Deal or No Deal: Probably Doesn't Matter Anymore

I have had a couple of days in traffic to listen to the business media discuss the next direction of the financial markets as they continue to sway to the developments from the United States and China regarding a potential trade deal to avoid the ongoing “war” many mention. What I have found both funny but also concerning is the fact that we are sitting near highs on most stock market indexes while all of this uncertainty of a downturn is being discussed. It seems that the Federal Reserve was able to inject cheap liquidity and capital into the market to offset the negative impacts of the trade war uncertainty.

Screenshot from Google Finance

I find it concerning because tools are being used today to keep markets afloat despite the fact that many more will be needed if we indeed see a downturn as some indicators are already pointing to. There is still a lot of contradicting data available as the GDP for the United States continues to grow despite some sectors showing some weakness. For example, the manufacturing sector has been seeing contraction for two months now and most are quickly to attribute it to the trade war. However, we just saw today that retail sales were actually down instead of an expected increase. This is a big red flag as the consumer is over 60% of the United States economy and it could be a slippery slope.

However, analysts continue to point to a strong employment market as well as strong services sectors led by the Technology giants as a catalyst for sustained growth which is a fair assessment. I would also add to the fact that we are about to enter an election year which has always seen the political leaders try to influence a stronger economy leading up to the election. With a President not shy to push his weight onto markets and influencers, I now believe that we will be good for the next year unless an unforeseen event were to occur. In fact, I actually think that we could see a “melt up” scenario where investors (like myself) are under-exposed to the market and rush into it to participate in healthy returns.

Screenshot from Google Finance

Unfortunately, in my opinion it will only make the foundation of the economy and financial system less sustainable over time with the potential for a sharp decline in the coming years. I feel this way as the inherent risk in the market does not seem to pricing in any negative outcomes of the uncertainties that surround us. Whether it be political, social or economic; substantial risk to valuations in assets are present. However, the VIX remains at relative lows which has gotten me interested in hedges at the end of the probability scales given that they seem cheap. Luckily, I am still on the sidelines without even having access yet to brokerage account so I am not tempted to trade at this point. However, I have started to become more disciplined to do more research to potential make an investment in the coming months.

In the meantime, I am trying to prepare for these outlier scenarios that could lead to financial impacts that many will not be able to offset easily. Whether it be paying down debt or accumulating an emergency fund, having finances in order is an important consideration. The worst that can happen is that you have more capital at the end. Given my learning experiences, I have gone further and putting assets in place for better storing and control of value via Cryptos and Precious Metals. The market for those continues to provide good opportunities for protection as long as done in a diversified manner.

Having a slowdown in the economy is not a bad thing but it seems that the last few recessions have cost politicians, policymakers and the public too much which is why they continue to prop it up. However, I feel that it is creating a larger gap in the bubble that debt and currencies continue to develop. Some on certain extremes are even talking about a total reset which I may not necessarily side with but can understand the logic behind the scenario. So, while the focus these days remains on the trade deal, the reality is that it probably doesn’t matter anymore given the underlying levers at play. Just look at how earnings season has started with Financial Services still making billions of dollars despite a flat yield curve. Easy money? Probably… but the cost is not yet priced in!

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