I feel like it’s a good time to talk a bit about global macro economics given the recent change in the direction of the US-China trade deal and news in the weakness of US Q1 GDP numbers.
I have to caveat this by saying I’m a stock picker that buys great valued businesses at fair prices and I’m no expert in economics. Although admittedly the excitement in macro economics do influence my decision on the positioning and hedge of my investments.
Currently the portfolio is nearly fully hedged against downturns via put options on the Russel 1000 Value Index (IWD). I would have preferred hedging against IWC, however liquidity is low on IWC and I place a higher value on options liquidity in the event I wanted to pull back on the hedge at reasonable prices.
My hedge against market downturn will say a lot about my thinking around my macro view.
I would ideally like to stay invested in the market as long as possible, while appreciating the fact that eventually (and I don’t know when) the market would likely drop. Economists have been predicting a downturn since the 2016 scare and if anybody listened to them, they’d lost out on a lot of money.
I won’t repeat what’s happened with the trade war, except to say that it’s taken a turn for the worst. I do believe a trade deal could happen. However I’m not betting on it and feel obligated to hedge against the increasing downside risk we’re seeing in the global investment environment.
The short version of it all is that Trump is moving forward with more tariffs in light of China backing out of their prior agreements. Q1 US GDP numbers were higher due to businesses preempting the trade war tariff impacts, and not actual strength in the economy. Now that this is evident, the Atlantic Fed’s GDP NOW and others have all revised down Q2 GDP numbers from ~2.5 to ~1-1.5 annualized.
A recent report by the CFO Survey provided fairly interesting tidbits. I find this survey to be a bit more meaningful than what economists think simply due to the fact that CFOs, who’s jobs are to allocate a business’s capital, should have a better handle on where and when to put their capital to use; and this should be an early indicator of GDP growth (at least the business investment component of it). I will mention that if you look into the raw data, their number of respondents is actually fairly low and I would hesitate to place too much weight into the survey results. FYI.
If you were to believe the result findings, then the US is expected to enter a recession in late 2020 / early 2021. The 1Q19 release basically says 67% of CFOs believe we’ll enter a recession in the next 16 months, with that number up to 84% by early 2021, while sentiment have dropped in 2019.
I have been fairly cautious since early 2018 but have stayed nearly fully invested for the entire duration mainly because I have no clue when the next recession will happen, and if we invested like a recession is always around the corner, than our returns would suffer greatly. This is not to say you should be aggressive in your positioning, it’s just that when I don’t know what’s going to happen to geopolitics or global economics, i stick to what I do know; stock picking. However I am of the belief that there’s a bit of a self fulfilling prophecy in the fact that when business leaders believe a downturn will occur, it impacts their investment sentiments and how they run their businesses, which in turn may impact the actual economy.
How this al impact my investment plan is basically as follows: I plan on raising cash in the next 6-12 month while lowering our market hedge. Cash is the best thing to hold in anticipation of any downturn, and I plan to raise our cash holding up to a more modest level in the short term.
I may provide an update on my macro view in the next few months however I hesitate to provide it too often. The Real Economy doesn’t change as fast as the news cycle nor politicians with their rhetoric. In the meantime, I’ll stick to looking for good businesses to buy.