"Kee" Points with Jim Kee, Ph.D.


  • An Agenda at War With Itself
  • How to Think About Markets Now

 

An Agenda at War With Itself

Global markets continue to reflect, in my opinion, President Trump’s policy program that seems to be at war with itself. Wealth is created by production and exchange, and the tax-cut deregulation policies that Trump has implemented definitely promote the production side of this wealth-creation equation. However, Trump’s tariff threats and related actions on trade policy clearly work against it on the exchange side. That is why I consider his program to be at war with itself. Near-term, the tax/regulatory environment is pretty set, so it is the back-and-forth in the global trade outlook that explains most of the back-and-forth (ups-and-downs really) in the markets this year. In addition, we are starting to see tangible effects of this in the real (as opposed to market) data. We see it in reduced global trade (particularly in capital goods), with Japan (the world’s 3rd largest economy) declining -.3% in the third quarter, Germany (the world’s second largest exporter) -.2%, and Sweden and Switzerland -.2% (Asian Times). There are other concerns out there – see the “glass half empty view” below – but trade angst explains the most with the least, so it wins the parsimony contest (which is what all sciences strive for). Interestingly, economist David P. Goldman argues that the relative outperformance of Chinese stocks during the recent turbulence suggests that investors believe Trump will do what it takes to get an agreement with China and move on. That is my sense as well, but I know how unsettling this volatility can be.



How to Think About Markets Now

Keeping your head when others are losing theirs is good advice when market volatility increases. Or, said a little differently by a current institutional strategist, "What is your greatest risk in markets right now? Well, it might sound trite, but it is probably you" (Matthews Asia). I have mentioned in prior Kee Points and webcasts that the world’s experts on volatility, like the University of Rochester’s William Schwert or London Business School’s Elroy Dimson, argue that volatility is not actionable. You cannot predictably make money buying or selling stocks just because volatility has suddenly increased or decreased. As an aside, trading technology might be playing an increasing role in short-term volatility. Automated trading programs (“program trading”) may enhance short-term market volatility by increasing sell orders when markets are falling and increasing buy orders when markets are rising. This could lead to the phenomena of over-shooting and under-shooting equilibrium security prices. It should also lead to other automated trading programs taking advantage of any mispricing (by buying on big dips and selling on run-ups), which should work to reduce volatility. Anyway, global markets as measured by our (STMM) benchmark MSCI World index are down 4%-5% year-to-date, and U.S. markets (e.g. S&P 500) are roughly flat. Going into 2018 markets weren’t in wildly overvalued territory, but I felt that they had priced in the stronger growth that we’ve seen (“surprising growth, disappointing returns”). Going forward, a “glass half empty view” would see 2019 playing out like 2018, with waning confidence in global trade negotiations and in EU/Italy debt negotiations. It would tilt toward a “hard Brexit” (less amenable trading relationship between the UK and the EU) outcome. It would see a continued deterioration of global capital spending and global trade in general, increasingly contentious politics in the U.S. (and perhaps overly aggressive Fed tightening), rising geopolitical tensions in the Middle East, and it would anticipate heightened effects of all of this on emerging markets. So what’s the “glass half full view”? Well, it is simply that none of what I just rattled off is exactly a secret to global investors, and it is reasonable to assume that a lot of it is priced-in. The glass half full view would argue that each of these could go the other way, i.e. tilt towards a more positive outcome, and markets would then surprise on the upside.