It is not one story, but so many stories, that is leading me to the conclusion that it’s as scary an environment for investors as it’s ever been. It is not a single item, or event, but the fact that we are being bombarded with supersized issues, whether it is at home or abroad. Investors are, in effect, under siege.
In the U.S., the pushback against President Donald Trump and his plans proceed unabated. Democrats, Republicans — it doesn’t matter. For one reason or another it’s like the entire establishment is barking, with great fervor, at our outsider president. I am paying special attention to all of this because I think it means that Trump’s agenda, on a wide variety of fronts, will take far longer to put into effect than the markets grasp.
Whether it is tax cuts, or some form of border tax, or his proposed cuts to Medicaid and food stamps, or less regulations, or changes to the tax code — you can just keep going. There is so much resistance, in every case, that whatever may get passed into legislation is unlikely to happen anytime soon. Consequently, the timeline should be noted as a negative for the markets as it will weigh upon them.
The equity markets will fluctuate, of course, but we have seen the vast majority of appreciation in this cycle. I said on Nov. 8 and 9 to buy equities and they have had a great run. The appreciation is beginning to stall and I suggest a more conservative course, relying on cash flows and the accumulation of intermediate bonds coupled with closed-end bond funds to produce a 7% to 7.50% total return. It is a far safer strategy when the political and economic currents are so frenzied that they may become unsafe.
Moody’s just downgraded China to A1 from Aa3. If you just looked at the headlines then you might shrug your shoulders and move on, but the underlying reasons they gave for the downgrade might cause a different reaction. This was the first time since 1989 that China’s ratings have been cut by Moody’s and that, in itself, is a reason to pay attention.
Moody’s estimate that China’s general government budget deficit was around 3% of gross domestic product last year, which is a number that I believe is far off from actuality, as I do not believe that the official growth numbers are accurate. I am not alone here, as Gary Schilling puts Chinese growth at 3.10%. What is frightening is Moody’s estimates that by the end of 2018 China’s debt to GDP ratio will rise to 40%, and closer to 45% by the end of the decade. That would mean the leverage China is using currently, to maintain its global position, is quite likely understated.
S&P this week warned about Brazil, putting it on the negative watch list. “Near-term uncertainties around President Temer’s political viability and the potential for a prolonged or disruptive transition process have heightened downside risk to the rating,” S&P stated. The country is rated “BB” and the prospects do not look good as Michel Temer is slapped with corruption charges. The story may get far worse before it gets better. One more hot spot to avoid.
Then, of course, there was the terrible incident in Manchester, England. The U.K. has raised their terrorism alert to its highest level and the country has added, significantly, to their boots on the ground. Terrorism is not country specific and while the markets mostly ignore all of this there may come a point when they do not, either because of the amount of activities or some additional horrible incident. No one likes to talk about all of this, but it cannot be ignored either.