August 18, 2019

The Global Political Recession Summons The Global Economic Recession

Waddell & Associates

Beginning with the Bottom Line:


Trump’s 10% tariff tweet didn’t cause a global growth recession, but it may have revealed it.  When analysts (us included) scrambled to adjust their forecast models for even more economic drag from tariffs, the fragility of the global economy became more apparent.  This led institutional investors to quickly adjust allocations, causing a collapse in interest rates and further inversions of the yield curve.  Equity market algorithms reacted predictably, leading to swift and jarring market movements.  While we do not believe a US recession is imminent, the data offshore is discouraging.  As evidence, global central banks have begun end-cycle monetary easing measures with the US now following suit.  We welcome the sure-to-come Trump tariff relief rallies but question their ability to divert the global economic undertow moving decisively towards our shores.  In response, we have begun hedging our global equity portfolios as risk/reward balances shift.


We will film an update to our outlook video this coming Wednesday to help clarify the current economic and market histrionics. If you have any burning questions, please email them to us at [email protected].


I imagine the Fed will reassure markets as they stage their Jackson Hole conclave next week.  Furthermore, with investor sentiment decidedly pessimistic, a relief rally may transpire should any good news make the news.  Emotions and market volatility correlate, but don’t get triggered.  We have emotions too, but we steadfastly focus on the fundamentals.  In short, relax.  Call if you need us and remember… our money is invested in the same strategies as your money.  Let us worry for you.



The Full Story:


Trade Alert

This week, we lowered our stock market exposure across our global equity exposure from 100% to 90%.  Our portfolio management discipline directs us to reduce risk levels at end-of-market cycles and increase them at the beginning.  This does not indicate that we have lost wholesale confidence in the present market or this economy. However, our macro work indicates that mid-term downside risks now exceed the upside potential.  We do not take hedging lightly and have no compulsion to try and frenetically time markets.  We last applied hedges to our portfolios in 2007.  Downturns that accompany recessionary periods create enough downside deviation to compensate for the inability to perfectly time tops and bottoms, making recessionary periods worth hedging.  Lastly, our portfolio design enables us to hedge up to 40% of our overall market exposure, making this step only a partial step, and perhaps the only step….or perhaps the beginning of a more defensive campaign.  Time will tell.


The Global Political Recession


chart 1 2


Political anxieties across the globe have risen to historic levels.  I will remind our readers that we invest in companies, not governments, making us somewhat immune to the typical hysteria over policy proclamations.  Unfortunately, the current mix of global policy actions and rhetoric has congealed into a deglobalization directive for the world economy.  Clearly, trade levels between the US and China have fallen, but Hong Kong and China have now gone to fisticuffs, and the UK seems poised to exit the Eurozone without an agreed upon plan.  Meanwhile on the back pages, Italy, Latin America and the Middle East all struggle with populist uprisings.  While there are no perfect indices for tracking globalization, comparing the level of world trade growth with world GDP growth makes a useful proxy:


chart 2 1


Clearly, growth in trade throughout the 90’s and 00’s exceeded growth in global GDP as NAFTA and China’s entrance into the WTO reduced trade frictions significantly.  However, since the Great Recession, governments have struggled with populist impulses arising from global wealth disparities encouraging reversal.  This has led to a rise in nationalism and a new round of international resentment.  Donald Trump didn’t create this balkanization.  Donald Trump is a symptom of the disease.  Intuitively and empirically, more trade makes economies more efficient and productive.  Less trade makes economies less efficient and less productive.  The current political energy devoted to deglobalizing the world economy isn’t new, it’s just a more bombastic continuation of a trend.


The Global Economic Recession


chart 3 2


Recent economic data releases place Germany, Britain, Italy, Mexico, Brazil, Argentina, Singapore, South Korea, Russia and Hong Kong on the edge of recession.  Macro-mavens will recognize that most of these countries rely heavily on exports for growth.  Here are exports as a percentage of GDP: Germany (47%), United Kingdom (30%), Italy (32%), Mexico (39%), Singapore (176%), South Korea (44%), Russia (31%) and Hong Kong (188%).  De-globalization hurts these countries a lot.  In the US, we are somewhat immune, with exports accounting for only 12% of our GDP.  From this perspective, Trump is right.  Because the US economy largely feeds itself, walling off trade hurts others far more than us.  Additionally, since the US consumer represents 70% of US GDP, if they remain employed, optimistic and consumptive, the US economy should continue to expand.  However, the US only contributes 11% to global GDP growth.  China provides 40% of all global economic growth and another 40% comes from emerging markets that largely sell into China.  Therefore, a downshift in Chinese growth means a downshift in global growth.


The IMF recently downgraded global growth forecasts for 2019 and 2020 while warning of further deductions should trade tensions remain.  Many assert that current economic concerns are overblown as the US consumer carries the global economy.  Here is the math.  The US economy represents 24% of global GDP.  If the US consumer accounts for 70% of US GDP, the US consumer, therefore, accounts for 17% of global GDP.  In my opinion, if China’s growth recesses due to trade deductions, their vendor economies will recess, corporate profitability in the US will recess due to higher input costs from labor and tariffs, employee payroll growth will slow, wage gains will diminish, and consumption spending will follow.  In other words, I do not think the US consumer can “Atlas” the global economy and I see consumer spending as a lagging indicator anyway.  If global economic momentum maintains its downward course, the US economy may lag…but it will follow.


Have a great Sunday!


Sources: Yardeni, FRED, Bloomberg, IMF, CNBC, Economic Cycle Research Institute
David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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