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Macro View of the Markets - June 2018


The National Association for Business Economics said in its latest quarterly outlook that its panel of 45 economists expects the economy to expand 2.8 percent this year. As measured by gross domestic product, this is slightly lower from the panel’s March forecast of 2.9 percent. Now I will be the first to tell you that the last place we look for investment advice is from an economist, but this NABE group of economists currently has an opinion that supports a few very intelligent and well-respected capital market practitioners to whom we do pay closer attention.

The NABE group as a whole does believe the major tax cuts President Trump pushed through Congress will give a significant boost to economic growth this year and next. However, they do worry that by 2020, the country could be entering a new recession.

We have recently discussed Guggenheim’s CEO Scott Minard’s comments about a recession within 20 months and a 40% plunge in the stock market. A few weeks ago, we saw a follow up Guggenheim presentation by Mathew Bush, Director of Macroeconomics and Investment Research reiterating a high probability of a recession by focusing on areas such as unemployment rate gaps, the natural or Real Fed Funds Rate, 3month-10year Treasury Yield Curve, Leading Economic Indices, Aggregate Weekly Hours and Real Retail Sales and the year over year changes of all of these MEASURABLE areas of interest.

Last week, famous trader and philanthropist Paul Tudor Jones was interviewed by Goldman Sachs CEO Lloyd Blankfein. The key takeaway from that interview was that due to a concept referred to as mean reversion, both monetary policy and fiscal policy cannot sustain themselves. Jones mentioned that the 10-year rate is normally at 2 percent historically and currently around negative.30 -.40. Normally and historically the short-term rates are around 1-1.20 percent and currently around negative .40 percent. They will “mean revert” back to the normal range and cannot sustain themselves at these manufactured levels.

The last time we were at 3.8% unemployment, it was 2000, and we had interest rates around 4.5-5 percent. We also had a 2.5 percent budget surplus. Anybody think we have a surplus today? How will our deficits affect the rate increases? Prices in anything; the stock markets, bond markets and real estate markets will have to come down in the long run as they get back in line with long-term pricing which has existed in capital markets for 250 years. In the short term, Jones said prices are “jacked up and ready to go.”

Blankfein likened the current markets to adding lighter fluid to an already lite fire. The two problems that you create are that you get flare-ups (the markets are moving up when they maybe shouldn’t be) and when you need the lighter fluid, it is all used up. In other words, monetary policy will not last, and fiscal policy cannot last. We will not have the tools needed to protect for a “soft landing” recession. When Blankfein asked Jones, what will he be doing during the next recession, Jones chuckled and said, “hopefully I will be short the market.”

I share this with you because it is only a matter of when not if. I share this with you to remind you that I look at this scenario as an opportunity, not a problem. I share this with you to remind you to trust the system and the process we have in place. A system which is flexible enough to hide in cash, take advantage of risk off trades from the stock market to the bond market and even short the market (think hedge strategies, insurance, Active Analytics in our Lily Growth Plus Portfolio) when the markets are tanking. I share this with you to remind you to ignore the media hype and the Wall Street tactics to entice us, individual investors, to make emotional decisions at times when it will only cost us money. I share this with you because “Markets change and so will we.” We will react to MEASURABLE market prices, and the markets will tell us when to react. Until then, we ignore the market noise and media noise, and we trust our proven process.

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