In last week’s commentary, we discussed some perspectives of gathering clouds over the short-term horizon (6-10 months). We expressed the opinion that caution is warranted regarding new market highs given that small caps do not follow the rally, and most importantly because the transportation index (perceived as a leading indicator) has failed to follow the recent rally.

Yesterday the transportation index dropped by 3.59%. Well-known companies which are considered economic bellwethers – such as Norfolk Southern, CSX, and others dropped between 6% – 10% on Wednesday. Moreover, the Cass Freight Index indicates a drop of more than 5% in shipments just in the month of June, which is the seventh consecutive monthly decline. If the trend continues, we will soon be facing economic contraction rather than merely an economic slowdown.

Moreover, the GDPNow Index (tracked by the Atlanta Fed), which measures economic growth in real time, signifies a growth rate closer to 1.5%, while Singapore just reported a second consecutive month in declining exports (in June it saw its exports decline by more than 17%), which justifies the drop of 3.4% in its growth trajectory. Given that Singapore exemplifies trade dependence, we could say that the trade wars have started biting in a significant way. Moreover, India saw its exports drop by close to 10%, while Indonesia saw its exports drop by 9%. As for South Korea, its exports declined by 13.5%.

Corporate investment decisions are swayed by the uncertainty surrounding the trade war and by the weaponization of trade and economic policies. Such weaponization, as we have explained before, could reduce the frontier of growth and consequently reduce revenues, earnings, and employment while constraining innovation and wealth creation.

Around 360 BCE, Xenophon – a student of Socrates – wrote a treatise regarding the management of the household and titled it “Oeconomicus”. In the treatise – which is a actually a dialogue between Socrates and Critoboulos – Socrates, in his usual style of teaching through a pretension of ignorance, guides us through ironic twists in the hero’s life story and reminds us that moderation and the advancement of stewardship are two elements that elevate a person/household/company/nation to a life worth living. The pursuit of misguided goals, boneheaded practices, the lack of wisdom in leadership, and the sheep mentality of brainless crowds could only result in regrettable outcomes that could affect the generations to come. That is when the rabbits get the guns, the hunter becomes the target, the paper wealth fails to cover the accumulated liabilities, and the engine of finance seeks geopolitical solutions to problems that could have been prevented if prudence had prevailed.

We still like assets that are nobody’s liabilities.

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