BIGGEST issues that I see
I’m not writing as a human being, but simply as a participant in the stock market game
–on the negative side
Three of them:
–ICE shrinking the workforce. Economic growth comes from either having more people working or by the skill level of workers going up. The current administration attack on education is a long-term cultural issue, and, I think, ultimately very economically destructive (we’re already seeing the first academics fleeing what they see as a replay of 1930s Germany in the US). But the much bigger near-term issue is ICE tactics that reduce the number of foreign workers in the US, given that an aging population is barely enough to keep the current workforce from declining. Having ICE reduce the domestic workforce by, say, 1% yearly is a recipe for perpetual recession.
–Trump tinkering with the Fed. This threatens a repeat of the 1970s in the US, when politicians routinely cut interest rates to give the economy some near-term oomph just before elections and “forgot” to remove it post-election. The result was a loss of faith in the dollar and in Treasuries–by foreigners but also in larger measure by US citizens–and a mad rush into physical assets of all sorts to defend purchasing power from the runaway inflation that political control of the Fed was causing. It took a deep recession, Treasuries at 20% and almost a decade to undo the damage. Why would we want to go through this again?
–tariffs. In the near term, this is the least worrisome issue for me. All we have to do to understand the negative long-term effects on an industry of government protection is to examine Ford and GM, which have been protected against foreign competition pretty continuously for a half-century. GM is a famous business school case on how to lose market share–having gone from 50% of the US market in the 1970s to about 17% now. The generally accepted explanation for this is that tariffs lessened the need at any given time to make necessary, but painful, structural change.
How to respond
…better said, how I’m responding
–the US is likely going to remain a slow-growth economy, shifting into progressively lower gears, while ICE is in play. We can already see this thought being expressed on Wall Street in the explosive gains of the dollar stores, while more upscale retail languishes. No reason now to think this will change, in my view. Worst hit will be high-end retail. Better to have US-based firms with large export or foreign businesses, where a weakening US currency provides a significant advantage. We’re already seeing a sharp falloff in foreign tourism, too, despite the fall in the dollar. This adds to domestic weakness.
–the combination of slowing growth and increasing tax breaks for the wealthy will likely decrease expected money flows into the Treasury, All other things being equal, this worry will gradually undermine the confidence of both domestic and foreign buyers in the ability of the US to repay, either in full or on time, money it is borrowing now. We’re already seeing this fear expressed through the recent sharp drop in the international value of the dollar. I don’t see any reason to think this trend is going to reverse any time soon. This implies to me that I should emphasize the stocks of export-oriented and import-competing firms–and avoid domestic sellers of imported goods coming from strong currency countries.
–I think there’s also a substantial risk that at some point–not today, but at some point–global investors will shift from selling the currency to selling the domestic stock market. Of course, higher rates eventually induced by worries about the country’s creditworthiness imply shrinkage in the overall market PE.
Overall, a difficult situation.
What works at a time like this?
I think:
–special situations, meaning companies, usually not that big, with some unusual or unique product or innovation that will allow it to grow, even in an overall lackluster economy. Nvidia has been one of these for a long time, and may still be (I own some). The general idea, though, is that sales are not a function of GDP growth in the US. Maybe biotech, which is something I’ve typically tended to avoid.
–exporters, not importers
–value stocks. That is to say, stocks in companies that are asset-rich, have had poor recent performance but which may be turning around. Part of the idea is that you can’t fall off the floor–that they have defensive characteristics. Not my favorite way to invest, but I spent half my working career in value shops, so I think I appreciate value’s use in an environment where growth is being invited to leave the room
–China. The biggest negatives for me here are that I don’t read/speak Chinese and that I worry about the quality of the financial reporting there. Still, it seems to me that Xi has been forced to take a pro-market, pro-entrepreneur stance, given the incredible mess he has made during the past decade, after deviating from Deng’s “socialism with Chinese characteristics.” In a sense, Trump has also become the new Xi. The China idea hasn’t worked that well so far this year, though. Maybe good, maybe bad.