The Dividend Cafe - Four Negative Weeks end with Best Week of the Year

Episode Date: June 14, 2019

Topics discussed: Fed put vs. Trump call - week #2 What Mexico Tariffs? Business Loses Confidence Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. recording quite a bit later than normal. Usually we try to do it around the time of the market open or shortly thereafter on Thursday morning. But a lot of action here today means we're actually recording a lot closer to the close of the market Thursday. So I guess if there's any advantage to that, besides the chaotic day I'm having that offsets the chaotic day I'm having, the advantage is that we have a lesser chance of being wrong in what we say right now about markets on the week. The more time that goes by, the more susceptible we are to a market fluctuation post my recording.

And of course, that could still happen on Friday. But bottom line is we had the biggest week of the year in the market last week. And we responded to that this week with a little continuation of the rally. As we sit here and type right now the market's up another 100 or so points on the week. Not much, it's been kind of modest but coming off of what I think was a 1300 point move last week just dramatic, this is something else. And so there were a a couple little small down

days here this week and a couple small to medium up days but that's where we stand here near the end of the day on Thursday all right I'm going to kind of go through uh for those of you listening and watching the same thing regarding what I basically went through in Dividend Cafe the commentary itself because a lot of it I'm going to keep this whole theme going about what I called last week the Fed put versus the Trump call. And the kind of concerning portion in that side a week ago, obviously, was the pending Mexican tariffs that the president threatened and by the time some of you were reading last week's commentary on into Friday night the president had backed off he had decided not to implement the tariffs and said

that he had gotten some concessions from Mexico on border security and he was happy so on one hand the markets were happy I don't know exactly what the market impact would have been had that not happened. We know that the day after he announced the threat of the tariffs, the week earlier, the markets had dropped close to 400 points on the final calendar day of the month of May. Look, we can't speculate on what didn't happen on a hypothetical, but I would argue that while it is bullish for markets and that I am happy for low-income people buying groceries and for manufacturing employees that work at companies

that import parts from Mexico, that I think it's a good thing the tariffs didn't happen at this point from the vantage point of these different aspects of economic connectivity. I still believe that there is a concern in the markets just from the way it played out that we now know, and if anything, the president perhaps is emboldened in this, that the threat of tariffs is on the table as a negotiating ploy for things that have nothing to do with trade. And so in this case, the president didn't even claim it was about a trade relationship with Mexico. Now, oftentimes when he has used that, like I'm putting tariffs to narrow the trade deficit

with China, I would disagree with that too, okay? But at least then you're talking about a tariff on a trade and you have a problem regarding trade. And that's when that's the excuse being used. Other times it has to do with intellectual property theft in China. And again, there's legitimacy to some of the concerns they're trying to address. The point I'm making, and I'm not saying it as articulately as I'd like, but I really hope you're gathering all this. Capital markets and global economics now have to price in a perhaps perpetual reality that at any point something can go wrong regarding border security or regarding technology transactions. transactions that then the go-to move can be on a unilateral basis we're going to impose significant tax. In this case, so far, it worked out in the sense that the tariffs didn't go

through. The president backed off. But I believe that it's imperative that investors realize that there is a compression of market multiple that comes out of this fear. Look, those tariffs were not ever even processed that he had announced. No paperwork had been filed, anything like that. And as I said, the avoided damage is good news for investors and for participants in that economic activity. However, when we look to what it means in the China deal, for example, one could argue that this victory last week makes the far, far, far bigger needed victory in terms of the China trade deal harder to come by because perhaps you could say that the Chinese now have gotten a look at how

to go about playing in response to the president's MO. But I wouldn't bet on that either because there's a lot of unpredictability around what's going on. And that's what I mean about the Trump call. These things are going to remain uncertain for some time. So let's go into that specifically with China. Let's see, it will be next Thursday, the 20th of June. The president is expected to meet with President Xi at the G20. And my forecast is, I mean, most certainly I don't expect there to be some resolution or some breakthrough moment. But I think it's perhaps, and I guess I'll say 50-50, but I'm making that up, 50% chance that they end up saying, okay, things seem positive.

We really are committed to working it out, so we'll go ahead and put a pause on any new tariffs. That would be like the best outcome, that they just go back to where they were in December, where they pause additional tariff damage and recommit to kind of an engagement, re-engagement around the issue. There are other chances that, you know, they basically don't have that development and they go forward with another tariff implementation on $300 billion of tariffs. And it's very unclear to me if the market has priced that potential in or not. I certainly hope that doesn't happen, but it isn't like a 10 or 20% chance that it could.

I think it's a 50% chance. And anything that's a 50% chance means the market has gotten some degree of discounting and pricing baked in there. So as far as an eventual trade deal with China, you have a political dynamic at play. There's been very little damage to the president politically around any of this so far. The vast majority of people that are upset about it were upset with him anyways. The vast majority of people that love it loved him anyways.

And then the real effects of it that I fear have not yet trickled in because he's been pausing and hemming and hawing and negotiating and nothing's really gone fully forward. So what exactly would happen if we went all the way? And I think that's what a lot of the dividendcafe.com focuses on this week is continuing impairment to business confidence. Now we got some conflicting data in business confidence this week. You had a CEO survey that was very bearish that was down five or six percentage points month over month and their CEO optimism but those are very large companies publicly held. But then you had a small business optimism survey that ticked a bit higher. And I guess you could argue that the small business number would be more of a laggard because the effects of

trade would hit some of the small companies at a later time. And it's the big capex spenders and the large public companies that would be more feet on the ear to the ground on this stuff. That makes sense, but I wouldn't bet heavily on that. I would just say at this point, it's somewhat uncertain in where the business direction is going to go. But I do know the clock's ticking. And I do know that we see weakness in ISM manufacturing. I've talked about for several weeks the weakness in capital goods orders growth. And so these things are the reason why the time sensitivity of a trade deal with China is very important. And more and more, I want to be prepared for the possibility

that a China trade deal does come and it comes too late to stop what could be some economic slowness and then you also have the risk that what is clearly, I can't say this enough, I just want to roll my L and R here enough to make the point clearly, the market's baked in that the Fed is going to come offer a rate cut in September. I don't think they will here in June, Even then it's possible. But with the Fed Funds futures market, which is the chart of the week at DividendCafe.com this week, what they're speculating on is that there will be a rate cut in September and another one by December.

The one way or the other, we end up at a half point lower in the Fed Funds rate by the end of this year. If there's some China arrangement that calms things down, if you get a resurgence in some of the inflation data, which I do not expect and you're not getting now, but if all of a sudden the Fed pulls away the punch bowl from the market, you could set yourself up for a pretty significant drop. Now, that would be that last part of it about the Fed kind of pulling away and playing the role of a tease in this case is extremely unlikely.

And the Fed is allowing this narrative to continue now. I guess it's been about almost two weeks, about 10 days, 11 days that no, no, no, we're going to be there. Fed funds futures have baked it in and they're not coming out and discounting it so um that would be our speculation at this point fed put is on trump call is on by trump call it's not a personalized or policy driven call it's more a paradigm that's being set now around the possibility of using tools to negotiate in a handful of transactions that have a direct impact to the global economy. So that's everything I want to talk about right now. In the DividendCafe.com, we do talk about some of the political issues. I think that the drug pricing issue is quite interesting that you have effectively a price control measure

that is circulating around the house. You have what you could argue is even perhaps more unfriendly for markets out of the White House, the administration idea to index drug pricing potentially to international drug prices, which I think is ironic for those who loathe globalism, but be that as it may. And then you have the Senate proposal, which is not great, but is certainly, I think, the most reasonable, in which case you would not affect drug pricing, but you would put a cap on what seniors would be spending out of their Medicare B and Medicare D. And that probably has a lot of political traction behind it. So we've got to continue watching that as it pertains to the drug sector.

We'll certainly have to watch what's going to happen with NAFTA 2.0 because definitely the odds of it passing have gotten higher now this week with the Mexico tariff issue going away. But Speaker Pelosi has a lot of power here. And I read a report this week about her historical track record in the President George W. Bush administration of delaying and so forth and kind of being obstructionist on three different trade bills that were before the House when he was president. So it's not a

gimme. Now, I think that the votes are in the House, even a Democrat majority-led House. I think that the president's trade bill would pass if she puts it up for a vote, but she has the ability to not put it up for a vote. If she just flat out refuses to put it up, I think the White House will just simply pull out a NAFTA. And I don't think anyone wants that to happen on any side. And more than likely, what she would do is sort of just delay. And that's where the question mark lies. But at this point, I would say that there's an increasing probability of NAFTA 2.0 getting passed, which is one less political trauma that markets would have to deal with. So I would argue that's a good thing for markets. We're a good month away still from earnings season happening.

So in the meantime, if I'm sitting around talking about the Fed and trade a lot, it's because the Fed and trade are all there is to talk about. I will be coming to you next week with our Dividend Cafe podcast and video from Grand Rapids, Michigan, where I'll be speaking at an economic symposium that I speak at every year. And in the meantime, please reach out to us with any questions. There's so much going on. We hope you've gotten a lot out of this week, and we appreciate you continuing to be a viewer and listener of The Dividend Cafe. Thanks so much.

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