Dear Valued Clients and Friends,
We know the following things about the last 2-3 weeks in the market:
(A) The China/trade war has blown up
(B) The Yield curve has inverted
(C) Negative yields persist all over the globe
(D) Recession talk is everywhere
So markets are obviously volatile, but it isn’t clear how these above things relate to one another, and people want to know what is going on. What I seek to do in this short, succinct podcast is get right to the point about what is going on – short term, and long term.
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I start with: Why are there negative interest rates, and what do they mean?
We know that Central banks feel they are the only game in town and must stimulate. But negative yields are an overreach. They are leading to the misallocation of capital and the reinforcement of deflationary forces. It would be nice for our Fed to earnestly and zealously proclaim their refusal to use NIRP as a policy tool, giving confidence and clarity to markets. But this topic needs to be understood.
As for Recession fears …
The 2/10 yield curve inverted last Wednesday. But last five inversions from initial inversion, to max inversion, which means that to the “un-inversion” was even longer, lasted 36, 71, 22, 46, and 224 days respectively. In 1998 the yield curve inverted for 22 days and we did not have a recession. This inversion lasted for a few hours (and has uninverted since).
Global weakness does not generally lead to a U.S. recession; rather, U.S. weakness generally leads to a global recession
- 1975, 1982, 1991, 2008
So is all okay?
Industrial production, ISM Services, Manufacturing, Durable Goods/new orders are all going the wrong direction.
The trade war has the double whammy of:
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- (A) Creating volatility/uncertainty/headline risk, and
- (B) Having the potential for creating truly systemic underlying problems if not resolved
- We just don’t know yet
- Will a trade deal get done to hold things over through election, or will it get worse?
- Will Fed go heavy with monetary stimulus, or underwhelm markets?
- Is U.S. economy resilient, or are the softening business investment conditions a sign of things to come?
- Short term: No recession for 12-24 months
- Even that is avoidable if this plays like 1998
- Long term: Central banks run amok will not slow down. Because government spending will not slow down. The way our Fed is asked to deal with national debt will be the story of the next 10-15 years
What to do – SHORT AND LONG term:
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- quality, defensiveness in equity allocation
- maintain the fundamentals of asset allocation,
- if you want some potential offense from your defense, alternatives over bonds
- look to cash flow generative non-cyclical companies
- behavioral focus on underlying company business and cash to your portfolio, not macro, headlines, price/valuation
- Respect markets – melt-up and volatility – unseemly realities, but invest for what is, not what you want to be
Listen to this special Dividend Café podcast for an easy-to-follow unpacking of all of this!
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
The Bahnsen Group
www.thebahnsengroup.com
This week’s Dividend Café features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
