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Reading my initial post, it appears that I may have "brushed over" some of the risks that may (naturally) arise as a result of a nine-year global growth cycle - albeit interrupted by the European Sovereign Debt Crisis, the slowdown in Chinese credit growth, the near-collapse of the Brazilian economy, the 2013-2016 collapse in oil prices, and the structural collapse of U.S. retail profit margins (FIVE, TJX, ROSS, and OLLI notwithstanding).

As I implied in my initial post, I keep a close watch on the term structure of the U.S. yield curve, along with the change in U.S. unemployment and potential inflationary pressures. An inverted U.S. yield curve has nearly always led to a U.S. growth slowdown; at the very least, U.S. stock prices (e.g. 1998) have tended to underperform, even if no U.S. recession occurred. A major exception is the October 1987 crash--when the U.S. yield curve did not invert--but this was preceded by a 200 bps increase in the U.S. ten-year yield, and of course, an exponential rise in U.S. stock prices and margin debt outstanding leading into the August 1987 peak.

The U.S. yield curve has not inverted, but there is increasing chatter that the Fed may hike 4 times this year, not 3. Worryingly, 10-year expected inflation, as implied by TIPS pricing, broke out to a new 4-year high last Friday. The Fed is now projecting U3 unemployment to hit 3.8% this year, and as low as 3.6% next year--the latter of which will be the lowest unemployment rate since 1969, or at the peak of Vietnam War troop deployment.

Sorry, I may be wrong (and I often am) but I just don't think we could keep the inflation genie bottled up if U3 unemployment rate declines to below 4.0%. Perhaps when that happens, the Fed can engineer a "soft landing" but the Fed hasn't had great success in doing this.

Another "weak link" that I am watching is the speculative short position in the U.S. dollar, which is now at multi-year highs. A prominent economist that I track asserts that for everyone 10% decline in the U.S. dollar, the U.S. economy receives the equivalence of 100 bps of Fed easing. EM economies also benefit from this indirectly through speculative flows into their economies, especially EM countries that are running structural current account deficits, such as India, Brazil, and South Africa. The IMF's April 2018 Global Financial Stability report briefly mentions this as a short-term risk--if the U.S. dollar stages a sizable rally, speculative flows could again flee EM economies. This is not another 1997 or 1998--given most EM economies have built up their FX reserves as a response to those crises--but it'd definitely put a dent to global asset prices/GDP growth in the short-run.

Comments and questions are welcomed.
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