Author: Administrator

5/13/2017 – What looks to be the single largest economic-development project in history, the Chinese-led Belt and Road Initiative will be officially unveiled in Beijing tomorrow at the Belt and Road Summit (Sunday, May 14th). The two-day summit will be hosted by Chinese President Xi Jinping and will feature over 65 participating countries, 29 heads of state, and a mind-boggling $1.4 Trillion investment proposal. This event will undoubtedly mark the beginning of a long-term project that will, in my opinion, change the global economic landscape to China’s favor.

The project hopes to “create the world’s largest platform for economic cooperation, including policy coordination, trade and financing collaboration, and social and cultural cooperation.” (McKinsey) Of course, China’s financial institutions, the Asian Infrastructure Investment Bank and the Silk Road Fund will lead the charge in financing these endeavors.

To help comprehend the scale of this project, China’s Belt and Road Initiative is 11 times larger than the U.S. Marshall Plan, which rebuilt Europe after World War II. Though, of course, if you were to visit any major American news site today to learn more about this event, you wouldn’t find it.

CNN Homepage

What Is The Belt And Road Initiative?

According to the official Chinese Action Plan, the Belt and Road Initiative (BRI) “help(s) promote the economic prosperity of the countries along the Belt and Road and regional economic cooperation, strengthen exchanges and mutual learning between different civilizations, and promote world peace and development.” In other words, China is attempting to rebuild the historic Silk Road in an attempt to foster higher economic expansion in a slow-growth global economy and to further China’s influence in global affairs.

The BRI will consist of two primary elements, the land-based “Silk Road Economic Belt” and the oceangoing “Maritime Silk Road.” The Silk Road Economic Belt includes countries located on the original Silk Road though Europe, the Middle East, West Asia, and Central Asia. The Maritime Silk Road is designed to include countries located in Southeast Asia, Oceania and North Africa.

Why the Belt and Road Initiative?

The Belt and Road Initiative was developed to help China transform from an export-driven and government-led economy to a more consumer-led economy. China, the 2nd largest economy in the world, is currently experiencing an economy that is led by falling exports and sluggish economic growth. Over the past two decades, China’s government has invested heavily on its industries becoming the global destination for manufacturing. While this has thrusted the country to global prominence, it has also created a major problem of overcapacity. BRI is China’s answer to this problem.

Bueller? Bueller?

Since Belt and Road was originally mentioned in 2013, the U.S. has pulled a Bueller by not responding to this move. This project by China, if executed properly, is one that will shift geopolitical power away from the U.S. to China. While the U.S. has stepping away from Asia and becoming more isolated, China has been making a move to become more accessible with greater influence in the region.

For months, the U.S. had no plans to attend this forum, which, of course, led to the Chinese media making a big deal of it. However, on Thursday, President Trump announced that the U.S. would send a delegation (a low-ranking one) to the event.

What concerns me is the long-term effects of this project. The sheer size and scope of BRI is one that will take decades to develop. This is the type of investment that tends to benefit future generations. China’s policy-makers tend to be inter-generational thinkers and the Belt and Road Initiative is certainly a long-term investment. This contrasts sharply with U.S. policies, which have lately been too short-sighted and is not as effective over the long-term. Nonetheless, a major project like this will certainly open a number of investment strategies to those that are well-positioned.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
5/13/2017


View All Newsletters

Sign-Up To Receive Our Newsletter Here

While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





4/2/2017 – If you find that your investment strategy is pinned on the hope that Congress will somehow pass economic-boosting legislation in a timely manner, you may want to reconsider your thought process. There is worry that Republicans will begin to distance themselves from President Trump amid his falling approval rating and after they failed to repeal and replace the Affordable Care Act. If Republicans begin to distance themselves, I believe there is little chance that any of President Trump’s proposed economic policies will get passed. Of course, this will undoubtedly not be good for the equity markets. Therefore, the question we should all be asking ourselves is, “after reaching new market highs, where do we go from here?”

To help frame this question, it helps to understand how we got here. The current bull market is one for the ages. We are currently experiencing the 2nd longest bull market in history: 2,946 days.

When this bull market began, very few, if any, would’ve guessed that this rally would’ve been so strong or so long. Though, this can also be said about many market rallies throughout history. Bull markets typically begin when optimism is scarce and they frequently end when optimism is abundant.

This particular bull market is unique as it has been characterized by extreme central bank intervention. This intervention has created a massive wealth effect by boosting asset prices around the globe. While the Federal Reserve has ceased its asset purchase program on October 31, 2014, there is still plenty of liquidity still being added into the markets. And make no mistake, a lot of this capital is continuing to find its way to U.S. assets.

After the Fed ceased its asset purchase program on October 31, 2014, the market struggled to maintain its momentum. During the two-year period between November 1, 2014 to October 31, 2016, the market moved sideways with high levels of volatility. Market returns was dampened by falling corporate earnings, Chinese growth concerns, and falling industrial production.

S&P 500 – 11/1/2014 to 10/31/16

Of course, in November 2016 President Trump shocked the world by winning the U.S. election. Between November 9, 2016 (the day after the U.S. Presidential election) and March 31, 2017 the S&P 500 rallied 9.22%. Coincidentally, Consumer Confidence has also rallied to near historic highs.

So, where do we go from here? There is a deepening divide within the investment community on what will drive the markets higher. Some believe that corporate earnings will continue to recover. Others believe that President Trump and the Republican-led Congress would be able to reform the tax code, repatriate foreign-held corporate cash, rebuild America’s failing infrastructure, and create other economic-boosting projects.

However, there is growing concern that President Trump and the Republican-led Congress will be unable to pass these measures. The failure to repeal and replace the Affordable Care Act has caused some to doubt that few if any of Trump’s fiscal policies will be passed in a timely manner. Merely hoping that they will pass, in my opinion, can be an ill-fated investment strategy. Though, if the major central banks continue to provide an accommodative policy and if capital continues to flow to the U.S., we may continue to see equity prices pushed higher.

I believe that the equity markets will always have an upward bias so as long as there are educated individuals, fair laws, and access to capital. As such, I am convinced that the equity markets will continue to outperform over the longterm. That being said, equity markets often appreciate much faster than the underlying economy does. Furthermore, central bank intervention is certainly continuing to skew the markets. This “rich asset price” party will not continue forever. Volatility is near all-time lows and tail-risk is likely extraordinarily high. If there was ever a time to hedge some risk, now is probably the time to do so.

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
4/2/2017


View All Newsletters

Sign-Up To Receive Our Newsletter Here

While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.