Submitted by Taps Coogan on the 27th of March 2019 to The Sounding Line.

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Sven Henrich, founder of NorthmanTrader, recently spoke with CNBC about his growing concern that investors are chasing a narrative that may no longer be relevant to the market.

 

Sven Henrich:

“There is so much uncertainty… (with regard to Brexit) and a lot of investment decisions are being placed on hold. Now, to the extent that you are going to get some clarity, hopefully soon, then obviously companies can make some decisions on how to move forward… This also applies to the China trade deal… We were supposed to get something in early March. Now it’s been pushed out into April and the longer that’s dragging out, as well, the longer that impacts global trade. And so there is a lot of pressure to finally get something done. Keep in mind, one of the key reasons earnings estimates have come down, and growth projections keep coming down, is because there are these two big uncertainties lingering around…”

“Let’s go back to where we were last year. The US government was projecting 3-4% GDP and a shrinking deficit and we got exactly the opposite. We have slowing growth. The Fed is projecting 2% this year and less than 2% growth next year and obviously we just had the largest monthly deficit in US history last week for February. On the side of the Fed, that was a complete ‘180.’ Just a few months ago they were on balance sheet roll-off on autopilot with rate hikes for 2019. That’s not happening. And even Wall Street, just go back to September, October, there were market upgrades, stock upgrades, and obviously none of them projected an earnings recession for Q1 2019. That’s exactly what is happening. That’s why I am saying everybody is chasing reality here. At the same time there is a lot of certainty expressed that there will not be a recession even though the yield curve has inverted. And that tracker in particular has an 85% probability that a recession may unfold in the next six months to two years…”

As the Brexit and China trade uncertainty drags on, we seem to be reaching a point where the uncertainty surrounding the two events is just as much of a drag on the global economy as ‘negative’ outcomes would be. With an essentially unlimited range of conceivable outcomes in both negotiations, yet an expectation for resolution at some point in the near future, businesses and investors are maintaining a wait-and-see approach. That puts investment and decision making on hold in many of the same ways that investors worry that bad outcomes in the negotiations would do. If Brexit keeps getting delayed but not resolved and China-US Trade negotiations keep dragging on endlessly, the prolonged uncertainty becomes arguably worse for markets than the ‘bad’ outcomes that investors fear.

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