Financial Outlook December 2019

I'm late this month, essentially because my portfolio is going nowhere in recent months, so I took extra time to review my beliefs about the market and the economy. I was just reading Proust and I found this:

Facts don't penetrate the world where our beliefs live, and since they did not give them life they cannot kill them; they may be constantly denying them without weakening them.

This quote has unlimited uses in the world of investments, and it reminded me that we must look at the world with humility and the certainty that many of our beliefs are surely wrong.

Since September/October the market is convinced that the worst is over, and that thanks to the future trade agreement and central bank intervention, economic growth will resume its path of sustained growth. The reported GDP, PMI and ISM do not support this belief, they show a fairly clear picture of the end of the expansive cycle.

The North American GDP falls without finding a floor, the same goes for SP500 earnings (while valuations continue to rise, going from a global PE of 14.4x at the beginning of the year to one of 19.3x)

The global economic slowdown is very real, China is a serious problem for the rest of the world, because it provides the marginal growth on which the entire structure rests. The new historical highs reached by the SP500 are also very real, and that is the belief that I have to reevaluate (being bearish for the whole year now)... It's true that compared to 2007, the world is enormously more indebted (especially corporations), central banks have much less ammunition and market valuations in relation to GDP are ridiculously high (2000 bubble high), all accompanied by a sharp slowdown and much larger deficits. But, as the adage says, the market may be wrong much longer than I can remain solvent.

While macro looks worse by the day, it seems that many investors believe that hard data is less important than the hope of an immediate recovery in the style of the hopeful WeWork earnings slide.

The truth is that November was not very generous with my portfolio, not so much because of the short positions (which are smaller) but because of the rise in US bond yields that impact on bonds and assets sensitive to these rates (precious metals and mining).

Now the question that is on everyone's head, did we see the roof on November 27? I really don't know, I thought the roof had been in October of last year, along with the growth rate, something the Russell agrees with, but SP500 does not. What I am quite sure is that we are not going to see any V recovery in GDP, nor on PMI, or ISM. We were supposet to saw this in the second half of this year, until now all these values have only worsened and for the last quarter of the year I think we are going to see a contracting GDP.

There are many beliefs, and in different time horizons, some contradictory ones may be valid. No doubt there were many who, even with a bearish vision, made upward trades based on market expectations. And under controlled conditions, these trades were undoubtedly positive from the point of view that generated money. That does not make the decision to have some short positions in bad decisions, the two most influential variables in the price of financial assets are growth and inflation (through the profits of companies), and today the two variables say that the market should be looking down.

I said it already, I repeat: I'm going to get bullish with US stocks when I see the GDP make a consolidated floor, for now it seems that hopefully that would be sometime on the second half of next year. Meanwhile in Crescat they mention a long list of macro imbalances and things that seem about to explode.

• Highest global debt / GDP ratio in history
• Underlying problem of passive investment that has led to high historical valuations of US equity
• China's bank assets valued at USD 41 billion, a major mismatch compared to its 13.6 billion GDP economy
• $ 17 billion of sovereign debt of negative performance that may have peaked in August 2019
• Excess private capital/risk in opaque assets, highly leveraged companies and often unprofitable businesses disguised as "disruptors of the economy"
• Record indebtedness of US corporations
• Short selling of volatility, used to improve performance in a world where fixed income is saturated, the additional return is obtained in exchange for accepting an asymmetric risk
• Technology bubble 2.0 with extraordinary valuations in SaaS, certain FANG + actions, many recent IPOs.

And the catalysts that suggest that there's not much time:

• Treasury Bond yield curve exceeded the critical inversion threshold of 70% that preceded each of the last six recessions
• Labor supply in contraction, unemployment rate in cyclic minimums
• The Atlanta Fed and the New York Fed have lowered the expected GDP throughout the year and approaching recession levels.
• Russell 3000 corporate profits contracted in the last quarter
• Increase in "insiders" sale of shares
• Manufacturing PMI and ISM of services at recessive levels
• Construction spending in contraction
• Cancellation, delays and disappointments in the latest IPOs
• Liquidity crisis that triggered interest rates in the US Treasury overnight repos market
• Inflation rate above the entire bond yield curve
• Biggest drop in commercial and industrial loans since the fall of 2009

For December 2019:

Metals: I maintained exposure to precious metals and mining companies.

US indices: I keep my short positions in the Russell 2000 and the SP500, hoping that we have already seen the “blow off top” but ready in case there is rope to cut losses and re-enter later (greater risk) 

Bonds: I increased my positions on the short side of the bond curve (short duration), sooner rather than later the Fed will surrender to market expectations.