Well, things have finally begun to warm up here in the Toronto area and may be doing the same in the markets. Of late, we have had a relatively quiet period in both the markets and geopolitical news. We addressed this in last week’s email in discussing the return to a low volatility environment and, in our view, to investor apathy.

That may have changed over the weekend. The catalyst might be Donald Trump’s threat to impose additional tariffs on China because the trade talks are not moving sufficiently swiftly in his opinion. That the China/U.S. trade talks may not be going as well as many have assumed is not a surprise for readers of the Global Investment Letter. It has been our view that risks to a successful agreement are higher than generally assumed because there is more at stake than just trade. China and the United States are involved in a struggle for global influence at several levels and neither side wants to be seen as having “lost” in a deal or having demonstrated weakness in any way. Moreover, while trade is important to China, it is not as important as many assume. China’s reliance on exports has declined as its domestic demand for goods has soared. Germany, for example, is far more dependant on exports than China. We hope a deal that avoids tariffs can be reached, because we believe in free trade, but that is not guaranteed. Protectionist trade policies, such as tariffs, remain a major threat to the current global economic expansion.

Whether a breakdown in trade talks between China and the United States occurs remains to be seen. Perhaps President Trump’s comments over the weekend were just negotiating rhetoric. However, as discussed last week, there is still reason to exercise caution re the equity markets. The strong rally since the Holidays has made many investors complacent and we have moved into a seasonally weaker period for stock markets. The odds of a pullback have risen substantially.

Though we would not be surprised to see a correction in the next few months, we remain positive on equities, particularly in the United States. One of the reasons can be found in the following chart.

central banks

The chart above illustrates that the number of central banks prepared to raise interest rates is declining, meaning the tightening phase of 2018 has been, at least for now, paused. The most important central bank, the Fed, seems to have put further rate increases on hold indefinitely. Our view is this pause in central bank rate increases will prove to be a mistake given that it will limit the tools available to combat the next recession. We believe the next recession will be especially sharp for this and other reasons.

In the meantime, the easing of the tightening cycle will likely lengthen the current expansion. An important aspect of our work is the analysis of monetary policy, and the recent easing should be considered a bullish factor. We note, however, that central banks appear to be placing short-term considerations ahead of the far more important long-term consequences of this action, a trend we find disturbing.

The May issue of the Global Investment Letterwas published over the weekend. In it we discuss the prospects for a pullback in equity markets and some thoughts on how to prepare and respond to them. I included a trading strategy that has been a long-term favourite of mine that can be implemented either as a stand-alone strategy or as part of a portfolio hedging strategy. It’s the first time I have written on it. Along with a discussion of the major global markets, I also discussed the future of oil prices, the sustainability of the breakout in the US dollar and activity in the gold and other markets.

We certainly do live in interesting times….

On behalf of your editor and the rest of the Global Investment Letter team,

Take care,

Jonathan

Editor & Publisher