“Because of the self-confidence with which he had spoken, no one could tell whether what he said was very clever or very stupid.”

— Leo Tolstoy

Friday very clever charts

This week, President Trump declared that April 2 will be Liberation Day in the US — the day US consumers will finally be liberated from inexpensive goods. 

US stock markets don’t seem to think this is a big deal — the S&P 500 was almost exactly unchanged on the week and is still trading a modest 9% below its all-time highs.

But Liberation Day also means US markets will be liberated from cheap financing because it's a package deal: We buy their stuff, they buy our stocks and bonds.

Reneging on that deal may or may not be a good idea, but it's almost certainly a painful one.

The Economist warns that reciprocal tariffs the president says he’ll impose on Liberation Day “would strike a fatal blow to the global trading system.”

Markets don't seem to be pricing that in.

Maybe investors are hoping that world leaders will soon assemble in Mar-a-Lago and amicably agree to remake the global trading system to the president’s liking.

The mooted “Mar-a-Lago Accord” would weaken the dollar by getting the largest foreign holders to sell most of their dollar reserves — but would keep interest rates low by then getting them to switch their remaining US Treasury holdings into new “century bonds.” 

That feels unrealistically cake-ist to me: A low dollar with low interest rates (and high foreign investment without a trade deficit) would be having our cake and eating it, too.

It’s not impossible, I guess, but I doubt that’s what’s keeping the market afloat — markets would struggle to price in the impact of such a radical and unprecedented change to the global economy.

Instead, I think it's more likely that the market is not down as much as the news would seem to dictate — because the news is happening too fast.

When an airborne object is moving so fast that the air it's travelling through cannot get out of its way fast enough, the result is an earsplitting sonic boom.

Something similar may be happening in markets.

Irrespective of whether you think the president’s grand plan is very clever or very stupid, it feels like markets are not getting out of his way fast enough.

If so, we risk a sonic boom that could burst investors’ eardrums.

The rest of the world may not wait to find out which it is.

A Danish MP indicated this week that Denmark will stop buying F-35 fighter jets from the US because “buying American weapons is a security risk that we cannot run” — an extraordinary statement from a country that sent troops to both Iraq and Afghanistan when the US asked for its help not so long ago.

Similarly, Germany will spend $1 trillion to decouple its defense interests from the US — and maybe its economic interests too.

Russell Napier believes the world is moving toward a system of “national capitalism” in which “national savings will be used for national purposes.”

Napier expects this to result in a “structural breakdown in the global monetary system,” that amongst other things, would be bad news for US investors. 

“If we move into a world where every developed world savings institution has to repatriate assets to buy bonds of their own government, they will need to liquidate the one asset they have all crammed into in the past years: the S&P 500. Over the past years, all the world's institutional investors have crowded into large-cap US equities. If they are mandated to own domestic assets, they would be forced to sell US assets. So you would not want to own the S&P 500.”

I’m not sure, though — I think investors have crowded into the S&P 500 because that’s where all the best companies are.

And I don’t think that will change: What other country could plausibly have a hype video celebrating its innovative companies like the a16z one released in the US this week?

My faith in US capitalism is undiminished — but my faith in the efficiency of US stock markets is wavering.

Let’s check the charts.

The only thing that’s certain is uncertainty:

The FOMC is increasingly uncertain about the outlook for both GDP growth and unemployment, as this chart from John Authers shows. Chair Powell also noted that uncertainty around Trump’s plans is “high.” (Which means the chance he helps the president out with rate cuts is low.) 

Making America Underperform Again:

Year to date, the Mag 7 has underperformed German and Chinese large-cap equities by 29 and 36 percentage points, respectively.

The first sign of “national capitalism”?

This is a survey, which makes it a co-incident indicator at best — but, if Russel Napier is even half right, it could be the start of a long rotation out of US equities.

We have a lot more to sell:

Investors’ allocations to equities are at an all-time high. That could prove to be a problem for investors, of course — but non-investors should probably worry, too.  

Equities vs. income:

The Economist notes that the $38 trillion of stocks owned by US households is 1.7x their income. With Americans so exposed to the stock market, “a prolonged stock market slump would have profound implications, both for politics and the economy.”

When you get to a fork in the road, take it:

This chart from Simon White simplifies things for us: If the US can avoid recession, the current correction is a buying opportunity. If not, it’s not. Walter Pies thinks so, too. 

We’re still OK, for now:

The ISM Manufacturing survey remains in expansion territory and the Sahm rule recession indicator is only slightly elevated. 

The market thinks it will probably remain OK:

According to Goldman Sachs’ model, market prices imply there’s an 80% chance we avoid recession in the US.

Let’s hope markets are still efficient enough to keep up with events. 

Have a great weekend, very clever readers.

— Byron Gilliam

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