Domino's or Papa John's?

CHICAGO, IL – OCTOBER 12: Domino’s menu items are shown on October 12, 2017 in Chicago, Illinois. Shares of the restaurant chain fell 4 percent today despite reporting an increase of more than 8 percent in domestic same-store sales. (Photo Illustration by Scott Olson/Getty Images)

Pizza is one of the most popular foods in America, with over 45 billion dollars in sales annually, and 1 in 8 Americans consuming it on any given day according to the USDA. These stats can make you hungry enough to fuel the question, “who has the best pizza”. Two big names in the pizza industry are Papa John’s and Domino’s. They consistently fight for every inch of market share and are listed as two of the top five performing chains in terms of sales. The debate of who has the best pizza may never end and the answer may never be clear cut – especially since both companies share the same cheese supplier. With this in mind, we are crystal clear when it comes to the question, which company is a better investment opportunity? In our opinion, Domino’s is the clear winner as they possess better fundamentals, faster growth, stronger analysts EPS revisions, better margins and greater profitability. Conversely, Papa John’s has unimpressive earnings growth and this has forced a number of Wall St. analysts to revise their earnings estimates down. Additionally, their margins and profitability are weaker than Dominos.

The foundation of our recommendations is to identify companies that perform best and worst on the collective basis of value, growth, EPS revisions, profitability, and LT momentum. The CressCap systematic trading model gathers data daily on 6,500 companies globally and assigns academic grades (A – F) for each financial metric. These grades are scored relative to its region/sector.

CressCap Investment Research

Expand to see how our directional recommendations are computed: CressCap uses a multi-factor model to select the best-performing stocks. Our data is updated daily and the academic grades (A – F) for each financial metric are scored and ranked on a regional/sector relative basis. The foundation of our recommendations is to identify companies that possess the collective investment style of Value, Growth, EPS Revisions, Profitability and LT Momentum. Academic grades of C or better indicate that each metric scores well compared to the peer sector

Domino’s reigning superior was not always the case. They have come a long way since 2008, when their growth rate was slowing and its share price hit rock bottom at $3.03 in November of the same year. The reviews of their pizza ranged from, having “cardboard crust” to being “the worst excuse for pizza”, along with many saying they would prefer microwave pizza to the chain’s. In 2010, the company, lead by CEO J. Patrick Doyle, had enough and approached their struggles from the ground up. In 2011, the company had changed their 49-year-old pizza recipe, along with overhauling 85% of its menu in order to improve their brand and to diversify themselves from their competitors. In 2011, the pizza powerhouse added a considerable number of new items to their menu including stuffed cheesy bread, penne pasta, chicken options and more dessert choices. In addition to the menu improvements, the company has emphasized that they attribute much of their success to creating mobile apps on all platforms along with a responsive website, which streamlines the process for customers to order their product. Domino’s Robotic Unit, an autonomous delivery vehicle, has taken tech lovers by storm, enhancing the future commercialization of this technology. Domino’s has even taken their community outreach one step further by launching its “Paving for Pizza” initiative. In this initiative Domino’s provide grants to US towns to help fill potholes, that could cause damage to the pizza on its way to its destination. Domino’s is experiencing a change in their front office, with the well respected J. Patrick Doyle stepping down as CEO. On July, 1, 2018, Richard Allison, currently President of Domino’s International, will assume the role of Chief Executive Officer. Doyle has faith in Allison and said this about his departure: “I wanted to have a Leadership Team in place that would be ready to create even better results into the future. I’m proud to say that we’ve accomplished all of those goals, and I will leave Domino’s knowing that it is in great hands”.

On April 26, the Michigan based Pizza chain released their first quarter 2018 financial results where they saw global retail sales grow 16.8% and domestic same store sales grow 8.3%. CressCap gives Dominos a grade of A-. The growth track record of the company is outperforming its consumer discretionary competitors with 68.01% compared to the sector average of 9.34%. The first quarter of 2018 proved be a tremendous success for Domino’s with revenues increasing $161.2 million, or 25.8% and net income increasing $26.4 million, or 42.2%. Domino’s attributes the boom in revenues to higher supply chain volumes resulting from order and store count growth. Further, they claim their net income increase can be attributed global royalty revenues, higher supply chain volumes, and a higher deduction related to excess tax benefits from equity-based compensation. This stock has impressed CressCap, that has a buy recommendation on the stock, a conclusion that is backed by both technical and fundamental opinions.

With Domino’s performance soaring, their competitors such as Papa Johns are struggling to keep pace. In their first quarterly report of 2018, the “better ingredients, better pizza” chain had far different results from Domino’s. They acknowledged a domestic sales decrease of 5.3%, and disclosed that consolidated revenues had also decreased by 4.9% to $21.9 million. They attribute this poor performance to lower comparable sales for North American restaurants and lower North American commissary sales due to lower volumes. Steve Ritchie, President and CEO of Papa John’s, tried to reassure investors by stating, “Although first quarter results were lower than the prior year, they were consistent with our expectations. We remain focused on enhancing our value perception and driving our strategic initiatives”.

Rather than following Domino’s lead and diversifying the menu, Steve Ritchie, the then COO, stated in 2015 that, “pizza is our focus”. He emphasized that the public should, “not expect to see us introduce an extensive development of sandwiches, side items, that would create complexity within the operations model”. With their model underperforming the market, the question remains, have they made the right managerial decisions? The company has done little to stay out of headlines with the, now former, CEO John Schnatter blaming the decline in NFL viewership and players kneeling during the national anthem as reasons behind the dwindling sales growth of Papa John’s pizza during the 2017 season. Following this statement made by Schnatter, Papa John’s is no longer the official pizza of the NFL in 2018, a title it had held since 2010. This is further adding fuel to the fire of the pizza chain struggling to gain a bigger market share in the consumer discretionary sector.

CressCap grades Papa John’s an F, based on poor financial metrics. The CressCap sector rank is 310 out of 315 companies. The 2 Yr. Forward Sales Growth Rate (%) for this stock is negative compared to the sector with a growth rate of 11.47% and analysts EPS revisions for the stock have trended down 18.5% in the past 90 days.

The debate of who has the best pizza may never end, but when it comes to wallet appetite, we have come to the conclusion that the heavy favorite is Domino’s. In every metric CressCap scores, Dominos outranks Papa John’s by wide margins.

Related Posts:

  • No Related Posts

How technology can help tackle the plastics pollution crisis

Lush Digital

The Lush Lens App in the Milan Naked Shop

Retailers are under increasing pressure to cut down on unnecessary packaging, and some shops are showing what a plastic-free, tech-enabled future could look like.

It’s a sad fact that plastic debris in our oceans is killing marine wildlife at a staggering rate. With plastics pollution spiralling out of control, shops are under pressure to cut down on their use of unnecessary packaging. Some of the greatest culprits in generating harmful waste that often ends up in the oceans or landfill are cosmetics companies – just think about how many bottles and pots of shampoo, conditioner, moisturiser, shower gels and other grooming products the average person keeps in their bathroom and it’s easy to see how it very quickly adds up.

The increased awareness of the problem among consumers means that this is a commercial opportunity for those offering environmentally friendly alternatives, however. And this is what UK handmade cosmetics company Lush has been doing for many years, making many products such as shampoo in solid form (which according to the company saves nearly 6 million plastic bottles a year) where they require neither packaging nor preservatives and are offered in what the company refers to as “naked” form (where at most buyers have the option to slip it into a small paper bag or have it wrapped in some greaseproof paper).

Currently over 40% of Lush’s product range is completely free of packaging, but in early June the company went a step further and opened a shop in Milan, Italy which is 100% packaging free, relying on technology to keep customers informed instead. The trial is currently running exclusively on Fairphone, and customers visiting the Milan shop have access to four devices, yet they hope to roll it out to global customers in the near future.

Powered by Tensorflow from Google, the Lush Lens app uses AI and product recognition to eliminate the need for packaging. In its current beta version, the information comes up as a simple text pop-up, but there are plans to explore more possibilities around immersive technologies such as Augmented Reality to provide more information about the sourcing of ingredients, the process of making products, provenance about who actually made each batch, and suggestions on how to use it. For those familiar with the company’s rather eclectic and unusual offerings, those features would all make a lot of sense.

With this prototype mobile app we’ve put new technologies such as AI to a good use in our mission to eliminate more packaging and further educate our customers on our unique cosmetics,” Says Adam Goswell, Technology R&D at Lush. “We believe in the ethical use of data, so all the information Lush has is secure and used in a transparent way. We’re increasingly part of the tech community, providing open source solutions where before only monopolies existed. This is in line with a company ethos that aims to give more than it takes, act transparently, push innovation and raise industry standards.

Lush is well-known for its activism, and have – if you’ll excuse the pun – recently got into hot water for one of their more controversial campaigns which was meant to raise awareness against abusive surveillance practices carried out by certain police force branches in the UK. Having spoken to its founders (Lush is very much a family business at its core in spite of its multimillion-pound global turnover) it is clear that politics and product are very much intertwined in their strategy.

In the past few years Jack Constantine – the son of Lush’s Founders Mark and Mo Constantine  has focused on developing in-house technology under the Lush Digital umbrella, including building an in-house R&D team called Tech Warriors. When we last spoke they were enthusiastic about the possibility of using image recognition and AR functionality to allow people to find out about the products in a shop simply by pointing their smartphone camera at them.

The company sees technology as playing a vital role in achieving their commercial-political goals, which translates not only in advocating for digital rights, embracing open-source technologies and adopting ethical sourcing of hardware, but also in their investment in new technologies such as 3D printing, artificial intelligence, image recognition, and immersive tech such as augmented reality.

Technology doesn’t have to be unethical. We believe tech can be built for the greater good and impact positive social change,” Constantine agrees. “Just like its approach to sourcing ingredients and testing products, Lush believes in continuously challenging norms and driving best practice when it comes to business ethics. One of those key principles is the ethical use of data and technology.

Related Posts:

  • No Related Posts

The America (Fiscal Deficit) First Fed Tractor Beam Gradually Tightens Global Monetary Conditions Further

Fed Chairman Jerome Powell alleges that rising real US interest rates are not negatively influencing the global economy. His global conviction is now being strongly tested by Mr Market. Liquidity flowing to North America runs, away from tightening global monetary conditions, towards tightening American monetary conditions. In the short term, the global liquidity injection may outweigh the tightening US domestic liquidity conditions and provide a monetary stimulus to the American economy. Should Chairman Powell read this as a signal to tighten US monetary policy further, a singularity may occur at which this positive feedback system overloads and then breaks down.

Chairman Powell is lucky that the global liquidity is chasing US financial assets rather than creating inflation in the real economy. This good fortune however comes at the cost of a destabilizing bubble in capital markets asset prices that the Fed needs to manage. Managing this asset bubble with higher interest rates may thus create the same singularity event risk ultimately.

The adoption of a more global perspective by Chairman Powell is the fundamental solution. Since he remains hostage to President Trump’s America First prime directive, this global perspective will be difficult to achieve in practice without some negative event in the global economy that can be sold to and then sold by the President as a threat to American national security.

The thesis of the last report was that the Fed may be overtaken by the global headwinds before it hits the neutral rate. Recent events indicate that the Fed is now being overtaken, by both global and domestic events, yet shows no inclination to adjust its position.

Hiding in plain sight, among the archives of the Kansas City Federal Reserve’s analysis, is a piece of evidence which suggests that this inflection point actually may have been hit way back in late 2016/early 2017. It is maybe no surprise that this evidence has been largely ignored and suppressed, since Kansas City Fed President Esther George is a noted Hawk who has been in a hurry to build a conventional interest rate cushion to deal with the implications of her analysts’ research.

The Kansas City Fed’s smoking gun is to be found in a research report entitled Nominal Wage Rigidities and the Future Path of Wage Growth. The report finds that wage rigidity has been rising since late 2016, with the corollary impact of exerting greater resistance to rising wage pressures. The researchers find that this phenomenon is driven by their observation that companies, that retained staff during the Great Recession, are now responding to this negative historic cost of carry by not raising the salaries of these people to whom they ostensibly showed loyalty during the bad times.

By implication therefore, which the Kansas Fed report omits, the positive driver of wage inflation must therefore be from the net creation of new highly skilled jobs that can command a premium. America is not however creating such highly skilled jobs in the number required to overcome the legacy wage rigidity in existing employment.

More alarmingly, the uptick in wage rigidity seen by the Kansas Fed is now coming off a higher low. The greater trend is therefore for rising wage rigidity and hence increasing downward pressure on wages. What the chart on wage rigidity actually signals is that the economic recovery started circa 2012 in compensation terms. It then ended in late 2016. In compensation terms we are into the next recession!

The FOMC on the other hand has been running to catch up and get ahead of the big fall in wage rigidity from 2015, which it interpreted as creating inflation risk in traditional Phillips Curve fashion. This risk seems to have abruptly ended in late 2016, but the FOMC is unwilling to acknowledge it. Now the FOMC “agonizes” over whether to call this risk of recession as mission accomplished on hitting the new lower neutral rate of interest.

The FOMC is not alone in its “agonizing” in relation to wage rigidity. It can draw a small measure of comfort from the fact that the world’s oldest central bank is also “agonizing” in the same regard. The Riksbank’s Henry Ohlsson recently commented that wage rigidity in Sweden is confounding the Phillips curve predictions, that tighter labor markets should produce wage inflation sooner rather than later.

(Source: Reserve Bank of Australia)

The Reserve Bank of Australia is also “agonizing” over the fact that the anemic pace of wage increases is challenging Australians’ “sense of prosperity,” with obvious headwind implications for the strength of the economic recovery there.

The growing global appreciation of wage rigidity, among the developed nation central banking fraternity, may ultimately become doctrinaire and temper enthusiasm for the raising of interest rates. Depending on how one looks at it, the Fed is either diverging from this doctrine or leading the charge towards it with gay abandon for a recession that it is creating.

(Source: Central Banking)

A more worrying diversion, down the global central bank thought leadership road on the Phillips curve however, comes from a Bank of England neophyte rate setter.

According to Silvana Tenreyo, the nascent inflation pressures in the Phillips Curve have become muted by the successful application of monetary policy by central banks. This little piece of panegyrics is setting the Old Lady and the young lady up for a great fall. If it goes to the heads of her global central banking colleagues, the fallout could be spectacular when the sound-bite expires, but the ride higher in risk asset prices could be well worth it for those who flatter through price discovery. As J K Galbraith noted: “Financial disaster is quickly forgotten. There can be few fields of human endeavor in which history counts for so little as in the world of finance”.

(Source: Boston Fed)

A second smoking disinflation gun, to go with that of the Kansas City Fed, was recently revealed by the Boston Federal Reserve. Boston Fed researchers have found another cause of wage rigidity, which they generally attribute to the rise of the all-pervading “gig” economy.

(Source: Quartz)

The Boston Fed may however be barking up the wrong tree, in identifying the causal relationship of wage rigidity to the “gig” economy. A recent study by the Bureau of Labor Statistics (BLS) has found that “gig” jobs’ share of employment is actually falling. So the “gig” economy is actually in decline, yet wage inflation is still not accelerating. Go figure?

With its own two smoking guns, clearly hiding in plain sight, it is going to become harder for the FOMC to argue for and deliver further interest rate hikes. The Fed’s ability to rebuild its conventional monetary policy interest rate cushion, to be used in the event of the next economic slowdown, is thus be challenged by its own thought leaders.

(Source: Bloomberg)

The incoming inflation data suggest that the Fed has hit its inflation target and/or the new lower neutral rate. Whilst the likes of James Bullard and John Williams have already broken out the “Champagne” and “Goldilocks” guidance epithets respectively in celebration of this, there is no cause for euphoria or any strong justification for thinking that these good times will last. The inflation drivers, that have nudged the needle to target, are not the pro-cyclical ones traditionally associated with strong economic growth. The party may therefore be short-lived and very embarrassing for the Fed’s revellers when it all ends.

The last report discussed the “agonizing” going on within the Fed over when and how to announce arrival at the neutral rate and then what to do next. The Kansas City Fed shows us that American workers have been in compensation “agony” since late 2016. Their “agony” has been exacerbated by the Fed’s normalization process. The Fed is in effect behind the compensation curve. St Louis Fed President James Bullard was also observed popping the champagne corks to celebrate the workers’ “agony,” which loosely translates into what San Francisco Fed President celebrates as the “Goldilocks” economy. Evidently, these two gentlemen, who didn’t get fired during the Great Recession, have had great pay rises in contradiction to the rising wage rigidity curve and can wash their lukewarm porridge down with “Champagne”! The Fed is clearly not on the same compensation curve that it is studying.

Having sobered up somewhat, Bullard has now moved on to address the problem of the inverted yield curve. He recently added to the agony, of his voting colleagues, by announcing that it is now time to slow the pace of normalization. This implies that he believes that the neutral rate has been reached, and it is now time to steepen the yield curve to stop sending the recession signal that its current shape is sending to some. A slower pace of continued normalization rather than a pause, combined with a tolerance for a slight inflation overshooting in line with the new “symmetrical” target, should then work its way through the forward curve into a steepening.

Fed Governor Lael Brainard’s practical way of dealing with the agony involves maintaining the “appropriate” tactics of gradually raising interest rates, whilst the headwinds from the global economy remain in a dynamic equilibrium with the domestic tailwinds. Her ultimate target is a “modestly restrictive” position, suggesting that the dynamic equilibrium will move in favor of the fiscal tailwinds over time. She has no fear over the collective market fear that the flat yield curve is a harbinger of recession. The last report suggested that Chairman Powell was done with reforming Fed guidance and would attempt to strangle-off the communications of his colleagues. Noting this looming threat, Brainard has alluded to the need to get rid of “stale” guidance.

New York Fed President John Williams chose the warmer than “Goldilocks” halo effect, of the May Employment Situation, to frame perceptions of the Powell choke on guidance. In this frame, the Fed should continue gradually hiking interest rates for the next two years and should then reach the neutral rate after three more rate hikes. As rates near neutral, there will be less need for forward guidance and the notion of “accommodative” policy will become less relevant as interest rates rise in his view.

The last report suggested that the Fed wished to steepen the yield curve. Williams ritually obliged in this endeavor, by opining that the Fed does “not necessarily” need to pause interest hikes after hitting the neutral rate. On the contrary, if the economy remains strong, interest rates could actually go above neutral for a period of time. Having previously tried and failed to steepen the curve, by discussing the tolerance for inflation overshooting target, Williams is now trying to show intolerance of this to achieve the same resultant steeper yield curve shape.

True to form, the voluble Minnesota Fed President Neel Kashkari is not going to be choked by the Chairman without a fight. He projected his own halo onto the latest jobs data in order to keep his viewpoint in the policy debate. Acknowledging jobs growth, he also observes some more slack in the labor market which can act as a drag on the rate hike and normalization process. This slack may also lower the neutral rate, thus obviating the need for further rate increases.

Kashkari’s thesis is not too dissimilar from that of the wage rigidity researchers at the Kansas Fed. It may also be borne out in the micro-economic behavior of companies as we shall see below.

(Source: Bloomberg)

The Fed is making leaps and bounds in its embrace of diversity. Unfortunately it does not expand this embrace of race and gender to business skills. The Fed is still an institution rigidly bound by its belief in the skills of career economists and/or career bureaucrats, with the occasional career policy wonk or Wall Streeter thrown in for good measure. The Fed’s view and policy is therefore framed by the collective capture by these great estates of the American polity. What is lacking are businessmen and entrepreneurs, the real creators of economic wealth rather than phony prosperity in the form of inflated asset prices.

This glaring omission is highlighted by the Fed’s current “agonizing” over the shibboleth known as the Phillips Curve. The Fed keeps hoping that the inflation from a tight labor market shows up. As noted by the previous Kansas City Fed study of labor market rigidity above, this may be a mirage. In the real economy businesses, especially small businesses, have been forced to exercise extreme financial discipline as a response to the enforced credit rationing experience of the Credit Crunch. Just as their consumers have deleveraged and changed their behavior, so American companies have also responded with efficiencies.

This rational discipline, on the part of business, now manifests in the recruiting process. There is a well-accepted skill shortage. Business however has to remain profitable. Since consumers have reformed their behavior, higher wage costs can no longer be passed on with ease. Thus even though companies would like to pay up to hire skilled staff, their narrow profit margins prevent this. In addition, there is a lack of skilled staff available, so it would be illogical to chase people who do not exist in reality. American business has therefore reached the labor supply side limit of productivity driven growth. Large nonfarm payroll increases may thus be a thing of the past, as America conforms to the new economic productive labor straitjacket.

Ironically, immigration and global free trade are the only things that can break this iron labor supply constraint – a fact unfortunately ignored by the populist tendencies of the leadership at present. The Fed, anchored in its own economic theory however, will read the tight labor markets and rising trade war barriers as inflationary. A man with a hammer only sees nails, so the Fed will continue with its gradual nailing of the real economy with gradual rate rises until it sees the economic deceleration that it is contributing to in the data.

As a consequence, American businesses will now have the headwind of higher interest rates and rising employment costs to deal with. This margin pressure will thus make them even more conservative in behavior. This conservative behavior will come in the form of aggressive cost saving. Aggressive cost saving will translate into aggregate economic stagnation at the national level. Since the Fed’s contribution to this stagnation is gradual, with interest rate increases, this deceleration will be slow in coming unless the global economy falls off a cliff in the meantime.

(Source: Econoday)

The latest FOMC decision to raise interest rates and signal confidence that an extra one can be inserted this year, provided no hint that the central bank has twigged the wage rigidity issue.

Under Powell’s leadership, the data dependent Fed is reactive to incoming data (which is itself historic) so that there is no possibility that it can get ahead of any curve real or imagined. The Dot Plots once again showed where it all goes pear shaped. The forecasters assume weak growth and inflation; however, they predict the rate hiking to continue presumably as the Fed builds a conventional monetary policy cushion to deal with the weak economy that it is weakening further with tighter monetary policy. The Dot Plots thus clearly signal the wage rigidity and the Fed’s ignorance of or unwillingness to do anything about it. By this metric therefore, the Fed is actually behind the curve.

(Source: Seeking Alpha)

The previous article in this series suggested that Chairman Powell would “strangle” the guidance of his colleagues in order to focus market attention on his own guidance. Further evidence in support of this thesis was provided by the Chairman himself, who stated that he will hold a press conference after every meeting. In addition to this “strangle” he also announced that forward guidance on the evolution of monetary policy will be dropped, thus fulfilling John Williams and Lael Brianard’s earlier predictions.

The Chairman has pretty much monopolized the guidance mechanism for himself and also made this process data dependent by nature of his own cognitive bias in this direction. The Fed has therefore become more opaque by default, thus increasing the risk of surprises for itself and by logical extension the market.

Through his monopolizing reform of the guidance process, the Fed Chairman has effectively set himself up to be the hero or the loser. This binary outcome of his admirable embrace of leadership does not appear to be sitting too well at present. The signs of his unease were clear, as he tried to field reporters’ questions during his latest press conference. In the past he has made it clear that, he “intuitively” believes in a structural trend towards disinflation, causally associated with spare global capacity, advancing technology and competitive markets. Picking away at this scab, reporters pressed him to conjecture upon what the new natural rate of unemployment may be, and hence what tight labor markets imply for monetary policy.

Noticeably uneasy on such pure econometric pursuits, Powell reached for the Dot Plots and then noting the risk in doing so swiftly grasped for his “intuitive” crutch. He averred that: “there’s no sense that inflation will – no sense in our models or in our projections or forecasts that inflation will take off or move unexpectedly quickly from these levels, even if unemployment does remain low,” and “if we thought that inflation were going to take off, obviously we’d be showing higher rates. But that’s not what we think will happen.”

If Chairman Powell is going to do anything serious about avoiding being hanged by his own petard, this author wagers that he will bin the Dot Plots because they are an embarrassment that may catch him out in the future.

(Source: Bloomberg)

The Dot Plots will also be of major concern to the global economy. The predicted rise in real US interest rates will provide a bid for the US Dollar and suck liquidity from the global economy. Chairman Powell’s belief that this is not a problem for the global economy is well known, so we should all be scared. High real interest rates are probably just what America needs to finance its rising fiscal deficit, ballooned even further by President Trump, so one should not be surprised at Chairman Powell’s America First bias in enabling this situation by reducing Federal Government access to the Federal Reserve’s balance sheet. Just as the Fed stops buying US Treasuries, the global flight to alleged quality and higher yields will pick up the slack. Chairman Powell is gradually providing that attractive yield whilst simultaneously undermining the sources of global capital flows. Global insecurity, created by higher US interest rates and trade war threats, is the corollary of American national security as perceived by the Trump administration and the captive Fed Chairman.

The great American dragging of global real interest rates higher is just something else that America’s trade partners will have to wear, as they renegotiate the new terms of global trade under constant threat of tariffs. Capital sucked from the global economy, into the attractive return environment of America, may even end up in more jobs and higher wages!

As the Fed sucks global capital back into American capital with monetary policy, it is simultaneously reinforcing these flows and their inherent risks with its macro-prudential rule rollback. The initial post-Crisis provisions of Dodd-Frank and the Volcker Rule are under attack. Most recently the Fed diluted its single-counterparty exposure provisions further for larger systemic US and global institutions. The bore of the pipes to connect global liquidity with American capital markets are thus being widened, as the monetary policy forces to boost these flows are being ratcheted up. As usual, it will be better to ride this flow than to arrive when it breaks.

Since this real interest rate dragging process is essentially a gradual one, the threat of sudden shock to the global financial markets is minimal. The threat of multiple limited duration financial shocks, as we have seen, each time real interest rates are incrementally ratcheted-up is a higher probability outcome. Balance sheets, both corporate and sovereign should be prepared for more of the same. Buyers of dips should take note to buy those who are prepared for this eventuality.

(Source: Seeking Alpha)

From its unique perspective, as custodian of America’s threatened global hegemonic legacy, the IMF has been well placed to see the next emerging global crisis developing. After the Fed recently tightened and the ECB and BOJ amplified this tightening by doing nothing, the IMF quickly stepped in with a warning principally aimed at America. Identifying America’s pro-cyclical stimulus enabled by higher US interest rates as the catalysts, the fund warned that this dangerous situation “will elevate the risks to the U.S. and the global economy.” Unfortunately President Trump and Chairman Powell don’t do globalism at present, so something stronger than globalist rhetoric will be needed to change their viewpoints.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Related Posts:

  • No Related Posts