When it comes to the recently passed $1+ trillion US fiscal stimulus, there are two opposing views in the market: one is that it was an unnecessary, ill-timed diversion, which the US economy with its near record low unemployment rate does not need, which will prompt a surge in inflation and will unleash a debt-funding crisis as the US Treasury is forced to sell record amounts of debt at every greater yields. This is the view typically held by those who are politically aligned against President Trump.
On the other hand, there are those who say the impact of US fiscal stimulus has been extremely visible in US business & consumer surveys (which have predicted >5% growth in real GDP) and together with tax reform, has been instrumental in send the S&P 35% higher since the Trump election. Supporters of president Trump tend to see more positives than negatives in the fiscal plan.
And yet, the reality is that to date US tax cuts have had little if any tangible impact on actual economic activity according to Bank of America economists. In a note released earlier today by BofA's Michael Hartnett, the chief investment strategist highlights the following:
- US capital goods orders in the past 5 months are very surprisingly flat despite corporate tax cuts, record profits & stock prices (Chart 6); and there is no evidence of Make American Wages Great Again (wage growth stuck around 2.5%)
- The $1600 gain from tax cuts in 2018 for average US households (Brookings Institute) has thus far been saved (personal savings rate is up from 2.4% to 3.1%), used to reduce debt (42% of respondents BofAML’s US consumer survey said they plan to use the tax cut to “save” or “pay down debt”), or used to fund an extra $320 in gasoline bills (gasoline prices are up on average 16% this year)
However, no matter what one thinks of Trump or the ultimate relevance of the fiscal stimulus, a bigger concern - according to BofA - is that a "visible stimulus" will be critical in the coming months for two reasons:
- First, the blockbuster corporate earnings bonanza is coming to an end as BofA's model suggests global EPS will slow from 20% to 6% in coming quarters as Asian export growth slows and global PMIs normalize, as predicted by the yield curve.
- Second, and far more important, is that both profit and economic growth is suddenly in jeopardy: according to Hartnett "South Korean export growth, a notoriously good global cyclical indicator, turned negative for 1st time since 2016."
And, as a further reminder, the last time South Korean export growth turned negative in the downward direction was just around the time of China's devaluation in the summer of 2015, when global markets were on the verge of a 20% bear market, and only the Shanghai Accord of February 2016 prevented a free fall in risk assets.
If the South Korean "advance indicator" is as accurate as it has always been, forget about soaring earnings for the coming quarters: an earnings recession is just around the corner!