5/12/19 Sunday

While I certainly wouldn’t advocate panic at this juncture, I am nonetheless amazed at the sanguinity (if not complacency) I’m witnessing among much of the investment community, amid what is clearly an escalation of trade tensions. I read where one well-known technician deems last week’s late-week bullish action as a signal that we’re near the end of this brief, and modest, selloff, and that new all time highs will soon be at hand. Bespoke Investment Group, whose research I hold in high regard, sees the present as an attractive buying opportunity for equity ETFs, particularly many non-US offerings. I continue to see references to “a very strong and resilient U.S. economy” and how it’ll hold up against the trade war headwind well into the future.

Well, while I like the sound of all of that, I presently do not share the near-term optimism, for the following reasons:

1. This seeming belief that the U.S. economy can indefinitely weather the direct multi-billion dollar hit (a tariff is a tax paid by U.S. importers; a cost ultimately passed on to U.S. consumers) of tariffs (along with multiple attendant disruptions [inflation, currency, supply chain, retaliation impact, etc.]), now scheduled to increase, and threats of even more, is utterly misguided. The latest score of our proprietary macro index, while still positive, is the lowest since the depths of the steep 2011 correction, which was a result of the global-economy-threatening European debt crisis. I.e., present general conditions, while not yet rolling over, can – by our assessment – no longer be described as strong and resilient.

2. Bullish analysts are putting much weight on the still-positive long-term stock price trends, and, in the very short-run, two days of late-day buying. They seem to be ignoring the fact that, with regard to the latter, in both instances the technical support level was hit (and held) simultaneous with tweets that implied that trade talks with China have been constructive and are still ongoing. Clearly, those tweets were designed to reverse intraday market declines. And while they indeed did the trick last week, to proceed as if such phenomena will continue to hold the market up when the President comments elsewhere that we don’t need a deal – and that tariffs are good for the U.S. – is wholly irresponsible, and is utterly ignorant of the unavoidable economic damage to come if he makes good on his threats.

3. Trump’s latest actions, along with his stump speeches and tweets, strongly suggest that he sees a tough, adversarial approach to China trade relations as a political winner. He is indeed correct that the average American voter, despite all in-their-face evidence regarding American progress and prosperity, sympathizes with the notion that the U.S. has been getting killed by China for decades. The monster problem for Trump’s reelection bid is that what he sees as a political momentum builder will, should he persist, ultimately crash the economy months before election day – of this I am certain! I.e., Trump is presently sowing the seeds of his own defeat (he virtually cannot win amid recession), and, clearly, is oblivious to it at the moment (there’s a reason why this is the one area where the opposition is applauding his actions and egging him on). His only hope appears to be that the stock market corrects aggressively enough to correct his thinking before general conditions roll over; inspiring him to ink a tariff-eliminating trade deal to rescue an economy that may – depending on the timing of said correction (the sooner the better!) – be on the precipice of recession. If, however, come aggressive-market-correction time, economic odds favor recession (i.e., general conditions have rolled over), his awakening will have come too late. Once that recession train has left the station it’ll have to run its course.

For now, immediate-term dynamics dictate that we continue to hold off on allocating any new cash. While general conditions (still expansionary) dictate that we hold tight with our current equity weightings, although present levels (our low, but still positive, macro scores) dictate that we begin strategizing on how we’ll begin playing defense if/when conditions begin to roll over.