“What has puzzled us before seems less mysterious, and
the crooked paths look straighter as we approach the end.” Jean Paul Richter (1763-1825)
Stuck with the Familiar
There’s enough professionals and
investors in financial services who are left stunned by the simple upward
movement of stock prices. The age old status quo of low
interest rates, low volatility and higher stocks market prices remain
resoundingly in place, yet again. Beyond so many warnings of calls of a
market top from average pundits and well-regarded investors, the stock market
has remained strong not only in the US but in Europe as well, with the German
stock market up over 8% for 2017.
There is a "bubble" forming somewhere; sure
that’s part of any cycle, but the details of how it'll play out have clearly
not been realized. Perhaps, the exact “bubble” remains mysterious beyond what's
imaginable.
Amazingly, the more the mysterious the unknown, the
more the status-quo becomes appealing. Strange psychology indeed. As it relates
to the bubble, more common questions are asked: Is the bubble in the low-rate
policy of Central Banks? Is the ETF and passive strategy obsession getting
overdone? Is the low volatility period about to end? Swirling speculations
surely circulate, but have not impacted the market sentiment in an adverse way
as some expected. From global worries ranging from Syria to North Korea to
changing policies landscapes in key regions, the general sentiment is not breaking
down the stock market sentiment easily. Maybe, there's so many concerning
issues that investors are becoming numb to worrisome topics. Theories
aside, as long as rates remain low in developed markets while emerging markets
re-attempt to stand on solid footing, the reinforced idea is to keep assets in
developing markets. This preference in developed markets extends from
stocks to real estate to the US Dollar.
Disconnect Revisited
In terms of the real economy, it presents a different
story that the bullish financial markets, in which real growth is not visibly
vibrant. Long term bond yields are low; in the case of the US 10-year being
below 3%, still signals lack of straight. Plus, the results of Trump and Brexit
still reflect how the Central Banks’ narrative of crafty words and theoretical
chatter fails to paint the reality that's felt by the average voter in the real
economy. The ground level realities versus the investment community is creating
an earth-shattering disconnect. Of course, in recent years the first
quarter data has been weak and first 3 months in 2017 was no different. Trump
or Obama is irrelevant, the soft near or below 1% GDP growth signals trouble
rather than a robust economy.
Government data is only one way to get a gut check of
the economy, but there are misleading factors and trickery that's purely
spewing disconnect. This is a common situation that observers are accustomed to
by now. The gridlock in Washington DC exhibits further frustration for change
seekers; but as Trump is learning, the establishment is quite unbreakable and
unfit for rapid policies. So far, the DC gridlock hasn’t bothered bullish
participants and, to be fair, the government shutdown few years ago did not
bother many investors either. The gridlock in Washington has delayed sound
policies that are in favor of business from low regulation to lower taxes. Yet,
with implementation taking a while, it is hard to see the revival of the real
economy in a meaningful way.
Convenience & Deferral
Amazingly, Trump and Yellen actually are best
positioned to ride the current wave rather than derailing the status-quo.
Despite Trump being the anti-establishment and “anti-Fed” politician, the
hardnosed pre-election comments by Trump are being diluted at a rapid pace.
Essentially, having stocks trade around all-time highs is a good spin for
political leaders who are desperate to find good news. Similarly, Yellen, who
has been ferociously challenged on interest rate polices, is finding that
deferring any risk seems easier than confronting reality. Essentially,
courageous and bold investors who’ve bet against the Federal Reserve have paid
a severe price given the multi-year stock market appreciation. At some
point, the natural flow of markets will expose the flaws of low rate policies
and the limitation of election officials in making a difference.
Article Quotes
“While the ECB has six weeks
and another round of monthly data to process before its next policy meeting,
the latest reports will give ammunition to Governing Council members who have
publicly aired their view that the time is near to signal the gradual
withdrawal of monetary stimulus. Draghi’s concern is that even
discussing the matter too soon, let alone acting, will stymie the recovery.
‘The risks surrounding the
euro-area growth outlook, while moving toward a more balanced configuration,
are still tilted to the downside,” he said after the Governing Council’s
meeting on Thursday, using language that was mildly less dovish than the
previous stance. “We have not seen any evidence, or any sufficient evidence, to
alter our assessment about the inflation outlook.’ Friday’s inflation data was
robust enough to snap a two-day decline for the euro and put it on track for
the biggest weekly gain since June. Core price growth, excluding food and
energy, accelerated to 1.2 percent in April. That’s the highest reading since
June 2013, and the half a percentage point jump from March is the
biggest in more than 16 years.” (Bloomberg, April 28, 2017)
“Economist Paulina
Restrepo-Echavarria and Senior Research Associate Maria Arias said foreign
central banks and other international institutions have been steady buyers of
U.S. Treasuries since 2008. However, these institutions have trimmed their
holdings of U.S. Treasuries since the size of their holdings peaked in 2015. China
and Japan, the two countries holding the most U.S. government debt, had
different reasons for reducing their holdings of U.S. Treasuries.
‘China has been selling U.S. Treasuries to defend its yuan in the face of
capital outflows due to slower growth,” Restrepo-Echavarria and Arias wrote.
“Japan has been swapping Treasuries for cash and T-bills because its prolonged
negative interest rates have increased the demand for U.S. dollars.’ Though
Treasury holdings by foreign official institutions have declined since 2015,
the authors said that U.S. Treasury yields were more or less stable until the
latter half of 2016. They noted that the yields on two-year, 10-year and
30-year Treasuries increased 0.24, 0.44 and 0.45 percentage points,
respectively, between their lowest point on the week ending July 6 and the week
ending Nov. 2.” (St. Louis Federal Reserve, April 20, 2017)
Key Levels: (Prices as of Close: April 28, 2017)
S&P 500 Index [2,384.20] – Approaching March 1st
highs of 2,400, which only reinforces the trend of making or hovering around
all-time highs.
Crude (Spot) [$49.33] – After failing to hold above $52, notable
sell-offs persisted in March and April. Crude
still struggles to hold above $50.
Gold [$1,266.45] – The uptrend since Mid-December lows of $1,226.95
remains in place. Intermediate positive trends continue to hold.
DXY – US Dollar Index [99.05] – Although the annual highs of
103.82 have not been reached in several months, still the strength of the
Dollar remains. Of course, the annual
lows of 98.69 was reached last week on April 25.
US 10 Year Treasury Yields [2.41%] – March 14, 2017 peak of 2.62%
remains the annual peak, since then Yields have retraced in recent trading days.
Breaking below 2.20% can trigger some worries and may symbolize risk-aversion.
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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
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