It’s never fun to watch people lose money.
That’s why we find it irksome when someone brands us “permabears.” We don’t enjoy triple-digit declines in equities and we’re not going to enjoy it when yields finally explode higher and every retail investor who owns a junk bond ETF suddenly realizes what all those pundits meant when they said “prices move inversely to yields.”
That said, what is fun to watch is Wall Street struggling to find compliance-friendly ways to describe what has become a completely ridiculous, over the top rally in both equities and fixed income. It must be a terribly difficult task to convey the sheer absurdity under such constraints because we have a hard time conveying it with free rein to say pretty much whatever we want.
But the sellside desks are getting restless. There’s a palpable sense that no one wants to be the guy or gal who didn’t at least try to warn clients that what’s going on simply isn’t sustainable. You can be a permabear and keep your job during a bull market. They’ll just call you a “contrarian.” What you can’t as easily do is be a raging bull just prior to a crash. That’s why you’re seeing more and more cautious desk commentary.
See, the fate of the economic universe now hangs on fiscal stimulus. It’s funny because central bankers have been begging for this for years. They probably realized sometime in 2013 that this whole monetary experiment was failing so they implored lawmakers to help out.
Well now that rates are sub zero and central bank balance sheets have ballooned into the multi trillions…
(Chart: Goldman)
...there’s pretty much only one option left and that’s deficit spending. It’s either that, or the entire developed world sinks into deflation - and that’s not hyperbole.
Whether or not a coordinated global push for fiscal stimulus will ignite inflation is debatable and how anyone plans to pay for it even more so. Consider the following amusing commentary from Morgan Stanley:
“Our framework warns that global reflation remains an illusion. You may trade in anticipation, but you may not see the reflation train ever leaving the station. This is why we see only a temporary EM FX investment opportunity. High global debt and low investment returns held back by discouraging productivity trends globally keep deflations risks high.”
“With monetary policy having less impact, the focus returned to fiscal and structural measures supporting economies. Structural measures are difficult to implement within societies increasingly influenced by populism. Consequently, fiscal policy has had a renaissance. Markets want to believe in the success of this approach despite evidence that its effectiveness has declined. Otherwise, the shift from defensive into offensive strategies would not make sense. Equity markets trading cyclical and financial equities higher and switching from coupon and dividend earning to growth strategies show that the market ‘wants’ to believe into reflation.”
“Facts fare better than ‘beliefs’: It is a fact that fiscal expansions have increasingly failed in developing positive multipliers. Today’s fiscal expansion is viewed as tomorrow's tax increase, leading to precautionary private sector savings.”
Good point. Which makes one wonder how Americans are going to react to any attempt by either Hillary Clinton or Donald Trump to stimulate the economy with increased spending. FactSet has some interesting commentary on this very same topic. Here’s Dave Nadig, Director of Exchange Traded Funds:
“Each year, David Kotok, well-known head of the Sarasota, Florida-based Cumberland Advisors, invites 50 or so well-known economists, investors, and journalists to join him for a little fishing in Grand Lake Stream, Maine. The point of the weekend isn’t so much the fish, however, as the conversation. Kotok has curated the list of attendees not to engender groupthink, but rather to represent a broad range of backgrounds and opinions on economics and markets, from every corner of the political and economic spectrum.”
“The weekend has been referred to as a ‘mini-Davos,’ which is probably apt. Somehow, this year, I was lucky enough to be included.”
“While participants came from varying parts of the political spectrum, I heard little direct support for either candidate. Instead, what I came away with was a concern that from an economic perspective, both parties seem to be heading towards record deficit spending without much real sense of how to pay for it. There was a substantial sense of longing for a time when politicians engaged in intellectual debate and ultimately came to compromise solutions for the benefit of the country – a nostalgia I feel myself.”
Well Dave, all of us political scientists feel that same nostalgia but unfortunately, we’ve entered an era that no longer produces politicians. Instead, the glory goes to the Vladimir Putins and Xi Jinpings of the world.
But guess what folks? No matter your political leanings you’d better get behind old Dave’s push for the resurgence of “politicians engaged in intellectual debate” in order to ultimately come up with “solutions for the benefit of the country,” because this doesn’t look so hot to us (and before you say “wait a minute that chart looks great,” note the y-axis):
(Chart: FactSet)