Durables preview , Fed Policy, China

Administrative note: Changing the format on CSR to a more daily type of market sensitive / information / opinion blog. Please bear with me while I get the hang of it.

At 8:30 am EST, we get July durable goods orders. http://www.census.gov/manufacturing/m3/index.html

Looking at the new orders components of July ISM and PMI reports, I would expect to show a better than expected pick up in most categories of the July durables report. Factoring in record levels in export / import shipments through the Port of Long Beach, we may also see a big jump on the shipment side of the report. The west coast port strike was definitely a factor in having subdued data for the fist half of the year, so we should get some payback.

The Fed….The debate over Fed liftoff has really gone to a new level of insanity recently. There are now many “experts” in financial media saying the Fed should avoid September liftoff because of developments in China and other EM markets. To suggest that the Fed should manage US monetary policy in anticipation of what any of these EM governments may do would in fact lead to legitimate asset bubbles in the US. Aside from China, we’ve seen these EM governments make mistake after mistake which has helped to keep them in long-term EM status. It’s not the Feds job to manage foreign economies. In the US, we are already looking at a potential housing bubble that is being fueled by ZIRP. This is a tangible risk that the Fed needs to manage. Looking at the drop in oil by itself, it is equivalent to a monetary loosening event. A loosening event that typically would be countered with policy tightening. The fact is, low oil has helped consumption and continues to drive it.

CPI 8.25.15

Briefly on China…I continue to be a long-term bull on the China story. When discussing China and its current economic environment, it is critical to look at what the intentions are of the people who guide China’s economic policy. Going back to the 2012 Central Economic Work Conference, the central planners made it clear the intention to move away from an export based economy to a more sustainable consumption based economy. Chinese exports suffered dramatically during the financial crisis so the government sought a way to protect the economy. More recently we have Zhang Gaoli, a member of the Politburo (China’s ruling political cabinet), saying “The growth model featuring high input, high energy consumption and over dependence on external demand is no longer sustainable.” In other words, the world needs to get used to China not being its workhorse anymore. The quicker people come to the realization that the Chinese slowdown is an intended one, the better off markets will be. This transition that China is going through will by no means be an easy one to do. Making adjustments to accommodate 1.5Bn people is not easy, even with a centrally controlled government and economy. As outside investors, I think we can take solace in the fact that China’s intentions are benevolent in nature and that they are just trying to manage a very difficult situation. At the end of the day, we are still dealing with an extremely well-financed country that will be a great addition to developed markets.

Good luck on the day!!

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