Best Ideas

Inflection Point

At EJR we aim to provide early, accurate, assessments of credit quality and related developments. While we have been and remain positive on the economy, our view is that there will be increasing evidence of a slowdown over the coming months and quarters. The reasons for this stance are manifold but we will try to address them below. The upshot is that credit quality for many issuers will come under increasing stress although at a measure pace. Listed below are our major concerns:

Washington Woes – While Mr. Trump has often used the term “swamp” to describe conditions in Washington, it is likely that his initiatives will be stuck in the mud over the next couple of quarters. The mode of the country has yet again changed and the major gains from Mr. Trump’s election probably have been realized. The Democrat’s control of the House is likely to stymie most legislative initiatives and the continued negative press and investigations are taking a toll. Although Mr. Trump might attempt to establish a working relationship with Ms. Pelosi, pressures from the Left is likely to make cooperation difficult. Ms. Clinton voiced an opinion which is probably shared by many fellow Democrats: paraphrasing, it is hard to be civil when your opponent does not share your values. Regardless of one’s political beliefs, it appears the focus of many in Washington will be gaining the political edge rather than any tangible progress. The disconnect currently is that despite the turmoil (some would say because of it), GDP growth and unemployment levels have rarely been more attractive. EJR’s View – 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 Challenge – Mr. Trump is attempting to reset the US’s relationship with China and in the process is triggering major angst. Against this backdrop is the massive growth in China’s indebtedness. EJR’s View – The fight will continue but perhaps some progress will be made.

EU Ennui – the divorce between the UK and the EU is progressing and the upshot is likely to be some restructuring struggles. Meanwhile, Italy is questioning is continuation in the Union and Turkey is seeking compensation for the refuges. While the Greece problems have been announced as solved, we have our doubts. Perhaps the most relevant item for financial watchers is he supposed exit of the ECB from quantitative easing. EJR’s View – The EU will continue its troubled ways for the foreseeable future and Germany will provide just enough support to keep the confederation going.

The Middle East Miasma – The murder of Khashoggi has hamstrung relations with Saudi Arabia in the short run but the reality is that the US is less dependent on the Middle East for energy. EJR’s View – The area will remain problematic but will muddle through.