Wednesday, March 13, 2019

Today's Log Entry

I need to preface this one with a huge caveat: While it might appear that I am making a prediction in today's entry to our internal market log, that's not how I view it. Instead, my current (always subject to change) "6-month thesis" (abbreviated version below) is simply the laying out of my current (always subject to change) base case.

Speaking of market predictions, I view them, particularly published ones, as very dangerous phenomena. I see it all the time, pundits pretentiously prognosticate as if they'd have us believe they know the future; and, be that as it may, they are desperate to not let us -- along with the reputations that earned them their spots in the mainstream financial media -- down. Thus, with their egos firmly cemented to their predictions, they mine in clawing fashion for every data point they can unearth that would support the forecasts that -- even in the face of strong real world refutation -- they table-poundingly cling to.

So, no, absolutely no predictions herein, just a sharing of my assessments of general conditions and our resulting base cases.

I have found that by committing my findings and deductions to writing I remain grounded, thoughtful and, most importantly, unemotional in my constant pursuit of the knowledge of general conditions. I'll share my notes from time to time (often of late) herein as the bulk of our readers are folks who have entrusted to us the management of their investment portfolios. We think it's important, you clients out there, that you know what we're thinking and, thus, why we're doing what we're doing.

Lastly, before I copy and paste today's entry, you should know that not only do we here at PWA not marry our egos to our theses, we are forever on the hunt for evidence that would prove our prevailing base case wrong, per the "what can go wrong" close to the following. 

 3/13/19 Log Entry (excerpt):

Question: Per the theory of Reflexivity, should, for example, stock prices fail to overtake the Sept ’18 high before retesting the Dec ’18 low, will they negatively influence the trend to the point of reversal, thus flipping the prevailing bias to negative, and precipitating the next recession and bear market?

In my current view, no. Odds favor general conditions withstanding what’s likely to occur over the next few months, and, thus, favor stock prices moving above the Sept 2018 highs in the coming weeks.

Per my present 6-month thesis (abbreviation):

1.  Accommodative central banks, and governments, will stimulate in aggressive-enough fashion; sufficient to stave off recession this year (and likely next).

2.  The U.S. will ink a deal with China that will see a sharp short-lived rally in stocks. That will embolden Trump to threaten hardball with Europe. Global equities (save for China) will immediately tank when markets sense such. Equities tanking will bring the sides together quickly to mend fences and make a deal. Monetary and fiscal easing will have bolstered economic sentiment enough to sustain the relatively short US/EU tiff.

3.  Article 50 will get extended, the hard-Brexiteers will soften and a deal will be struck later in the year. The extension will relieve pressure on the pound, UK and EZ equities.

4.  Global equities will trend higher into the fall. Bonds will hold up (yields will hold down) until trade issues are resolved; trending lower (rates higher) thereafter on the prospects for accelerated growth and tighter central banks. The Dollar -- despite the prospects for rising U.S. interest rates -- will trade lower on the prospects for the rest of the world’s economies/asset markets catching up.

What can go wrong?

1.    Trump walks away (with no near-term path for turning back) from a China deal. Hugely bearish for stocks! Recession risk explodes higher and we get busy adjusting client portfolios.

2.  A deal gets done, but existing tariffs remain. Not as bad as no-deal, but stocks will nonetheless sell that news.

3.    The coming row with Europe gets under the key players' skins to the point where they abandon their economic/market-centricity and we have a protracted US/EU trade war; which means general sentiment tanks, taking an already weakened economy with it. And we get busy.

4.    Brexit blows up and sparks a cascade in European equities that ripples across the globe. Best case scenario, 10-20% correction; worse case, global sentiment tanks to the point of catalyzing the next recession. And we get busy.

5.     #1 or #2 and #4 both occur this year. And we get busy!

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