Friday, May 10, 2019

This Morning's Log Entry

5/10/19 Friday


As I type the Dow future contract is pointing to a 90–pt decline at the open. Given the hike in tariffs overnight, Trump’s tweet this morning that essentially said there’s no rush and that tariffs are good, the potential for him to announce tariffs on European cars next week, the pending details on how China will retaliate, and the odds that the EU will respond aggressively to any hike in U.S. protectionism make the shallow depth of this morning’s futures selloff – not to mention the modest rally occurring in European equities (and the overnight rally in China [although I suspect state-backed buyers stepped in big time) – frankly, surreal!

The punditry is taking two base positions on this morning’s lack of reaction:

1. It was all fully priced in and, thus, the reality of it is a non-event, or, in the case of China and Europe, a buy the news event.

2. There’s absolutely going to be a deal, therefore, selling now would subject investors to an uncatchable whipsaw rally when the deal is announced.

As for #1, if that (it's already priced in) is the correct assessment, my what a naïve (or, more kindly, sanguine) position (among traders) to what, should he stick with it, will be a most economically destructive decision by the President.

As for #2, I agree, although my own naiveté may be on display here. The assumption here is that – despite the content of his tweets – Trump indeed understands the economic risk he’s taking. If so, he’s then clearly making a political calculation; i.e., he believes that the economy’s strong enough, and that the stock market’s risen enough, to absorb the pain long enough to delay a deal until we get closer to the 2020 election; i.e., he’s looking for a strategically-timed trade deal to provide a market boost that’ll last into November 2020.

Given the uncertainty of immediate-conditions (a market-moving tweet or comment can materialize without notice), I have Bloomberg TV playing in the background: The interviewees (market analysts) are amazingly sanguine; they're talking about the overall solid state of the economy, favorable monetary conditions (easy central banks), likelihood of a deal (as negotiations are still ongoing), strong Q1 earnings, etc.. One analyst even dubbed it a buying opportunity.

My assessment of general conditions basically jibes with the macro sentiment I just summarized. Although, I’m not viewing the latest at this point as a buying opportunity, and I do believe that conditions will on balance deteriorate further (our macro score has been on the decline lately) as long as the dark tariff cloud looms over the global economy.

Question now being, will tariff-removing trade deals (yes, deals, the EU is next) occur before conditions roll over into the red? If so, the whipsaw analogy is the right one. If not, said trade deals will indeed spark a rally, but it’ll be akin to the rallies heading into the past two recessions that took stocks to all-time highs just before rolling over into their respective bear markets.

Our job is to respond if/when we see odds favoring recession over continued expansion. For the moment, the pundits are correct, recession, and therefore protracted bear market risk, remains low; although, again, lasting protectionism will bring such favorable conditions to their end sooner than their time.

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