Mike’s Morning Brief – September 4, 2019

What’s going on in the world…

Market opens higher after a tough start to September with yesterday’s sell-off. The volatility continues. So does the economic slowdown. The August ISM came in below 50 for the first time in three years. Factory activity in the US has shrunk. Below 50 means contraction. Growth is slowing. Hong Kong has decided to pull the extradition bill, which triggered the massive protests weeks ago. Is this an olive branch, or a false positive? We shall see. It could be too little, too late, as the pro-Democracy theme has gained serious momentum threatening China’s iron grip. This could play out as China caving to the protesters. Hong Kong leaders seemingly do nothing without Beijing approval. Regardless, it’s a major shift. However, China is not likely to back down, particularly with their 70th anniversary event in less than a month. China does not want to look week. It’s also being reported that President Trump actually wanted to double the tariffs on China last week after they slapped the US on the tax. He apparently had to be talked out of it by advisors. It helps explain his the twitter tirade that Friday. The Trade War and Hong Kong have presented serious challenges and China is struggling to deal with them. As a result of the Trade War, Oxford Economics, Bank of America Merrill Lynch, and Bloomberg Economics have all cut their forecasts for Chinese GDP growth in 2020 to below 6%. The Chinese economy is already at a 3-decade low. It has not grown below a 6% rate since the 1980s. The Hong Kong Stock Market rallied 4% on the news overnight. Global Markets were largely in the green overnight after a stretch of red. British Prime Minister Boris Johnson suffered a major setback with his Brexit plan after losing his slight majority. A hard Brexit is trying to be taken off the table, but there is no clarity as to what ultimately happens. Another election might take place. How to account for this has been damn near impossible. I heard someone say yesterday that UK politics have become like cricket… totally impossible to comprehend for anyone trying to get to grips with it merely by observing. He said even he doesn’t understand cricket and he’s English. The Stock Market is excited again about the prospects of more Fed rate cuts. NY Fed President Williams came out and said that maintaining the US economic expansion is job #1. The Market takes that as aggressive cuts to prop up the slowing cycle. Central banks have been inflating assets this whole 10-year cycle, most prominently in Europe and Japan. China is doing it too. So too is the US. Any sign the Fed doesn’t cut at least 50 bps this month could send this Market sharply lower. September has historically been the worst month for stocks. The average S&P 500 return for September is a drop of 1%. Since its inception, the index has ended lower in September 54% of the time, more than any other month. Stocks are up while the Dollar and Gold are down, a reversal from yesterday. Interest rates are higher too, as money flows back out of bonds into stocks. This has been the theme all Summer. We expect it to get more choppy in September. It’s already started. Keep those belts buckled. Our patience is going to be tested.

Have a great morning,

Mike Frazier

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