In a world that has a shortage of role models, the loss of Senator John McCain is especially sad. Angus and I watched the coverage last night for about an hour. An eleven-year-old boy has next to no interest in watching CNN, but I could tell within minutes that he sensed that he was seeing something significant. We talked about always trying to do the right thing even when it is difficult. We talked about doing things for other people and no one noticing. We talked about the way boys, young men, and fathers should behave. These are topics that are seldomly discussed and frankly should be expressed more with actions than words. The life of John McCain show that even with our flaws, all of us can achieve and do so, in the right way. We may not share the same views or ideologies, but we can respect all around us. None of us are perfect and John McCain certainly was not and while we cannot control the outcome, we can control how we try. That’s my lesson from the life of John McCain and hopefully Angus got a sense of that as well.
You can’t handle the truth !
(This is part one of the Sunday Blotter, we'll publish the latter half tomorrow.)
Angus and I were running a few errands on Friday and I had to FedEx some incorporation documents over to my attorney. When I explained what I was doing, a look of horror came across his face. “Lawyer? Dad, are you in trouble?”. Clearly, I have an eleven-year-old who is constantly subjected to cable news and equates the legal profession with being in hot water. Even after I explained that most interaction with lawyer is designed to prevent problems, he looked at me as if I was about to serve ten to life. Luckily, my legal interactions are limited to the mundane and aren’t market moving. However, I think we all know a certain someone who is facing a few legal concerns of his own and the potential outcomes are far from benign.
President Trump had a really bad week and the market didn’t care. The Trump administration and the team that got him elected is now littered with guilty pleas or convictions for everything from campaign finance breaches, to tax fraud, to lying to the FBI regarding Russia’s attempts to manipulate the 2016 Presidential election. Despite what supporters will say, this is without precedence and while the case for impeaching President Trump is currently not solid, the demands from the Democratic base for such action is growing louder. More on the consequences of this later but as we stand today, the response of asset markets remains oblivious and has been for a very good reason:
The US economy and the health of US corporate profitability remains buoyant and while we can be appalled by the President’s behavior, there is no end in sight to the robustness of corporate America. Tax induced sugar high? Clearly a major factor but until the effects start to wane, US equities will focus on the health of the economy at large. Everything else is a side show.
President Trump’s grasp of the truth is tenuous at best and while I find it difficult to believe anything he says, I must concede on two points. Firstly, while his ability to execute on policy has in some cases been poor or blocked by the checks and balances of Congress, he has attempted to implement most, if not all the policies that he outlined during his campaign for President. Tax cuts and Chinese tariffs have happened as have tougher immigration policies and while we have not broken ground on the border wall, it hasn’t been for a lack of trying. We all tend to dismiss his hyperbole as simply that but in some cases, there has been an element of truth in what he says.
During an interview with Fox News this week, President Trump commented that the market would crash, and we would all be a little poorer if he was to be impeached. There is a strong degree of truth to this statement and while the market correction will happen well before the impeachment itself. The market sell-off would occur if the Democrats take back the Senate at November’s midterm election and while this makes his removal from office far from certain, a Democrat controlled Congress would spook the markets well before impeachment proceedings begin. The markets are not really looking at this scenario and financial assets dismiss President Trump’s accurate comment about the reaction to impeachment.
As Jack Nicholson said to Tom Cruise in the 1992 MovieA Few Good Men:You want the truth? You can’t handle the truth!
Financial assets have rightly focused on the factors that drive the US economy forward and dismissing the Washington circus. As we end what was been, effectively, an uneventful summer for the holders of US assets, volatility in US equity and fixed income markets remains depressed. While international and especially emerging market investors haven’t been subjected to the high Sharpe ratio returns that many US equity investors have experienced, there is definitely a strong degree of complacency from US centric assets that continue to prove that geo-politics and the Federal Reserve are an irrelevance to them. I wrote about this at length in the July Portfolio Update and US investors with a home bias continue to outperform by ignoring everything except for profit growth. They are to be applauded and the rest of us are left to wonder why we focus on anything else. The following chart of global equity returns so far this year sums it up perfectly.
That said, as the summer doldrums come to an end, we are entering a three-month period where global asset markets are facing enormous geo-political cross currents including:
- The likelihood of a Hard Brexit
- The Italian Budget
- The likely implementation of 25% tariffs of another $200bn on Chinese imports into the US
- Turkey’s inevitable economic decline and IMF involvement
- Brazil’s contentious election
- And of course, the US mid-term elections.
The Bank of Korea should do nothing this week but the cancellation of US Secretary of State, Mike Pompeo visit to North Korea, won’t instill confidence in South Korea stocks or the currency. Is anyone truly surprised about a lack of progress regarding denuclearization? German IFO on Monday. European M3, UK House prices, and US Consumer Confidence on Tuesday. US GDP revisions on Wednesday. On Thursday, Australian Building approvals, German CPI and Employment data, and Canadian GDP. On Friday, Japanese CPI and Industrial Production, Chinese PMI and US Sentiment