By: Scott Davis

Credit drives all cycles, but inventories drive much of the cycle volatility. Something many investors have been reminded of in recent months with destocking across many industrial verticals (e.g. autos, electronics). Inventories are notoriously difficult to measure, particularly in Emerging Markets, which also tend to see even larger swings around restocking/destocking than the developed world. We have decent gov’t data in the U.S., however, and right now those data are flashing warning signs that we need to pay close attention to. Industrial channel inventories, in particular, are at levels not seen since the 2008-2009 financial crisis. And are now two standard deviations above their long-term average.

The key question is: are inventories rising because of slowing demand, or because companies are building safety stocks given tariffs/trade tensions? Right now, we think it’s more the latter, though clearly trade distortions are making it increasingly difficult to draw conclusions from our data. At a minimum, there clearly seems to be continued short-cycle risk going into 2Q earnings.

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