It remains a heavily propagandized market with low transaction volumes and computer trading programs in charge 24/7. We cannot imagine why anyone would embrace a large exposure to unhedged equities with valuations that harken back to the prior bubble peaks of the last one hundred years. Going back sixty years, the current price-to-sales ratio of the S&P 500 has only been exceeded at the 2000 tech bubble peak and not by much. Cash flow multiples are also at extremes.
Those willing to bear high equity risk may, in fact, make money, but it is not based on any valuation math upon which we would risk our capital. As for the “don’t fight the central bankers” concept, that rings hollow when one realizes that some of the biggest drawdowns in market history, including 2009’s, have occurred when monetary policy is loose or loosening simply because investors decided to head for the exits as cash suddenly looked better than equities when risk aversion set in.
Regardless, the notion that in February, behind the scenes, the central bankers of the globe coordinated an emergency response to disappointing growth and volatile markets is a consistent theme in recent weeks. With that in mind, investors have become further convinced (if that were possible) that the central bankers are completely held hostage by markets and that has provided the impetus for the sharp relief rally of the past two months. The idea that the Fed is going to raise rates substantially has fallen by the wayside for now.
That change in mindset on monetary policy supports our case because it meant that markets finally had come to grips with the idea that if equities were going to remain extremely richly priced, they could only do so in the context of interest rates remaining low for longer. In addition, it seems that recent events also made clear the concept that fiat currency debasement in various forms remains in overdrive, making gold and silver more attractive. We have believed for months that interest-rate risk and currency risk were cheap to equity risk.
Though equities have rallied strongly, the growing sense that earnings and fundamentals are deteriorating brings the term Pyrrhic victory to mind. Based on what we have seen, many traditional investors remain skeptical sellers of stocks. In contrast, short sellers have been forced to cover positions because of relentless corporate buyback pressure and heavily manipulated stock futures trading. Companies continue to issue billions in debt to fund a roughly $500 billion annual stock buybacks habit, which help keep management stock options profitable and EPS better than it otherwise would be. It is the only game in town and a key element of the charade which keeps people with pitchforks away from the Fed’s Eccles building. However, in an odd juxtaposition, treasury bonds remain generally well bid near the recent lows in yields because holders just can’t bring themselves to part with positions given the slow global growth of recent months.
Central bankers and other deciders are now feverishly attempting to maintain control of the system and the dialogue with more outlandish schemes and theories. For instance, it has become clear that the Chinese orchestrated an irrational lending binge to start the year in an effort to maintain the appearance of real economic growth. We are hearing close to $1 trillion was poured into the economy in the first quarter and that is a new record for their recklessness. It seems that problem assets are coming to the surface with more frequency in China in recent months and that cannot be good when loan growth has been so enormous.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relation.