The first observation I drew is that he was keen to point out the lead indicators for future recessions he employs and how many of them are positive versus negative. Of course, some of these have longer lead-times to a signal than others which is not a point he made. The clear conclusion was that there are certainly challenges emerging and that quantitative tightening is a headwind for stock markets. The clear message here is that if the Federal Reserve continues to remove liquidity and the ECB holds to its commitment to end purchases that is likely to continue to represent a headwind for asset prices.
For example, the yield curve spread is a long lead time indicator and is very tight right now. Meanwhile unemployment is still low and PMI figures are still trending higher. When these turn, they are likely to be either short-term or coincident indicators for a recession.
There has been a great deal of commentary recently about the impact of inventory building on GDP figures and that highlights the impact of the trade war on company actions. That also suggests the net positive effect of inventory buildings will conclude either with a further delay to imposing tariffs or if the tariffs are imposed. One way or another the inventory build cannot continue at this pace which will remove a major source of demand.
The biggest topic was a topic covered by Ray Dalio, Stanley Druckenmiller and Paul Tudor Jones previously which is the size of future US deficits. The projections are for deficits of truly monumental proportions which is why they all have such a bearish view of both Treasuries and the US Dollar. I have some sympathy with these views is we take project the deficit in a linear fashion but the fact the USA is now a net oil and gas exporter is something I don’t believe has been factored into projections.
The other point of course is that if the projections are so disastrous and well-publicised, they are unlikely to be realised, because the market will take corrective action before conditions get as bad as people fear. That does not mean asset prices will be unaffected by this process but the budget deficits are impossible to rationalize and therefore will not occur, at least not in the manner people anticipate.
If these noted investors are correct about the Dollar’s demise, that means the Euro and Yen will need to strengthen. Call me skeptical. If one is looking for a Dollar bear story then there is increasing evidence of that against the currencies of emerging markets. That gels nicely with the relative valuation discount on offer which should perhaps more accurately be described as the overvaluation of Wall Street.
Here is a link to the full deck of slides.
Here is a link to a commentary from ZeroHedge kindly forwarded by a subscriber.Back to top