Saturday, September 8, 2018

Changing our macro outlook

The U.S. stock market has been on a tear, especially since 2014 including a few small set backs such as the 2016 ‘earnings recession’. But, as pointed out before, this is the U.S. 2009 – 2018 bull market in stocks – one of the longest lasting in history. Whenever there is a bit of political instability, rather than turning to gold, many investors treated the U.S. markets and the dollar as safe haven.

But guess what, the world is changing. Just ask Canadians today if they are still cozy with the U.S. and their narcissistic president. You know, before Trump, I barely knew how to write ‘narcissistic’ nor did I know its meaning very well. No longer, it is becoming a household word. This weekend Trump threatened that if we, Canada, don’t sign NAFTA he will destroy our economy.  Lately, the change in attitude towards the U.S. in the world has become like a landslide and it is for the worse if you consider yourself a U.S. citizen. The Canadian press and Canadians are asking themselves whether they can consider their neighbor to the South any longer as a friend?  Does Trump realize how much damage he is doing?  It is not only NAFTA and Trump’s narcissistic trade negotiation tactics. Many Canadians invest in the U.S. – in this blog I often advocated investing more in the U.S. than in Canada, especially with Justin’s Liberals in power and now Bill 69 (another Liberal atrocity).  But no longer.

You see, with an unstable president who inches, no matter how unlikely today, towards impeachment. Many ex-Whitehouse execs publish how irate and unworkable the Whitehouse these days is – who needs ‘House of Cards’ which so suddenly collapsed. The U.S. is so polarized and divided today it hardly can be considered a unified country. Earlier I thought that rising interest rates would spell the end of the current U.S. bull market. Now, I think that the Trump presidency could prove to be another market crash trigger. With Trump admonishing Congress and Senate to stay the hell out of his trade negotiations or else… you can decide how little regard the man has for democracy.  Not only does he seem to adore dictators and to kick his allies into the teeth, he doesn’t even respect his own country's democratic institutions. Is that how demagogues like Hitler gradually took over Germany?

Look, Hitler’s rise was not only the fault of a humiliated German populace in the 1930s. After World War I, the economic sanctions put on Germany nearly destroyed that country. There were stories of Germans who tried to buy goods in the market places of my home town; the eastern Netherlands.  Several Dutchman at the time used the German Reichsmarks, which were as inflated as Venezuela’s is today, to publicly wipe their arses.  Not very nice and extremely humiliating for the onlooking Germans. No wonder they elected Hitler who promised and did build today’s still famous German Autobahns as well as cars affordable for the people, das Folk. He named those cars “Volkswagen” and they were designed by a famous car designer named Porsche. If you wonder why Porsches had so much in common in design with the Beetle, now you may have figured it out. 

In the U.S. the divide between rich and poor is worst amongst OECD economies (see an earlier post). Education in public schools is often considered atrocious. Yet, compared to earlier times, the economic and class inequality had improved dramatically up to the year 1970, since then no noteworthy progress has been made. This underlies the often-quoted lack of inflation adjusted wage growth since the 1970s. It seems that this lack of progress and the uncertainty of unemployment in an economy aimed to automate is the root of so much discontent in the U.S. population. It may be why many Canadians are happier in their much more equalized society. Not sure whether this is a bit too simplistic but how else can one address these macro trends? 

It is often quoted that 80% of public shares are owned by 20% of U.S. citizen. Well, it may be strange, but if you don’t save to accumulate assets, whatever the excuse, you do not own assets such as  stocks. If you don’t own stocks (and  other assets) how can you enjoy the compound growth of your assets? With nearly 68% of U.S. citizen living from paycheque to paycheque and not saving, is it then any wonder that the ‘rich get richer’?   It is not that to make money you need to have money.  It is that to make money you must have SAVINGS!

You may look with envy at the 10% but blame falls also on the 90%. Yet no matter why, many feel nearly as hopeless and humiliated as the Germans between World War I and World War II.  So just like Hitler came to power we now must deal with the ‘Great Disruptor’ who in the end, likely causes more damage than good. 

I truly hope that the November election will help prevent the U.S. from sliding deeper and deeper into the Trump hole and I certainly hope that we don’t slide to the extremes of a Hitler analogy. But there is likely a lot more instability to come. Indeed, the world may lose confidence in a Trump-led economy that insults all international investors, allies, and trading partners alike. Just like me, international money may lose confidence in the U.S. as safe haven and that may trigger a major crash rather than a Trump impeachment would, as claimed by his narcissist.
The other question is, where will trade go once we realize the unreliability of the U.S. as a trading partner. Europe is also on the road of recovery, currently it is still stimulating its economy with bond repurchases and extreme low interest rates, but the end is in sight. So, is it time for Europe to show the economic resurgence that we have seen in the U.S.?  Many believe so, including me. A more prosperous European Union, truly the world’s largest economy, and a China that will shift more of its production to its own growing middle classes, to that of India and to a revived Europe. In such a world, the U.S. may stand at the side lines. The current hostile mood of Canadians toward Trump’s U.S., just like we are doing with the pipelines and LNG, may have us look to other trading partners, as already illustrated by the Trans Pacific Trade Pact and Canada-Europe Trade Agreement (CETA). 
If Trump thinks he doesn’t need the rest of the world, then he and his country maybe holding the empty bag much faster than based on demographics as pointed out on earlier blog posts. Canada should steer away from being the largest trading partner of the U.S. and I think that our relation with the U.S. has already been damaged for decades to come. No longer will Canada see its neighbor to the South as a big brother or friend and ally. Thank you, Trump and Mr. Obama who blocked the Keystone pipeline for years.

This is what I plan to do over the coming year when much of this is likely coming to a head. With emerging economies, including China, in bear market territory, I will use the opportunity to build my investment portfolio there. I also will ad more to my European holdings and of course, I will become more Canada focused after the coming elections – especially when Trudeau is gone. With Trudeau I don’t see Canada as truly investable other than banks and some oil and gas. Just imagine the chaos that will be brought on by a Bill 69! Severe reduction of my U.S. holdings but I will hold on to companies like Disney, U.S. energy stocks and worldwide megacompanies like JNJ or Cisco. New target allocations for stock portfolios: Canada 20-30%; U.S. 15-20%, Europe 25-35%, China 10% and the rest of the world:20% or so.

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