Spoiler Alert - the Titanic sank … but we care about the turning

In case you are not familiar with the Titanic (spoiler alert), it was supposed to be an unsinkable ship, but on its maiden voyage, it famously or infamously, struck an iceberg. The collision (more like a sideswipe) ripped open the hull of the 46 thousand ton ship, sending it to the bottom of the North Atlantic in 160-minutes (35-minutes less than the length of the movie Titanic).

While it's the sinking and the lack of lifeboats (more on that in a moment) that has ingrained Titanic in the history books, it's the turning that we are interested in.

You see - the iceberg that would ultimately sink Titanic was spotted 30-seconds before impact. The bridge tried valiantly to turn the ship, which was traveling at an estimated 22.5 knots (about 40 kph), but turning a 46 thousand ton monster that displaced more than 50 thousand tons of water takes not seconds, but minutes to turn - time that Titanic and its ill-fated passengers and crew unfortunately did not have.

In many ways, the U.S. economy is like the Titanic before it struck the iceberg. It is a $21 trillion monstrosity that is responsible for ~25% of all global activity, despite having ~4% of the globe's population. Put another way, the average U.S. person punches roughly six-times above their economic weight.

Over the past 75-years (since the end of World War II), the U.S. economy has only had 10-instances in which it has actually experienced a year-over-year decline in economic activity (sideswiping the iceberg).

Many of the years in which the U.S. economy did not shrink (missed the iceberg so to speak), were accompanied by horrible headlines.

Consider:

Now, in the moment, all of these events led to headlines that appeared to strike the chord that the U.S. was heading toward recession and there was no amount of turning of the wheel that would avoid collision. But, like the Titanic, the U.S. economy is a very hard ship to turn when its course has been set. And in almost all years, the course is set not toward recession, but rather toward the great engine that displaces an incredible amount of economic activity producing continued growth.

2019 has embodied the steaming spirit of the U.S. economy. Despite negative headlines around U.S./China trade, the impeachment of Donald Trump, Brexit, and a global slowdown that has hit much of Europe and Asia - the U.S. economy, as epitomized by strong jobs data on the first of November, continues to steam along.

As we have noted previously, we tend to focus on five things when thinking about the next 12-18 months. They are:

• Job creation: simply put - an economy that is creating enough jobs to put new workers to work is generally a healthy one;
• Wage growth: the more money in folks' pockets, the more they will spend/pay down debt/feel good about things;
• Manufacturing activity: while not as important to the economy as the consumer (it's about 1/6th the size in the economy), manufacturing tends to be more sensitive to what's really happening (its peaks and valleys are bigger);
• Housing starts: every new house built is three new jobs and generally jobs that pay well;
• Lending conditions: if banks are willing to lend to consumers and businesses, then the whole system tends to function well - if banks start to tighten up, the economy tends to feel it.

Of the above, only manufacturing has been struggling and this is likely very closely tied to the ongoing trade dispute with China. Thus, while we continue to worry that it may spread to other areas, it has not as of yet and we could see it as a source of growth in 2020 should the trade dispute reach a resolution.

Canada is the water-skier hitched to the Titanic

Canada has a myriad of economic problems: consumers have too much debt; our oil is both perceived as dirtier than other oil and is more expensive to produce; and there is generally not much foreign investment in the country (a key to long-term wealth creation). But, history has taught us that as long as the U.S. economy is continuing to grow, the Canadian economy is very likely to follow suit. In fact, going back to World War II, Canada has not experienced a single recession that was not accompanied by a U.S. recession.

Remember the Eastland!

Titanic led to one of history's most tragic examples of the law of unintended consequences. In the wake of the sinking and the lack of lifeboats aboard the ship, many calls were made for "lifeboats for all." The U.S. ultimately passed the LaFollette Seaman's Act, which required lifeboats for at least 75% of passengers aboard a vessel, despite warnings from some that adding a number of heavy lifeboats to the deck of a ship could make them more unstable and thus ultimately less safe.

The Eastland, which was a Great Lakes passenger steamer, abruptly capsized in light rain less than 20-feet from shore in large part because of the added weight of the lifeboats that the new law required. Because of the rain, many of the passengers were below deck when the ship literally flipped over - killing more passengers than had died in the Titanic tragedy three-years earlier.

We pass this last tidbit along because things in the world of investing will never be perfect (there will never be lifeboats for all). We think prudence dictates a bit more caution with a very contentious election approaching and some signs of economic cracks (manufacturing). But we also remain relatively upbeat and while we are on the lookout for the iceberg, we do not see signs as of yet.