Tag: Free Trade

2019 Economic Themes: Return of the Bear – Reviewed

2019 Economic Themes: Return of the Bear – Reviewed

  1. Bear Market Comes out of Hibernation.  […]  We contend this reversal gains steam this year as stocks globally will finish 2019 in firmly negative territory.  […] –  We were flat out wrong on this one. After being down 4.45% in 2018, total return on the S&P was an eye-watering 31.29% in calendar year 2019. The MSCI world index was up 24%.
  2. Peak Interest Rates.  […]At the start of 2019, the effective target rate stands at 2.25%-2.50%. While the Fed has signaled a continuation of rate hikes this year and into 2020, we think rates will peak in 2019 and the Fed will pause before potentially cutting rates if/when a recession materializes. […] – We were right on this. The Fed cut rates a bit earlier than we expected, but 2.5% marked the high point for short term rates in this cycle. 
  3. Unemployment Rises.  2018 saw the US unemployment rate reach a 49-year low of 3.7%. […] this expansion cycle looks due for a reversal and we expect the unemployment rate will climb back over 4% in 2019. […] –  We were wrong here. Unemployment dropped slightly over the course of 2019, ending the year at 3.5%. A Brookings institution study released in November noted that 53 million workers in the US are making low wages, with median annual earnings of $17,950. Under such conditions, it is questionable whether unemployment is a good estimate of economic prosperity.
  4. Investors Want Value.  […] We believe value will outperform growth this year as economic expansion slows and investors shift investment capital into more defensive sectors. […] – We were right here, barely. While stocks rose indiscriminately in 2019, The S&P500 Value index was up 31.93% while the S&P500 Growth index saw gains of 31.13%.
  5. The Unwinnable War.  […]We see 2019 ending with some measure of tariffs still in place, continued global hostility towards the Trump administration and ongoing damage to the US reputation and economy. – We were right here. Despite numerous announcements of progress or deals, the trade dispute between the US and China remains unresolved.
  6. Real Estate Reckoning.   […] The S&P/Case-Shiller 20 City Composite Home Price index peaked in April 2006 and didn’t reach a bottom until March 2012. […] We think this streak comes to an end in 2019 and the index will finish the year lower. – We were wrong here, the Case-Shiller index remained largely flat. It stood at 212.66 in December 2018 and the latest data for Oct 2019 has it at 218.43, up 2.7%.
  7. Oil Prices Flounder.  […] we believe Brent Crude will dip below $50 per barrel and finish the year under that level as global trade slows and energy consumption slackens. – We were wrong here too. Brent closed the year at $66/barrel.
  8. High Times for the Cannabis Industry.  […] We expect 2019 will bring more legislation to expand the recreational market and more investments from multinational conglomerates (2018 saw Altria and Constellation Brands invest in the space).  We expect publicly traded marijuana stocks will outperform consumer discretionary stocks in 2019. – We were partially right here. Legalization continues to gain steam, with NY state on track to legalize marijuana in 2020. Though there is no index for Marijuana related stocks, the largest ETF ended the year down significantly.
  9. China Stumbles.  […] we  believe 2019 will continue to be a flat to negative market for Chinese equities. The Shanghai Composite remains around 2,500. This is less than half the 5,178 level reached in 2015, which was lower than its all time high of 5,800 in 2007. – We were wrong here, the Shanghai composite ended the year up at 3,050.
  10. Battery Power.  […] We expect EV sales to continue to grow in 2019, and global liquid fuels growth to be below 1.3%. – We were right on this one. Global electric vehicle sales were up 46% in the first half of 2019, then slowed due to expiring subsidies in China. EV sales for 2019 are expected to still be above 2018.  Global liquid fuels consumption was 99.97 million barrels/day in 2018. For 2019, the figure is estimated at 100.72 million barrels/day, or under 1%.
Q4 2016 letter

Q4 2016 letter

Dear Friends,

We hope you have had a good start to the New Year and wish you the best for 2017. As always, in our first letter of the year we have attached a review our 2016 investment themes and a list of our investment themes for 2017.

The fourth quarter of 2016 revolved around politics, with a focus on the US presidential election. In Jan 2016, we wrote there was a “strong possibility one or both major party nominees will be from outside the establishment mainstream”. In retrospect, that looks like an understatement. A series of unusual news stories and the eventual surprising result of the US presidential election led to sharp drops in US equities in early November. Markets recovered quickly and ended the year close to or at their highs. In some ways this is a relief rally, driven by the realization that much of the Republican establishment will support the Trump administration and vice-versa.

The political upheavals of the past few months have not changed the underlying economic realities confronting investors. We are likely at the tail end of a bull-market that is almost 8 years old, and several risks loom on the horizon. Interest rates in the US will continue to rise as the Fed attempts to normalize historically low borrowing rates. This will modify the calculus for investors as interest bearing assets become attractive and rising rates impact the denominator in equity valuations.

The results of the US election have created enormous uncertainty about the US’s future economic policies, particularly with respect to trade. We believe that workers’ concerns about economic insecurity do require political solutions. We are not, however, convinced that protectionist barriers are the answer to job-losses in the US manufacturing sector (the last US experiment with high tariffs, 1930’s Smoot-Hawley Act, likely exacerbated the effects of the Great Depression). Nor do we believe it is in the US’s long-term interests to loosen environmental rules. The incoming administration seems bent on trying or threatening one or both of these approaches.

Roughly 50% of sales for S&P500 companies occur overseas. This underscores the global nature of the world we live in, and the degree to which US businesses rely on foreign operations. The prospect of a full-fledged trade war with major regions or countries should worry investors deeply. Though some investors may have been emboldened by the November/December recovery, we would advise caution given the significant headwinds and uncertainties facing us.

As always, we have published our investment themes for the upcoming year and reviewed our themes for 2016.



Subir Grewal, CFA, CFP                                                        Louis Berger

Worrisome breeze of protectionism

Worrisome breeze of protectionism

We believe free and fair trade are not only integral to economic growth, but also essential for a sustained global recovery. Barriers to trade reduce efficiency, inhibit growth, and hurt consumers. We are sympathetic to the argument that countries with weak legal protection for individuals can exploit resources and workers in an irresponsible fashion, but we feel in many cases the benefits from trade can outweigh these concerns and often spur the creation of better institutions and laws. We are also particularly wary of trade barriers being erected at the present time because this is exactly the type of action that exacerbated the economic impact of the crash of ’29, and led to the Great Depression. We’re not there yet, but there are some worrying signs of increasing protectionism. Within this context, we would like to highlight, an article in the Economist about the new US tariff on tires made in China, a report in the New York Times on the union which pushed for this tariff, and Arthur Laffer’s op-ed in the Wall Street Journal on tariffs and the depression, and George Will’s Op-Ed in the Washington Post on the tires tariff.