Where the Puck Is Going
During his first inaugural address to Americans struggling in the depths of the Great Depression, President Franklin D. Roosevelt famously admonished, “the only thing we have to fear is fear itself.” This author can certainly think of a few possible additions to FDR’s things-to-fear list, but concedes the point. America today has a growing and potentially paralyzing problem with fear itself.
As CNBC put it this week, “In a word, ‘pessimism’ has crept back in where the animal spirits had been after Trump’s election.” That’s one way to sum up the current state of investor fear regarding the interplay between uncertain Trump administration economic policy, the economy, and financial markets.
Regardless of how one describes it, however, the increased fear has recently become a matter of record. This week, the Conference Board Consumer Confidence Index for March plummeted to a post-Covid lockdown low of 92.9—below the consensus estimate of 94 and miles below last month’s 100.1 reading.
Notably, the Conference Board’s forward-looking six-month expectations component drove the sobering decline in confidence, falling to 65.2 from 74.8 in February. According to the Conference Board, “Consumers’ expectations were especially gloomy, with pessimism about future business conditions deepening and confidence about future employment prospects falling to a 12-year low. Meanwhile, consumers’ optimism about future income—which had held up quite strongly in the past few months—largely vanished, suggesting worries about the economy and labor market have started to spread into consumers’ assessments of their personal situations.”
The report’s weakest link was the “Fewer Jobs” expectations index. This gauge of employment expectations advanced for a rare fifth consecutive month to 28.5, a threshold level associated with all six recessions from 1973 to the 2008 Great Financial Crisis, and a level nearly reaching the index’s all-time peak of 29 amid recession and the popping of the tech bubble in late 2001.
Not surprisingly, households’ crumbling confidence also spread to “Income Expectations,” which gapped down 5.2 points to 0.8, the largest month-over-month decline of the post-Covid economic cycle and way below November’s relatively sanguine local high of 8.6. Importantly, history states that income expectations have reliably anticipated turning points for the National Bureau of Economic Research’s U.S. recession indicator. Furthermore, The Conference Board’s report Tuesday said that the measure of Americans’ short-term expectations for income, business, and the job market fell 9.6 points to 65.2. That’s the lowest reading in 12 years, and well below the threshold of 80—which the Conference Board uses as a signal warning of potential recession in the near future.
On the heels of post-election economic policy uncertainty and the resulting downturn in consumer confidence, this week CNBC also reported its latest quarterly Chief Financial Officer Council Survey on CFO confidence. The results didn’t inspire confidence.
According to the survey, a majority of CFOs (60%) say “they expect a recession in the second half of the year—another 15% say a recession will hit in 2026.” The survey findings suggest that the trade war outlook, a White House that has given every indication it is committed to a major change in global economic policy, and “shifting messages” from President Trump are all introducing sufficient uncertainty to cause widespread executive paralysis and, by extension, a possible resulting recession.
The downbeat CNBC CFO survey was also corroborated by the latest Chief Executive Officer Confidence Index, which plummeted in March. On a scale of 1 (Poor) to 10 (Excellent), CEOs’ rating of current business conditions fell 29%, from 7.01 in December to 4.99 in March, making for the weakest reading in 13 years. Importantly, corporate forecasts for revenues, profits, capex, and headcount were all marked down in both surveys.
The message is that fear of fear itself regarding the unknown of Trump administration economic policy is beginning to bite. This week, Deutsche Bank’s Jim Reid perfectly encapsulated a new and important revelation when he said, “The more you listen to the current U.S. administration, the more you appreciate that they are prepared to sacrifice near-term market performance and economic growth if it’s required to meet their longer-term objectives.”
Even if the policy prescriptions implemented by this administration are ultimately helpful to America and the American economy (no guarantees), the downside of the current state of uncertainty regarding what this administration will actually do is problematic. It is driving executives and consumers in the real economy to begin reflexively deferring business and spending decisions, which in turn risks sending the economy toward recession—in a hurry.
Now, while we know little in the way of specifics, we do know that the Trump administration has repeatedly vocalized its MAGA vision to ultimately “detox” America off an “unsustainable” economic path onto a “sustainable” one. As HAI stated last week, this author is confident that, given current conditions, the U.S. government and economy cannot be detoxed and set on a sustainable path without triggering significant withdrawal symptoms. But in HAI’s view, there is profound opportunity beyond the fear of the short-term unknown.
Of great significance, however: while most are still paralyzed by fear of uncertainty, not all are. There are indications that some corners of Wall Street and some elements of the all-important Western institutional investment community are waking up to what is potentially the bigger secular opportunity at hand.
Years ago, in an attempt to explain his particular hockey genius, the great Wayne Gretzky famously offered a penetrating insight when he said “I skate to where the puck is going to be, not where it has been.” Well, Wall Street seems to be starting to take note of where the puck is going.
On March 19th, JPMorgan’s Michael Cembalest released a publicly-available presentation titled “Chaos v. Grand Design: Trump 2.0 for investors” from JPM Private Bank U.S. In the presentation, Cembalest highlights many of the accumulated negative consequences that recent decades of globalization have had on U.S. interests. Furthermore, Cembalest points toward likely Trump administration efforts to course-correct and unwind globalization as a major theme of Trump 2.0 administration efforts.
This week, the Financial Times ran an article titled, “‘Globalisation as we knew it’ may be over, says HSBC chair Mark Tucker.” According to the article, “The world is experiencing a ‘period of deep and profound change’ in trade, economic policy, and international security arrangements, said Tucker. ‘As we consider present developments…we believe that globalisation as we knew it may have now run its course… Economic considerations guiding optimally efficient supply chains led to one of the world’s greatest periods of wealth creation we have ever seen. The balance of economic power changed as a result, and what used to be sustainable no longer is.’”
Importantly, back in 2019, the Bank for International Settlement (BIS) highlighted a history lesson from the breakdown of what they called “Globalization 1.0” from 1846-1914. In short, the BIS lesson demonstrated that during the breakdown of “Globalization 1.0,” previously established global trade flows collapsed along with the real value of financial assets relative to gold and hard assets. In HAI’s view, the BIS history lesson is accurate. The breakdown of our era of globalization 2.0 is very likely to produce a directionally similar outcome.
Mark Twain is credited with the line that “history doesn’t repeat itself, but it often rhymes.” In HAI’s view, investors would now be well served by cautiously positioning for history’s resonating rhyme—a secular bull market in gold and hard assets amid the unwind of globalization 2.0.
Trump administration economic policy uncertainty, or what JPMorgan called “chaos” (creating a fear of the unknown), may be slowing economic growth and threatening recession in the near-term. However, the big-picture “Grand Design” seems far more certain—and the investable opportunities far clearer. The breakdown of globalization 2.0 is underway with Trump administration backing. In HAI’s view, whatever policy prescriptions are used to get there, and whatever pain a “detox period” brings about as a result, investors should prepare for restructured global trade flows along with a restructured global monetary regime that structurally favors gold and hard assets over the financial assets.
As Merrill Lynch legend Bob Farrell said, “In a shift of secular or long-term significance, the markets will be adapting to a new set of rules, while most market participants will still be playing by the old rules.” In HAI’s view, Farrell’s observation is on full display today. Most market participants are, indeed, still playing by the old rules, but a shift of long-term significance is very much underway. Some corners of Wall Street and the Western institutional investment community are beginning to catch-on, and capital flows are just beginning to adapt to the new set of rules. Given expectations for enhanced volatility ahead in all asset prices, attention, vigilance, and caution are certainly warranted. However, in HAI’s view, rather than being completely paralyzed by the fear of fear itself, it’s time to start skating to where the puck is going.
Weekly performance: The S&P 500 was down 1.53%. Gold was up 2.04%, silver was up 3.19%, platinum gained by 0.47%, and palladium was up by 1.79%. The HUI gold miners index was up by 2.02%. The IFRA iShares US Infrastructure ETF was down 0.79%. Energy commodities were volatile and higher on the week. WTI crude oil was up 1.58%, while natural gas gained 3.09%. The CRB Commodity Index was up 0.36%. Copper gained by 0.32%. The Dow Jones US Specialty Real Estate Investment Trust Index was off by 0.17%. The Vanguard Utilities ETF was nearly flat, down 0.08%. The dollar index was nearly flat, off 0.12% to close the week at 104.01. The yield on the 10-yr U.S. Treasury was off 2 bps to close at 4.24%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
