There are moments in time when decades seem to happen in weeks.  That’s how it feels now as I sit to write this commentary.  The whipsawing of the markets over the past 3 months was smooth sailing compared to the first week of April.  The Oak Springs investing strategy was carried through the first quarter by the performance of the long duration US government bonds and gold.  The Magnificent 7 stocks, which have been the market return for the past two years, lost approximately two trillion dollars in the first quarter.  The Nasdaq and the Russell (small caps) both moved into bear market status, meaning down over 20%.  The Dow and the S&P are both in correction status, down between 10 and 20%. 

So, the air is coming out of the asset bubble.  Bubbles don’t pop on their own.  The Dot Com bubble was pierced by the unraveling of stocks such as Global Crossing and Enron.  The Great Financial Crisis was kicked off by the failure of Lehman Brothers.  The implementation of tariffs by the Trump administration is getting the bulk of the blame for the current market meltdown.  But the real reason is probably the dawning awareness of a US recession.  The uncertainty surrounding the tariffs has been fuel thrown on an existing fire.  The US private sector has been in recession for the past two years.  The public sector has benefited from massive government spending of borrowed money and the inflated asset bubble.  The government’s spending is now being reigned in, and the asset bubble has popped.

The long duration government bonds which were our flotation device for the 1^st quarter are now being dragged down by concerns the tariffs will create inflation.  Treasuries are also being hit by short sellers and probably some countries are selling treasuries in retaliation over the tariffs.  The slow down in global trading is also creating a shortage of dollars.  Domestic and international holders of treasuries may be selling to create cash.

The tariffs are creating global trading uncertainty, but the trading system is already in a slowdown.  The US was propped up by deficit spending, but Europe, Asia, Canada and Mexico are already deep into recession.  The US is now joining.  So, is this the garden variety recession which lasts 8 to 10 months or something more painful. 

According to FED chairman Jerome Powell the economy is strong, and employment is fine, as long as you already have a job.  The FED is delaying any cut in short term interest rates while it waits to see the impact of tariffs.  Their concern is that tariffs will increase prices and cause inflation.  History says that’s not what happens.  The FED has a perfect record of being wrong and late to make a decision.  Instead of inflation the FED will be cutting interest rates as it chases after a deflating economy.  Latest March consumer and producer prices were both negative for the month.  Another sign that disinflation and not inflation is the current direction

Gold continues to outperform, reaching an all-time high. The primary buyers of gold have been central banks.  Questions surrounding the US dollar reserve currency status, the US government debt, the economic weakness in Europe and China, the threat of military conflicts, and the breakup of the global trading order are all pushing up the demand for gold. The US dollar, US treasuries and gold are the only accepted world trading currencies.  I expect to see the price of gold continue to climb, along with silver and other hard asset commodities.  Gold, silver and commodities make up approximately 15% of our portfolio. 

Long duration US government treasuries are a 40% position in our portfolio.  As the recession deepens and deflation picks up speed, the treasuries will appreciate.  As we entered the month of April treasuries began to sell off and yields climbed. 

Tariffs will continue to dominate the financial news as we move through the remainder of the year.  But there is plenty of other financial news to keep me up at night.  Bank lending is slowing. Corporate bankruptcies are hitting a high last seen during the Great Financial Crisis.  As are personal bankruptcies, credit card late payments, residential foreclosures and auto repossessions.  Acquiring credit will become a problem for the people who’ve not been paying back their student loan debt.  Beginning in January the failure to make timely payments was being reported to the credit agencies.  Approximately 20% of those borrowers are more than 90 days delinquent. Expect the unemployment rate to continue going up, with or without tariffs.  Consumer spending will continue to slow.

The market will more and more reflect the weakness in the economy.  At some point there will be a great buying opportunity.  In the meantime, out equity exposure will be primarily focused on dividend payers. 

Expect big swings in the market. Historically big swings.  Every down day doesn’t mean a buying opportunity, but, that day will come.