In our year-end 2017 letter I reported the following:
"...our macro score presently sits at a very bullish +60, with 85% of the data reading positive, 3% negative and 12% neutral."Oh, and by the way, a mere two weeks later our macro index jumped to an all-time record +81!
So, of course I was humming quite the bullish tune as 2018 got underway.
Although, in that very same 2017 client letter, I did offer up this cautionary note: added emphasis this morning...
"...combine a potentially higher trending dollar with higher barriers to international trade (which has, thus far -- notable exception(s) aside -- been more rhetoric than realty) and we'll have a combination that could ultimately put our bullish thesis to the test."Well, sadly -- potentially disastrously -- those higher barriers (read tariffs/trade war) are today more reality than rhetoric.
As our PWA Index meandered its way from +81 in January of last year to +38 at the market peak in September, I devoted no doubt dozens (and dozens) of blog posts to what I saw as the root cause of the decline (not the Fed, by the way), often to the push-back of readers and video watchers. I mean, they had their points, how could tariffs be so bad if the market was doing so good?
Well, okay, but in early 2000 the crowd was crowding into tech stocks with the notion that 100+ price-to-earnings ratios (if a tech company even had earnings) couldn't be bad if the market was doing so good. In case you forgot, the tech bubble implosion, at the time, turned into a bear market for the ages. And, as you haven't forgotten, a mere decade and two-thirds later a hypnotic greed lulled the consumer, the politician and Wall Street into believing that the economy can grow to the sky as long as folks had their wealth tied up in their homes, and the world's financial institutions had their's tied up in securities derived from mortgages (1st, 2nd, and 3rd mortgages) against those homes. Well, you know now....
My point, history has proven time and again that things can indeed be so bad, even when the market's doing so good!
So am I predicting a third major market collapse as we near the 20th anniversary of the above-referenced tech bubble debacle? Well, if you're a client and you've noticed the names of the sector ETFs that occupy your portfolio, you know that my answer today is no. My weekly analysis is simply not signaling the sort of economic stress that typically precedes recessions, despite our macro score's notable decline over the past 15 months or so (btw it bottomed at +22 in December, scored +33 this weekend).
So why all the hand-wringing over trade? Well, the crunching of data and the living in financial markets for virtually my entire adult life, not to mention my never-ending study of economic history, has honed in me a real understanding of how the real world works. And while bull markets can be resilient things, and while general conditions continue to support the present one, I can promise you, with conviction, that if we continue to disrupt the very global system of trade that, ironically, the U.S. has influenced more than any other country, and by far has benefited from more than any other country, general conditions will deteriorate at a substantially faster pace than they otherwise would have, and I will indeed be seeing the telltale signs (in my weekly assessments) that it's time to begin playing defense.
The above was inspired by the following from Bloomberg this morning (see, it's not just me!): emphasis mine...
"At an event on the sidelines of the IMF meeting on Thursday, Mark Carney, the governor of the Bank of England, bemoaned the fact that a global economy that just a year ago was in the midst of an upswing driven by robust trade and investment now appeared uncomfortably reliant on consumer spending as a result of the trade tensions.
“And normally when an expansion is reliant on the consumer you start watching the clock in terms of how much longer it will last,’’ he said.
While Mnuchin prods other countries do more to boost growth, the reality is that in places like the EU -- which Trump last week threatened to hit with new tariffs and called a “brutal trading partner’’ -- the easiest way to boost growth may be to simply remove the uncertainty caused by Trump’s trade bombast."