Financial Outlook September 2019

Macro data peaked at the end of 2017, since then the global economy has been slowing down, the same is happening with the US economy since Q4 of 2018. Far from improving, data says the economy is slowing at a faster rate. Is there going to be a recession? Globally we are already there, not yet in the US, but the truth is that it doesn’t matter. A recession is not necessary to take action and rotate from stocks to bonds and include some gold in your portfolio, only clear signs of a slow down are needed.

The only thing that sustains the S&P at these levels is false hope in magic, either the Fed or the trade agreement with China, one that is very close to its completion for almost a year now. A lot of commentators and charlatans helped make the whole world believe the narrative that China's problems begin and end with the commercial war, narratives cannot be sustained indefinitely when hard data begins to contradict them. China reported the lowest growth of the last two decades despite lowering the repo requirements and making record monetary stimuli, the result to show is a recession in manufacturing PMI: 49.5 (despite creative accounting and invented numbers). This is not a trade war, this is the reality of a global economy in slowdown since the end of 2017.

As Morgan Stanley say: “The slowdown is now broadening out into the non-manufacturing sector. Cracks are also starting to appear in the labor market and the consumer. Geographically, the US will not be immune to this weaker global growth backdrop. ”

Last month I talked about more than 15 trillion dollars of government debt with negative yield (17 trillion at the end of this month) and a few billion dollars of corporate debt. The month passed and leaves us with a record of corporate debt with negative yield of more than 1 trillion dollars. Conceptually a nation can, to some extent, resort to some fiscal and monetary mechanisms to improve its ability to pay and cover its debts, what can a company do that justifies this?

Since July of last year I have been warning to reduce exposure to stocks and increase exposure to metals and mining stocks, and since the beginning of the year I included the recommendation to add US bonds to the mix.

Performance in the last 12 months were:

• S&P  +1.42%
• 10Y Notes +9.38%
• 30Y Bonds +13.8%
• Gold +27.43%

Performance Year to date:

• S&P +17.47%
• 10Y Notes +7.8%
• 30Y Bonds +12.9%
• Gold +19.87%

Of course the S&P YTD is very high, after the worst December in the history of the stock market. Nobody should have to go through capital losses of more than 20%, and that is exactly what happened to passive investors who were invested in shares at the end of last year and are now barely even. The biggest decline in the VA-Long/Short fund in this period was 8%, and the VA-LongOnly fund only 4%. The performance of both so far this year, VA-Long/Short 15% and VA-LongOnly 20%. My expectation is that the VA-Long/Short ends the year well above the VA-LongOnly once Q3 earnings reports begin to appear and the Fed and Trump magic narratives begin to crumble.

When will I change my pessimistic view of the market?

When profits begin to improve and global growths begin to look like it’s bottoming. Meanwhile, US CAPEX is already negative (-0.5%) and 5 of the 11 sectors that make up the S&P are in recession, regardless of whether the bond yield curve is reversed or not.

There will be no acceleration of growth until one of two things happens: a strong reflation triggered by a huge Fed intervention that exceeds market expectations (and the market expects a fairly large intervention), or we enter a recession that dismantles some of the bad business that has been sustained by easy credit for more than ten years.

Meanwhile, control anxiety and remember: Patience is the refined sense of confidence.

For August 2019:

• Metals: I maintained exposure to precious metals and mining companies. I expected a pause in the values of last month, there was no rest for the rise in metals, perhaps the pause occurs in these values.
• US Indices: I kept the short positions for the Russell 2000, the S&P500 and the Nasdaq, in that order (higher risk).
• Bonds: I maintained positions in US bonds throughout the curve.