·       The stock market is back after a serious drop in the fourth quarter of 2018.  The tightening financial conditions and the threat of more interest rate hikes along with BREXIT, trade disputes and other macroeconomic uncertainties have all contributes to the risk-off environment.

·       The U.S. treasury yield curve has inverted and that has traditionally been a precursor to an economic recession to follow in 12 to 18 months.  It has typically been regretful for those who suggested “this time is different” in economic prognostication.  But the yield curve has been heavily manipulated by the Federal Reserve since the Great Recession, and ECB, BOJ and BOE have all taken unconventional and extraordinary monetary actions to influence their yield curves since the Global Financial Crisis.  The question we should ask is if the long end of the yield curve now is lower than it otherwise should or could be and is now less responsive (limiting within a small range).

·       We do believe that no economy can expand forever and this one will too end with a recession.  We are not sure if the current inversion is a false signal (happened in the past).  The strength in the U.S. labor market, the improvement in hourly worker (especially service sector) wages, and the absence of traditional consumer financial over-leveraging are all factors that support a continuing economic expansion.  As an inside-the-beltway creature, we also believe that politicians will do whatever it takes to get reelected, and what it takes is to maintain a positive economy with promises of money and benefits to all.  This is not a prescription for recession. We suspect a back-to-back quarterly economic downturn to come at the earliest in 2021 with a new administration or a Trump second term.

·       Global growth has slowed.  In fact, Europe has been slowing since 2018 and continues.  The IMF just released its April forecast that the world is expected to grow at a 3.3% rate down from 3.9% projection made last year and 3.5% rate just in January this year.  Most of the slowdown will be felt the first two quarters (we are in the thick of it now) with improvement in the second half.  The global policy response to the tightening financial conditions experienced last year and the end of the super impact felt from the front-loaded U.S. tax cut take time to work through every economy.  We expect a 2.3% real GDP for this year.

Please click here to read the complete first quarter 2019 commentary.