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ThreeKeyIssues

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Thethreekeyissuesforthismonthare:

1) Trumppolicystagnation/futureDebtCeilingdebacleintheUS.

2) Acapitalflighttosafetyisunderwayinthemarkets.

3) Europe’sinflationjumpwillleadtheEBCtoenditsQEprogramshortly.

Regarding#1,asI’veexplainedpreviously,theTrumpadministration,whiletryingtoimplementdramaticeconomicreforms,israpidlydiscoveringthatnothinginWashingtonDCmovesquickly.Onthatnote,onSaturday,Trump’sTreasurySecretarySteveMnuchinmadetheroundsonvariousTVoutlets.Amongstthevariousinsightshepresentedwere:

1) Taxreformisthe#1priority;hehopesto“getitdone”byAugust.

2) Trumpwillmakezerocutstoentitlementsinthenewbudgetbutis“lookingclosely”ataBorderAdjustmentTax.

3) GDPgrowthof3%isachievablebutit’snotcominguntiltheendofNEXTyear(2018).

4) Nodecisionwillbemadeconcerning

labelingChinaa“currencymanipulator”beforeApril.

5) Rateswillbe“relativelylow”forthenext

severalyears.

6) TheTrumpadministrationbelievesthestockmarketisa“reportcard”onTrump’spolicies(moreonthislater).

Three Key Issues March 1 2017

SHORT-TERM ISSUES

• Trump’sTreasurySecretarydeliverssomebrutalhonesty.

• Astealth“flighttosafety”isunderway.

• Trumpmanipulatingthestockmarkethigher?INTERMEDIATE-TERM

ISSUES • The$USDposedtocrashintomid-’90slaterthisyear.

• TheEuroprimedforamoveto121asECBendsQElaterthisyear.

• EmergingMarketsreadyfornewbullmarket.LONG-TERM ISSUES

• Excessivedebt,baddemographics,andlittleifanydeleveraging.

• Eventualmarketcollapseof50%+inrealterms.

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Let’sdivein…Firstandforemost,wenowhaveabsoluteconfirmationthatnothingTrumpwantstoaccomplishwillhitwithinsixmonths.Mnunchinstatedpointblankthattaxreformisthe“#1priority”thathe“hopes”tohavedone“byAugust.”However,eventhismightbeoverlyoptimisticasMnuchinadmittedthistimelinewas“aggressive”(implyingthatinrealityit‘sverypossibleitwilltakelongertoaccomplish).Again,thesinglebiggestpriorityfortheTrumpadministrationwillhopefullybeimplementedbyAugust.Ihatetobethebearerofbadnews,butMnuchin’sotheradmissions(#’s2and3inthelistabove)suggestthatTrump’staxreformwilllikelymissthisdeadline…ifitisimplementedatall.ThisisnotacriticismnoranendorsementofTrump’sagenda;thisissimplyastatementthatthe“mathdoesn’taddup.”ZeroEntitlementCuts+LowerTaxes=HugeDeficits/DebtIssuanceORaBorderTaxGovernmentspayfortheirbudgetsviataxrevenues.Iftaxrevenuesarenotgreatenoughtocoverthebudget,thenthecountryhastoissuedebt.Withthatinmind,thenotionthatTrumpwantstocuttaxes…withouttouchingentitlements…isliterallyIMPOSSIBLEwithoutaBorderAdjustmentTax(moreonthisshortly).Entitlements(socialsecurity,Medicareandthelike)comprise64%ofthe2017USbudget.Thenextlargestsegmentofthebudgetisdefensewhichaccountsfor15%ofspending.Now,TrumphasstatedthathewantstoBOOSTdefensespending.Betweenthisandhispromisetonotcutentitlements,thismeansthatafull79%ofthebudgetwouldbeuntouchableforspendingcuts.SoIFTrumpwantedtocutthebudgetatall,he’dneedtocutspendinginoneofthefollowingareas:

1) AdministrationofJustice2) Internationalaffairs3) NaturalResourcesandEnvironment4) GeneralScience,SpaceandTechnology5) Otherprograms.

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However,combinedalloftheseitemsonlyadduptoabout$322billioninspending.EvenifTrumpcutALLofthembyanincredible20%,we’reonlytalkingaboutreducingthetotal2017Governmentbudgetby$64billion.Onabudgetof$3.65TRILLIONthisrepresentscuttinglessthan2%.Putsimply,bystatingthatitwon’tbecuttingentitlements…andwillbegrowingDefensespending,theTrumpadministrationiseffectivelystatingthattherewillbenexttonobudgetcutsthisyear.OK,that’sfine.ButthentheTrumpadministrationisALSOstatingitwon’tberaisingtaxesandwillinsteadbecuttingthemonboththecorporateandindividuallevel.So…whereisthemoneygoingtocomefrom?

A) ABorderAdjustmentTax?B) Debtissuance

RegardingA,TreasurySecretaryMnuchinimpliedthattheTrumpWhiteHouseislookingintoaBorderAdjustmentTax,orBAT.Ifyou’reunfamiliarwiththisconcept,BATessentiallymeansputtingataxongoodsthatareimportedintotheUS(currentlythenumberbeingfloatedaroundis20%)andofferingtaxbreakstocompaniesthatexport.SoBMWwouldpaya20%taxtobringitscarsintotheUSwhileFordorotherUS-basedautomanufacturerswouldreceivetaxcutsforexportingtheirs.ThismightpassCongress,butthusfaritislookinghighlycontentious.Somecorporationsarehighlyinfavorofit…

GE,Boeing,OracleformcoalitiontosupportRepublicanbordertaxU.S.companiesincludingmajorexportersGeneralElectricCo(GE.N)andBoeingCo(BA.N)launchedacoalitiononThursdaytobackaHouseRepublicanplantotaxallimports,sayingtheproposalwould“supportAmericanjobsandAmerican-madeproducts.”Thegroup,comprisedofmorethan25U.S.companiesanddubbedthe“AmericanMadeCoalition,”alsoincludesDowChemicalCo(DOW.N),EliLillyandCo(LLY.N),PfizerInc(PFE.N),andOracleCorp,thecompaniesconfirmed.Thegroup’slaunchunderscoredagrowingdivisionincorporateAmericaovertheHouse

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Republicanproposalthatwouldcutcorporateincometaxto20percentfrom35percent,excludeexportrevenuefromtaxableincomeandimposethe20percenttaxonimports.http://www.reuters.com/article/us-usa-trump-companies-tax-idUSKBN15H2VV

Whileothersarestaunchlyopposed…

TheCEOsof7majorretailersareheadedtoWashingtontotakeonaproposedbordertax.Butit'snotthetaxonMexicanimportschampionedbyPresidentDonaldTrumpthathasthemworried.They'llbelobbyingagainsttheplanunveiledlastyearbyCongressionalRepublicansforabroad"borderadjustmenttax"thatcouldincreasethetaxbiteonanycompanythatimportsgoods.Retailersareparticularlyvulnerabletosuchastaxbecausetheyhavetopurchasethegoodsthattheysellintheirstores.Andiftheysellalotofimporteditems--clothesorelectronicsorgeneralmerchandise--theycouldseeamajortaxhitundertheproposal.http://money.cnn.com/2017/02/14/news/companies/retailers-border-adjustment-tax/

Predictingtheoutcomehereisimpossible,particularlysinceyouonlyneedahandfulofRepublicanSenatorstovoteagainstaBATtokillit.IwouldsaytheoddsofthispassingCongressarelessthan30%.ThisleavesdebtissuanceandaballooningdeficitasthefinaloptionstocovertheTrumpbudgetgap.However,TrumpisNOTinthesamepositionObamawasin2008.TheFedhasalreadyemployedZIRPforsevenyearsastheUSDebttoGDPratiogrewtoover100%!Trumphasverylittle“drypowder”toworkwithintermsofdebtissuanceanddeficits(particularlygiventhattheGOPhasbeenpushingbackondeficitspendingforyears).

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Whichbringsustothenextmajorissue…theUSisfacingadebtceilingwithinthreeweeks.TheUSwillhititscurrentDebtCeilingonMarch152017.SoCongresseitherneedstosignoffonraisingthedebtceiling,ortheTreasurywillhavetheemployextraordinarymeasures.However,eventhoseextraordinarymeasureswilltriggeraduedateforanotherdebtceilingdebate.Putsimply,thissituationisacompletemessandfranklythemathisNOTthere.TheonlywayTrumpwillbeabletoaccomplishanyofhisproposalswouldbeforCongresstopassa20%-35%bordertaxadjustment(againthisishighlyunlikely)ORfortheUStostartballooningitsdeficitsandgrowingitsdebt(extremelyproblematicgiventhatmanyintheGOPareopposedtoincreasedspending).Regardingthatlastpoint,Mnuchinseemedtosensethiswhenhestatedthat“interestrateswillbe“relativelylow”forthenextseveralyears(thiswouldsuggestMnuchinwillbegivingYellenhermarchingordersonratehikessoon).Ihonestlydon’tseehowanyofthiscanwork.Butthenagain,thathasbeentheentirestoryoftheTrumpcandidacyandPresidencythusfar:howcouldanon-politiciantakeoutTWOpoliticaldynasties(theBushesandClintons)aswellasthemainstreammedia?MypointwithallofthisisthatTrumpwillhavetopulloffhissinglegreatestupsetevertomakethiswork.Regardlessofone’spoliticalaffiliation,thisisalowoddsscenario.Meanwhile,thestockmarketistradingasthoughsomehowallofthiswillworkoutandeconomicgrowthisjustaroundthecorner.

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Speakingofwhich,onSaturdayduringhisinterviewwithCNBC,TreasurySecretaryMnuchinstatedthatGDPgrowthof3%(not5%asCNBCiscurrentlyprojecting)is“achievable”butthatitwon’thituntiltheendof2018!!!!Again,Iwillrepeatthis…Trump’sTOPeconomicadvisorhasstatedopenlythatGDPgrowthof3%isgoingtotake18monthsormore.Givenalloftheaboveitems(admissionsthatragingeconomicgrowthisnotjustaroundthecorneraswellasnumerousfiscalissuesthatneedtoberesolved),wehavetoask…WHYARESTOCKSTRADINGATALLTIMEHIGHS?WegettheanswerfromMnuchinhimself:DuringhisinterviewsonSaturday,MnuchinstatedrepeatedlythattheTrumpadministrationviewsthestockmarketasa“reportcard”onTrump’spolicies.Putanotherway,theTrumpadministrationviewsthestockmarketasareal-timeindicatoroftheworld’sreactiontoTrump’spolicies.ThismeansTrumpishighlyincentivizedtopushstockshigher(hencehisrepeatedlyissuingtweetsabout“huge”plans“comingsoon”wheneverstockscomeclosetobreakingdown).Thus,wehaveasituationinwhichthemarkethashitnewall-timehighsbasedoneconomicpoliciesthatarecomingmuchfartherdowntheroad(ifatall)andanadministrationinwhichthePresidenthimselfhisactivelypushingstockpriceshigherinreal-time.ThisisaHIGHLYdangerousenvironment.Particularlywhenyouconsiderthatastealth“flighttosafety”isalreadyunderwayinthemarkets…meaningthatinvestorsarealready“battingdownthehatches.”AFlighttoSafetyisUnderwayWhileCNBCandthefinancialmediacontinuetoraveaboutstockshittingnewall-time,therealitybeneaththesurfaceofthemarket,capitalisfleeingfromriskintosafehavens.Considerthefollowing…Yeartodate,20+YearTreasuryBondsareoutperforminggrowthorientedsmallcapstocks!

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Iftheeconomicutopiathemarketisanticipatingisindeedreal,weshouldseecapitalfleeingbondsandpouringintosmallcapsandothergrowthplays.Here’sanotherjawdropper…yeartodate,defensiveUtilities(XLU)areoutperforminggrowthorientedFinancials(XLF)!

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Thisfinancialmediahasbeenravingaboutbanks/financialsasthetopsectorsduringourneweconomicutopia.Andyet,theHIGHLYDEFENSIVEUtilitiesETFisoutperformingFinancials.UtilitiesalsooutperformingBanks(BKX)!

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Anotherexampleofjustoverhypedthe“growth”storyis…I’vebeenhearingaboutGoldmanSachs(GS)virtuallynon-stopinthefinancialmedia.Therealityhowever,isthatthebulkofits“Trump”gainscameduringthefirstthreeweeksafterelectionnight.SinceDecember12th2016,GSisup~2%!!!

Othersignsthatthe“Trumpmiracle”isinfactfading…Bondyieldsarenolongerconfirmingthegrowthhype:theyieldsonthe10-YearUSTreasuryhasbegunturningsharplydownwardevenwhilestockscontinuetopresshigher.Thisindicatesa“flighttosafety”isunderwayascapitalmovesoutofthegrowthofstocksandintothesafetyofbonds.

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Yieldsonthe10-YearUSTreasurypeakedinearlyDecemberandhavesincebeenfallingsteadily.ThisisnotjustabouttheUS:yieldsonGerman10-YearBundspeakedinmid-Januaryandhavesinceunwoundmostoftheirpost-electionnightmove.

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Andfinally,the“growth”indexintheUS,theRussell2000,hasalreadyunwoundmostofthelatestmarketrallyandisactuallyDOWNsinceearlyDecember2016.

Indeed,theeconomicallysensitiveDowTransportshasrolledoverandbeguntocorrectevenastheDowIndustrialAveragesurgestonewhighs!

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Allofthesechartsarewarningusthatwhilecertainmarketindexesaresurgingtonewrecordhighs(theS&P500andtheDowJonesIndustrialAverage),beneaththesurfacecapitalisshiftingintodefensivepositions.WhileI’verepeatedlystatedthatthemarketsshouldretraceALLoftheirpost-electionmovesina“grindlower,”I’mbeginningtobeconcernedthatwemightseeanactualaggressivecorrectionormini-Crash.ThereissimplyTOOMUCHhypeinthemarketsgiventhefundamentals.Oneofthesinglemostdangerousmovesinthemarketsisa“falsebreakout.”Afalsebreakoutiswhenasecuritybreaksoutofaconsolidationpatternonlytothensharplyreverseerasingtheentiremoveandthensome.Itoftenoccurswheninvestorspourintoasecuritybasedonafalsepremise,onlytorealizethatthereisno“followthrough”onthemove,leadingtopanicselling.TheS&P500appearstohavestagedpreciselysuchamove.

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TheS&P500hasbrokenoutofarisingwedgeformationtotheupside.Butunlessstocksgoabsolutelyparabolichere,we’regoingtorolloveranderasetheentiremove.ThismeanstheS&P500droppingHARDtotheredlineat2,100ifnotlowerfortheS&P500.Again,thisentiremovehasbeenbasedonexpectations.Economicrealitiesdonotsupportit.Speakingofeconomicrealities,4Q16GDPgrowthwasbeenreviseddownAGAINtosub2%(1.9%).Andwhileconsumerconfidencehasbeensoaring(hittinga15yearhighinFebruary),realfinalsalesofdomesticproductisgrowingatamere0.91%.Putanotherway,despiteallthehooplaandhope,neitherconsumerspendingnorrealGDPgrowthisanywherenearthelevelspeople“feel.”

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Intermsofcurrentgrowth,GDPfor1Q17istrackingat2.5%...NOTtheGDPgrowthof5%thatCNBCandotherscontinuetospoutonadailybasis.Notetoothatit’strendingdownwards.

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What’sstaggering,isthedespitethiseconomicweakness,Fedofficialscontinuetospoutnonsenseabouthikingrates.

Thecaseforaninterest-ratehikehasbecome“alotmorecompelling,”acrucialFederalReserveofficialsaidinastatementthatmovedmarkets.InaninterviewwithCNNInternational,NewYorkFedPresidentWilliamDudleyonTuesdaysaidthat“animalspiritshavebeenunleashedabit”inthewakeofthepresidentialelection,pointingtotheriseinthestockmarket.“Itseemstomethatmostofthedatawe’veseenoverthelastcouplemonthsisverymuchconsistentwiththeeconomycontinuingtogrowatanabove-trendpace,jobgainsremainprettysturdy,inflationhasactuallydriftedupalittlebitasenergypriceshaveincreased,”Dudleysaid.http://www.marketwatch.com/story/feds-dudley-says-case-for-interest-rate-hike-has-become-more-compelling-2017-02-28

SotheUSistracking2%GDPgrowthatbestandtheFedistalkingabouthikingrates?It’sabsolutelybonkersparticularlywhenyouconsiderthattheFedkeptratesatZIRPforsevenyearsduringstrongerGDPgrowth!Thisaddsyetanotherwrenchtothe“economicgrowth”narrative:theFediscontinuestoclaimit’sgoingtohikeratesaggressively,despitethefacttheREALeconomyisploddingalongatbest.So…torecaptheUS…

1) RealeconomicgrowthisnowherenearthelevelsAmericans“feel.”

2) TheTrumpeconomicpoliciesthataregeneratingthisenthusiasmwillnotbehittingformonths(ifatall).

3) Trump’stopeconomicadvisorhasadmittedGDPgrowthof3%isunlikelybeforethe

endof2018.

4) Stocksareatall-timehighs,basedonhope,whilethe“smartmoney”(bonds)isshowinga“flighttosafety”isunderway.

Thisisthetypeofenvironmentinwhichmarketcrashescanoccur.IwouldsteedclearofbuyingUSstocksattheselevels.

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Elsewhereintheworld,inflationisrippinghigherthroughouttheEU.Germany’sinflationratehasbrokenoutinabigway.

Spain’sisrisingevenmoreaggressively.

ThissurgeininflationwillleadtheECBtohaltitsQEprogrammuchfasterthanmostexpect.InfactamajorECBofficialhasalreadybegunhintingaratehike…albeitseveralyearsout.

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Investorexpectationsforaninterest-rateincreasebytheEuropeanCentralBankin2019aren’ttotallyunjustifiedasdownsideriskstotheeconomicoutlookrecede,accordingtoBundesbankPresidentJensWeidmann.

Acceleratinginflationandastrengtheningeconomicoutlookhavefannedadebateinthe19-nationeuroareaabouttheappropriatedegreeofstimulusascentralbanksprepareforapolicyshift.WhileofficialsincludingWeidmannarearguingthatthetimetotalkaboutanexitiscomingcloser,ECBPresidentMarioDraghicontendsthatrecordlowratesanda2.28trillion-euro($2.4trillion)quantitative-easingplanarestillnecessarytoproduceasustainedpickupininflation.https://www.bloomberg.com/news/articles/2017-02-23/bundesbank-increases-risk-provisions-to-buffer-future-losses

CentralBanksALWAYSprepthemarketsformajorchangesinpolicy(thisiswhyWeidmanistalkingabout2019asopposedtothisyear).TherealityisthatthefacttheheadoftheGermanCentralBankistalkingaboutratehikesatallmeanstheECBwillbeendingitsQEprogramshortly.ThiswillfinallybethetriggerthatignitestheEurorallywe’vebeenwaitingon.Indeed,youmightbeshockedtodiscoverthatyeartodate,theEuroisactuallyoutperformingthe$USD!

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BetweenthisandthefacttheTrumpadministrationneedsaweak$USDfortradeandmanufacturingpurposes,the$USDwillbeplunginginthecomingweeks.Thiswillcontinuetobenefitpreciousmetalsandemergingmarkets.Speakingofwhich,theS&P500/EmergingMarketratioissignalingthattheperiodofUSstocksoutperformingEmergingMarketsislikelyending.

ThisiswhyweareinvestedinEmergingMarketswhileshortingsomeUSstockindexes.Intermsofpreciousmetals,Ihavetoreiteratemycentralviewonthissector:weareinaRAGINGbullmarketbutthisisaVERYvolatilesectorparticularlyasfarasminersareconcerned.Speakingofwhich,thislatestcorrectioninGDXhasshakenoutallofthehotmoney.We’venowgotasolidbasetobeginthenextlegup.

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Indeed,GDXJ:GDXratiosuggeststhiscorrectionforminersingeneralisoverandthenextlegupisabouttobegin.

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Inthisenvironment,thekeysectorstobelookingarepreciousmetalsandEmergingMarketswhileavoidingUSstocks.Ifyou’renewtoPrivateWealthAdvisorymanyofourPreciousMetalspositionsremainbuys(GDX,GDXJ,SSRI,andRGLD)asareEPU,RJA,ASHR,EWZ,andUNGinourstocksportfolio.Theremainderofourpositionsare“Holds”fornow.Thisconcludesthismonth’sissueofPrivateWealthAdvisory.I’mwatchingthemarketscloselyandwillissueupdatesasneeded.Barringanynewdevelopmentsyou’llnexthearfrommenextWednesdayinourusualweeklymarketupdate.ButasIwritethisearlyWednesdaymorning,USstockslooktobehittingablowofftopcourtesyofTrump’sStateoftheUnionaddress.Thiswillendshortly,USstockswillfinallycorrect.Sentimentisbeyondoverboughtandinvestorsaredueforarudeawakening.Untilnextweek…

GrahamSummersChiefMarketStrategistPhoenixCapitalResearch

BestRegards,

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OPEN POSITIONS

STOCKS PORTFOLIO

Pricesasofmarket’scloseon2/28/17atmarket’scloseReturnsincludedividends

POSITION SYMBOL BUY DATE

BUY PRICE

CURRENT

PRICE

GAIN/ LOSS

NuveenMuni.Fund NVG 1/2/14 $13.12 $14.57 33% EmergingMarketBonds EMB 11/21/16

$109.82$113.56 4%

LongUSTreasuries TLT 11/21/16 $121.05 $121.74 1%

POSITION SYMBOL BUY DATE

BUY PRICE

CURRENT PRICE

GAIN/ LOSS

Exxon XOM 9/24/14 $95.82 $81.32 -8% RPXCorp RPXC 8/5/15 $15.48 $10.75 -31% EnterpriseProductsPartners EPD 11/31/16 $25.93 $28.03

10%

PeruETF EPU 12/7/16 $33.23 $34.24 3%

UraniumETF URA 6/8/16 $15.49 $16.70 14%

Cameco CCJ 1/4/17 $10.69 $11.09 4%

CoalETF KOL 1/4/17 $12.59 $13.19 5% AgriculturalCommoditiesETF RJA 1/12/17 $6.46 $6.54

1%

EmergingMarketsETF EEM 1/12/17 $36.60 $37.99

4%

ChinaETF ASHR 2/1/17 $24.91 $25.16 1%

BrazilETF EWZ 2/8/17 $37.58 $37.73 1%

UtilitiesETF XLU 2/8/17 $49.40 $51.77 5%

NaturalGasETF UNG 2/22/17 $6.57 $6.69 2%

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Pricesasofmarket’scloseon2/28/17atmarket’scloseReturnsincludedividends*Averagepriceof$17.50and$14.97

PRECIOUS METALS/ MINERS PORTFOLIO

POSITION SYMBOL BUY DATE

BUY PRICE

CURRENT PRICE

GAIN/ LOSS

FranceETF(SHORT) EWQ 9/16/16 $23.38 $24.91 -7% ItalyETF(SHORT) EWI 9/16/16 $21.56 $23.65 -10% Russell2000ETF(SHORT) IWM 12/14/16 $135.37 $137.84 -2% FinancialsETF(SHORT) XLF 12/21/16 $23.61 $24.54 -4% USSteel(SHORT) X 2/1/17 $31.33 $38.72 -21%

SPECIAL SITUATIONS/HEDGES/SHORTS PORTFOLIO

POSITION SYMBOL BUY DATE

BUY PRICE

CURRENT

PRICE

GAIN/ LOSS

Gold 3/17/10 $1,120 $1,248.00 11% Silver* 3/17/10 $16.23 $18.40 13%

GoldMinersETF GDX 10/5/16 $22.83 $22.85 0% GoldMiningJuniorsETF GDXJ 10/5/16 $37.52 $36.93

2%

SilverWheaton SLW 10/5/16 $22.59 $19.55 -13% SilverStandardResources SSRI 10/5/16 $10.30 $11.10

8%

BarrickGold ABX 10/5/16 $15.54 $18.58 20%

NewGold NGD 10/5/16 $3.88 $2.89 -26%

RoyalGold RGLD 2/8/17 $71.36 $66.05 -8%

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POSITION SYMBOL BUY DATE

BUY PRICE

CURRENT

PRICE

GAIN/ LOSS

EuroTrust FXE 10/5/16 $108.80 $102.78 -6%

CASH/ CURRENCIES PORTFOLIO

Pricesasofmarket’scloseon2/28/17atmarket’scloseReturnsincludedividends