Something’s Gotta Give
One week ago today, I conducted what will likely be my last event for The New York Society of Security Analysts. The topic was the divergent messages of the fixed income markets versus the equity markets. The title of the event was “Credit versus Equity Markets: Something’s Gotta Give”.
Many of the areas explored at the seminar were recapped in my most recent appearance on Bloomberg radio two days ago. The audio for the interview can be heard here:
Audio Length: 00:14:07
Here are four items of note to the event and the radio interview:
1 - The message of the two major markets (equities and fixed income) are in opposition to each other. Fixed income rates imply weak economic growth and very low inflation, equity markets suggest the opposite. Therefore, in the minds of many equity investors, exceptionally high current valuation levels for US stocks are justified. Very risky.
2 - Do the high yield markets suggest that they are the canary in the economic coal mine? Data says no.
However, rapid changes in the default rate could occur, which would presage economic troubles immediately ahead.
3 - There is a profits recession underway. Will that result in an overall economic recession? Not necessarily.
However, you don’t need an economic recession to have a stock market decline. A profits recession will do just fine.
4 - Central bankers have become the great enablers. By continuing to act aggressively they are giving other public policy officials a free pass. It is a form of monetary activism that is not helpful.
Monetary policy alone cannot do what is needed to get the global economy to a sustainable economic expansion. This is a huge and growing problem with many other implications and consequences.
If some of the above looks familiar, it should. The central banker as enabler – and its related factors of negative interest rates and the global excess supply and insufficient demand of goods and services – is a theme that I have been focusing on to an increasing degree of late. And it is a topic that I am not alone in raising, as experts such as Nobel laureate Joseph Stiglitz1, Larry Summers2, and Martin Wolf3 to name a very few, along with commentaries in the Financial Times4, the Wall Street Journal, and elsewhere who have raised the issue of the advisability of central bankers engaging in “monetary activism” and, in the process, continuing to give elected officials a free pass on doing their job.
Investment Strategy Implications
As it relates to financial assets, a major byproduct of central banker action has been to enable not only other public policy decision-makers to NOT do their job but to, also, force investment professionals into assuming riskier assets to generate rates of returns to meet liabilities and objectives they are charged with achieving. Therefore, is it any surprise that US stocks ride higher and higher into overvalued territory despite challenges to doing so?
Macro strategy analysis may not be as sexy as picking the latest hot stock or trading idea but without a clear understanding of the macro drivers at work, hot ideas lack the sustainable qualities necessary for consistent investment results. Kind of like a central banker losing his/her focus on the longer term consequences of their actions.
1 What’s Wrong With Negative Rates?
Note: In this commentary, Professor Stiglitz also the issue of central bankers using models that have been demonstrated to have failed at key points in the recent past. In other words, central bankers may operate with an air of invincibility but they are anything but.
2 The Age of Secular Stagnation
Note: Included in this commentary is Mr. Summers "secular stagnation" theory, which ties directly into the points I have been raising regarding excess capacity and insufficient demand.
Disclosure: Accounts managed by Blue Marble Research may presently hold a long/short position in the above mentioned issues and their inverse comparables.
one of the things that ought to be done, both as an economic stimulus and a humanitarian measure, is to forgive or restructure the Greek debt. Failure to do so is one of the things holding back the Eurozone economy/ies/. German opposition to debt forgiveness or restructuring for Greece is hypocritical since Germany was probably the greatest beneficiary of debt forgiveness in the 20th century. The Marshall Plan money, 15 billion $ given to Germany after WW2, the German war, all stayed in Germany. Most was forgiven debt while a small part was paid back to the USA but stayed in Germany as counterpart funds to be used for projects in Germany. Then the various countries occupied during the war, including Greece, signed away their right to reparations under US pressure. Furthermore, Germany engineered its own debt forgiveness for WW One debts owed to France by devaluating their own currency. so forgiving or restructuring the Greek debt while also undertaking infrastructure projects in Greece, including maritime oil and gas exploration off the Greek coast, would provide needed stimulus, not only for Greece but for the whole Eurozone and EU. And if drilling were successful, it would ensure oil/gas supplies within the EU itself and under EU control. We bear in mind that most of today's Greek debt was incurred after Greece revealed its problems in 2010. After that, the interest rate on Greek state debt ballooned, especially since there was no eurozone solidarity with Greece and Greece had to borrow on the free market.
Not usually a fan of podcasts but enjoyed this one. Thanks.