Through the 20th century, the people of the West built up a very high compliance inertia. They complied with the demands of authority and taught their children to do the same, until it became automatic. People obeyed simply because they had obeyed in the past. Authority quickly became addicted to this situation, basing their plans on receiving every benefit of the doubt. Automatic obedience, however, is a brittle thing. Economies of scale are failing, the money cartel has been exposed, government schools have lost respect, mass media is fading away, and the game continues because the populace is distracted and afraid. And that will not last forever. The ‘walls’ of reflexive compliance are growing thinner. Any serious break may ruin the structure.
In the current deluge of wannabe leaders clamoring for attention and trying to convince us that they are the boss who should be applying rules to us, it strikes me that all of them are looking backward and none are looking forward. So, since none of this crowd is going to venture anywhere outside of their hermetically sealed status quo, we’d like to offer an example of something a real leader might say...
This is the question that astute investors are forced to ask themselves these days. No reasonable person believes that a system of ever-expanding debt can resolve painlessly. It simply cannot happen... not, at least, until 2+2 stops equaling four. But the international money system, while deeply interconnected, can implode in sections. In fact, it’s highly unlikely that it will crash as a single unit. So, if you have significant moneys to invest, you end up coming back to our question: Who will be the last to crash?
Since the beginning of this year the markets have primarily treaded water. The primary support for the bulls has been continued acknowledgement by the Fed on an inability to remove accommodative policy by raising interest rates. (Which should make you question what happens the first time they do.) The bears have been feasting on weak economic data and deteriorating fundamentals.
It’s over. Except for a short moment or a wild and self-exhausting governmental mandate (both of which are doubtful), there will never again be enough “good jobs” to go around. That model is gone and we need to root it out of our imaginations.
The recent peak in profits, combined with substantially elevated P/E ratios, is likely suggesting that forward return expectations should be revised sharply lower.
With the Federal Reserve now indicating that they are "really serious" about raising interest rates, there have come numerous articles and analysis discussing the impact on asset prices. The general thesis, based on averages of historical tendencies, suggests there are still at least three years left to the current business cycle. However, at current levels, the window between a rate hike and recession has likely closed rather markedly.
The reality is, like dominoes, that once one of these issues becomes a problem, the rest become a problem as well. Central Banks have had the ability to deal with one-off events up to this point by directing monetary policy tools to bail out Greece, boost stock prices to boost confidence or suppress interest rates to support growth. However, it is the contagion of issues that renders such tools ineffective in staving off the tide of the next financial crisis. One thing is for sure, this time is "different than the last" in terms of the catalyst that sparks the next great mean reverting event, but the outcome will be the same as it always has been.
The economic data has continued to disappoint on virtually all fronts, earnings are weak and markets are grossly extended. Yet, investors are more bullish than ever...
Randolph Duke: Money isn't everything, Mortimer.
Mortimer Duke: Oh, grow up.
Randolph Duke: Mother always said you were greedy.
Mortimer Duke: She meant it as a compliment.
History is on the market’s side, says DoubleLine's Jeff Gundlach, noting the Fed’s forecast for how much benchmark rates will rise is still too high, even after central bankers lowered their estimates last month. BlackRock’s Jeffrey Rosenberg says the bond market’s too complacent and is poised for a correction, claiming The Fed has "a tremendous ability" to send bond yields higher. But as Bloomberg reports, "if the burden of proof is on anybody, it’s on the Fed," and for now, as Gundlach exclaims, The Fed has "been wrong for so long," that their forecasts have been literally of no value, "the market’s pricing has been closer."
Something stunning took place earlier this week, and it quietly snuck by, unnoticed by anyone as the "all important" FOMC meeting was looming. That something could have been taken straight out of the playbook of either Cyprus, or Greece, or the USSR "evil empire", or all three.
No matter how bad the overall profitability picture got, S&P500 earnings per share (assisted almost exclusively by a record amount of stock buybacks in 2015 putting downward pressure on the PS in EPS) would grow by the tiniest of amounts, just so the profit recession stigma could be avoided in a world in which the stock market is the last remaining bastion of faith in central planning and confidence in the economy. No more. Overnight, Deutsche Bank finally did the unthinkable, and "broke the seal" of optimistic groupthink, when its strategist David Bianco became the first sell-sider to forecast that not only will 2015 EPS not grow (at 118 on a non-GAAP basis, this will be unchanged Y/Y), but "down a bit ex bank litigation costs."
Why Monetary Policy Is Failing
The "conundrum" between lower gasoline prices and retail sales is not really one at all. Furthermore, the real story behind the weakness in retail sales also suggest that something is "amiss" within the broader economic backdrop. When combined with the deterioration in earnings, the risk of a "gotcha" moment in the market has risen markedly.