Katherine Ross: Kenny Polcari, Managing Principal at Butcher Joseph Asset Management joins me to talk about what’s next for trade and the yield curve. Kenny, stocks yesterday surge after we got news of a tariff delay, but today the market’s told a different story after we got the first inversion of the 10 years since about 2008 are we getting to the point that trade clarity isn’t enough to halt recession fears?
Kenny Polcari: So, here’s what I think has happened. You have to look at the broader picture, right? Because the yield curve over here inverted this morning, not because it just inverted, it inverted because you got negative news out of China, negative economic news out of China, industrial production and retail sales really missed the mark in China, which brings up the whole fear of the global slow down and China slow down oh my god. And then in Europe, across the euro zone, you had GDP, which was positive, but was down from the first quarter, which was unexpected. And so therefore that sets the tone and Germany’s GDP actually went negative. And so that really now kind of raises that fear once again about what’s happening, not only in Germany, but what’s happening across the euro zone. Add that to the negative news. They got a negative macro data news.
Kenny Polcari: They got China this morning and then it causes, you know, this fear of this global recession. Now look, no one should be surprised. We’ve been talking about the yield curve going to invert on an invert on ..and this morning it did based on all this data, right? That people are… they’re flocking once again to treasuries. You see what’s happening to stocks in Europe and now stocks futures here in the United States pointing lower, because that overriding fear now of the broader macro picture is once again at the top of the conversation.
Katherine Ross: Kenny, with the tariff delay, is President Trump showing investors that he actually wants a trade deal or is he just a pro stocks president?
Kenny Polcari: You know what, I’m not even sure anymore what he wants, right? Does he really want to deal? I think, yes, he does want to deal as he tries to push it out. Is he trying to appear as if he’s putting, you know, ultimate pressure upon the Chinese and this is his way of doing it. I think what’s frustrating is he puts a pressure on then he takes it off, and he puts it on men. He takes it off. And last week when he made that surprise announcement, he caught everybody by surprise, including his own negotiators. And then yesterday he scratched his head and they all come out and they go, well, we want to disrupt the holiday shopping season. Are you kidding me? Are you kidding me? Really that’s what this is about. That we’re worried now about disrupting the holiday shopping season. So you’re going to take the tariffs away from the tech industry, because that’s really what it was, because retail is still going to get hit on September 1st unless he comes out today and says he’s going to do away with that as well.
Kenny Polcari: But the tech industry, so video games and iPhones and computers and laptops, all very kind of high priced items. He doesn’t want to disrupt for the holiday shopping season. I think it’s an abomination. If you want my honest opinion, you make the comment back in September. You stand your ground and then all of a sudden you go, well, we’re worried about the consumer. If you’re worried about the consumer, then what you’re really saying is that the tariffs are really being paid the consumer as if that’s what you just said. You don’t want to disrupt Christmas and you’re worried about the consumer. What you’re really telling everybody is, yes, I’m going to post these tariffs, but ultimately Americans are paying for it. And ultimately that’s a conversation we’ve been having all along as who’s really paying for the tariffs. And so, you know, is he a pro stocks president? Absolutely. I don’t think he’s got a big pain threshold. And I think that was obvious after we saw what the market did the last couple of days, that he needed to find a way to try to put a floor under it. So yesterday’s action did. Now, today’s going to be different story because the market’s now reacting to economic data. Something he can’t really control. But we’ll see what he does, with another Tweet today or not.
Katherine Ross: Kenny, I’m glad that you brought up the change in language from the president about the consumer paying the tariffs because I think that kind of got washed away by all the other market noise yesterday. Should investors be concerned that that language has changed?
Kenny Polcari: Well, listen, something that they should be concerned that it changes because a lot of people have all along felt that it’s a consumer who’s paying the tariff anyway. No matter what, Trump says that China is paying it. China’s not paying it. We’re really paying it because we’re paying the higher prices. And that was evident in exactly what he said yesterday that he didn’t want to disrupt. He’s worried about the effect it would have on the consumer during the Christmas holiday shopping season, which really means I don’t want prices for this high end tech stuff to go up. I want to be able to say we had this robust surging holiday shopping season as the president cause I want to use that as part of the story, the narrative going into the 2020 elections. And so quite honestly I think people are… I think people are getting fairly smart to his, to the antics going back and forth. And I think ultimately what’s going to happen, he’s gonna end up shooting himself in the foot from my opinion.
Katherine Ross: Kenny, we’re heading towards the end of August. I’ve got to ask, is there a light at the end of the tunnel for this August or are there more markets storms ahead?
Kenny Polcari: No. Listen, I think there’s market storms ahead. August tends to be a volatile month. We know that it’s kind of historical. Not a lot goes on in August, although there’s a lot of noise this August. A lot of it is positive noise. All right, It’s negative stuff going on in geopolitical stuff going on in Hong Kong. The stuff going on now in Argentina or in the fear of another debt default in Argentina or what’s that going to mean? And so therefore I think August will continue to be volatile as we move into the month and then you come into beginning of Fall, September, October also tend to be months where there’s a lot of volatility, as we moved into the last quarter of the year. So I think there’s a light at the end of the tunnel. Yes. I don’t think it’s August. I think the light at the end of tunnel is going to come as we get closer to year end.
Kenny Polcari: I think the next month or two could tend to be a fairly volatile and I think investors need to brace for that. But if you’re a longterm investor, it is opportunities like this, unless the fundamentals really change. Your opportunities that are created by a market, that sells off in good quality names is an opportunity where creates value. And if you’re a long term investor, someone that’s out five, 10, 15 years out, it’s opportunities like this, that you should welcome right? Now, look, if the story changes ultimately and fundamentals start changing around the world where it’s really sick, where really shows that, you know, we’re headed for a really tough recession. You know, the great financial crisis, not that I’m suggesting it gets that bad at all, but if people are starting to be concerned about that. Look at the dynamic conversation, this inverting of the yield curve, the media and everyone, Twitter and everyone saying, oh my God, the yield curve inverted, there’s recession coming. Recession’s 14 months out, which actually puts us where October of 2020, right ahead of the election, not exactly what Trump wants.
Kenny Polcari: And so therefore, I think there is light at the end of the tunnel, but I think it’s after we get through the next couple of months.
Katherine Ross: So following all this volatility, do you have any actual advice for investors? What is one thing that they should be doing to protect themselves right now?
Kenny Polcari: Well, look. So you protect yourself by not overreacting, right? Not being emotional, not making a decision based on a Tweet, whether it’s a Tweet from the president or Tweet from the media or a Tweet from, you know, some other world leader. You can’t make longterm investing decisions about that. So how do you protect yourself? You protect though by building kind of a portfolio that, is representative of not only who you are, but your timeframe in terms of investing, right? If you’re someone that needs your money next year and next month, you know, you don’t really want to be in high growth stocks.
Kenny Polcari: You want to be more in value and certainly want to be more in bonds. But look, even bonds now are gonna provide, are not gonna really provide an opportunity. You’re probably better off going into high quality blue chip Americana names that have great dividend yields that have now created some value with this recent action. So I can just stay the course right? If you’re a longterm investor, you stay the course. The worst that you can do is make an emotional decision.
Katherine Ross: Kenny, great advice for investors. As always. Thank you so much for joining us.