We liken the current QE-juiced equity market environment to performance enhancing drug use in Major League Baseball. First, many market participants believe the Fed’s QE has a steroidal effect when in fact its efforts are but a placebo. In addition, the fences in the ballparks have been moved in 150 feet or so, but all the signage still indicates that the dimensions from home plate are unchanged. Meanwhile the pundits can’t stop talking about how many homeruns are being hit and the immense talents of the players. For instance, when we first started in the business, 300,000 new jobs in a monthly BLS employment report was considered good news and 200,000 jobs was needed each month just to keep pace with population growth. Now, in spite of a larger population in the U.S versus twenty-five years ago, 175,000 jobs are celebrated even when labor force participation is back at the low levels last seen thirty years ago. Meanwhile, the S&P500 is priced as if the teams (companies) are replete with sluggers who can hit the ball 600 feet as the median stock is valued at the most expensive levels it has been in many decades of data based on price-to-sales.
Longer term treasury, mortgage, and municipal bonds are cheap relative to nominal global economic growth and precious metals (the original money) are cheap relative to the trillions in paper currencies created by the powers-that-be in recent years. The very things that make the most sense in the current environment are also the most compelling as most market participants follow the bouncing ball of Fed-induced equity levitation that seems like a new national pastime. We think many are confused (and rightfully so) because of the existence of conflicting elements of both inflation (stocks, art, some real estate, food, energy) and deflation (wages, chain store revenues). They bizarrely choose equity speculation on a tightrope without the safety net of reasonable valuation because the Fed and the pundits encourage it.
While recent weeks seem to favor the deflationary elements of this milieu as evidenced by soft employment data, company specific news as well as weaker equity markets and stronger bond markets, we would not be surprised if reflation/growth talk continues to show itself into the spring. Not only does Wall Street always love a “happy days are here again” story, but come March the central banks may have to lean back toward a more dovish posture (if that’s possible) when the data stream remains mostly punk. Specifically, we expect the “basket case” known as Europe to try to keep animal spirits aloft with some EU leadership policy initiative or another. Germany’s high court punted on deciding the legality of the ECB’s bond-buying scheme in a timely “see-no-evil” hand-off of responsibility. Also, Japan’s deciders may feel compelled to make some more noise as 2013’s fireworks fade. It’s just what deciders do when variances from the script occur.
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 relations.