It Won’t Get Any Better Than This

‘#Buycanadian’, ‘#BoycottUSA’, ‘#Trumpfree’.

These are some of the trending tags last week.

US-Canada trade spat

The row between Canadian President Justin Trudeau and US President Donald Trump, during the G7, angered Canadians.

Some are even boycotting American products and cancelling their travel plans to the US.

As reported by CBS News:

Canada’s CTV reports angry Canadian shoppers and travelers “are mounting strikes against America’s pocketbook by boycotting U.S. goods and trips to the States” as the summer travel season begins. “On Twitter, hashtags including #BuyCanadian, #BoycottUSProducts and #BoycottUSA are spreading tips on using purchasing power to defend Canada’s honour,” CTV reported.

‘The television network cited an Ottawa man who tweeted a photo of a cart of “Trump free” groceries on Sunday. “Others are refusing to buy Kentucky bourbon, California wine and Florida oranges, and ignoring major U.S. brands such as Starbucks, Walmart, and McDonalds,” CTV reported.

There is even a ‘patriot’s guide to shopping’ list, with guidelines on how to shop during a trade war between Canada and the US.

Canadians can be a nice bunch…until you cross them.

Will the trade boycott have a big impact on US brands?

Probably not. Canada’s population is only 36 million, and the US has a large domestic market with a population of about 325 million.

Yet the US-Canada trade spat was just one of the many economic news items to hit last week.

The US Federal Reserve raised rates again last week, and is looking at two more hikes this year…

…the European Central Bank announced it will be ending its bond buying program by the end of the year…

…the US is imposing a 25% tariff on US$50 billion worth of tariffs on China…China has vowed to do the same.

Meanwhile, stock markets were eerily quiet

The S&P 500 ended the week slightly higher, the Dow Jones about 0.90% lower.

The VIX, or ‘fear index’, went lower.

A very different story from last February. Remember the February scare?

Volatility shot up…markets dropped…investors were panicking.

Why?

All because of a strong US jobs report that showed wage growth was picking up. It made investors fear that inflation was making a come-back.

Yet this week, neither rising rates, tensions between US and allies, nor the trade war intensifying has spooked the markets.

Markets haven’t moved much since last February.

Check out the S&P 500. After a steady climb to hit a record high last January, it has been zig-zagging ever since.

s&p500-180618


Source: Bloomberg
[Click to enlarge]

Or the Dow. It is still about 1,500 points lower from its January top.

dow-180618


Source: Bloomberg
[Click to enlarge]

While 2017 was a good year for stocks, 2018 has been a very different year for investors.

And even though stocks have gone nowhere, investors remain bullish.

According to a recent American Association of Individual Investors (AAII) survey,

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 5.8 percentage points to 44.8%.

‘Bullish sentiment is above its historical average of 38.5% for the third time in four weeks.

Yet, there shouldn’t be so many reasons to be bullish.

The risk of a trade war is increasing

Oil prices are rising, unemployment is at lows, both of which will have an effect on inflation.

Central banks around the world are ending post crisis stimuli and rising rates.

Global growth is slowing.

According to Morgan Stanley, we could have already reached global growth peak:

2017 will likely be remembered as the year investors rode a wave of favorable trends: Global growth synchronized, inflation remained persistently low despite tightening labor markets and low volatility in both developed and emerging markets set a tone of unusual calm. 

‘But according to Ruchir Sharma, Head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment Management, these trends may be poised to turn.

‘“2018 could end up being a year marked by a confluence of peaks in many respects,” says Sharma. “Despite above-trend global economic momentum, there are some cyclical and structural signs that point to peak growth.  Record lows in global unemployment rates point toward peak employment.  The recent jolt of volatility may signal the end of peak calm. And all of this is coming at a time when liquidity is peaking across the world.”

That is, it will only get worse from here.

A trade war between the largest economy in the world and China, Canada, Mexico, and the European Union, will affect global economic growth.

Plus, we have added a lot of debt since the 2008 crisis. World debt, in the last 10 years, has increased by 64%, going from US$142 trillion to US$233 trillion. A US$91 trillion increase. This debt has been driving the global economy in the post-recession years.

In the aftermath of the 2008 economic crisis, central bankers in developed economies lowered interest rates. They pumped trillions into the global economy system to lift their economies.

Now interest rates are still at relative lows. The Fed is in the process of reversing QE and raising interest rates. The ECB is only now winding down its QE program, and is holding interest rates at 0 until at least next year.

If there was a crisis tomorrow, central banks wouldn’t have the same tools available to boost the economy. If there was a big crash tomorrow, how confident are you that your portfolio will weather the storm?

A crash is hard to predict.

It could happen today, tomorrow, next month, in a year.

But once it happens, I think it will be much worse than in 2008.

And, when it happens, only those prepared for it will pull through.

Now is the time to prepare. Protect your capital. Make sure you are holding some cash. Make sure that you decrease your debt. Make sure you have insurances.

It is hard to recover from a massive loss of capital. And the later in life you are hit, the worse the hit will be.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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