Key Economic News:
Debt Ceiling Raise: Secretary Mnuchin has asked for Congress to raise the debt limit by Sept. 29, otherwise the government will have issues paying for social security, military salaries, tax refunds, interest on treasury securities, Medicare/Medicaid, and much more.
Our Take Away: The debt ceiling must be raised by October in order for the government to legally borrow more money and meet its obligations. Historically, we have never seen the government fail to raise the debt ceiling, but such failure would quickly send significant shockwaves that dramatically disrupt U.S. and global markets.
Government Shutdown: The potential for a government shutdown has become a growing concern since the federal government only has enough funding to make it through to the end of September.
Our Take Away: One of the biggest causes for concern is how Trump, at a recent rally, threatened to block any spending bills unless funding for “The Wall” is included. If there is a shutdown, government employees could be furloughed until Congress can approve a new budget. All-in-all, government shutdowns are not a pleasant issue to experience or resolve, but it’s less of a critical problem as compared to raising the debit limit.
Heightened Volatility: After hitting an all-time low in July, the VIX experienced major spikes throughout August and concluded the month at a gain.
Our Take Away: The VIX is still greatly undervalued despite the relatively meager gains observed in August. Furthermore, a buying opportunity still exists for the fund since we are likely to see even more volatility throughout the rest of the year.
Other Risks: Running off July’s momentum, markets hit record highs again in August. However, current risks to this growth “appear to be more political than economic,” according to hedge fund manager Ray Dalio.
Our Take Away: We could not agree more with Dalio’s comment. There are some surface-level cracks and chips, but we have yet to see any data indicating an imminent, critical economic threat on the horizon. On the other hand, as the current political landscape intensifies, we see a minefield of threats that could snowball out of control and begin dragging down markets. From our discussions, the overall sentiment within the team remains bullish, but plateauing even more.
Key Political News:
North Korea: The rhetoric on both sides of the Pacific has increased substantially since Trump took office, and even more so over the past month.
Our Take Away: While threatening “fire and fury like the world has never seen before” and warning that “the time for talk is over” is meant to frighten a 33 year old dictator, investors also tend to be alarmed by such threats of thermonuclear warfare. For that reason, we expect to see more surges in volatility throughout the coming months, but we do not expect to actually “duck and cover” anytime soon. Kim Jong Un knows that North Korea is out-gunned and any direct attack against the U.S. or its territories would not end well. The real predicament will come if South Korea (or Japan) is attacked and the U.S. has to decide whether or not to assist its allies.
Business Councils: Trump abruptly disbanded two of his main business advisory groups, the Strategy & Policy Forum and the Manufacturing Council, in August.
Our Take Away: Prior to the disbanding, most of the members had resigned and cited Trump’s weak condemnation of Neo-Nazis and other hate groups as the tipping point. If Trump desires to make progress on key economic policies with the assistance of any industry leaders, he will need to regain their respect by continuing to denounce support from hate groups and toning down his own rhetoric against those whom disagree with him.
The Administration: Chief Strategist Steve Bannon and Deregulation Adviser Carl Icahn resign from their posts, leaving Trump with an ever-shrinking administration.
Our Take Away: Issues with Bannon began to compile after White House officials suspected him of leaking information to the press, either intentionally or unintentionally. Meanwhile, Carl Icahn stepped down ahead of an article from The New Yorker listing Icahn’s potential conflicts of interest. As we stated in the July 2017 investor letter, Trump will need to get his house in order and form a functioning team before any effective legislation comes out of Washington. The team has also concluded that Secretary of State Rex Tillerson is most likely one of the next officials to exit the administration.
Tax Reform: This has been another core promise of Trump’s campaign and Secretary Mnuchin stated that details of the tax reform plan will be made public by the end of September and that we should expect a bill passed by year-end.
Our Take Away: Easier said than done. With other issues on the table such as the debt ceiling, a government shutdown, natural disasters, immigration reform, and so on, both Congress and the Trump Administration will have a full plate for the next few months. We do not anticipate much progress along this front during the remainder of the year, but it will be interesting to see the proposed plan.
Key Social News:
Charlottesville Protests: The protest was originally meant to oppose the removal of a General Robert E. Lee statue, however, the protest ended up attracting white supremacists and Neo-Nazis from across the nation. Violence between protestors escalated, resulting in the death of one and multiple injuries to others as a car plowed through a crowd.
Our Take Away: Vague comments from Trump only incited more outrage since he failed to quickly denounce the white supremacists that were “fulfilling Trump’s promises,” as quoted from David Duke, former Grand Wizard of the KKK. Had he immediately condemned the actions and such support from these hate groups, Trump could have avoided more social unrest as well as disapproval from other world (and industry) leaders. Future lapses in judgement and principle will only enflame current emotions, leading to more political strife in Washington as politicians take sides.
Hurricane Harvey and Irma: Between the damage Harvey inflicted throughout Texas and the expected devastation that Irma will wreak upon Florida, this hurricane season may easily go down as one of the costliest in history.
Our Take Away: Given that we are only in the middle of hurricane season (June through November), the team can only brace for the worst since other storm systems (Jose and Katia) are projected to take their toll on the Caribbean and Gulf Coast. Economically, we will likely witness volatility in the energy sector as oil refineries and chemical plants recover, witness a spike in jobless claims as we did after Katrina and Sandy, and witness a surge in the housing market as builders reconstruct communities.