The Die Has Been Cast

The financial markets seem locked in a tug of war amongst a goldilocks global economy, accelerating growth with muted inflationary pressures, and geopolitical risks, which has led to rising volatility and a lack of direction in the markets.

No one can argue against Trump’s success. He has passed his pro-growth, pro-business America First agenda but the political infighting in his administration has muddied the waters. It did not help that the Republicans lost an election last week in Pennsylvania but the media has framed the loss incorrectly as the Democratic winner, Conor Lamb, ran away from his “liberal” party platform and supported the Republican agenda for the most part. If he becomes the norm for future Democratic Party candidates then we have little to fear that the next administration will reverse current economic policies.

The market seems to hang its hat on each reported monetary statistic. Remember how the market freaked out when the Atlanta Fed earlier forecasted first quarter GNP growth of 5.4% with wage pressures accelerating? Well, now, the Atlanta Fed is forecasting first quarter growth beneath 2% with moderating inflationary pressures. We said then, and continue to recommend, that you don’t hang your hat and make any investment decision based on any one or two economic data points. A successful investor must pause and reflect on any shifts that have occurred and then, look to where we are going; not where we have been.

The die has been cast. Our economy will benefit dramatically from tax and regulatory reform as well as Trump’s America First Policies. Can you really argue against free, fair trade with reciprocal tariffs, if any at all, in today’s global economy? Can you argue against protecting our intellectual property? It is generally acknowledged that the Chinese have pirated away hundreds of billions of dollars of our IP demanding significant ownership in any foreign corporation wanting to operate in China.

Peter Navarro made a lot of sense to me when interviewed last week on CNBC. He advocates free and fair trade. And who could argue against Larry Kudlow replacing Gary Cohn as head economic advisor to Trump? He is a pro-growth supply side economist who will monitor the stock market as does Trump for measuring the success of their programs!

We often say that the pendulum swings too far to either side as a new course is charted like on foreign trade. Yes, there are risks, but taking them may be better than maintaining the status quo where we, as well as our closest foreign partners, are greatly taken advantage of by the Chinese. They are not our friends. Remember The Godfather, when Don Corleone said “Keep your friends close but your enemies closer?” That may be Trump’s strategy dealing with the Chinese. The U.S and its allies are in an economic war with China and thank heaven Trump is taking a firm stand against unfair trade rather than kicking the can down the road as past Presidents did. Our future and that of our children are at stake.

Do you believe that the U.S. economy is getting better or not when last month we added over 300,000 more jobs, consumer confidence hit a 14-year high and industrial production rose a surprisingly strong 1.1%?

Do you believe that tax and regulatory reform will lead to accelerating corporate profits, employment and capital spending? Do you believe that Trump’s trade policy, including steel and tax tariffs, will lead to foreign producer building plants here hiring American workers? All of this will boost wages and consumer spending. And higher capital spending will lead to accelerating productivity gains holding down unit labor costs and future inflation. Not a bad scenario but none of this happens overnight so be patient and invest accordingly as there will be clear winners and losers, too.

Concerns over China’s growth evaporated last week after it was reported that industrial output accelerated 7.2% over January/February with fixed capital investments expanding 7.9% led by the technology sector. The government is focusing on growth in consumer demand and technology rather than industrial production. We have as well with investments in Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU), to name two that we have made in China.

Growth has remained strong in the ECB and Japan with inflation moderating somewhat from prior periods. We were pleased that Kuroda was reappointed head of the Bank of Japan for another five years. He pledged to maintain an overly accommodative policy at least through the end of 2019. As long as inflation remains benign and the euro strong, we expect the ECB to keep its overly accommodative policy too. Don’t worry about the higher union wage hikes in Germany as rising productivity and competitive forces will hold down reported inflation.

The bottom line is that the global economic environment has never been better than now. Yes, we are concerned and watching closely discussions about trade policies here and abroad. But we believe that it is about time that our government, along with our closest partners, faces this problem that has only been kicked down the road by past administrations. Change is in the air and there will be clear winners/losers by regions, industries and companies.

The die has been cast.

Invest looking through the proverbial windshield by finding and investing in the beneficiaries of the longer-term trends mentioned above and short the losers. For instance, it is clear that our domestic steel and aluminum industries will benefit. Maybe not overnight but certainly over the next few years.

Other long term beneficiaries of these trends include financials who benefit from growth and deregulation; industries/companies that will benefit from a surge in domestic capital/infrastructure spending over the next few years including capital goods and low cost industrial commodity companies; technology companies where growth far outstrip GNP and special situations where internal changes will boost earnings, margins and future valuation. Stay long the market, as it remains undervalued and short bonds. But not all markets or stocks are equal. Herein lies our strength. Paix et Prospérité continues to outperform all indices.

Our success over our 40+year career managing the leading hedge funds like the Quantum Fund has been in part correctly identifying investable long-term trends just like our former partner, George Soros. And we know when to close ranks and go to cash or be net short. Now is not that time! It is next to impossible trading this market. How many very wealthy traders do you know?

Stay the course!

Review all the facts; pause, reflect and consider mindset shifts; analyze your asset mix and risk controls; do independent research and… Invest Accordingly!

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