As many of you know, we have been on holiday in South Africa for the past three weeks. The trip began with a long plane ride to Cape Town where we were gathered up and taken to the five star rated Ellerman House (Ellerman). The place is appropriately named because it is not really a hotel, but rather a home with elegant furnishings, an art gallery populated with African art, a fabulous restaurant and wine bar, and a spa. Quite frankly, it is the home you wish you lived in. From there we drove to the wine country in Stellenbosch and Franschhoek, which actually felt like being in Switzerland. After a few days of wine tours we headed to Jeffreys Bay, one of the best surfing towns in the world, followed by a quick plane ride to Durban and Umhlanga where we stayed another must see hotel named The Oyster Box (Oyster Box). The highlight of the trip, however, was a safari at Zulu Nyala and Phinda (Zulu). To be sure, we saw most of the animals of South Africa and four of the “big five” because regrettably we never saw an African leopard (Big Five). For anyone wanting to go to Africa our advice is . . .GO.
So what’s happened in the various markets in our absence? Well, the answer to that question, from just looking at the averages, is not much. When we left the S&P 500 (SPX/2476.55) was changing hands around 2475 and as of Friday’s closing bell was trading at 2476. Beneath the surface, however, there have been a lot of moving parts. We had the Hurricane Harvey tragedy, more geopolitical situations: North Korea, Chinese “mischief” in the South China Sea, Nigeria, tensions between India and Pakistan, riffs between India and China, Brexit squabbles, potential tariffs on Chinese steel, NAFTA renegotiations, and of course the First Lady’s shoes (as the liberal “Daily Show” host Trevor Noah aptly said, “Here’s the thing, I don’t know why anyone should care what anyone wears when they’re on their way to help people.”).
Speaking to the hurricane horrors, we had one portfolio manager (PM) recite the famous French economist Frederic Bastiat’s (1801 – 1850) quip about the “broken window fallacy.” Said quip goes like this according to Investopedia:
In Bastiat's tale, a man's son breaks a pane of glass, meaning the man will have to pay to replace it. The onlookers consider the situation and decide that the boy has actually done the community a service because his father will have to pay the glazier (window repair man) to replace the broken pane. The glazier will then presumably spend the extra money on something else, jump-starting the local economy.
Bastiat goes on to explain why that is not true in the real economy. Likewise, the sagacious Caroline Baum stated in an article on MarketWatch (8-29-17), “No, hurricanes are not good for the economy – Yes, GDP may get a temporary boost from rebuilding, but there is nothing positive about destruction” (read the article here: Baum). That same PM suggested that thousands of trucks are now underwater, and since Texans love their trucks they will replace them, which should be positive for the truck manufactures. One positive thing coming out of this catastrophe is that it is now almost certain the debt ceil gets raised due to the billions of dollars in hurricane aid money that has been attached to the debt ceiling bill. Also on the positive side Chinese export orders tagged their best levels in seven years, British manufacturing hit a four month high, the French manufacturing PMI orders rose at the fastest rate in years, and Greece and Italy are doing better as the world’s synchronized economic recovery continues. Here in our country the recovery is quite noticeable with the ISM Manufacturing Index reaching its highest level since 2011 (Chart 1). The ISM Manufacturing Employment Index confirms that strength with its highest reading since 2011 (Chart 2). Meanwhile, ISM Manufacturing (customers’ inventories) is plumbing lows, also not seen since 2011, implying future demand and further economic strength (Chart 3).