January Economic Data: Data from the beginning of January shows a noticeable slowdown in the manufacturing data reported from several Fed regions. New orders, order backlogs, and capacity utilization all showed major pullbacks. This is coming on the back of robust activity for most of 2018 where fears of increased tariffs on Chinese goods prompted many businesses to bring production forward and hold more inventory. Durable goods orders have also largely slowed as well and economists predict further softening in this, and other, measures of business investment to continue as the trade war between the U.S. and China drags on.
Our Takeaways: This most recent round of data is to be largely expected. It became clear as early as the third quarter of last year with tensions between the U.S. and China growing that we would see business reactions largely to this effect. With the White House, at the time, signaling an increase in tariffs for the start of this year, businesses reacted by bringing forward production thus boosting 2018’s production numbers. This latest pullback is the effect of that cause, but what has complicated matters further in the interim is how the U.S. and China reached an agreement whereby additional tariffs threatened by the White House were postponed an additional 90 days. This only fosters more uncertainty in the trade war, and there are few things businesses, and markets, like less than uncertainty. Going forward, unless and until the trade issues between the U.S. and China are resolved, anticipating the path forward for U.S. manufacturing and industrial firms will be difficult, but in general we expect the uncertainty to have a negative impact on these firms short and medium term business operations.
Updates on German Data: In late December, Germany announced it expected its economy to grow by just 1.5% for 2018. This came after a November report that industrial output was down 4.7% - the worst decline the economy has seen since 2009. What makes matters worse is this decline was seen as being broad based with consumer goods and energy leading the way down.
Our Takeaways: This latest report out of Germany further confirms the bleak picture that is being painted in the European Union. It is commonly assumed by market participants at this stage that Italy is in a recession with France likely right behind it. Germany has been the engine for the EU economy at large, but this latest round of slowing may just be the straw that breaks the camel’s back. An outright recession in Europe may not trigger one in the United States, but it could serve to further depress emerging market economies resulting in a global slowdown. If this were to happen, it’s possible the effects could not fully permeate the U.S. economy, but there are few U.S.-centric economic factors that strong enough to ward off a downturn in the face of a global downturn. For this reason, Germany looks poised to remain the bellwether for economies in Europe and abroad for the foreseeable future.
U.S. Government Shutdown: For 35 days, about 800,000 federal workers have either been out of work or have worked with no pay due to a lack of funding approval for a handful of federal governmental departments. The standoff began back in December over a disagreement between the White House and Congress for federal funding of border security - notable a “wall” for the U.S. southern border with Mexico. With this “wall” being a major campaign promise for the President, he saw this opportunity to take a hardline stance on the issue and try to force what has become a Democrat controlled House to bend to his will on the matter. The market reaction has ranged from benign to unexpected as the major indices have largely had a strong recovery from the fourth quarter (December in particular) decline they had recently endured. Over the course of this 35 day period, federal workers affected by the shutdown missed two paychecks which caused many to seek assistance from government and non-profit programs, friends, and family to meet basic needs such as food and payments for shelter (rent or mortgage). The shutdown has since been suspended with an agreement and subsequent continuing resolution being enacted on the evening of the 35th day, but this will only allow the government to operate as normal for 3 weeks setting up another showdown between the White House and Democratic lawmakers.
Our Takeaways: From a political standpoint, the shutdown was a clear example of the gridlock that has been prevalent in Washington for quite some time. To a certain extent this is a good thing because gridlock increases the likelihood things remain status quo which in turn means things will remain more certain at least so far as the economic impact from political events is concerned which in turn is viewed positively by financial markets. However, to the extent things become so dysfunctional that payments are no longer making their way to federal workers, this has the potential to start to effect the real economy. In addition to the 800,000 employees that were affected, there were many thousands of federal contractors that also did not receive work during this period and unlike the employees who will receive back pay - these contractors will not. Ultimately, these delays and lack of payment will translate to some reduction in consumption, both for the month of January, but likely going forward until a more permanent resolution is put into effect. While 800,000 workers is not a huge portion of the overall economy, it still is not insignificant, and many economists are already predicting the spillover effects due to their lowered consumption could be enough to post a flat GDP number for the 1st quarter of this year. The final days of the shutdown showed other ways in which the effects could be felt by the economy at large. Due to a lack of flight control personnel at New York's LaGuardia Airport and at New Jersey's Newark Liberty International Airport, many flights were delayed or ultimately cancelled causing a major disruption for thousands of travellers. It is easy to imagine how quickly such disruptions to routine traffic could backup and adversely impact other areas of the economy if this type of situation was to occur unchecked at more airports across the country for an extended period of time.
U.S. Oil Fracking Woes: Recent reports have revealed that the yields from thousands of U.S. shale wells are, in some cases, dramatically lower than what was initially projected. In most instances, wells are on track to produce around 10% less capacity than projected, but some regions are seeing shortfalls as much as 50%. In total, the shortfalls are estimated to be in the neighborhood of $30 billion over the next 30 years at current prices.
Our Takeaways: This story is still developing, but could be a major canary in the coal mine type event during the next downturn. Oil and gas has seen a high number of zombie companies in its industry for a number of years now as many U.S. firms have sprung up to capture some market share with the newly developed hydrofracking technology. This has all of the makings of a “see who is swimming naked when the tide goes out” moment, and will be one we watch closely over the coming quarters.
Venezuela - From a Powerhouse to a “Nearly Failed State”: Venezuela used to be one of the leading economies in South America with its capital of Caracas serving as the regional and global headquarters of many notable multinational firms. The formerly robust Venezuelan economy, in large part, had been prosperous due to how the country sits atop some of the largest, proven oil and gas deposits in the world. However, several decades of governmental failure (driven in many instances by outright corruption) and several downturns in global oil markets have brought the country to its knees both economically and politically. The confluence of the extreme levels of poverty rampant throughout the country and the high levels of civil unrest has led to a struggle for power between incumbent (and newly “re-elected”) “President” Nicolas Maduro and opposition leader Juan Guaido. Maduro, a successor of Hugo Chavez, has the support of the military, but Guaido overwhelmingly has support of the Venezuelan people. The United States and many other Western nations have come out in strong support of Guaido, while Russia and, to a slight extent China, have backed Maduro. This story is continuing to develop, and at the moment it does not appear there are any easy or straightforward resolutions to this standoff over power on the horizon.
Our Takeaways: Beyond the geopolitical and societal impacts of these developments, there are some financial market implications that have been largely overlooked. The most obvious is in oil. Venezuelan oil production has dwindled to just over 1 million barrels a day, but some analysts think the official numbers are actually overstating production and that in reality it is much lower. In a more stable political and economic climate for the country, oil producers would be in a much better (and likely necessary) position to significantly ramp up production which could flood global markets and depress prices. Also of note are Venezuela’s government bonds. Currently, the country has tens of billions of dollars in debt held by a variety of creditors around the world (most significantly Russia and China) all of which is in default and trading at extremely depressed prices. If the opposition party were successful in stepping in and bringing political stability back to the country that could certainly open a path to repayment of those obligations which would be a huge positive for their value.
DISCLAIMER: We only work with accredited investors and qualified purchasers that know at least one of the Managing Partners. This website is provided for informational purposes only. None of the information available on the website (the "Website Information") constitutes an offer to sell, or a solicitation of an offer to buy, any interest in any entity or other investment vehicle offered by Gold Sail Capital LLC or any of its affiliates (collectively, "Gold Sail"). Any such offer or solicitation will be made to accredited investors only by means of a final offering memorandum. The Website Information should not be deemed as a recommendation to buy or sell interests in any entity or security. Gold Sail cannot and does not guarantee the success of any investment. Past performance is not indicative of future results and no assurance can be made that profits will be achieved or that substantial losses will not be incurred. All investments involve risk and loss of capital. Gold Sail reserves the right to change, modify, add or remove portions of any content posted on the website at any time without notice and without liability. Our Terms, Disclosures, & Privacy Policy govern your use of our website; by using our website, you accept the Terms, Disclosures, & Privacy Policy in full. If you disagree with any part of the Terms, Disclosures, & Privacy Policy, then do not use our website.