While the new administration may provide welcome relief from the current central bank-dominated regime, the new guy on the block might face some harrowing times given the fact that the already shaky foundation of the current system was beginning to crumble under its own poor design before he came to office. We sense that the Fed and the other central bankers might have just found their scapegoat for their own monetary policy failures.
It looks like maybe some voters had been reading our monthly letters regarding how the underlying economy was not working for a lot of people. If the employment situation was really as robust as was popularly proclaimed, Trump would not have won. Pundits are busily acting as if they have all the answers about what the future holds and what you ought to do to make a ton of money today. It happens every election cycle. Of course, these are the same commentators who did not recognize the discontent below the surface of the manipulated markets or who do not do valuation work. We mostly have initial thoughts and questions, not answers at this point. From our perspective, the investment math has not changed much at all.
The elections have changed the landscape a bit and a lot of ad hoc and unsubstantiated game plans are being bandied about in response. Many investors were obviously quite surprised by the result. Some of the price movements in markets are pretty amazing as emotions took over and levered players and short traders were forced to close out losing positions. The sheer size and speed of some of the swings suggest these moves will likely be faded. History shows that similar stock price spikes have not proven sustainable when valuations were rich at the outset.
At the same time, it seems that a lot of the current activity is just a rapid acceleration of what was going on already and much like late last year as the Fed was preparing to tighten policy for the first time of the cycle. If it moves in December as expected, it will once again be doing so with an economy struggling along, so that alone presents risks.
It is very amusing to hear the same guys who said a Trump win was the worst thing imaginable now declare that “happy days are here again.” We are still working through our thinking and much is up in the air given the high number of unknowns regarding the new administration’s priorities. Plus, Congress will obviously weigh in. We are quite confident that the new guys do not recognize that the exact prescriptions that may have worked at one time may not be the best cure now because the current disease is so different.
We do get the sense that attempts will be made to transition from a world dependent on central bank activities and financial markets to one that is driven by the underlying real economy. We would welcome that. The problem is that asset prices in stocks and real estate are of the bubble variety and no sustainable growth program can work until the system is cleansed of these massive distortions. That will be painful and lead to a lot of finger-pointing and name-calling that the Fed took upon itself to avoid.
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.