Sunday, February 24, 2019

This Morning's Log Entry

This coming week will be interesting, if not telling. Trump appears to be at odds with Lighthizer; this has been a long time coming. Lighthizer’s history, and utter lack of economic tutoring (by his own admission) always made him a strange, and dangerous, pick for the top trade post. Up to him, the negotiations would drag on and tariffs would likely rise in the meantime. I.e., if it were up to him we’d be staring down stronger odds of a near-term global recession; although he – as his words and actions dictate -- would be oblivious to the risk.

Trump wants a deal now, despite the reported risk that not enough headway has been made on IP theft and forced technology transfer; I remain befuddled by this one: What’s to be gained by demanding that a thief stop stealing, and, if he doesn’t, demand that he agree to his own punishment? As opposed to simply saying "you’ve been put on notice, we have the resources to catch you, and if we detect more instances of theft we’ll come down hard on you in the following manner………"

Additional near-term market stress could come via Brexit; the EU is reportedly in the mood to allow for a 21-month delay. While, on the surface, that may sound bullish, it’s likely to enrage the hard Brexiteers, as it’ll keep the UK in the block as is until 2021. The coming week’s rhetoric will be instructive for sure…

The Trump/Kim Summit is a non-event for markets in my view.

Our economic subindex paints a mixed overall picture, while credit spreads denote low general financial stress and equity market breadth is resoundingly bullish. Bottom line: While my current economic assessment is markedly less bullish than it was this time last year (overall score of +31 vs +75 on 2/26/18), I see few telltale recession signs at this point. Ironically, the less-rosy economic backdrop may be very bullish for stocks going forward, as it alleviates any concerns over near-term Fed tightening and allows for huge risk appetite if the headwinds around global trade continue to abate.

That bullish narrative will flip bearish in a hurry, however, if the U.S. goes at Europe this year like it went at China last year. If, on the other hand, the China experience inspires in Trump a conciliatory tone toward the EU, and, as a huge bonus, if he were to rid the White House of Lighthizer and Navarro, assuming he'd replace them with one or more qualified/experienced/economically-savvy individuals, the market would reward him in spades.

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