Two Major Signs Say the Global Economy Is Getting Over Its 'Cold'
Two major signs the global economy is getting over its 'cold'... Why the German economy is so important... How it got sick and how it's getting healthy... What a turnaround means for the rest of the world... The recent turn in a leading bullish sector...
If the German economy sneezes, it's likely that the world catches a cold...
And, like an airborne illness, most people don't see it coming either...
Lost in the back-and-forth of trade negotiations between the U.S. and China over the last 18 months, and the continued uncertainty about Brexit (now finally happening), the performance of the world's fourth-largest economy has flown relatively under the radar...
But as I (C. Scott Garliss) will show you today, the German economy is sending a clear signal for which direction the global economy and a key bullish sector are heading in the coming months...
And we think any investor should be interested in that.
You see, 'fiscal discipline' and 'Germany' are basically synonyms...
Regular Digest readers know about the mind-blowing amount of debt the U.S. and other advanced nations have on their books. Global debt reached $188 trillion in 2018, the most recent year of data analyzed by the International Monetary Fund ("IMF").
The U.S. debt to gross domestic product ("GDP"), a good measure of a country's balance sheet health, is close to 108%...
France's is roughly 97%... Italy's is almost 131.5%... And advanced economies in general had a level of 267% debt to GDP last year, according to the Bank for International Settlements...
Germany's ratio sits right around 60%. As major economies go, that's pretty good.
The country's relatively low debt numbers lead many institutional investors to clamor for German sovereign bonds in times of perceived crisis... knowing they'll be repaid with little to no risk.
I know from my 20 years on Wall Street that you can tell investors are getting nervous about the global stock market when they put their capital in German bonds. Because the default risk is low, fund managers are willing to pay a premium as a way to protect their assets.
Here's what happened in Germany during the mini-crisis we saw in August...
The global markets were worried...
U.S. and China negotiations were in uncertain and hostile territory. The United Kingdom looked like it would crash out of Europe without a deal. Money managers decided their best bet was to put money to work in safe-haven assets...
They bought bonds and gold. Remember, when bond prices rise, yields fall... German bonds were so popular that the yields on its 10-year sovereign bonds went negative...
They fell as low as -0.714%...
At one point, roughly $17 trillion in global sovereign bonds had negative yields.
When everyone near you is 'sick,' you can catch a cold even if you're doing the 'right' things...
During the recent global trade fallout, Germany's economy crumbled...
As companies around the world got scared of spending – given the widespread trade policy – uncertainty and prices rose, demand for goods dropped precipitously... and Germany's manufacturing engine (the largest in Europe) seized up.
In particular, German automakers were concerned about Brexit – given that Britain was their single-largest export market – having sold 800,000 cars there in 2016. (The U.K. government formally announced the country's plans to withdraw from the EU in 2017.)
The fears showed up in the data... In the second quarter of 2019, German GDP fell 0.1%. The markets were worried heading into the third-quarter report as analysts were anticipating a similar result.
Last fall, the country's finance minister, Olaf Scholz, said that the government in Berlin had prepared a fiscal stimulus package worth 50 billion euros ($55 billion) if the country were to slip into a recession.
However, a crisis was averted when Germany's third-quarter GDP data showed growth of 0.1%.
But the German economy still seemed vulnerable...
Germany's Manufacturing Purchasing Managers' Index ("PMI"), determined from surveying senior executives of more than 400 different companies in 19 different industries, fell from a high of 63.3 in December 2017 to a low of 41.7 in September 2019.
The number 50 is key because it's the dividing line between an economy that's expanding (above) and one that's contracting (below).
But today, things are different. We're seeing signs of a rebound in Germany...
Germany's PMI data appears to have bottomed... It has picked back up to a level of 43.7 in December. While that still indicates contraction, it tells us the level of slowdown is easing...
In addition, another key indicator – German industrial production – rose 1.1% in November. That was the highest level since May 2018. The number had also reached a recent low of -2% in April.
Why is this turnaround important?
What happens in Germany is closely tied to the health of the European and global economies.
The eurozone is the world's largest trading bloc... and Germany is 30% of the euro-area GDP, with a $3.4 trillion economy. That's about a trillion more than the next largest countries, the U.K. and France.
If Europe is going to turn around, Germany must lead the way.
And if European markets rebound, they will drag the entire world higher.
Manufacturing nations like China, Japan, and South Korea will see a pickup in demand for goods manufactured in their countries.
That will put more people to work and money back into their economies. And that will help to further the growth cycle as individuals get more money in their bank accounts to spend.
That's how the global economy can become healthy once more.
Evidence of a turnaround is materializing in the technology sector...
And here's why.
The Federal Reserve and central banks all want to have "goldilocks" policies to keep their economies from getting "too hot" or "too cold."
Today, that means a low-growth, low-interest-rate environment... The thinking is that cheap borrowing costs and easy-money policies are great for the steady-state 2% growth we've been seeing.
And in an expanding economy, where the cost of growing your business is low, technology is one of the most efficient ways for businesses to increase profits.
Whether it's software or hardware, technology makes your business more efficient.
If you can pay a one-time fee for a software program or hardware device that takes the place of a human worker you have to pay over a lifetime, you just put margin in your business and extra money in the pocket of either you or your investors.
If you invest in a cybersecurity benefit that allows workers to focus more on their jobs and waste less time chasing the problem down, you just did the same thing. The more times you can replicate this, the better off your business becomes.
So, by borrowing at current, cheap interest rates to invest in technology makes a lot of sense.
Since the trade dialogue turned, semiconductor demand has jumped in particular...
Semiconductors are the heart of the microprocessor chips that power a lot of the world's most important products and services.
Companies like Intel (INTC), global conglomerate Samsung, and Taiwan Semiconductor Manufacturing (TSM), are among the leaders in the space that's now more critical than ever.
Our Stansberry Innovations Report editor John Engel, who tracks these stocks, among others, just touched on this fact in his latest issue...
One thing is certain in the digital age: The amount of data humans produce every day will continue to grow, and we'll need a way to store and protect it all. All that increase in demand will clog the networks, unless we increase processing speeds.
We first saw signs of demand picking up for semiconductors in Japanese exports back in November, as I wrote then in the Stansberry NewsWire.
At the time, demand for Japanese semiconductor manufacturing equipment fell 5.7%, which might not sound great on its own, but that was versus the average decline of 16.2% in the six months prior.
In addition, semiconductor chip exports rose 3.6% versus the average decline of 2.3% in the six months prior. In December, the numbers improved more and turned positive, up 2.6% in January.
We saw a similar sign out of South Korea, where semiconductor sales make up the largest portion of the country's exports.
In December, the headline data seemed disappointing at negative 17%. But when you looked at it versus the down 20%-plus readings of the prior months, it was a sign that demand in this key area was beginning to turn.
In January, South Korea's customs service said semiconductor shipments were up 8.7% for the first 20 days of the month.
And it's not just the export data that tell the story...
Corporate earnings have confirmed the turn...
Intel shares rallied 6.5% in after-hours trading following its earnings report. The company talked up demand for its data-center chips.
Microchip Technology (MCHP), whose CEO Steve Sanghi has a reputation for calling industry cycles, stated that demand for its products have been strong since October.
And similar stories were told by industry bellwethers Texas Instruments (TXN) and Micron Technology (MU). Leaders from both companies have said that industry dynamics are tightening as demand improves.
Companies are anticipating a change in the growth dynamic, and they're investing to profit.
So what does this mean for individual investors?
Well, first know that the global growth picture is likely to improve – even with the latest "coronavirus crisis" dominating the headlines...
Second, unless you have the time to dig through customs data from South Korea and Japan, it's likely you'll miss these trends until it's too late.
Fortunately, we have ways you can stay ahead of these trends, much like Wall Street money managers...
Our Stansberry Innovations Report team is all over the specific investments worth making in tech...
Editor John Engel, who I mentioned, and our team of technology experts have issued recommendations in industrial automation, cybersecurity software, and computer hardware (chips)...
And based on the current macro environment, with Germany shaking off its "cold," and technology investment from CEOs, CFOs, and business owners picking back up, you owe it to yourself to check out our Innovations Report.
And now is a great time for more than one reason. Just last month, John published a comprehensive review of his investment strategy and the roughly two dozen companies in his model portfolio.
If you're interested in learning more, or want to give this research service a try, here's how.
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In today's mailbag, a paid-up subscriber shares his feedback on yesterday's Digest by Stansberry Venture Value editor Bryan Beach... Have a question or comment? As always, shoot us an e-mail at feedback@stansberryresearch.com.
"I enjoyed reading today's Digest and was particularly interested in the bit about Shopify. I well remember Porter's original recommendation a few years ago. If I remember correctly, it was paired with a short of Yelp. I liked the sound of SHOP, so I bought a few shares, although without the corresponding short of YELP. I didn't sell when it hit its stop (I know, I know... !) and I still hold it today.
"It has been by far my biggest winner, more than a 15-bagger. I just wish I'd bought more! Still, it has grown to be the largest position in my portfolio so I now have the problem (a good one) of whether or not to pare it back a bit. I don't want to be too greedy, so I might start selling it off soon. Many, many thanks to Porter and the Stansberry team for putting me on to this before it started its massive run. It has paid back my subscription many times over, and then some!" – Paid-up subscriber Mark E.
Regards,
C. Scott Garliss
Baltimore, Maryland
January 29, 2020