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May 25, 2018

Chaos in the Face of Inflation Optimism

Investors have navigated a tightrope this year, with a few painful drops along the way. Three of the five steepest one-day point declines in the entire 122-year history of the Dow Jones Industrial Average all occurred in 2018.
The largest ever drop in the Dow happened on February 5, 2018, when the index plunged 1,175.21 points due to fears of rising inflation and borrowing costs.
Stocks almost lost their footing again yesterday, but the Federal Reserve came to the rescue. The Dow Jones Industrial Average, S&P 500 and Nasdaq all inched into the green, after the three indices spent most of the session in sharply negative territory. Release of Federal Reserve minutes today indicating a calm attitude about inflation helped pare losses in late trading. The session was volatile.
The Fed prevented a market rout yesterday, but mounting dangers are too great to ignore. We’re due for additional big sell-offs, which are only worsened by algorithmic “machine trading.”
Remain wary of the bullish pronouncements of government officials and their media shills. All too often, reassuring platitudes uttered one day are directly contradicted in 24 hours (or sometimes in minutes). It’s headline risk… on steroids. In this uncertain climate, large-cap momentum stocks are particularly vulnerable.
Global growth is slowing, inflation is stirring, bond yields are rising, public and private debt around the world is mushrooming, “populist” insurrections threaten social stability, North Korea remains untamed, Russia has gone rogue, political scandals engulf the White House… shall I go on?
I’m not an alarmist by nature and I take a dim view of perma-bears and fear-mongers. However, it’s important for investors to face harsh realities when they actually arise.
The catalyst for the current volatility was the realization that trade disputes between the U.S. and China won’t be resolved anytime soon.
Trump initially threatened to impose $50 billion in tariffs on Chinese goods. China retaliated with tariffs on U.S. products, especially agricultural goods produced in “red states” that voted for Trump in 2016. Trump responded by threatening an additional $150 billion in tariffs. This tit-for-tat has spooked markets.
Indeed, the international trade framework involving all regions, not just China and America, is devolving into chaos. Investors who thought otherwise have been partaking of the “hopium” pipe.
Hopium is a term that I like to use for unrealistic hope that’s pursued like a drug. This habit-forming investment behavior is dangerous to your portfolio.
Geopolitical risks worsen…
You can add Turkey and Italy to the list of global crises. Turkey’s currency is plummeting to record lows. Italian borrowing costs are soaring on worries that the incoming coalition will hike government spending and walk away from the country’s huge debt.
President Trump today threw more cold water on Treasury Secretary Steven Mnuchin’s previous comments that the trade war is “on hold.” Trump said the current negotiating track seemed “too hard to get done,” a day after telling reporters that he was unhappy with the talks.
Reports also surfaced today that the president’s trade negotiating team is at each other’s throats, as the hawks battle the doves. The U.S. seems to have no coherent industrial or trade policy, whereas China is positioning itself to dominate most of the world’s key industries for decades to come. The U.S. is girding for battle… with itself.
The planned June 12 summit between President Trump and North Korean leader Kim Jong-Un also is in serious doubt, as the two leaders engage in testy exchanges. After luring Trump with softer rhetoric, Kim is behaving as a hardliner again, in a tactic reminiscent of Lucy jerking the football away from Charlie Brown.
The global economy enjoyed brisk, synchronized growth in 2017 and investors had expected this growth to continue in 2018. However, much of this expansion was fueled by an increase in trade.
These anxieties were underscored Wednesday, with release of the flash IHS/Markit Eurozone Purchasing Managers’ Index (PMI), which showed the single-currency European economy slowing more sharply than expected. The PMI fell from 55.1 in April to 54.1 in May, hitting fresh 18-month lows. The expected reading was 56.
The PMI for May, together with the April reading, indicated a second consecutive quarter of growth in the euro zone of only 0.4%. An economic slowdown already is underway; a trade war would only exacerbate it.
Wall Street has been traversing a risky line. It won’t take much for a bad tumble.
Courtesy of John Persino, Investing Daily (More from Investing Daily Here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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