“It is dangerous to be right when the government is wrong.” (Voltaire 1694-1788)
Grasping the Narrative
Three Fridays ago, high-octane NASDAQ stocks temporarily showed signs of slowing. Perhaps, that began to set the tone for a June that symbolized a breather to the ongoing near-record high broad index performance. Even debt markets are mildly realizing that some of the madness in “yield chasing” requires an occasional sanity check. From an overheating auto sector to retail, there’s signs of concern and contemplation of tragic end possibilities to this smooth-sailing cycle. However, the tame volatility and overly calming message by Central Banks makes the “fear” of overheating seem out of favor and unwarranted.
It’s no accident that most of the bond markets have been lethargic in buying into the Fed’s story of “economic improvement”, as the 10-year yields remain in low standing in the familiar territory of below 2.5%. Of course, short-term rates have risen to a nine year high from ultra-low levels (2-year US Treasury Yields closed at a meager 1.41%), showcasing the impact of the Fed’s recent hikes and the ongoing perception of rising rates ahead. Perhaps, the rate hike anticipation builds into the optimism in bank stocks which are being favored. Plus, if the shares of Tech high-fliers begin to normalize away from euphoria, then more capital will seek to rotate into interest-sensitive themes.
Yet, in order to grasp the impact of the Fed’s policy versus perception of economic growth, one is left with too many mixed economic data, unconvincing inflation and a frustrated voter class. It is hard to get a clear picture on inflation, which surely is not digestible and not convincing on many levels. Inflation is not the primary concern at this moment since the lack of wage growth, lower energy prices, expanding aging population and lack of wealth creation beyond financial asset appreciation are also weighing on observers’ minds. Not to mention further M&A, more robust e-commerce and fierce retail competition is gearing to drive prices even lower. This all adds up to formulate deflation pressures rather than previously feared “inflation”.
Grand ol’ Theme
Despite the day-to-day market swings, the grand old theme of relatively low rates and rising real estate and stock prices is abundantly familiar in Europe and the US. But that’s too well documented by now and predicting the so called “turn” or market “top” has proven to be a deadly game, especially for professional money managers. For capital allocators and retirees, “yield chasing” is the desperate feeling for a need to take risk or the mind games that come with feeling left out of the multi-year rally.
Risk-taking is a form of an addiction, like low rates and low volatility. The Central Bank-induced reality is tempting more risk-taking. The skeptics are left to hold cash earning near-zero while awaiting distressed opportunities or mode ideal entry points for liquid markets. Patience might be rewarded, but opportunity can be missed too, as many have learned.
This tireless loop of relatively low interest rates in which yield-starved investors seek “risker” returns, mixed with skepticism from professional pundits regarding elevated stock markets, persists. This revolving pattern in not the summer theme, but rather an all-year round theme to a point where the surprise element has diminished given low volatility. At times it’s hard to tell what’s more numbing, the near all-time high stocks or the grand market top calls by pundits? Frankly, both seem sensational at times. The near or all-time high stocks is today’s reality; meanwhile, the timing of the demise of all this is just speculation. ‘Tis life in the investment world. For the skeptic crowd, the root of bearish catalysts needs to be clarified, as event-watchers eagerly await.
Innovations & Wastefulness
The Industrial Revolution of our generation has been felt from Apple to Google to Amazon to Facebook to Tesla, creating lifestyle changes in industries, but also reshaping the labor markets. There’s a massive change in retail, groceries and other industries like newspapers, autos and Fintech, as well. Of course, M&A is geared to heat-up with large companies looking to acquire smaller companies, and there’s deflationary pressures mounting – where prices are lower for consumers. However, the enhanced benefits for consumers in the near-term will lead to more obsolete jobs in several sectors, which impacts the economy adversely. Therefore, the pace of new economy jobs may (or needs to) pick up. This will require new skills and force the working class to reinvent themselves in several areas. Bracing for a rapidly changing and competitive economy is hard to do, but important to come to terms with at this stage.
Wage growth remains a challenge as policy makers struggle to find a solution to the inefficient and costly healthcare and education systems. Inadequacies in healthcare and education continue to hurt Americans and deflate sentiment and optimism. Meanwhile, the American voter, in the middle class especially, is not too thrilled by gridlock in DC, lack of meaningful growth policies and policymakers’ pragmatism to identify priorities. From tax reform to the healthcare debate, the inefficiency of the public sector is a bottleneck to growth as much as the efficiencies of recent innovations. Whether through human deficiency via politics and outdated policies or by human efficiency through machines – wealth creation for most is being attacked from both sides.
In the intellectual circles, debate about Yellen’s effectiveness, the possible rift in Middle East between Qatar and Saudi, and innovative ideas seem to dominate discussions. In the real economy, rising home prices (due to Yellen’s policies), extension of Federal powers to a less effective government and the media who entertain headlines without sense of urgency resurface in the middle class circle. The glaring disconnect between low interest rate policies that inflate stocks versus bad policies that increase costs while lessening taxpayer benefits is apparent. If Trump’s victory symbolized voters’ outrage against the establishment, one should only imagine what more status-quo can do to the anger level of the middle class. Urgency for reform is becoming popular despite the failed executions and circus-like actions.
Key Levels: (Prices as of Close: July 3, 2017)
S&P 500 Index [2,429.01] – The Index is staying above 2,400, which sets the new landmark for the recent record high moves. The June 19th high of 2453.82 remains the record high, but sideways action remains in place.
Crude (Spot) [$47.07] – June 21st annual lows of $42 stands out after the weakness exhibited by Crude during the first half of the year. Since March, Crude weakness has decelerated, which reiterates the supply glut.
Gold [$1,229.25] – Prices retraced from $1,336.25 to 1,126.95 in the second half of 2016; this year some mild recovery in Gold ended up materializing. Now, a mild pause is formulating.
DXY – US Dollar Index [96.21] – The Dollar weakness has been quite a downtrend after a strong 2016. The strength from last year faltered during this first half. Interestingly, the May 3, 2016 of 91.91 can be a noteworthy point to redefine the Dollar’s trend.
US 10 Year Treasury Yields [2.34%] – Last July, yields bottomed at 1.31%. Today, after 100 basis points later, yields remain below 3% as the annual highs of 2.62% in March define the next benchmark.
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The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
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