Financial Outlook October 2019

“You will know then what the great world is. A game of fools and rogues.” - This is how Balzac defined in “Le Père Goriot” the high society of Paris in the 19th century. That "great world" of Balzac closely resembles this "great game" of the markets that is also, in many respects, a game of fools and rogues. Balzac's advice is the same I give to everyone: "Try not to be neither one nor the other."

Now let me clarify some things that I have been repeating:

1. The global slowdown began before the commercial war.
2. If the trade war were resolved today, the slowdown would continue its natural course.

Lets think beyond the narrative that everything depends on the last headlines, trade balances between China and its Asian partners: all in decline. I think that's a little bigger than sino-american trade-war... For example, South Korea saw its exports falling by 21%, 8% compared to the previous year and its imports contracted by 11.1%; in particular, exports to China decreased by 30%.

China is having a significant slowdown in its economy, one of the side effects of the excesses of the Shanghai Accord 2015-16. Specifically, it presents a serious shortage of dollars that is evidenced in the difficulties to refinance an over-leveraged financial system where the devaluation of the yuan presents reliefs that are only temporary.

If we forget for a while about the commercial war and the constant bombardment of twits and headlines, we find ourselves in the longest economic expansion in the United States (in clear divergence with the rest of the world) and showing clear signs of end of the cycle. The most obvious is the signal that the Fed sends when it begins to cut rates, trying to keep up appearances and talking about a mid-cycle cut; the more important is the clear slowdown in GDP growth despite the increase in spending financed through debt; and the most inevitable, margins are decreasing while wages rise.

All this can be disguised in many narrative ways, but sooner or later it inevitably materializes in companies earnings, profits that are contracting and will possibly be worse than expected (following the steps of Autodesk, US Steel and FedEx, among other).

If you read many REPO headlines and FED intervention, the simple version is that financing conditions remain less lax than the market needs, something that is also evident in what is happening with WeWork. The chances of a liquidity event coming up, that strongly increases volatility (as it happened in January 2018), are getting higher.

All economic cycles are similar. The real problems are not recognized until it is too late and then come the surprise, half of the specialized press screams that nobody saw it coming while the other half explains the details of what happened as if they had anticipated something; then central banks apply the same recipes that lead us to the initial problem to begin with, they over stimulate to the point at which no one wants to evaluate the risk behind a loan or an investment.

Returns since the US economy began to slow down. Gold and Bonds outperforming S&P.

For October 2019:

• Metals: I maintained exposure to precious metals and mining companies. Finally there was a break in the rise, I remain holding patiently.
• US indices: I kept my short positions for the Russell 2000, the S&P 500 and the Nasdaq, in that order (higher risk).
• Bonds: I maintained my positions in US bonds throughout the curve.