I’m asked constantly what the risks are to the macro and market outlook. From my lens, they are vast and varied and none are to the upside. In that sense, it was interesting to see U.S. Federal Reserve chairman Jay Powell focus exclusively on some of these in this week’s congressional testimony, followed up by Stephen Poloz who did very much the same. One can legitimately wonder if they had compared notes ahead of time.
- Escalating trade tensions – I’m already concerned over the contraction in global trade flows and disruptions to global supply chains. We have a U.S. President who doesn’t understand that trade deficits equate to capital account surplus, and who lacks an appreciation of what that means and how the United States benefits from being the world’s reserve currency. We have a tentative trade truce now, but Beijing has already said all bets are off until all tariffs are removed. And Donald Trump likes to call himself the “Tariff Man.” I see little chance of resolution. And keep an eye on this tech trade war under way between Japan and South Korea.
- Iran’s breach of its enrichment caps – this is a big deal geopolitically.
- Will the Fed cut rates and then disappoint by signalling that this is just an “insurance” cut? This is a big risk – moving too slow at a time when the inflation data are so muted.
- A no-deal Brexit is a major concern – so is the uncertainty over who will lead the Conservatives. The Oct. 31 deadline is not that far away.
- Mr. Powell gets fired or demoted – people tend to forget that the President can take swipes all he wants, but Mr. Powell is just one vote. A powerful one, to be sure, but it’s still one vote on the Federal Open Market Committee. What if the whole committee decides to resign? What if Mr. Trump’s son-in-law and senior adviser Jared Kushner becomes the next Fed chairman, or worse – White House economic adviser Larry Kudlow? This is a serious risk. And that economist Arthur Laffer could compare monetary and fiscal policy – as he did this week when he suggested the Federal Reserve should be controlled by Congress and the President – is absolutely incredible. It’s like comparing a cactus to a hot dog. Gold will surge if anything happens on this front, but Mr. Trump will get the weak dollar he so desperately covets.
- The 2020 election – this is not going to get resolved for another 16 months and while the President remains wildly popular among his base, his approval rating is a dismal 40 per cent. And this is coming off the peak of the economic expansion and stock market, and the low in the unemployment rate. Meanwhile, the only reason we have such a wide field of Democratic candidates is because they each smell a huge opportunity. Yet, the vast majority are left-of-centre and the leading centrist is seen as too old and gaffe-prone to make the cut.
Never mind the trade frictions with China, if you are a U.S. business today all you see are these Democrats threatening to roll back at least some of the corporate tax cuts. So, what do you do? Wait and see what happens, which means cash gets built up on the balance sheet instead of being deployed into the real economy. The surge in the NFIB uncertainty index in June, and commensurate pullback in capital spending and business expansion plans, spoke volumes in that respect.
The best advice I can give is to be liquid, defensive and yield sensitive with an eye toward selling strength in equities and buying the dips in bonds.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.