“Life is the art of being well deceived; and in order
that the deception may succeed it must be habitual and uninterrupted.” (William Hazlitt 1778-1830)
The Long Game
Amazingly, the market status-quo does not change much,
as tame volatility and stable stock market prices continue to persist.
Calls for bubbles, from high-profile and average investors since 2008, have
proven to be loud screams without substance (at least in precision timing). Even
after the Tech Boom, markets quickly recovered and rediscovered the next bubble,
which was infested in the mortgage related areas. Since 2008, fears have
accumulated at a rapid pace, from Brexit fears to the commodity correction to
Eurozone instability to perceived risk of low interest rates. Yet, the stock
markets keep going higher. Taking a
slight step back, it is not a shock for markets to go higher over an extended
period. From mid-1990 to 2001, from 2003 to 2008 and from spring 2009 until
today, the slow and steady upside move resumes in a familiar directional
pattern. No wonder, from the incentives of large institutions to the taxation
on profits to the ongoing collective, faith in the Federal Reserve and the concept
of buy and hold is deeply ingrained in the mindset of American risk-takers.
Perception Wars
The slow and steady upside move is worth
understanding beyond the week-to-week point of view. First, the influential financial
players need to be identified and simply dissected. Most of the investor
sentiment and dominant themes are driven by a few large financial institutions
(the usual suspects, aka Wall Street Banks), which impact the mindset created
by research and expressed in trading across the board.
For good or bad, the key originator of investor
sentiment still is the Central Bank, which now has mastered the art of public
relation, television and newspaper. Not
only is the Fed the well-crafted wordsmith, but also the Fed has
transformed into a media genius that can manipulate realities and reshape
collective perception of reality. Holding press conference often, dominating financial headlines and having
market participants follow the desired script (by staying bullish and not
causing major volatility) demonstrate the expansion of Fed’s influence on financial
markets. No mater weak real economic data, brewing
tensions of hostile global regimes, loss of jobs due to machines and lack of
wealth creation, the stock market interrupted through the Federal Reserve in
the US operates as an engine on its own. It is quite remarkable. Perhaps, the media-savvy
US president can learn few things from the made-for-TV drama artist: the Fed.
Secondly, the Central banks can choose to emphasize one
indicator over another and trick observers into thinking real economy weakness
is immaterial for day-to-day activities. Yet, there is something truly
stunning, Trump and Brexit did not break, shackle, or call out the
trick-infested Federal Reserve and their like-minded colleagues. Finally, the players that range from large
financial institutions to political establishment, play a vital role, more on
this below. The highly coordinated messaging between the Central Banks,
big media, large financial companies and, ultimately, politicians that benefit
from a “slow & steady” stock market rise is the machine that keeps on turning.
This steady stock market appreciation seems to occur regardless of any visible
economic weakness. This is the trickery
that’s misleading. From the European Central
Bank (ECB) to Bank of Japan (BOJ, the low interest rate polices of advanced
countries, helps feed into the global message. As for small businesses or
others, who don’t see the benefit of this coordination the uproar has been
reflected in elections and political groups.
While, the outrage about savers being severely
penalized due to low interest rates gets a lot of attention, the equity market
has become a “quasi- income generator” and a dangerously predictable tool to mildly grow one’s wealth.
In other words, the appreciation in stock prices has create a notion that the
run is steady and given the low volatility, turbulence has died out.
Inevitable Vulnerability
The retail and financial sectors seem to have shown
weakness last week, which hints toward them being vulnerable areas in the
public market. Retail is seeing an all-out blitz from Amazon and Walmart, where
both companies offer quick delivery, robust logistical infrastructure and, of
course, competitive prices. “Already about 89,000 employees in general
merchandise stores have been laid off since October, more than the entire
number of people working in the coal industry….[Meanwhile] “The internet retail
giant's stock [Amazon] is up 32 percent
over the year and it's devouring bricks and mortars while expanding its
real-world experiments into bodegas, drone delivery, and airship warehouses.” (CNBC,
May 12, 2017).
Financials continue to see migration to electronics
and machine-learning. The regulatory climate enhances costs and limits the
profitability for very few. Not to mention, low interest rates and low economic
growth hurt the fundamentals of consumers.
In terms of the health of the economy versus the
roaring stock market indexes, these questions remain:
- If the US economy was
so strong, then why is the US 10 Year Yield below 3%?
- Retail and financial
services seem vulnerable, isn’t that damaging for the real economy?
- Given high healthcare
and education costs, is there any noteworthy wealth that’s been created in
the last 5 years?
The gridlock in Washington DC ultimately is the
bottleneck to solving tangible issues. The record or near record high stock
market movement is a clever attempt to mask some pain or unsolved issues by
mainly establishment forces from the traditional left and right. Therefore, financial analysts cannot ignore
this factor when being too bullish or bearish. The ferocious civil-war like
political rift is not comforting. Sadly, a major correction might be needed
again to restore some sense and priority to real economy matters rather than
the cheer-leading of share prices that go higher due to very low interest rates.
Article Quotes:
“Many of Europe’s largest investors are now turning their attention to
another risk to their portfolios that is rapidly gaining momentum: the rise of
Italy’s Five Star Movement, and its potential to upend the economic bloc. The
concern is that Five Star, the anti-establishment party set up in 2009 by Beppe
Grillo, the Italian comedian and blogger, could win the country’s next
election, which is due to take place within 12 months. Mujtaba Rahman, managing
director at Eurasia Group, a consultancy that advises large investors on
political risks, says: “The biggest risk in Europe is Italy. The euro area is
not working and as long as it fails to deliver growth, populism will continue
to grow.” (Financial
Times, May 15, 2016)
“China has emerged as a leading
fintech player, with banks joined by huge internet players such as Alibaba and
Tencent, pumping billions of dollars into areas such as mobile payments and
online lending. The central bank says that this fintech revolution has
"injected new vitality" into financial services but also throws up
"challenges". In response, it is organising an idepth study on how
financial and technological developments impact monetary policy, financial
markets, financial stability and payments and settlement. In a separate move,
the central bank is backing a venture capital firm called Silk Ventures that
plans to invest up to $500 million in US and European tech startups, with a
focus on fintech, AI and medical technologies.” (Finextra, May 15, 2017).
Key Levels: (Prices as of Close: May 12, 2017)
S&P 500 Index [2,390.90] – Another record high, yet again.
The breakout above 2,100 marked a key trend of a bullish run.
Crude (Spot) [$47.84] – Recent months have showcased
Crude’s inability to stay above $55. The supply-demand dynamics seem unclear
for now.
Gold [$1231.25] – Surpassing $1,250 in the near-term remains a
challenge. Interestingly, the 50-day moving average is at $1,258.
DXY – US Dollar Index [99.25] – Peaked at 103.82 in early
January and since then the Dollar strength has slowed down.
US 10 Year Treasury Yields [2.32%] – Yields remains low, but that’s
all too familiar these days. March 17, 2017 highs of 2.62% may be the peak for
the year but 3% again seems very illusive.
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