The Federal Reserve has pursued the unprecedented monetary policy of lowering rates to zero and increasing their portfolio from 500 billion to over 4 trillion. But as the Fed reminds us, there is a cost.
"If Trump’s policies work or if they otherwise demonstrate that we are not stuck in secular stagnation, it’s bad for stocks and bonds and good for the economy. If we wind up back in recession, it’s good for bonds and not necessarily terrible for stocks because valuations can stay high, buoyed by low cash and bond rates."
As a result of continued market underperformance, assets under management at Jeremy Grantham's iconic GMO have tumbled to about $80 billion, down from a peak of $124 billion in June 2014, a drop of 35% in two and a half years.
Somewhere, someone first said “bull markets don’t die of old age.” We suppose this throwaway phrase was first uttered in a time and place much like today. That is, in the midst of a protracted bull market where stock prices had detached from the assets and earnings of companies their shares represent claim to.
Politicians are and their pet goals are far more dangerous than referendums. Chancellor Merkel and her inane, mathematically impossible, open arms welcome of refugees was the #1 Reason UK Voted Leave the EU. Let’s not blame the voters or the referendum itself.
The US is drifting back into yet another banking crisis. Despite the headline numbers (like Friday’s largely-fictitious jobs report) that imply a stable, modest expansion, under the surface the financial system - composed of business loans, bank profits, etc. - is deteriorating fast.
Historically speaking, it is unlikely that with reported earnings early in the reversion process that we will see a sharp recovery in the second half of the year as currently expected by the majority of mainstream analysts. As long as the Fedremains accommodative, the deviation between fundamentals and fantasy will continue to stretch to extremes. The end result of which has never “been different this time.”
"when I look at the current picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career." The disaster that Druckenmiller sees coming for the United States is all about changing demographics and entitlement spending. They don’t add up to a sustainable situation. Fixing this is going to require some real sacrifice by the American people and that doesn’t sound like a very appealing platform upon which to get re-elected.
Falling profit margins and rising valuations (as earnings fall) make for a pretty bearish one-two punch for the stock market. Investors will surely become less eager to pay higher valuations for companies growing more slowly. That equation usually works in reverse. And there’s no reason we can see to expect these challenges to corporate profit margins to let up any time soon. The S&P 500 now trades at its highest price-to-earnings ratio since the bull market began even as the index remains well off its recent price highs. And profit margins still could have a long way to fall before even reaching their average level since 1950.
The bulls will presumably argue that this Fed impact is now part of the accepted wisdom, and that P/Es should remain higher than history in order to reflect the Greenspan/Bernanke/Yellen Put. The bears will suggest that if ever there were a time for the scales to fall from investors’ eyes over the Wizard-of-Oz-like nature of the Fed, then this is it. We are inclined to the latter view. Betting on the Fed’s ability to generate continued market levitation seems like a dangerous game to us, but as Newton long ago opined, “I can calculate the motion of heavenly bodies, but not the madness of people.”
"By now, it’s an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization. A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake."