Best Ideas

Method to the Madness, or Just Madness


The year 2018 was marked by wild swings in the markets with few of the “experts” being able to understand, let alone call the market trends and turns. Our view is that few understand that the old rules have changed as a result of the efforts of the current administration and that a new understanding is needed for proactive investors. Listed below are some of the major shifts:

Washington Shutdown – Even after the government re-opens, it is likely to remain paralyzed as the House of Representatives is unlikely to pass any substantial legislation the White House wants, and the White House is unlikely to sign anything the House of Representatives passes. The Mueller investigation will continue but the report is unlikely to change much. Likewise, while some presidential hopefuls will talk of impeachment, given the disaster the Republicans faced post President Clinton’s impeachment, Nancy Pelosi is unlikely to allow it to happen. Hence, by default, the current administration is likely to focus on those areas where congressional support is not needed and gearing up for the 2020 campaign. The major item in 2019 and 2020 will be the extent to which the Democratic party will move to the left and like the Tea Party movement of the Republicans a few years ago, whether it will undermine mainstream support. EJR’s Commentary – Inaction in Washington is not necessarily a bad thing. However, the power of Washington is immense and needs to be monitored. The fight between Mr. Trump and the Washington status quo is likely to continue for the foreseeable future. Democrats are searching for a lever to make Trump ineffective and Mr. Trump is continuing his pugilistic approach.

China Reset – unlike prior administrations, Mr. Trump is attempting to reset the US’s relationship with China and in the process is triggering major angst. The current administration is challenging China-based technology firms such as Huawei, questioning the security of the tech sector’s supply chain, objecting to the technology transfers, rejecting unequal tariffs and challenging the newly-created islands in the South China Sea. President Xi is hoping to wait out the current administration, but a strong Democratic challenger has yet to emerge. EJR’s Commentary – This multi-faceted fight is likely to have a massive impact on global markets, particularly if it spins out of control. Our view is the Mr. Trump will garner a few victories which he can tout on the campaign trail but that overall, little will change.

Maturity of the Recovery/ Pending Recession – an issue on most sophisticated investors’ mind is whether we are due for a recession, and if so, when it will occur and how deep it will be. The indications of concern are the flat and at times, inverted yield curve, the duration of the recovery, the rising indebtedness, and the impact of a withdrawal/ unwinding of the monetary easing. Additionally, the weakness in the capital markets might be an indication that a reversal is already upon us.