The global economy is experiencing strong and synchronized growth. Central banks remain expansionary. Inflation is not a concern. Profits grow. Many are beginning to think that we have indeed entered a new era of inflation-free growth and cannot find a reason why the stock market rally should stop. It's really like this? Let's try to review the risk factors. Some are brand new.
Saudi Arabia. The fall in oil and the idea that fossil fuels are in strategic decline have begun to corrode the foundations of a country that appeared solid only because it was immobile. The structural weakening then comes at the worst moment, in a phase in which Iran tightens the siege in the south with Yemen, in the east with Qatar and in the north with a pro-Iranian Iraq and a weakened Kurdistan, with an Alawite Syria he is getting back on his feet and with a Lebanon that slips more and more into the hands of Hezbollah's Shiites every day.
The Saudi elite clings to the United States and Israel, but in the process divides itself because it finds a divided America. The young prince Mohammad bin Salman came to power with the support of Trump with a coup that marginalized his Obama cousin and is now attacking the very rich and anti-Trumpian Al-Waleed. George Friedman, a geopolitical strategist gifted with great depth of thought, does not rule out the possibility of a civil war or a new coup. All with Iran at the gates which, to make itself heard better, sends a missile on the capital Riyadh. Iran has great friends in Russia, Europe and among American Democrats and is in good economic shape thanks to the nuclear deal that ended the sanctions.
Oil has reacted in the recent past to production crises in Libya and Nigeria with a few dollar gains. A crisis in Arabia would cause much greater increases and it would still take weeks for American producers to try to compensate for any lower Saudi production.
Korea. It's time for diplomacy, but don't be under any illusions. There has been diplomacy for two decades on Korean nuclear power, and in the meantime nuclear weapons are becoming more and more dangerous.
America. The Democratic victory in Virginia and New Jersey completely changes the political picture and paves the way for a reconquest of Congress in twelve months and of the White House in 2020. Among the Democrats, Joe Biden stands out, the most capable of speaking to the industrial states that have gone Trump, and, left, Sanders and Warren. The Clintonites, who controlled the party even in the Obama years by moderating its drift to the left, are in a rut. The radicals, marginalized with tricks by Clinton last year, this time will be very careful to control the electoral machine. Sanders and Warren mean aggressive reregulation, heavy taxes, bank breakups, the fight against pharmaceuticals and oil, and anti-business policies of all kinds.
Tax reform. After the failure of health care reform, it is the last chance for Republicans to avoid a return to the opposition, but this does not necessarily make the path easier. On the one hand there is in fact the group survival instinct which would require an agreement to be found, on the other there is the individual instinct which asks to conform to the moods of one's electorate, which are different in each constituency. Then there is a part of the party that hates Trump to the point of preferring a historic defeat to a reconfirmation of Trump.
In any case, the defeat in Virginia and New Jersey serves as a reminder that people do not vote for businesses and that this reform is all biased in favor of business and does very little for the people. It is therefore possible that the corporate tax relief, already incorporated by the markets in many calculations on 2018 earnings, will be less than expected or will be introduced only gradually over the next few years, or that it will be temporary and limited to the next ten years.
China. As always, everything was perfect and glittering up until Congress, but from the day after it ended we saw a rapid succession of rate hikes, a slowdown in growth and warnings about the high level of the stock market. Thankfully, so far, nothing particularly serious, but a waste of momentum nonetheless.
Positioning. On the surface that's not a problem, because the percentage of equity in the portfolios isn't particularly high. Looking closer, however, we see that the bond part, in recent years, has seen the growth of the corporate component, often not of excellent quality. A drop in the stock market would be good for low-risk governments, but it would be bad for corporates. Wallets, at that point, would be exposed almost across the board. Consider also the explosion of ETFs, often bought by a risk-averse public less willing to tolerate volatility. The combination of these factors could generate the desire to lighten at any moment and would accentuate volatility.
disruption. Bob Lutz, who has spent a lifetime in cars, wrote that cars in twenty years will be like horses, which were once everywhere and are now only on the estates of the wealthy who love to ride in the green. It is a structural issue, it will be said, but that the sector is preparing to spend a lot of money on an electric one that will be less profitable will already begin to be seen in the next quarterly reports. And the auto industry is certainly not the only sector that is about to enter the storm. We only think of energy, pharmaceuticals, distribution and finance.
We stop there, remembering that sometimes you don't need a trigger to initiate a fix. In fact, every now and then it happens that the market goes into self-combustion and then finds the justifications for the descent along the way. We don't want to call it a bear market. We limit ourselves to thinking that for a correction, when the time comes, the second derivative will suffice, i.e. a weakening of the flow of positive surprises, without the need for negative surprises. Without reaching the level of the Bundeswehr, which is preparing for scenarios of dissolution of Europe and the Atlantic alliance, investors would do well to submit their portfolios to some form of stress test, after which they will be able to continue enjoying what the bull market will still want to concede.
