US that they were missing an awful lot about the rest of the world. And the rest of the world was saying, we've got problems. And what is very interesting, of course, is the FAANG names and all of the high tech-y, high growth areas were getting the attention in the United States.
So one of the things that I'd like to show that's just a great leading indicator for last year were actually the Chinese indices. The stock market there was telling you about problems long before we started to realize that the Chinese economy may be slowing down. But certainly, this is before all the trade war stuff really took hold and we had the tariffs that were imposed and all the numerous threats that kept bouncing back and forth between China and the US.
So if we show the Hang Seng and the Shanghai, there's two good stories there. And the one that I want to get across is that what we had here in terms of the Shanghai was a steady decline. Now, why is that important? That's important because you've got retail participation, the Chinese retail participation.
Well, what was going on? Contraction in the money supply. Tightening credit conditions. The Chinese People's Bank were very concerned about shadow banking, and they wanted to eliminate all the illegals. Well, that means you've got a liquidity squeeze.
And so it definitely bore its brunt on what was happening in that Shanghai Index. We did see the same thing, of course, with the Hong Kong market. But what really is important here is the Hong Kong market has started to rebound as the global markets have, but we're still seeing a pretty low level for the Shanghai.
So the way to interpret this is if you think the problems are solved in China, you're wrong. The trade settlement won't eliminate them all. There still is a banking problem. And I can't emphasize this enough. Banking problems are one of the big catalysts for an awful lot of recession and economic disparity that you're seeing. And it happens globally, and we're sure seeing it again in other parts of the world.
So that's what's really key to watching this. And to me, when I look at the overall picture from the standpoint of the Chinese, there's a lot of hope at this point. So what does it mean in terms of what we're dealing with trade? Trade balances come down, OK? But that's because we've got less trade.
That's not happening.
That's not a healthy situation. We are dealing with a situation whereby most people in the world think in terms of the US dominates all the globe. Well, that's not true anymore. Its $20 trillion economy still is only a part of the $81 trillion global economy. That's a little change in dynamic. In fact, the European one was, up until this last six months, bigger than that of the United States, but there's obviously been big changes.
So when you look at the trading blocs, you have this massive bloc of Asia. OK, that's a significant part of the world. But then, you have this massive European situation. How are we doing in Asia? Not as good as we were a year ago. How are we doing in Europe? Really much worse than we were a year ago.
So when you take those two chunks and you look at the chaos that's already going on in South America, if you believe, like so many Americans do, the American economy is capable of taking everyone higher, that's not true. And I think that's one of the things that's going to be faulty in 2019's thinking.
Let me ask you-- because obviously, I know we're going to talk about trade a little bit later on. But just going back to China's economy for a moment, they have set a lower growth target, economic growth target--
--of, say, 6.5%, I think, in 2019. Last year's target was marginally higher, 6.5%. How important is it, not so much in the absolute numbers, that you have the Chinese government guiding lower than it did the previous year?
I think it tells you exactly what they wanted to get across, and that is that the liquidity squeeze is starting to bring some normalcy to their overall sustainability. One of the big problems, of course, is that when you get that level of growth for that population, it's very hard to go and keep maintaining a 6% plus growth.
As the Americans have often wondered, how is it that we've never got 6% in 100 years? So I think that you've got to put it in perspective. There's no doubt that when the American economy was the same size as the Chinese, we were lucky if we got 4% growth.
That aside, it's all about the population and making them consumers. And if they don't get them to being consumers and happy and all that, there could be a real big problem in terms of expansion. And what I mean by that is social unrest could, therefore, rise.
So I'm more concerned about the internal domestic problems that could arise in China over the next couple of years because of this growth. So I'm feeling that in spite of the fact that we may get a settlement, it may be that we're not going to get the comfort level back into the Chinese economy that will actually make it grow at the rates that are being projected at this point.
How is this reflecting? I know you've got some charts here. We've got oil. What do you see happening with oil? And we saw a big increase, and a huge drop down. I mean, in Canada, of course, we talked about-- suddenly, we were all talking about Western Canadian Select when no one did before, but we bounced back up. So from a world standpoint in oil prices, what's going on? Where do you see it?
Well, I think that's probably the toughest thing to predict this year, is what's going to happen to oil prices, because the producers are all over the map. We've got Venezuela. We don't know with any certainty. Saudi Arabia. Good luck trying to figure out what they're going to do.
Russians are desperate for money because they've got big deficits. So will they overproduce to knock the price down? And then, of course, you've got the Canadian situation, which is on the marginal side. But the bottom line is that we're still a very decent sized producer with enormous uncertainty that's attached to that.
So I look at all the producers. Then, I say, the global demand is most likely to go down this year. So what we're finding is a big change in the attitude of the American inventory and the strategic reserves. And just the overall inventory levels in the States are much higher than what they were five years and before. And a lot of that is definitely needed, given the uncertainty for supply that we've seen.
And I'll give you an example that's really close to home. Venezuela used to be the big provider of heavy oil into the southern Gulf refineries. Well, we know that that's been reduced tremendously. The latest numbers are well below a million dollars when they were-- a million barrels.
And what's happened is that, of course, the big problem is there's no revenue going in there, but there's no supply source. So where's that supply source coming? Canada. And there's a lot of--
On the rails.
On the rails. Yeah. They're very safe. We do get it railed to the pipeline, but that's another story. But my message here is that when you're talking about oil prices, we've got the prices back up. But now, we've run into a domestic problem because the cost of putting on the rails is now starting to be prohibitive. And we saw last week that there was a slower pace of rail traffic for oil than what we've seen in the last year.
So where I'm coming from is in the Canadian case, it's great that the price is up, but we're producing less. So if I look at global stuff, I'm leaning more towards that it'll go down on a supply demand basis, but we've got big geopolitical uncertainty. And that's why it's going to be very difficult for people to predict oil price.
But the worst part of it is that uncertainty will mean even if the price goes up, what's the incentive to go buy Canadian oil? You just don't know what you're going to get for it. And so that's going to be a restricting mechanism for the oil producers.
Let me ask you because we have to go to commercial after this-- I've only got about 30 seconds. We have here-- and it caught my eye. It was actually probably the first thing I should have asked-- a statement here, which I want you to talk about. You don't need an inverted yield curve for a recession.
Yeah. I get so fed up with all the economists telling me, you've got to have an inverted yield curve.
No. It sometimes happens that you get an inverted yield curve and it leads you to a recession. And the best example we have is right now, Italy is in a recession. And the short end of the curve is minus 24 basis points. Yes, minus. Top end's the 275. So that's hardly inverted. It's what happens when you have extreme debt and you have an overmanipulation by a central bank. Does that sound familiar?
And guess what? That's exactly what is the big change. So don't get yourself hung on the fact that, well, it's going to be OK because--
The yield curve.
OK. Good insight. Stay with us. When we come back, David's got some more insights. We're going to be talking about tariffs, economies, US and China, and also what it means for the markets. You're watching "Money Talk." We'll be right back.
We're back with one of our great conversations with David Prince. He's founder of Harbinger Capital Markets Research and publisher of the weekly Harbinger Notebook. Another chart that you brought in to talk about was-- I'm not going to say what the chart is. It's about whether tariffs are having an impact. Is this on the States, I assume?
In the States, yes. So I brought in the ISM New Orders, but it's the non-manufacturing New Orders. And what's happening is you're getting that roll over in the ISM Management, as you can see. We're not contracting yet because this is a diffusion index, so it's out of 100.
And it's basically is it better or worse. And then, you add them all up, and you get a number. If it's above 50, things are still expanding. If it's less, then, they're contracting. Well, what you've got is orders for export have really, really declined. That's part of the trade. But this is in the non-manufacturing side.
So what is that?
So that's services in terms of computer services. So it really ties into their domestic markets are slowing down. So international orders for some of the things that the Americans really have had a big expansion. Which I'll use an example of just the service for Salesforce, force, things like that. So the people that built that model. Well, that's gone international. OK.
So stuff like that is slowing down? Is that--
It's slowing down internationally. And that, I think, is really important, especially with the way it has in that fourth quarter. So there are impacts that are happening, but it's already showing up in the domestic economies of the other people. But it will hit back, and it's a good point to allude to.
So many people don't realize that 40% of the S&P earnings are international. So when you're looking for the growth and you're seeing nothing but slowing down in the rest of the world, then that begs the question, why are you so jubilant about where we are in the market?
And we're seeing that in manufacturing. GM, for example, came out today. And I said-- it's not an apples to apples, but they're selling less than China. And we're seeing that-- that's happening over and over and over again in terms of what we're hearing. I never know if that's actually true or if this is more just baby bathwater. Get it all out there when things aren't looking good.
Well, in the case of GM, I mean, obviously, there's a lot of politics going on, especially in our own country because of that. But the reality is there's been a huge consumer shift away from the traditional sedan, which everybody was buying. Well, the Asians have gotten ahead on crossovers and on SUVs, and they're selling a lot more. And that's what people are demanding.
So now, there's a switch going on. And what I find interesting is that you're getting that production out of the Far East, and it's still cheaper than what you're able to do it here in North America.
I didn't mean take you off track there, but when I have you here, I need to ask.
That's all right.
Bottom line, if you could take a look at the ISM numbers, less jubilant, as you said. What does this mean for markets? What's priced into the markets right now in terms of what we're expecting?
The thing that has happened is that because of the switch in the Fed policy-- which basically, people have said-- we have another Fed governor who is a chairman that has ended up being a provider of a market put. I remember how comical that was for Alan Greenspan. But then, along came very shortly after the '87 crash, which looks like nothing on a map now, but it really did have a big impact.
So we're back into that period where the market thinks, OK, rates are going to stay low because we've got control over them. Well, if we have rates staying low, then what do we got-- and I can see that you've got the S&P up there, and I'll go through it. You've had this massive sell off that we all know about in December.
And what was really important about that was just the extreme volume. But more to the point precisely was the fact that you had panic type selling where people just wanted out for that liquidity because of margin or because they didn't want to show it for year end, which I always call the portfolio embarrassment sale. But that liquidation was huge.
The rebound has done nothing but take us right back up into the area it was before the real scare hit the market about higher rates for the United States. Granted, it was originally talked about, which set this thing in motion, back in October. So what I'm looking at is the market has to believe that there's going to be additional growth on a global basis to take it higher from here.
And what I believe is going to be more likely the case-- we're going to churn around here, I think, for the next six months in a trading range. And it's going to have some pretty wild swings because, as we saw from the earnings reports, we're halfway through. We're getting some pretty good returns. But an awful lot of the problem is what they're saying for next quarter and the quarter after it in terms of lower growth. So it's hard for me to get really excited about the market at this level. We've had most of it.
David, always a pleasure. Thank you so much.