S&P 500: Donald Trump and the next recession

Treasury yields continue to fall, with the 10-Year testing long-term lows at 1.50%. A sign that investors are growing increasingly risk averse.

10-Year Treasury Yields

Crude oil prices remain weak; a bearish signal for the global economy. Breach of support at $50/$51 per barrel would warn of a decline to $40.

Nymex Light Crude

Volatility (21-Day) above 1.0% on the S&P 500 is flashing an amber warning. Breakout above 2940 is likely and would signal another test of 3000. But expect stubborn resistance at our 3000 target level.

S&P 500 Volatility

Bearish divergence (13-Trend Index) on the Nasdaq 100 warns of secondary selling pressure. Breach of 7400 would warn of a test of primary support at 7000.

Nasdaq 100

Robert Shiller maintains that Donald Trump is unlikely to survive a recession:

“So far, with his flashy lifestyle, the US president has been a resounding inspiration to many consumers and investors. But his personal narrative is unlikely to survive an economic downturn….the end of confidence in Trump’s narrative is likely to be associated with a recession.

During a recession, people pull back and reassess their views. Consumers spend less, avoiding purchases that can be postponed: a new car, home renovations, and expensive vacations. Businesses spend less on new factories and equipment, and put off hiring. They don’t have to explain their ultimate reasons for doing this. Their gut feelings and emotions can be enough.”

I would go further and argue that Trump’s management style is likely to cause a recession.

Some of the aims the President is attempting, like addressing China’s unfair trade practices, are vitally important to long-term US interests and he should be given credit for tackling them. But his constant hyperbole, erratic behavior, with a constant mix of bouquets and brickbats, and on-again-off-again tactics, has elevated global uncertainty. Consumers are likely to increase savings and cut back on expenditure, while corporations may cut back on hiring and new investment, which could tip the economy into recession.

GDP growth contracted to 2.3% in the second quarter, while growth in hours worked contracted to 0.92% for the year ended July 2019, pointing to further falls in GDP growth for the third quarter.

Real GDP and Hours Worked

August employment figures are due for release next week and will either confirm or allay our fears.

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value.

Hope is not a strategy

Bob Doll’s outlook this week at Nuveen Investments is less bearish than my own:

Trade-related risks seem to be growing. President Trump looks to be holding out hope that the U.S. economy will stay resilient in the face of escalating tariffs and rising tensions. So far, the U.S. economy has not faltered, thanks largely to continued strength in the consumer sector and labor market. But if business confidence crumbles (as it has in parts of Europe), it could lead to serious economic damage…..

The president’s recent actions to delay the implementation of some new tariffs show that he is sensitive to the market impact of his trade policies. But the erratic nature of his on-again, off-again approach adds too policy uncertainty. At this point, we can’t predict the ultimate economic impact from these issues. Our best guess is that the U.S. remains more than a year away from the next recession, but risks are rising. In addition to the solid consumer sector, we don’t see financial stress in the system. Liquidity is still broadly available, and fixed income credit spreads are generally stable outside of the energy sector.

With additional Federal Reserve rate cuts already priced into the markets and bond yields falling sharply, the only catalyst for better equity market performance could be improving global economic data. We hold out hope that the global economy will improve, and still think there is a better-than-even chance of manufacturing activity and export levels to grow. But those improvements will take some time, suggesting equities will remain volatile and vulnerable for now.

Where we seem to differ is on the inevitability of the US-China trade war escalating into full-blown disengagement. This week’s events have not helped.

China’s national English language newspaper, Global Times, under the People’s Daily, announced new tariffs.

Global Times

Followed by an admission that the timing of the announcement was intended to cause maximum disruption to US stock markets.

Global Times

The inevitable Twitter tantrum ensued.

Donald Trump

The President also tweeted “Now the Fed can show their stuff!”

He is deluded if he thinks that the Fed can help him here. The best response would be announcement of a major infrastructure program (not a wall on the Mexican border). Otherwise business confidence will decline due to the increased uncertainty. Business investment will contract as a result and slow employment growth.

Retail sales have shown signs of recovery in recent months but will decline if consumer confidence erodes.

Retail Sales

Especially consumer durables such as light motor vehicles and housing.

Consumer Durables Production

The global economy is already contracting, as indicated by falling crude oil

Nymex Light Crude

…and commodity prices.

DJ-UBS Commodity Index

Volatility (21-Day) is rising as the S&P 500 tests support at 2840. Breach is likely and would test primary support at 2750.

S&P 500 Volatility

Bearish divergence (13-Week Money Flow) on both the S&P 500 and Nasdaq 100 (below) warn of selling pressure. The Nasdaq 100 is likely to test primary support at 7000.

Nasdaq 100

The Russell 2000 Small Caps ETF (IWM) is testing primary support at 146. Follow through below 145 is likely and would signal a primary down-trend.

Russell 2000 Small Caps ETF

Fedex breach of support at 150 would also warn of a primary down-trend and slowing activity in the US economy.

Fedex (FDX)

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value because of elevated risk in the global economy.

No US-China trade deal

“On Monday, US President Trump told reporters that he would impose tariffs on an additional USD 300 billion of Chinese goods if Xi Jinping doesn’t meet with him in Japan.” ~ Trivium China, June 12, 2019

Trump is doing his best to kill any chance of a trade deal. He is making it impossible for Xi to turn up for a G20 meeting. To do so would be admitting defeat. Kow-towing to Trump would totally undermine Xi’s standing in China.

President Trump should look in the mirror

President Trump has repeatedly attacked the Fed and his recent appointee Jerome Powell for raising interest rates. In an interview with the Wall Street Journal, the President made clear his displeasure, stating that he sees the FOMC as the biggest risk to the US economy “because I think interest rates are being raised too quickly”.

What the President fails to grasp is that his actions, increasing the budget deficit when the economy is thriving, are the real threat. Alan Kohler recently displayed a chart that sums up the Fed’s predicament.

Unemployment and the Budget Deficit

The budget deficit is normally raised when unemployment is high (the scale of the deficit  is inverted on the above chart to make it easier to compare) in order to stimulate the economy. When unemployment falls then the deficit is lowered to prevent the economy from over-heating and to curb inflation.

At present unemployment is at record lows but Trump’s tax cuts have increased the deficit. The Fed is left with no choice but to steadily increase interest rates in order to prevent inflation from getting out of hand.

Real GDP growth came in at a robust 3.0% for the third quarter, while weekly hours worked are rising.

Real GDP and estimated Weekly Hours Worked

It’s the Fed’s job to remove the punch-bowl before the party gets out of hand.

Gold as ‘Trump insurance’

Yesterday’s solid blue candle on the gold chart [XAUUSD] confirms my view of the precious metal as a form of “Trump insurance”. After Trump and North Korea exchanged threats suggesting nuclear retaliation, gold gained 1.32%, breaking resistance at $1275/ounce. Follow-through above $1300 would signal a primary advance, with a target of $1400*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

From the BBC:

US President Donald Trump says North Korea “will be met with fire and fury” if it threatens the US.

His comments came after a Washington Post report, citing US intelligence officials, said Pyongyang had produced a nuclear warhead small enough to fit inside its missiles.

This would mean the North is developing nuclear weapons capable of striking the US at a much faster rate than expected.

The UN recently approved further economic sanctions against the country.

The Security Council unanimously agreed to ban North Korean exports and limit investments, prompting fury from North Korea and a vow to make the “US pay a price”.

The heated rhetoric between the two leaders intensified after Pyongyang tested two intercontinental ballistic missiles (ICBM) in July, claiming it now had the ability to hit the US.

Mr Trump told reporters on Tuesday: “North Korea best not make any more threats to the US. They will be met with fire and fury like the world has never seen.”

Gold tests resolve

The Dollar Index is in a primary down-trend. Short-term support is unlikely to hold. The long-term target is the 2016 low between 92 and 93.

Dollar Index

Silver often acts as a lead indicator gold. Testing primary support at $15.50/15.60 per ounce, breach would warn of a primary down-trend.

Silver

I have been bullish on gold since the election of Donald Trump as president. My comment last week was:

“Let me put it this way: recovery of gold above $1250 would not be a surprise. And would test resistance at $1300….”

Gold is trending lower, breach of $1215 warning of a test of primary support at $1200.

From a fundamental viewpoint, I can find no strong argument to support a lower gold price:

So I remain bullish on the long-term outlook for gold. But a peak below zero on Twiggs Trend Index warns of weakness. Breach of primary support at $1200 would mean that all bets are off.

Spot Gold

Warsaw: Trump unequivocally commits to Article V | CNN

….As long as we know our history, we will know how to build our future. Americans know that a strong alliance of free, sovereign and independent nations is the best defense for our freedoms and for our interests. That is why my administration has demanded that all members of NATO finally meet their full and fair financial obligation.

As a result of this insistence, billions of dollars more have begun to pour into NATO. In fact, people are shocked. But billions and billions of dollars more are coming in from countries that, in my opinion, would not have been paying so quickly.To those who would criticize our tough stance, I would point out that the United States has demonstrated not merely with words but with its actions that we stand firmly behind Article 5, the mutual defense commitment. (Applause.)

Words are easy, but actions are what matters. And for its own protection — and you know this, everybody knows this, everybody has to know this — Europe must do more. Europe must demonstrate that it believes in its future by investing its money to secure that future.

That is why we applaud Poland for its decision to move forward this week on acquiring from the United States the battle-tested Patriot air and missile defense system — the best anywhere in the world. (Applause.) That is also why we salute the Polish people for being one of the NATO countries that has actually achieved the benchmark for investment in our common defense. Thank you. Thank you, Poland. I must tell you, the example you set is truly magnificent, and we applaud Poland. Thank you. (Applause.)

We have to remember that our defense is not just a commitment of money, it is a commitment of will. Because as the Polish experience reminds us, the defense of the West ultimately rests not only on means but also on the will of its people to prevail and be successful and get what you have to have. The fundamental question of our time is whether the West has the will to survive. Do we have the confidence in our values to defend them at any cost? Do we have enough respect for our citizens to protect our borders? Do we have the desire and the courage to preserve our civilization in the face of those who would subvert and destroy it? (Applause.)

We can have the largest economies and the most lethal weapons anywhere on Earth, but if we do not have strong families and strong values, then we will be weak and we will not survive. (Applause.) If anyone forgets the critical importance of these things, let them come to one country that never has. Let them come to Poland. (Applause.) And let them come here, to Warsaw, and learn the story of the Warsaw Uprising….

Source: Trump’s speech in Warsaw (full transcript, video)