It is becoming clearer that the business expansion underway before the trade war has taken on water that it may not be able to drain away even if there is a palatable conclusion to it all with China.
Some impact to nominal growth has already surfaced, and it can be seen in the manufacturing survey pointing to a decline in new orders. The market has not yet cared because the comparative reference rate for how strong corporate profits are valued has declined, boosting valuations and sentiment.
I do not trust my own analysis on this to the degree I want to because (a) The data is still coming in, and (b) I certainly know how much I want to believe that the trade war did not disrupt the capex renaissance that our economy was beginning to enjoy. But all wishful thinking aside, the bad case is that the trade war suppressed confidence enough to stall and stunt the projects needed for further enhancement to productivity and growth (thereby accelerating the end of this economic expansion). The optimal case would be that the present slowing evidenced in the data is temporal and will not show "slip through" to the whole economy - giving things time for a trade resolution to take hold. Time will tell us more.
Cause and effect?
Note the peak in economic activity growth (manufacturing, construction, etc.) - February 2018 - the month the trade war began. Labor growth has stayed steady, but the manufacturing and construction side (while still growing) has seen its growth contract/slow significantly!
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The worst argument for a recession ever
One commonly uttered piece of anti-intellectual nonsense is that "the longer the recovery has been, the more likely a recession is." In the basic sense that the "more days that have gone by, the less there are to go," sure. That's really helpful information. But is says nothing whatsoever about the timing of a recovery ending or a recession starting. It merely tells you that "yesterday was one day ago." While Captain Obvious is always fun at parties, it is hardly practical economic commentary.
Race to the bottom?
I am intrigued by the fact that the Euro sits around $1.12 to the U.S. Dollar even as so much presumed dovishness exists around the future of European monetary policy, and certainly no expectation of a reversal of that with the announcement that Christine Lagarde will be the replacement to Mario Draghi at the European Central Bank (Lagarde is the former head of the IMF, and is perhaps the only candidate they could have found more dovish than Draghi proved to be). My view is that the Euro running in place is more about the dollar than the Euro. If the Fed was in a 2018 hawkish state of mind I expect the uber-dovish Euro landscape would be pushing the Euro far lower, but with the Fed joining the party in trying to weaken their own currency the market is stuck with two currencies (three if you want to count the Yen) trying to jockey for superiority in weakening their own currency.
How 'bout that dollar?
On a trade-weighted basis (blue line below), the dollar is currently as strong as it has been in nearly 20 years. Why does evaluating it this way matter? Because the standard dollar index (white line below), also showing strength, leaves out emerging markets countries, and it is fair to say our dollar's comparison to countries like China and Mexico matters in evaluating our overall economic health. Our view, and this ties into our short term view on emerging markets pricing, is that if the dollar is over-valued (it is), it will need to demonstrate such against the emerging markets currency world, not merely against Europe and Japan.
Click here to view the chart.
Something that has to change
The FDA has approved 14 new drugs this year. Fourteen. It was 59 all of last year (which was actually the most ever in a single year). Whether it is the result of human genome sequencing or improved R&D, there are significant opportunities slowed up in a bureaucratic pipeline. This does have profound implications for investors, but far more importantly, for the quality of human life.
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David L. Bahnsen is the founder, Managing Partner, and Chief Investment Officer of The Bahnsen Group, a bi-coastal private wealth management group with offices in Newport Beach, CA and New York City, managing over $1.5 billion in client assets.
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