Every summer for the past several decades I have organized a series of Friday lunches in eastern Long Island for serious investors. More than 100 people attend the four sessions, with 25–30 at each one. The participants include hedge fund, private equity and real estate billionaires, venture capitalists, an academic and some corporate leaders. I moderate a discussion of the key issues facing the financial markets for the better part of two hours. This year, several significant events occurred between the first two and the second two sessions. First, the Federal Reserve cut the Fed funds interest rate by a quarter of a percentage point; second President Trump announced a 10% tariff increase on $300 billion of Chinese goods; third, China allowed its currency, the renminbi, to decline to more than seven to the dollar; and fourth, the Hong Kong disturbance took place.

These events sent both the stock and bond markets into turmoil, rocking the complacency of investors throughout the world. The Standard & Poor’s 500 dropped sharply from its high, the 10-year U.S. Treasury yield declined to below 1.6% and the prospect of a recession in 2020 increased. At the first two lunches, most investors were positive, thinking the S&P 500 would continue to make some modest progress through the end of the year and the next recession would not occur until 2021. At the two August lunches, many thought the market could lose ground in the final months of 2019 and that the likelihood of a recession was increasing for 2020. Investors had been assuming that a trade deal with China would be reached sometime prior to the 2020 election, but when Treasury Secretary Mnuchin and Trade Representative Lighthizer returned from Shanghai and told the president that talks with the Chinese had not gone well, Trump reacted strongly by announcing the new tariffs and the stock market began its long slide down. Yields on Treasury securities plummeted as the prospects for a recession in 2020 increased. The turbulence in the capital markets is sure to have an impact on the willingness of both consumers and corporations to make spending commitments. As a result, earnings estimates for companies and GDP estimates for the economy are likely to be adjusted downward. If the current negative conditions continue, Donald Trump’s prospects for a second term will become darker, and that increases the likelihood that he will do something to reverse the trend. One step he could take is to defer the imposition of the new tariffs beyond the September 1

st announced date and do everything possible to resume trade discussions with China on a positive basis. By the middle of August he had done just that on some goods covered in the tariff increase, thereby improving the prospects for renewed talks with China.

At three of the sessions, I went around the table asking, “What do you think is the most important issue facing the financial markets over the next twelve months?” Naturally, the trade war with China, a possible recession because of a monetary policy or other mistake, and the unpredictability of Donald Trump were often mentioned. What was seldom brought up in the discussion that followed was climate change, gun control, health care policy and the political polarization between the left and right around the world. There was some discussion of the high and growing level of government debt, but few believed that was a near-term problem. There was not much of an appetite for Bitcoin, Libra, or any other crypto-currency, but there was broad support for the significance and viability of blockchain technology.