Coronavirus & Sanders: Jolt of Uncertainty

By Paul Hoffmeister

---

CoronaVirus: All about Treatment and Containment

The market outlook became much cloudier in late January due to the uncertainty caused by the Coronavirus outbreak and the recent surge by Bernie Sanders.

To paraphrase Frank Knight, the early 20th century University of Chicago economist, “risk” applies to situations where we do not know the outcomes but can reasonably measure the odds; whereas “uncertainty” applies to situations where we simply do not have sufficient information to confidently measure the odds.

Within this framework, one can easily argue that the Coronavirus epidemic in China created a textbook case of uncertainty. Where did the virus come from? How deadly would it be? And, how far would it spread?  

On January 23, 2020 Chinese authorities expanded travel restrictions imposed on the city of Wuhan to surrounding municipalities, shut down travel networks, and attempted to quarantine 25 million people.[i] What was considered by many as an epidemic localized in Wuhan suddenly became a potential global pandemic, evoking memories of SARS and Ebola.

As of the time of this writing, Johns Hopkins estimates that more than 20,000 people have been infected in 27 countries, with 427 dead. And according to CNBC, at least 24 Chinese provinces, municipalities and regions have told businesses not to resume work until February 10.[ii] This shutdown in Chinese production is huge, as these parts of the country account for more than 80% of China’s GDP.[iii]

One can see that accurately measuring the consequences of the Coronavirus – in terms of human and economic costs – can be exceedingly difficult, especially if the virus were to spread much more. Therefore, it’s not surprising that January 23rd, when this relatively contained epidemic seemed to begin morphing into a potential global pandemic, marked the recent peak in the S&P 500. On a closing basis, the S&P 500 traded at 3325.54 on Thursday January 23, and fell 3% to a low of 3225.52 on Friday January 31.[iv] 

For some context for thinking about the market impact of a major, deadly viral outbreak, we estimate that the SARS and Ebola episodes in 2003 and 2004, respectively, led to approximately 5% to 11% selloffs in the S&P 500.

The histories of the SARS and Ebola outbreaks as well as what we’re currently seeing with the Coronavirus suggest that the key questions for markets are: will the respective outbreak be relatively contained, and will the symptoms be mostly treatable? In the Knightian sense, concrete answers to these questions can transform highly immeasurable “uncertainty” into much more quantifiable “risk”. And that may be what we have been seeing recently.

While the human and economic costs of the Coronavirus have been massive, recent information offer some hope that this crisis will be contained.

First, effective treatment strategies may be on the way. For example, in Thailand, doctors have reported success in treating severe cases with a combination of anti-flu and anti-HIV medications.[v] Thailand’s health ministry has reported that a previously positive testing 71-year old patient tested negative for the virus after starting the combination.[vi] This news appeared to break on Sunday February 2, and in our view, may have been the key factor behind the strength in the S&P 500 beginning the next day. Then, on February 5, Sky News reported that a British scientist made a breakthrough in the race for a vaccine, which could reduce the development time from two to three years to just 14 days.[vii] The news appeared to further support the strength in equities this week.

Secondly, measures to contain the outbreak have been drastic. As most of us have seen, travel into and out of Hubei province has mostly stopped, and travel into and out of China has been significantly restricted. This may be the world’s largest quarantine in history. Additionally, the New York Times has reported that Chinese officials are utilizing the country’s vast surveillance network to track down infected citizens, as well as those that may have been near them; and even offering bounties of 1,000 yuan for each infected Wuhan person reported by residents.[viii] [ix] Leaving democratic and privacy principles aside, it’s possible that these extreme measures may be what financial markets want to see as far as containment is concerned.

While it took months for the SARS and Ebola outbreaks to get under control, and this will likely be the case with the Coronavirus, the improving outlook for treatment and containment should encourage financial markets going forward. We will almost certainly see infection counts and death tolls continue to rise during the near-term. But as long as treatment and containment continue to be effective, the rates of infection and death should ultimately crest.

The Bernie Rally 

The political market is increasingly eventful these days, and should be so as the primetime of the Democratic primaries happens during the next 60 days.

The big news is: Mayor Peter Buttigieg surprised many with his victory-by-a-nose in the Iowa Caucus, and former Vice President Joe Biden’s prospects to secure the nomination have plummeted. According to the Predictit betting market, Biden was being priced on January 8, at a 43% probability to win the Democratic presidential nomination. As of February 4, he traded at 20%.

But the biggest news in the political arena is the ascension of Bernie Sanders to front-runner status. Between January 8 and February 4, his odds on Predictit of securing the nomination jumped from 32% to 39%, with a high of 46% on February 2.

Interestingly, the Bernie Rally seemed to ignite on January 24, after popular podcast host and UFC commentator Joe Rogan said on his podcast that he will “probably” vote for Sanders, after having interviewed him months ago.[x] The next day, Bernie’s Predictit odds jumped to a new high of 38% (from 34% on January 24), and his odds haven’t closed below 38% since. According to Slate, Rogan’s podcast was Apple Podcasts’ second most downloaded podcast in 2017 and 2018.[xi] Without a doubt, the landscape of political news and influencers has dramatically changed in recent years. 

The next two months may very well decide the Democratic nominee. New Hampshire is February 11, Nevada February 22, and South Carolina February 29. According to Predictit, the front-runners in each are, respectively, Sanders (at 83%), Sanders (66%), and Biden (60%).

Then “Super Tuesday” takes place on March 3, when nearly a third of all delegates are awarded; of which the biggest prizes are California and Texas with 415 and 228 delegates, respectively.[xii] Currently, Sanders is the front-runner in both states in the Predictit market.

January may turn out to be a major inflection point in the Democratic political market for the White House, with Sanders’s ascension and Biden’s plunge.

The consensus appears to be that President Trump is extremely pro-stock market, while Sanders may be the polar opposite. But what sectors will be most at-risk should Sanders win the general election in November? As we see it, Sanders could be especially negative for private prisons, gun manufacturers, student loan services, healthcare, private equity, and industries that benefit from a low minimum wage such as retail, leisure and hospitality.

We’ll likely see some movement or discounting in the stocks of these sectors during the coming months, especially if Sanders’s momentum continues. But, of course, one cannot easily assume Bernie Sanders will be president in 2021. Predictit is currently pricing in a 54% probability of a Republican winning in November; with Republicans likely keeping the Senate, and Democrats the House.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of Camelot Event-Driven Fund  (tickers: EVDIX, EVDAX).

*******

---

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

[i] “Chinese cities cancel New Year celebrations, travel ban widens in effort to stop coronavirus outbreak,” by Anna Fifield and Lean Sun, January 23, 2020, Washington Post.

[ii] “More than half of China extends shutdown over virus,” By Eveyln Chang, February 1, 2020, CNBC.

[iii] Ibid.

[iv] Source: Yahoo Finance.

[v] “Cocktail of flu, HIV drugs appears to help fight coronavirus: Thai doctors,” by Panu Wongcha-um, February 3, 2020, Reuters.

[vi] “Thailand Says New Drug Cocktail Successfully Treated Coronavirus in Chinese Patient in 48 Hours,” February 3, 2020, News18.com.

[vii] “British scientist makes breakthrough in race for coronavirus vaccine,” February 5, 2020, Reuters.

[viii] “China, Desperate to Stop Coronavirus, Turns Neighbor Against Neighbor,” by Paul Mozur, February 3, 2020, New York Times.

[ix] “China Sacrifices a Province to Save the World from Coronavirus,” by Claire Che, Dandan Li, Dong Lyu, Rachel Chang and Iain Marlow, February 4, 2020, Bloomberg News.

[x] “Podcast host Joe Rogan endorses Bernie Sanders,” January 24, 2020, Yahoo Finance.

[xi] “Joe Rogan’s Galaxy Brain,” by Justin Peters, March 21, 2019, Slate.

[xii] Source: New York Times

Thinking about 2020

By Paul Hoffmeister

With the charts in this month’s client letter, we try to put into perspective where stocks and bonds might be headed in 2020, and what factors may influence them. The general narrative of the S&P 500 and the 10-year Treasury yield in recent years may be boiled down to this:

In 2017, the S&P 500 rallied in a relatively consistent fashion due primarily to the tailwinds of major deregulation and tax cuts. The rally was interrupted in 2018 in large part by concerns over the Fed raising interest rates too aggressively, and in small part by the onset of the US-China trade conflict. The major reversal in Fed policy in early 2019 was the major macro story and catalyst of the year, a Fed officials shifted from signaling in late 2018 the possibility of two or three rate increases during 2019 to actually reducing the funds rate three times. Negative news from US-China trade negotiations in 2019 briefly worried stocks, but not significantly. During the last four months of the year, we experienced what appeared to be a major confluence of positive developments: a phase 1 US-China trade deal, clarity in the UK political and Brexit outlooks, major Fed intervention in the repo market and signals that it might hold the funds rate steady for a prolonged period of time.

As for the 10-year Treasury yield, strong economic data and hawkish signals from the Fed throughout 2018 pushed the yield to as high as 3.23% by November of that year. But emerging evidence of slowing growth, weak equities and then ultimately a pivot in Fed interest rate policy led to a major decline in the 10-year yield in 2019. It ended the year at approximately 1.92%.

As we look forward, the tailwinds are arguably at the market’s back in early 2020, particularly if the Federal Reserve does not raise interest rates this year (which we believe it likely), and remains more concerned about downside risks to the global economy.

As we see it, the US economy has downshifted into a lower gear compared to 2018. But we believe that growth should remain positive near a 1-2% annual growth rate. Although in August 2019, it appeared that the US economy was slowly drifting toward 0% GDP growth or less, the steepening of the yield curve since then has signaled that a recession during the next year is increasingly unlikely. Arguably, the strong employment environment is keeping the US out of recession. With the national unemployment rate at 3.5% as of November 2019, according to the US Bureau of Labor Statistics, we would need to see unemployment rise to at least 4.0% for us to get worried about the economy falling into negative GDP growth.

As we see it, with so many positive tailwinds surprising markets in 2019 (dovish Fed interest rate policy and repo market interventions, a partial US-China trade deal, and Brexit clarity) leading to major equity market gains, it will be much harder for the S&P to replicate its 2019 returns this coming year. A 10%-12% return in the S&P 500 appears to be more likely. And if the Fed remains neutral in its rate policy outlook, the 10-year Treasury yield could end 2020 between 2.00% and 2.25%.

The biggest uncertainties of 2020 appear to be geopolitical and political. Will the US-Iran variable escalate significantly, following the killing of Quds Force Commander Qasem Suleimani? And who will win the US presidential election in November, and what party will control Congress?

I suspect we may have seen the climax in US-Iran tensions in the near-term, after their retaliation against US bases in Iraq on January 7th and, importantly, President Trump does not seem to be re-escalating. But, it’s worth considering worth case scenarios. Saddam Hussein’s invasion of Kuwait in August 1990 may be a useful precedent to review. In the months following the invasion, which of course led to a US-led coalition driving Hussein’s forces back toward Baghdad in January 1991, the S&P 500 fell almost 17%, gold rallied nearly 12%, and West Texas intermediate crude sky-rocketed almost 87%.  Within this context, major market risks certainly exist should the US and Iranian militaries engage in all-out conventional warfare.

As for the political outlook, President Trump’s prospects to be reelected have risen steeply in recent months. Based on the Predictit betting market as of January 6th, the President had a 48% probability of winning in November, compared to 40% on October 9th. It’s hard to ignore the correlation between impeachment efforts and Trump’s improving chances during the last 90 days. Perhaps this is evidence of impeachment blowback, which arguably happened to Republicans in November 1998 after the Clinton impeachment events. Interestingly, the Democratic frontrunners today are former Vice President Joe Biden and Senator Bernie Sanders. Senator Warren prospects have seemingly plummeted in recent months, after taking relentless heat for her Medicare For All plans. 

Neutral Fed policy may be the most important macro variable of 2020, which could allow stocks to continue drifting higher.

Neutral Fed policy could keep a “lid” on interest rates in 2020.

The inverting yield curve in summer 2019 suggested that the US economy was heading toward 0% GDP growth or less. The steepening curve since then is a relief.

Despite the steepening Treasury curve that may be signaling a lower probability of recession in the United States, the economy seems to be stuck in a lower gear at the moment. The heyday economy of 2017-2018 may have been squashed by higher interest rates and other major macro uncertainties, including the US-China trade row and Brexit concerns.

We aren’t worried about a recession occurring during the next year as long as the job market remains strong. Based on the Sahm Recession Indicator, we’d start getting worried if we saw the national unemployment rate jump to at least 4%, from the recent 3.5% level.

How much downside in the S&P 500 would there be if the United States and Iran engaged in an all-out conventional war? Impossible to predict. But the nearly 17% decline in the stock index in 1990 may be a useful precedent to consider.

Gold jumped nearly 12% as geopolitical uncertainty skyrocketed after Saddam Hussein’s invasion of Kuwait and a US-led military coalition was being assembled for war.

Oil seems to have had one of the most pronounced price reactions to the invasion of Kuwait and the lead-up to the first Iraq War.

Will President Trump be re-elected? According to Predictit betting markets, Trump is the clear front-runner to win the 2020 presidential election. Biden and Sanders are in a distant second and third place, respectively.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of Camelot Event-Driven Fund  (tickers: EVDIX, EVDAX).

---

******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

2019: The Year of the Fed and China Variables

By Paul Hoffmeister, Chief Economist

During the first week of 2019, we explained that our base case stock market scenario this year was for a 15% return in the S&P 500. So far, the S&P 500 has rallied more than 23%, not including dividends.[i] To us, the key driver of equities this year has been strongly dovish Fed policy, which has seemingly confirmed the adage: “Don’t fight the Fed.”

Arguably, the most important distinguishing feature between December 2018 and December 2019 is the fact that a year ago, many FOMC members were telegraphing two to three rate increases during 2019, whereas the reality has been that the FOMC has actually reduced the funds rate this year by three quarter points. In other words, rather than the funds rate going up in 2019 from a 2.25-2.50% range to 3.00-3.25%, the funds rate has DECLINED to 1.50%-1.75%.

And indeed, on January 4th after weeks of market panic, Chairman Powell saying that the Fed would be “patient” in raising rates appeared to mark the critical inflection point for the policy outlook and stocks have seemingly never looked back.

As such, we’ve seen a major U-turn in Fed thinking this year from one focused on slowing growth because of inflation fears, to one focused on supporting growth in the face of myriad macroeconomic risks, including the slowing global economy and trade frictions.

Notwithstanding, this year’s stock market performance has been ostensibly unremarkable or even boring, with the S&P 500 gradually floating higher for most of 2019. The Fed-catalyzed stock market rally was, for the most part, meaningfully interrupted only twice with the small selloffs in May and August. Both of those episodes appeared to have been sparked by negative news related to the US-China trade conflict.

Interestingly, when one looks deeper into the market behavior of 2019, the negative US-China trade news in May and August appeared to have also caused the Treasury curve to invert; while the announcement of a “Phase One” trade deal on October 11 appeared to cause the curve to steepen. This impact of the US-China trade variable on the Treasury curve suggests that these trade negotiations are having an important impact on economic growth at the margin.

Unfortunately, the US-China trade conflict doesn’t seem like it will be completely resolved anytime soon. The supposed Phase One deal announced in October has yet to be consummated, even though it was scheduled to be finalized in November. Even more worrisome, Phase One arguably encompassed many of the easiest aspects of the disagreement to be resolved. If this was supposed to be the easy part, how long will Phases Two and Three take to complete?

The recent comments from President Trump signaling that a trade deal may not happen until after the 2020 elections supports a pessimistic outlook for this variable. The remark may well be a late stage negotiating tactic to complete the Phase One deal. Or it could be a sign that, in fact, Beijing and Washington are so far apart on a deal that we are a long ways from any meaningful resolution. I believe both are true: this is negotiation, and there is serious disagreement about major trade issues that will require years to be resolved comprehensively. The best case scenario for this variable in 2020 could be that a Phase One deal is reached, and both sides maintain a constructive dialogue throughout the year.

With the US and China in a protracted trade conflict, we should expect the uncertainty and the reorganizing of global supply chains to weigh on global economic activity during the near-term.

Why would companies invest billions in new capital investment if supply chains are at risk and economies appear to be slowing? Unfortunately, too, this may be an environment that continues to put the entrepreneurial segment of the global economy at a great disadvantage relative to the largest companies that have more capital and “business moats” to weather economic uncertainty. This is unfortunate because arguably entrepreneurs and small businesses are the lifeblood of a thriving, dynamic economy.

This cautious view of near-term economic conditions appears to be underscored by the fact that some credit spreads have not fully “healed” (i.e. narrowed) to where they were in late 2017, early 2018 – before the trade conflict erupted.

For example, according to the St. Louis Federal Reserve, the Baa-Aaa spread currently trades at approximately 91 basis points, compared to a relatively tight spread of 65 to 70 basis points in late 2017, early 2018. As I see it, a wide or widening spread reflects higher risk aversion and less economic growth; whereas a tight or tightening spread reflects less risk aversion and less growth.

Even though this spread has narrowed since early 2019 from more than 120 basis points, investors are not willing to pay up to the same degree that they did two years ago for assuming the additional investment risk. In our view, this makes sense: two years ago the economy was accelerating to a nearly 3% GDP rate (year-over-year), whereas today it simply does not have the same horsepower with GDP likely growing less than 2%.[ii]

Something is restraining the global economy. While volatile currencies and growth-inhibiting tax rates are a pervasive problem, the US-China trade conflict may be the most acute issue.

In summary, this year’s “risk on” rally in equities and the Fed’s U-turn on interest rates are much welcomed. And, a dovish Fed posture next year will be extremely important, and likely creating a nice tailwind for risk assets. But the outlooks for growth and risk are not as strong as the 2019 rally might suggest, and it may be due to US-China trade uncertainty. For as long as the trade conflict persists, it should act as a governor on animal spirits and risk-taking. Therefore, it’s likely that one of the most important catalysts for financial markets in 2020 -- beside Fed policy -- will be trade. It could determine whether we have another strong equity market performance or whether we have an eruption of panic about commerce between the world’s two largest economies and the resultant fallout from even slower growth. We’re marking December 15th on our calendars. This is the deadline that President Trump has set for another round of tariffs on Chinese imports, which could certainly happen if Phase One isn’t finally completed.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of  Camelot Event-Driven Fund  (tickers: EVDIX, EVDAX).

*******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

[i] Source: Dow Jones.

[ii] Source: Bureau of Economic Analysis

Big Things in October. What Next?

By Paul Hoffmeister, Chief Economist

November 7, 2019

As we stated last month, important news about US-China trade, Brexit, and the Fed was due in October that had the potential to move markets significantly. The good news is, markets received positive information concerning these variables, sparking a strong stock market rally during the month.

On October 11, it appeared that the US and China had agreed to what was dubbed a “phase one trade deal”. According to President Trump, the Chinese government agreed to increase purchases of US agricultural commodities, certain intellectual-property measures and concessions related to financial services and currency.[i] In exchange, an increase in tariffs on Chinese imports was delayed.

Then, on October 17, European Commission President Jean-Claude Juncker tweeted, after heated negotiations with Prime Minister Boris Johnson over Brexit: “We have [a deal]! It’s a fair and balanced agreement for the EU and the UK to our commitment.”[ii] While the deal did not ultimately receive approval from the British Parliament, it appeared to have reduced the odds of a no-deal Brexit in the future. Underscoring the importance of the perceived breakthrough in this variable, the British pound rallied in October from a low around 1.22 dollars per pound to a high of nearly 1.30 – an especially large swing in one of the world’s largest currencies.[iii] Nonetheless, the Brexit issue is not yet resolved completely. The UK will hold a general election on December 12, meaning that the question of Brexit and its specific outlines will be left to the voters once again.

Finally, on October 30th, the Federal Open Market Committee announced an interest rate cut for the third time this year, nearly reversing its four rate increases in 2018. Note, the three rate cuts so far this year is a vastly different scenario than what FOMC officials were telegraphing late last year for 2019, when they contemplated two to three rate INCREASES. As such, the federal funds rate now trades at a range between 1.50% and 1.75%, as opposed to what was possibly going to be 3.00%-3.25% today.

While Fed policymakers recently expressed concerns about slowing global growth and uncertainties surrounding trade and Brexit, there also appeared to be a major change in their perspective about the general price level, from fear in 2018 of inflation to a fear today of unacceptably low inflation. The Fed is now, importantly, more accommodative and arguably more in-line with what equity markets want or expect.

As we see it, the confluence of positive news on trade, Brexit and Fed policy ultimately translated into a more than 5% rally in the S&P 500 in October -- when measuring between its October 2nd closing low of 2887.61 and its close of 3037.56 at month-end.[iv]

The major macro developments of recent weeks also appear to have relieved the concerns seemingly priced into credit markets, as the US Treasury curve significantly steepened out of the inversion we saw during the late summer.

After reaching a low of nearly -50 basis points in late August, the spread between 3-month and 10-year Treasuries is now nearly +30 basis points.[v] As readers know from our writings in recent years, the almost persistent flattening and then inverting of the Treasury curve during 2018 and 2019 was increasing the odds of a future recession based on the New York Federal Reserve’s yield curve/recession model. The major steepening in recent months has alleviated the concern over an imminent recession.

With many fears and uncertainties sorted out during the last month, we can breathe a sigh of relief, at least for now. The Fed is no longer trying to slow growth with interest rate increases; there’s less fear about the UK crashing out of the European Union; and relations between Washington and Beijing are, at least, still constructive.

Notwithstanding, there are still important questions and potential dangers ahead.

The questions at the top of my mind are the following: At what point will the Fed no longer be accommodative? What happens to US-China relations after any phase 1 trade deal is signed? Will the British voters give Boris Johnson a clear mandate on December 12 to complete the Brexit deal he has negotiated? Does the Trump impeachment push have any legs to it? Who will win the 2020 presidential election, and what will that mean for future US economic and foreign policies?

The Fed: The last time the Fed made a “mid-cycle” adjustment (if in fact we are in a mid-cycle adjustment phase today) was in September 1998 when it started to cut the fed funds rate from 5.50% to 4.75% in November 1998. Those rate cuts seemed to prop up stock prices and steepen the yield curve, similar to this year’s cuts. It’s noteworthy, however, that the Fed then reversed course and restarted its rate-hiking campaign by June 1999, raising the funds rate from 4.75% to 6.50% by May 2000. If that episode is analogous to today, then the Fed’s present dovish policy posture may be short-lived, perhaps only six to nine months. With many of today’s Fed policymakers concerned in recent years about low unemployment creating inflation risks and stock market highs creating investment bubbles, it will be important to note whether those views re-emerge in the coming months.

But, for now, the Fed policy outlook appears favorable. As Chairman Powell said during his October 30 press conference: “The reason why we raise interest rates, generally, is because we see inflation as moving up, or in danger of moving up significantly, and we really don’t see that now.”[vi]

US-China Trade: In recent days, rumors have emerged that the signing of the phase one deal could be delayed to December. According to Reuters, Beijing wants Washington to drop the 15% tariffs on $125 billion worth of Chinese goods that went into effect on September 1, AS WELL AS a reduction in the 25% tariffs imposed on approximately $250 billion of imports including semiconductors, machinery and furniture.[vii] Reportedly, the White House wants strong language in an agreement related to enforcement mechanisms related to intellectual property theft.

As I see it, this is last minute horse-trading where the important details of the phase one deal will be worked out. Given that the phase one deal is only a partial one and doesn’t touch on other major areas of disagreement (such as Chinese subsidies to state-owned enterprises and easing controls over the internet), it’s unlikely that the White House will roll back most of its tariffs. Arguably, the main leverage that the White House wields in the negotiations are tariffs and black-listing major Chinese companies from doing business in the United States. But, at the moment, it’s likely that a sufficient number of tariffs will be rescinded, and a partial deal will still be reached.

Nonetheless, there is still a long way to go in the trade dispute between the US and China. Quite possibly, this will go on for many years. The issues in the phase one deal could be the easiest issues to resolve.

UK Elections & Brexit: According to a YouGov survey between October 17 and 28, Boris Johnson’s Conservative Party leads with 36% of voters, then Labour with 22%, Liberal Democrats 19%, and Brexit 12%.[viii] Consequently, the December 12 general election looks like Johnson’s to lose. If the Tory’s give up that lead to Labour and Liberal Democrats, then Brexit may not happen anytime soon. Conversely, if Tory’s give up the lead to the Brexit Party, we could see another stalemate with the EU, as the future government will be pressured to be even more aggressive in negotiating another deal.

Trump Impeachment: On October 31, the House passed a more formal process related to impeachment. In the weeks ahead, six different House committees will continue their investigations into the Trump Administration, which will include public hearings as well as closed-door depositions. The first public hearings will be held during the week of November 11.

Predicit betting markets are currently pricing in a 40% probability of a Trump impeachment by year-end 2019, and 78% probability by the end of his first term.

Perhaps the most important aspect to a possible impeachment will be whether Republican senators stay united in their opposition against the removal of the President. Notably, on November 5th, Senate Majority Leader Mitch McConnell said, “I’m pretty sure how [an impeachment trial] is likely to end. If it were today, I don’t think there’s any question, it would not lead to a removal.”[ix]

If we see Republican senators begin to support impeachment and voting to remove President Trump, the S&P 500 could be vulnerable to a significant decline.

As we’ve pointed out before, we believe the events leading up to President Clinton’s impeachment contributed to a nearly 15% selloff in the S&P 500, specifically between the time of the Lewinsky plea deal and the release of the Starr Report when the clouds were arguably the darkest for Clinton. With regard to President Nixon’s impeachment and ultimate resignation, between November 1, 1973 when Leon Jaworski was appointed special prosecutor and August 8, 1974 when Nixon resigned, the S&P 500 fell approximately 25%.

At the moment, it seems that markets are not overly concerned about the prospect of a Trump removal. If that changes, we could see major equity market weakness.   

2020 Presidential Election: According to Predictit betting markets, Senator Warren’s chances of winning the Democratic nomination have fallen significantly from approximately 52% on October 4, to 33% on November 4.

Nonetheless, she remains the favorite to win the nomination. On the same day, former Vice President Biden traded at 22%, Mayor Buttigieg at 19%, and Senator Sanders at 14%. Interestingly, although she has not entered the race, Senator Clinton traded at 9%.

It appears that Warren’s collapse can be attributed to her unconvincing answers related how to pay for her Medicare-For- All plan. It seemed quite clear that her opponents viewed that issue as her weakest flank, and they attacked it aggressively during the last month.

The race for the Democratic nomination could be a long one. At the moment, it seems that the party is divided between the populist left platform represented by Warren and Sanders (with a collective 47% probability of either of them winning the nomination), and the moderate left represented by Biden-Buttigieg-Clinton (with a 50% probability).

Interestingly, in a recent New York Times/Siena College poll, Joe Biden leads or is even with President Trump in five out of six key swings states (Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin).[x] Whereas Sanders and Warren, lead or are even with Trump in three of those six states.[xi] With the party so divided and Biden looking politically weakened by the attacks from his Democratic and Republican rivals in recent months, it is understandable that Hillary Clinton might see an opportunity to enter the race.

With the Iowa Caucuses scheduled for February 3, the next three months are a political eternity, where anything could happen in the race for the Democratic nomination.

Conclusion: I believe the major reversal in Fed policy, from effectively telegraphing a 3.00%-3.25% funds rate in late 2018 to now having a 1.50%-1.75% funds rate, contributed substantially to the 20+% appreciation in the S&P 500 this year. Despite the major uncertainties with US-China trade, Brexit and US politics, this year may be another example to support the axiom: “Don’t Fight the Fed”.

Using the same logic, the next year’s worth of equity returns will likely not be as easy. The Fed appears to be now on a more neutral footing. And if the Fed were to cut during the next year, it will likely be in response to new economic negatives. But, if policymakers can simply “do no harm”, then the global economy should begin to stabilize in the coming months; and certainly, more positive news with regard to trade, Brexit and US politics will help.

With the macroeconomic outlook appearing to be much better today, a “risk-on” investment approach makes sense. However, many significant questions and issues still exist, suggesting that we’re not out of the woods yet. The most market friendly scenario in coming months would appear to be a dovish Fed, political stability in the US, a clear path to Brexit (finally!), and more constructive dialogue and progress between the US and China. The bear market scenario could well include one or more of these variables going horribly wrong.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of Camelot Event-Driven Fund  (tickers: EVDIX, EVDAX).

*******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

[i] “Trump Touts US-China Phase One Trade Deal, Delays Tariffs,” by Jennry Leonard, Saleha Mohsin and Shawn Donnan, October 11, 2019, Bloomberg.

[ii] “UK, EU Reach Brexit Deal – Now Comes the Hard Part,” October 17, 2019, The Associated Press.

[iii] Source: St. Louis Federal Reserve.

[iv] Source: Yahoo Finance.

[v] Source: St. Louis Federal Reserve.

[vi] “The Fed’s View on Inflation Is Quietly Shifting. Here’s Why,” by Jeanna Smialek, November 1, 2019, New York Times.

[vii] “US-China Trade Deal Signing Could Be Delayed Until December – US Sources,” by David Brunnstrom and Matt Spetalnick, November 6, 2019, Reuters.

[viii] “These Four Charts Show How the UK Election, and Brexit, Could Play Out,” by Holly Ellyatt, November 7, 2019, CNBC.

[ix] “Mitch McConnell: A Senate Impeachment Trial ‘Would Not Lead to a Removal,” by NBC News, Youtube.

[x] “Trump Is Competitive in Six 2020 Swing States Despite National Weakness, Polls Say,” by Jacob Pramuk, November 4, 2019, CNN.

[xi] Ibid.

Buckle Your Seat Belts for October

By Paul Hoffmeister, Chief Economist

This month, there will be a lot going on macroeconomically that could move markets significantly. On October 10, US-China trade negotiations will be held in an attempt to break the deadlock both sides have reached in recent months; a European Union summit will take place on October 17, and Brexit will be the top issue; the FOMC will meet on October 29-30; and the current, official deadline for Brexit is October 31. All the while, political uncertainty is erupting as Congress undertakes an impeachment inquiry of President Trump.

As we see it, the world’s most important macro variables are “in play” during the next 30 days. In this client letter, we will answer some of the most popular questions related to these issues.

Is the US going into a recession? It’s getting too close for comfort.

Will the more than 3-year uncertainty over Brexit finally culminate with the UK’s exit from the EU by month-end? People might be sleeping on this scenario; it has a higher probability of happening than some might believe.

Will the US and China put an end to their trade dispute, which arguably sparked the big US equity selloffs in May and August? Prospects are good for a partial deal; not so good for a comprehensive settlement.

What’s the 2020 election outlook and policy implications? It appears that it’ll be Trump v. Warren, but don’t count out Hillary Clinton. Also pay attention to healthcare providers, which seem to be the most sensitive sector to election news.

Lastly, would a presidential impeachment be a serious market risk, and are Republicans in trouble in 2020? Yes, we believe it’s a serious market risk when considering how markets traded during the late summer of 1998 when the Clinton impeachment events began to heat up. As for Republican electoral prospects next year, they could be even stronger if the 1998 midterms are a clue. Furthermore, the Trump re-election campaign may be the most formidable in history in terms of money, and its voter targeting has so far been a competitive advantage versus Democrats. 

Is the US economy going into a recession?

While I’ve been a critic of Fed policy in recent years, I believe there’s a good chance that the economy can still avoid recession.

To be clear, I’ve been critical of the Fed’s interest rate increases during the last 1-2 years because: 1) it was intentionally sought by many supporters as necessary to ensure that the economy didn’t overheat (I disagree with the notion that too many people working is a bad thing, and that low unemployment can spark an inflation spiral); and 2) rate increases were excessively flattening and inverting the yield curve (which is an ominous forward-looking indicator).

Arguably, the combination of higher interest rates and macro uncertainty that’s inhibiting risk-taking, such as trade frictions and Brexit, have been the primary factors behind the economic slowdown we see today. And the US economy is inching closer to recession.

According to the Institute for Supply Management, the ISM Manufacturing Index peaked in August 2018 at 60.8 and the Non-Manufacturing Index peaked a month later (September 2018) at 60.8 as well. As of September 2019, the indices respectively registered 47.8 and 56.4, indicating that the US manufacturing sector was contracting while the non-manufacturing sector was still growing albeit at a slower pace than a year ago.

Given this economic data and the fact that the 3-month/10-year Treasury spread is inverted by approximately 18 basis points today, according to the St. Louis Federal Reserve, it’s understandable that recession fears are mounting and growth is likely trending toward 1%. But the good news is, despite the economic damage of the last year, recession could be avoided.

First, interest rate futures at the Chicago Mercantile Exchange currently imply an 88.3% probability of another quarter-point rate cut by year-end, which could lift much of the yield curve out of inversion. Second, many Fed officials are no longer focused on the unemployment rate, but on external risks, such as the global slowdown and trade tensions. Third, the job market remains in decent shape. It’s not as strong as a year ago, but it’s not meaningfully deteriorating either. Fourth, some credit market spreads have narrowed this year, suggesting a healthier risk-taking environment today compared to late 2018, early 2019.

The confluence of these factors could keep the United States out of recession during the near-term.

Without question, though, we believe major negatives continue to weigh on the economy, such as the weak manufacturing sector and the uncertainty surrounding Brexit and US-China trade. Resolution and clarity in both could spark a resurgence in global growth. Contrarily, the more these uncertainties drag on, the greater the headwinds to growth.

Importantly, it has been hugely positive that the Fed has been more dovish this year and has undone two quarter point rate increases already. In our view, we need the Fed to remain dovish, and markets likely won’t be pleased if Fed policymakers question whether further rate reductions are necessary.

It’s worrisome, for example, to see that some Fed officials seem to not yet be convinced about cutting rates further before year-end. For example, on Monday September 30, Chicago Fed President Charles Evans said: “What we’ve done already might be sufficient, I’m open minded to suggestions that we might need more. At the moment I’m going to be looking at the data.”[i] Arguably, it would be best for equity markets if public comments from Fed officials were consistent with the high likelihood already priced in by markets of another quarter point cut at one of the last two FOMC meetings of 2019. 

The current Brexit deadline is October 31, and it has been more than three years since voters in the UK passed their historic referendum to leave the European Union. Are we only weeks away from this finally happening?

Arguably, the biggest mystery in markets today is whether Brexit is going to finally happen at the end of this month.

The UK Parliament recently passed legislation to prevent a no-deal Brexit, and the UK’s Supreme Court ruled that Prime Minister Boris Johnson’s suspension of Parliament was unlawful. Notwithstanding, Johnson continues to insist that the UK will leave the EU on October 31.

By the end of August, the Predicit betting market was suggesting a greater than 50% probability of Brexit occurring by November 1st. That probability plummeted in early September when the House of Commons passed legislation to force a delay.  

It appears that Johnson will deliver to the EU in the coming days a new Brexit proposal, the central feature of which would be the elimination of the backstop deal his predecessor Theresa May crafted and instead installing customs checks between Northern Ireland and the Republic of Ireland. It’s a long shot attempt to reach a deal with EU leaders who will be meeting on October 17-18.

If a deal isn’t reached, it’s unclear whether Johnson will simply force Brexit to happen automatically on the Halloween deadline, even though many UK lawmakers will call it unlawful. Given that Johnson’s rise to become Prime Minister was rooted in his promise to deliver Brexit “deal or no deal” and that his top adviser, Dominic Cummings, was the chief architect of the 2016 “Vote Leave” campaign, it’s possible that Johnson will ignore Parliament, force a no-deal Brexit, cast the dispute as the people versus the establishment, unveil major tax and trade plans to support the no-deal economic scenario, and call on lawmakers to hold new elections – thereby leaving his leadership and policy methods to the will of the people, rather than to Parliament. It would be a major economic and political gamble.

Currently, the Predictit betting market gives only a 21% probability of an official Brexit occurring on November 1. This could be an underestimation. It’s likely in our view that this variable will heat up in the coming weeks and markets will be dealing a serious possibility of Brexit actually happening at month-end. 

What’s the probability of a comprehensive agreement between the US and China by year-end?

In sum, the trade conflict with China is arguably so large and multi-faceted that a comprehensive agreement is highly unlikely to happen soon. That said, it’s very possible we will see a partial agreement.

First, to understand the enormity of the trade dispute with China, it’s important to understand the perspective of the Trump Administration. In December 2017, the Administration released its National Security Strategy for the United States, making clear that the country “will no longer tolerate economic aggression or unfair trading practices.”[ii]

Then on June 28, 2018, in a speech at the Hudson Institute, White House trade advisor Peter Navarro outlined six strategies of economic aggression used by China against the United States:[iii]

1)    Protect China’s Home Market from Imports and Competition;

2)    Expand China’s Share of Global Markets;

3)    Secure and Control Core Natural Resources Globally;

4)    Dominate Traditional Manufacturing Industries;

5)    Acquire Key Technologies and Intellectual Property from Other Countries, including the United States; and,

6)    Capture the Emerging High-Technology Industries That Will Drive Future Economic Growth and Many Advancements in the Defense Industry.

Navarro then outlined fifty “acts, policies and practices that China engages in in order to promote its economy worldwide.”[iv] After discussing many of these strategies and tactics, Navarro ominously concluded his speech by saying, “If you’re in a negotiation, and you take 25 of these off the table in a successful negotiation, you still have 25 left.”[v]

From this perspective, the extent of the US-China trade dispute is simply too large to be resolved anytime soon. And, if many important issues are fixed, many other important issues will remain unresolved that will still need to be addressed.

Therefore, it’s not surprising that in August, in the face of the negotiating stalemate between the US and China as well as ever-rising tariffs, US-China relations looked like they were at a multi-year low. Importantly, though, circumstances might be turning for the better that could make it possible for a partial deal to be reached between the two countries.

First, the trade deals that President Trump is reaching with various countries (Japan, Korea, Mexico, and Canada) and the trade barriers being installed against China could be increasingly separating China from the rest of the world. This may mean China will need to flatten the playing field if it wants to play inside the US economic sphere.

Secondly, the Chinese economy seems to be progressively suffering. The economic data for August showed that China’s exports shrank by nearly 1%[vi]; arguably a dangerous development for an export-led economy. So the trade battle and US tariffs seem to be taking a toll on the Chinese economy, and putting pressure on Chinese leaders.

And lastly, as it stands now, top US and Chinese officials are scheduled to reconvene in Washington in the coming weeks. According to Peter Navarro, those talks will focus on two key issues: ending China’s policy of subsidizing state-owned companies and opening up the Chinese market to American competition.[vii]

It’s noteworthy that the talks will center on these issues and not on others, such as IP theft and forced technology transfers. This may signal that both sides are focused on small wins, rather than getting everything done at once, which will be much harder.

It’s unlikely a comprehensive trade deal will be reached between the US and China during the next year, but there appears to be a good chance that we’ll see a partial deal. This will probably mean that some tariffs will stay in place for a long time, but at least we’ll see some progress compared to the very pessimistic outlook that existed in early August.  

What is your 2020 presidential election outlook and the policy implications?

At the moment, it appears that the presidential election will be Donald Trump v. Elizabeth Warren.

The Democratic Senator of Massachusetts has sky-rocketed in the polls and betting markets. According to a September 19-23 poll by Quinnipiac University, Warren is winning 27% of Democratic voters and independents who lean Democratic, compared to 25% for former Vice President Joe Biden; Bernie Sanders is in third place with 16%. Note in August, Biden was at 32%, Warren 19%, and Sanders 15%.[viii]

In betting markets, Warren’s prospects of winning the Democratic nomination are even more promising. According to Predictit, Warren’s probability of becoming her party’s nominee is 47%, versus 25% for Biden and 11% for Sanders. To highlight just how quickly and far she has ascended in recent months, Warren was at 19% in early July.

Warren’s notable policy positions are Medicare for All, a wealth tax, rolling back the Trump tax cuts, dividing commercial and investment banking units at large financials, and requiring private equity firms to assume debt and pension costs of acquired companies.

As we’ve highlighted before, the most sensitive sector to the election outlook has arguably been healthcare providers, which are now down nearly 20% during the last year. They’ve been notably weaker during the last month despite the strength in the broad market. We believe this is in response to Warren’s political ascendancy.

Of course, the Democratic primary season is still far off, with the Iowa Caucuses scheduled for February 3, 2020. Four months is a political eternity, and therefore anything could still happen. It’s worth monitoring Hillary Clinton for the possibility of her entry into the race. Clinton has a new book being released and will do more public appearances; and with the Trump impeachment inquiry, the argument may grow even more among her supporters and some independents that the 2016 elections were illegitimate.  

Is the possibility of a Trump impeachment a major market risk? Are Republicans in trouble in November 2020?

Yes, an impeachment process could be a major market risk. But its likelihood appears low to us.

In previous client letters, we’ve highlighted our view that the Clinton impeachment events during the late summer of 1998 may have contributed to a nearly 15% decline in the S&P 500. That’s a useful precedent to consider when thinking about the market implications of a Trump impeachment, especially in light of the major, market-friendly corporate tax cuts that could be undone in 2021 with a new administration.

Of course, the validity of an impeachment inquiry and trial is currently divided along party lines. The key developments we are watching for here are whether any Republican senators would cross party lines in favor of conviction in a Senate trial, as well as the public’s appetite to impeach the President.

Removal from office would require a two-thirds majority in the Senate. Republican political consultant Mike Murphy told MSNBC’s Andrea Mitchell on September 25 that one Republican senator told him that if a secret vote were held, at least 30 Republican senators would support impeachment.[ix] But we haven’t seen more reports of that view. For now at least, there appears to be no indication that the President lacks the support of most of his party in the Senate.

As for public opinion, a recent Monmouth poll found 52% oppose impeachment and removing the President. This is hardly the support some Democratic leaders have hoped for in order to pursue impeachment. Although she supports an inquiry today, House Speaker Nancy Pelosi said in March that she opposed impeachment because: “Unless there’s something so compelling and overwhelming and bipartisan, I don’t think we should go down that path, because it divides the country.”[x]

For now, the prospects of President Trump being impeached may be overestimated by some.

Furthermore, it isn’t necessarily clear that Republicans are in trouble in the next election. President Trump may have created the most formidable re-election campaign ever. According to the Washington Examiner, Trump’s campaign and the Republican National Committee raised $125 million during the third quarter 2019, raised $308 million during the first three quarters of the year, and had more than $156 million the bank. To underscore the scale of this fundraising, President Obama raised just $70 million during the third quarter of 2011.[xi]

The Trump campaign and the RNC may raise $1 billion in this election cycle. Even more, and perhaps speaking more to the new political environment caused by the new impeachment push, on September 24th they ran a fundraising drive in response to Democrats’ inquiry. By the end of the day, $1 million was raised.

This unprecedented fundraising could be powerful given Trump’s competitive advantage in terms of voter targeting. In March, in an interview with CNN, Howard Dean, who is in charge of the Democratic National Committee’s data analytics and targeting infrastructure, acknowledged: "I think, right now, we're not competitive. [Republicans] been doing this the right way for two cycles and you know the DNC has really started out in a hole. You know, we have basically 12 months or so to get us in shape."[xii]

Furthermore, the impeachment inquiry may not necessarily be a serious political wound for Republicans, but an advantage if the public doesn’t meaningfully support the undertaking. The Clinton impeachment precedent may again be instructive. During the weeks leading up to the 1998 midterms, Newt Gingrich had been expecting to pickup 10 to 40+ seats in the House. Ultimately, Republicans lost 5 seats.[xiii]

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of Camelot Event-Driven Fund  (tickers: EVDIX, EVDAX).

*******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

[i] “Charles Evans says Fed has turned dovish, but still might need to do more,” by Holly Ellyatt, September 30, 2019, CNBC.

[ii] “National Security Strategy of the United States of America”, December 2017, the White House.

[iii] Speech at Hudson Institute by Peter Navarro, June 28, 2019, Hudson Institute.

[iv] Ibid.

[v] Ibid.

[vi] “China’s exports fell unexpectedly in August as US trade war continues to slam industrial economy,” by William Zheng, September 8, 2019, South China Morning Post.

[vii] “Navarro: US and China will discuss these two issues in next round of trade talks”, by Evie Fordham, September 8, 2019, Fox Business.

[viii] Warren Continues To Climb While Biden Slips Quinnipiac University National Poll Finds; Democratic Primary Is Neck And Neck”, September 25, 2019, Quinnipiac University Poll.

[ix] Andrea Mitchell Reports, September 25, 2019, MSNBC.

[x] “Pelosi: ‘I’m not for impeachment of Trump”, by David Alexander, March 11, 2019, Reuters.

[xi] “Trump and Republicans break fundraising record and bring in $125m haul”, by Zachary Halaschak, October 2, 2019, Washington Examiner.

[xii] “Money, Power, and Data: Inside Trump’s Re-Election Machine”, By Jeremy Diamond, Dana Bash and Fredreka Schouten, March 19, 2019, CNN.

[xiii] “The 1998 Elections: Congress – The Overview; G.O.P in Scramble over Blame for Poor Showing at the Polls”, by Alison Mitchell and Eric Schmitt, November 5, 1998, New York Times.