BUT FIRST, A NOTE TO CLIENTS: If the last paragraph below re; "options collars" is not familiar to you, you've missed several blogs and direct emails from me over the past 2-3 weeks, and you need to click here for my basic presentation on hedging with options. Then, for the nuts and bolts of how it works, click here for Nick's presentation. Then shoot me an email: We need your authorization to modify your portfolio to get that done.
From PWA Internal Market Log 8/4/19:
"...our macro index just dipped into the red (-2) for the first time since its inception; although there have been back tests (leading up to the two last recessions) that yielded negative scores as well.
Beneath our overall macro score the consumer data remains positive, as does our financial stress subindex. Industrial-related data, commodities, and our financial markets subindex, however, are sending concerning signals.
Our now negative macro read notwithstanding, in my view there remains a window of time where abating trade stresses can reignite corporate animal spirits and avert a near-term recession. Unfortunately, it’ll take a significant equity market selloff to inspire the players to abandon their literally historic protectionist ambitions. And if such a selloff does not occur relatively soon – i.e., before general conditions completely roll over – a mad dash to do trade deals will not be enough to avert what I suspect will be an extremely painful bear market.
There’s also the distinct possibility that it’s already too late; that I'm wrong in terms of my "window" metaphor. I.e., there’s not much underpinning the current expansion beyond the consumer and the Fed; a steep correction could indeed tip the economy into recession if it sends the consumer into hiding.
As for the next recession:
The concerning corporate debt picture – in terms of level (record) and the credit tranche where much of it sits (BBB: Which will spark huge disruptions as portfolios and funds mandated to hold only investment grade debt unload [BBB is the lowest investment grade rating] when the economic slowdown forces credit downgrades) – government debt levels, low tax revenues due to recent tax cuts (making fiscal stimulus a challenge) and the fact that the Fed is grossly ill-equipped at this juncture, strongly suggests that the next recession, be it within the next year or further out, will morph into something deeper and longer than the norm.
As for our investment posture:
For the time being we’ll maintain our present sector weightings and apply 6-month options collars to client portfolios. Where we go thereafter of course depends on developments along the way..."