Interest Rates, Chinese Economic Strength, and Cannabis Space Growth: Steve Misener’s Market Wrap
Midas Letter Capital Markets Advisor Steve Misener, CFA discusses White House chief economic advisor Larry Kudlow’s recent comments that the Fed will not raise interest rates again “in his lifetime.” Misener notes that Kudlow’s statement echoes similar thoughts made by former Fed Chair Ben Bernanke in 2014. Misener speculates that there might be some truth to their comments in terms of the major rate hikes that were common in the past. He explains why the Hong Kong stock exchange, with a market cap of US $5.7 trillion, surpassing Japan’s stock exchange as the second largest in Asia is significant. Misener believes it is a testament to the growth and strength of the Chinese economy to have Shanghai and Hong Kong as the leading exchanges in Asia. He also notes that the change is a reflection of Japan’s slow long-term economic growth. The segment wraps with a discussion of the double growth component unique to the cannabis space. Misener explains that new customers and markets are generating revenue for cannabis companies but those revenues will increase as the illicit market is eliminated.
Ed Milewski: I’m now joined by frequent visitor here on the show Steve Misener. Steve, glad to have you back. Always got a lot of interesting things to say. Never a dull moment on Wall Street, Bay Street. Larry Kudlow made an interesting comment.
Steve Misener: He did. He’s President Trump’s advisor, but long time Wall Street personality and for years a very, very high-profile guy, and he recently said that for the rest of his lifetime, he doesn’t see interest rates going back up again. That’s a powerful statement and it’s kind of interesting because it echoes former Fed Chairman Ben Bernanke who in 2014 said essentially the same thing, that he did not see rates climbing for the rest of his days. Now, we’ve had a little backup and rates, but I guess they’re talking about major long-term secular rising rates like we had decades ago and perhaps they’re right.
Ed Milewski: Maybe we won’t see that and I know you know, they were pretty rambunctious back in October and looked like they were going there pricing in this rate, this rating and now I read make the next move might be down.
Steve Misener: Yeah, it’s amazing because the Fed and all central banks around the world, they only have two. I used to say arrows in their quiver. They can tell people they’re going to raise rates which is the soft arrow and then they can actually use the big hammer and actually raise rates and it’s the, they’re equally powerful because just indicating trend, indicating a you know, an intention to tighten is what caused the, it wasn’t the December hike that was well anticipated that caused the stock market to get really, really corrected in December and to create that scare as it did, but it was the speaking that even then we’re still planning three more rate hikes for 2019.
Ed Milewski: Right.
Steve Misener: And then 90 days later, they’re not hiking rates and they’re telling people maybe we should, maybe they won’t admit we made a mistake but they’re saying maybe we should dial it back a bit and keep an eye on the numbers. They always say we’re keeping an eye on a number. A good economist forecasts often.
Ed Milewski: In Asia, we’ve got a new number two market in terms of size.
Steve Misener: Yeah recently just the other day Hong Kong, Hong Kong’s market cap at just around 5.7 trillion US Dollars and that’s adding up all the market caps of all the listed stocks on the Hong Kong Stock Exchange, at 5.7 trillion US, just surpassed Japan. I don’t kick the second spot as the large estate or second largest Asian market, Shanghai is the largest but Japan was just surpassed.
Now, this is the second time this happened. Back in 2015 for only two months Hong Kong surpassed Japan, but it is a statement and a testament to the incredible growth of what we’ve been seeing economically and also capital markets-wise in China that now you’ve got Shanghai and Hong Kong as number one and two.
It’s also a commentary on Japan’s relatively subdued growth and their stock market performance for a long time. Famously the Nikkei out at just under 40,000, 39,000 and change in December of 1989. That’s almost 30 years ago. It is this year 30 years ago and the Nikkei index has not recovered even 50% on a sustainable basis of that level from 30 years ago.
That’s what slow economic growth domestically and also, Japan was always a big export market and it’s been supplanted by the new, the new countries like South Korea and China taking away and cutting into Japan’s, you know, spectacular historic export growth in the past.
Ed Milewski: Yeah.
Steve Misener: That’s what stagflation looks like.
Ed Milewski: But their debts are all contained isn’t it? Like it’s all within their own nation, I guess.
Steve Misener: Yeah. They’re the highest percentage of savers on the planet. The average household in Japan has something like a hundred and fifty to two hundred thousand US dollars in just liquid savings per household or per capita. It’s an amazingly huge number and no other country on the planet has that kind of liquidity or conservative savings.
Ed Milewski: This negative interest rate thing has got huge implications for banks, doesn’t it like? `Banks and we were talking about insurance companies institutions. I don’t understand it.
Steve Misener: Rising rate can hurt banks in the early stages because they’re deemed to be yield plays as people buy those equities for dividend yield and obviously a rising rate structure means that we need to look for competitive yield on the other hand in their operating business. It’s that spread between what we’re taking in as deposits and our funding side, which is often bank deposits and GICs or CDs. Yes, and other forms of funding and then what we can lend it out to at a sort of safe spread and in a compressed interest rate environment margins for banks get squeezed for sure and a rising rate environment after the market adjust to Rising rates from a stock perspective. It’s actually better for banks operationally that they have a better rate spread. I’ve noticed the price of oil is sort of moving up which
Ed Milewski: That’s sort of a contra a contra signal in my mind. But oil, you know oil prices are both the highest they’ve been now and in several months, I believe like, you know.
Steve Misener: Yeah, I mean been stuck in this sort of 45 to 65 dollar band for a while, but it’s well up from the lows of 29, but it’s way down from ten years ago from 1.49. Oil is always hard to forecast as the US has become the largest oil producer again. I mean that’s been an amazing story as they’ve developed a new technology and opened up new reserves.
On the other hand, it is a consumable product so little different than gold and other types of, maybe commodities. Well specifically gold, but as a consumable asset or consumable commodity, they always have to find more. It’s a treadmill to find more so, you know, it’s fair to argue that longer term that oil prices should start a slow climb back upwards again, but in the interim it’s not in this band. Now it was an incredibly long cold winter in North America and…
Ed Milewski: Well look at the weather today.
Steve Misener: Well, and there’s a big giant storm out West. I was reading about in Minnesota and The Dakotas are getting 30 inches of snow. It’s like just a staggering you know late, you know late spring or, you know early spring storm. And so the heating season is going on a little longer than your typical and then we get usually some seasonal weakness in May, June until we get the drying season going for the summer.
Ed Milewski: Steve, the cannabis space is always front and center and we’ve got some major market cap, even though the last few days have been a little touch-and-go, seen some, you know Tilray has been knocked back a bit quite a bit. Any thoughts? Any clarity?
Steve Misener: Well, I was looking at some bigger pictures figures and I thought one that one that’s worth noting is that and we spoke about this a few weeks back that the rate of growth in the Canadian, particularly in the Canadian cannabis market, but I think it’s typical across the United States and other Western world markets is that cannabis growth rate through the product line continues unabated and it’s going to be significant.
But where you get, I guess the uniqueness of this business is that you’ve got secular or new kind of growth of new participants, people who maybe weren’t consumers before who are coming into the into the retail marketplace. So that’s a growth component that’s substantial and investors are watching that and it’s a substantial growth element.
The other thing I wanted to add as you’ve also got in many of these mature markets the black market or the grey market where much of the Cannabis had not been above board in terms of consumption and in terms of being on the books and so what I was trying to get at was that there’s a double growth component, I think too many of these companies on the revenue side is that we’ve got the secular growth in cannabis consumption and new markets amongst the Western world markets and in fact all over the world, that’s legalizing but then you’ve got this extra revenue stream where gray market sales and black market sales become on to the balance sheet or income statements and therefore generating extra revenue for the company’s, extra jobs, extra taxes for those regimes. So really the growth rates could be quite continue, quite substantial for a while notwithstanding as the market sorts out where the valuations should be in the short term.
Ed Milewski: Great Steve. Thanks for coming by. Really appreciate your contribution and we’ll have you back soon.
Steve Misener: Absolutely, my pleasure.
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