Report from Leen’s Lodge

Author: David R. Kotok, Post Date: September 4, 2018
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We start September with a cash reserve in our US equity ETF portfolios. Some details of our thinking follow.

We wish our readers a Happy Post-Labor Day return to confront the 9-week run-up to the midterms. Other risk items include a possible government shutdown (not likely, in our view) and the effects of the continuing trade war.

The US-EU truce persists. We expect a deal to get done with Canada. The interests of all sides are served if there is not further ratcheting up. Mexico is done but, Trump tweets notwithstanding, it is questionable whether much has been accomplished.

Nothing has been accomplished with China, either. The response in Asia to US moves on trade seems to be entirely opposite to that predicted by Trump trade advisor Peter Navarro. In our view, risk is rising for US interests in Asia.

Opinions on US-China outcomes varied at our 27-person Labor Day gathering at Leen’s Lodge. Forecasts were as varied as the political views of the participants, who ranged from hard-core Trump supporters to Sanders socialists. All discussions were civil.

Some bond folks await the mid-September change in the taxation of corporate payments to defined-benefit pension plans that are underfunded. Most folks at Leen’s believed the Treasury yield curve will steepen after this one-time flattening pressure subsides. We will learn more from the results of the October Treasury auctions.

We benefited from three days of extensive and detailed conversation about central banking, with two former practitioners present. The investment bankers and commercial bankers and deal-analysis folks chimed in. Add a few economists and some money managers, and things got lively.

The headcount of 27 was our largest Labor Day ever at Leen’s Lodge. The weather cooperated; the fish did, too. Leen’s new owners are upgrading the facility and have excellent hospitality skills.

On Monday our friend Chris Whalen of The Institutional Risk Analyst published his usual insightful piece on the economy and markets, but with a difference: This one originated at Leen’s Lodge and grew out of our intensive discussion of the Fed’s manipulation of the yield curve, which led us to the question, Is the United States really an AAA credit? We think you’ll appreciate Chris’s analysis, and we thank him for it. Here’s the link to his commentary: https://www.theinstitutionalriskanalyst.com/single-post/2018/09/03/View-from-the-Lake-Is-the-United-States-a-“AAA”-Credit

We will close with a link to a Bloomberg editorial about the Trump trade war. We remind readers that trade war effects are sequential shocks. They are nonlinear. There are no Z-scores.

Here is the link: https://www.bloomberg.com/view/articles/2018-06-19/trump-s-self-defeating-trade-war-with-china

David R. Kotok
Chairman and Chief Investment Officer
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