August 20 2019 Economic update - Language Matters
Language Matters
Language matters. Syntax and words matter.
Please remember this as markets fluctuate in the coming months.
A lot of words have been floating around lately: words from the President of the United States, words from pundits, words from economists.
Recession is at the tip of everyone’s tongues right now, and I think we should be careful as we throw that word around. Very careful.
Recession is a natural phenomenon, most often caused by central banks & policy makers working to control markets and influence sentiment to help stabilize economic conditions.
Sometimes though, they just happen. "
In a recent update from Clement Ginac and Sebastien McMahon Sr. Vice President and Chief Economist & Sr. Portfolio Manager and Economist for Industrial Alliance respectively, they spoke to the many factors of the global economy but one word they did not use: will.
They did not say that recession will come, at any point.
What they did say, is that the likelihood of recession in the US could come at some point in 2020. This is a statement made, about this time last year, that they have returned to with no real language being used to point to a single global issue, or recession to come.
It Is highly likely that we are already seeing a US/China trade decline (deficit), and a global decline in manufacturing, but most economic data on a global basis is either pointing towards continued expansion, or is flattening.
It may be that we have in fact hit some sort of plateau for economies around the globe.
But language matters, and you will notice that I did not say that markets have plateaued.
The markets are not the economy; they are a leading indicator (generally) of economic health, but they do not represent the end all be all of the economy. Stock and Bond markets are but one indicator of an economy that is healthy or headed for recession. There are many other factors to consider, many far more complex and to be super clear (ironically), more opaque than the traditional stock markets.
Markets are not the economy!
Language matters.
It bears repeating in times like these as words are bandied about as if they have no meaning.
We can officially state that cracks are beginning to appear, and that it looks like at some point in the next three to thirty six months (3M to 3Y) we will see a recession. This is based on an inversion of the Yield Curve, however short an event that may be, but at every correction point all everyone can talk about is recession and not the buying opportunity.
Language matters.
Let me share with you some of our latest information in the simplest way possible:
Through illustration.
So far this year we are having a good run, markets have weathered a number of storms, each one calling for recession.
But they have come back up after hiccups. These issues have been, for the most part, political, not based in true economic fundimentals.
Far more often than not what is moving the needle is policy POTUS is either generating or threatening against China or the middle east. But there is a lot of noise here, so allow me to simplify:
Year over year you can see we have made 7%+ over the last 12 months, notice how the end of 2018 trails off into the correction we saw from October to Christmas Eve. We believe as we go forward this year, we should see a large divergence from the previous years end because consumer sentiment is high, which means companies should make good money going forward to the year end, which hopefully contributes to strong stock prices.
Even if we see business sentiment hitting a peak earlier this year and dropping somewhat, the consumer ultimately decides what to buy and what to sell. When to get greedy and when to panic.
To create an even more simple illustration, at last years fall and Christmas events, we were spending a lot of time talking about the opportunity to buy into the correction. For the last 11 years we have been stressing the importance of buying low when the opportunity presents itself. Last falls correction was an opportunity, and for those of you who had the ability to invest in the markets during this correction, you’ve made somewhere between 8 and 20% on that deposit in the last 10 months or so, as seen below.
It is nice to look at the past and see where we have come from, even more so if we have been successful, but what about the future?
The fact is, no one is going to know we are in recession until we are in recession. A correlated value such as an inverted yield curve, which you may have been hearing a lot about (learn more here: Yield Curves) or various other indicators, be they leading or lagging, may or may not lead to a downturn. We just don’t know, we can only speculate.
Instead of gambling on futures or moving into cash, we have made careers out of diversifying. Diversity is our greatest weapon to wield against a topsy turvy market. Diversity is not a defensive mechanism, it is offensive and it is something we use to attack the markets on a regular basis.
If you recall at the end of 2018, we were venturing into new markets and into new fund concepts such as the Thematic Innovation fund or IA’s version of a pension style fund where we could use profits from the last few years, or new deposits to buy into positions at a good time (see: buy low).
This was an offensive position.
We rely on the fund managers we pick to buy the defensive positions for us. To be tactical and brandish a shield on our behalf. They are much closer to the information and the purchases than we are, so we trust them to find the right fit to protect and shine a light where we cannot see.
At the moment, if you watched the video linked at the start of this update, Clement talks about their position in gold at the moment, why they are buying now and why they are weighted at 3-4% into gold. This is defense.
With that being said, we are not attack! attack! attack! all the time. Our positions in the Global Asset Allocation and Global Diversified fund from Forstrong as well as the dividend paying funds we have positioned within the portfolio are meant to create a backstop for us if the market starts to slide into recession (or if we are already in one, and don’t yet know it.)
Blunt instruments vs a sharp weapon, so to speak.
This is how we use the portfolio to ensure our offensive strategy doesn’t become unpleasant. Say what you want about defense winning championships, you have to score. Winning teams win because they are deep, not because of one single component…
Let’s just discount for luck. 🤷🏻♂️
So, if by now you are still wondering when the next recession will hit; welcome to the club, we have beer in the back and there is probably some cake left, we will let you know.
Until we know, we will continue to look for new ways to expand our model, diversify and find the right risks at the right time.
Stay tuned… and watch your language.
Darris Cameron,
President and COO, Financial Value Inc.
