Leen's Lodge Labor Day Musings

Labor Day weekend at Leen's Lodge in Grand Lake Stream, Maine, continues a quarter-century tradition, and the best parts of that tradition have been reaffirmed. Sure, we also discussed the world as we see it and debated scenarios. A great outline of issues was summarized in the opening paragraph of Sunday's Politico Playbook:

"Good Sunday morning. ON TRUMP'S PLATE: A rogue North Korea, which he cannot convince to stop testing deadly weapons. The dual threat of a government shutdown and debt ceiling default, which needs to be solved by the end of the month. America's fourth-largest city trying to recover from a historic storm, and a Congress that needs to spend billions of dollars to clean it up. A Republican leadership he's been warring with. A stalled agenda. The nation's longest war." (Source: Politico)

We have some observations here.

1. The test of wills with North Korea intensifies, as all observers of this news flow confirm. We don't like the evolution, and we are maintaining a cash reserve.

2. The revisions in Friday's employment report were disconcerting. There are mixed signals in labor data, but a thoughtful analysis has to conclude that the picture is not robust.

3. The central bank picture remains fuzzy, as divergence in policy makes interest rate forecasting more difficult. The Fed seems hell-bent on shrinking its balance sheet even though no inflation threat is apparent and even though the economy seems to be muddling along at a lower growth rate. The ECB and the BOJ remain on their respective stimulus-oriented paths. Meanwhile, next year's Fed leadership remains the subject of political speculation. Our view is simple. We cannot project what policy will be if we don't know who will be deciding it.

4. We are watching credit spreads closely. They are a high-frequency, real-time indicator of stresses. They are giving us some warnings, as are credit default swap (CDS) prices.

5. In the muni space, a government shutdown and debt ceiling limit failure could threaten some BABs' subsidies and inflict unnecessary costs on all levels of government. Maybe the Houston-Harvey support package will pressure Congress to behave more rationally.

6. Novel approaches to pension-deficit funding now include lottery proceeds as New Jersey dedicates money from the lottery to pay what the legislature refused to fund. Will other states follow?

7. Torsten Slok at Deutsche Bank Research offers an interesting observation. He notes that the worldwide household savings rate is about $1.8 trillion a year. That is about $150 billion a month flowing into stocks and bonds and other assets. He sources OECD data for 27 countries that report detailed information with full transparency. To derive that estimate, Torsten multiplied the household savings rate by household disposable income country by country and then converted all to US dollar equivalents. Brilliant! Torsten, come fishing with us again in Maine.

We expect a September of surprises and volatility. We favor high credit quality in the bond space and are holding some cash reserve in the ETFs space. Of course, changes in portfolios can come at any time.

8. Lastly, the Friday ruling of the US Senate parliamentarian that requires the 2017 budget continuing resolution (CR) vote to take place by the September 30 deadline for any Obamacare change means the 60-vote rule will then take effect. Thus, the Trump administration has likely lost one of the key CR strategies for advancing its legislative agenda. Hat tip Stan Collender (here).