You Cannot Artificially Create Demand

We discuss the fact that the market could get all three of its wishes in tax cuts, an infrastructure spending plan, and deregulation and still go into a recession because the natural course of the business cycle trumps all of these on the margin policy growth drivers. I would put it at around 50% that the US Economy signals to the market that we are entering a recessionary downturn this year. The hard economic data is much softer than the market realizes given the upbeat soft market sentiment data.

Investors are often pointed in the wrong direction at crucial turning points. A normal business cycle last about 6-8 years, 10 years is pushing it. There are only so many houses and cars that need to be supplied to the market in a given time, real structural demand is what moves the economy, not meetings with CEOs promising to create more jobs. We have had quite a run since the 2008 financial crisis, with everything from clunkers for cash, bank bailouts, unlimited stimulus, zero percent interest rates, etc. which has brought a lot of demand forward with regard to many goods and services like automobiles and houses.

We could get all of Trump`s initiatives and still roll over in the business cycle, or Trump policies could actually quicken the tightening of the credit market, and send the economy into a recession faster than without policy changes. Shoot we could drop in the stock market just by valuations alone because financial markets are in a bubble. Market participants are rather complacent and oblivious to the risks associated with asset prices at these levels given that we are most likely at the late stages of the current business cycle in my opinion.

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