The “choir” on Wall Street is grumbling and moaning while the “pastors” at the Fed preach about tightening soon because growth is so good. Very few still buy the sermon and eyes are rolling. Much of the market euphoria caused by the astounding $1 trillion in new Chinese lending earlier in the year is quickly fading, as one might expect, because the reality of still soft global growth cannot be escaped. Now numerous Wall Street pundits and strategists are not singing the pre-approved hymns as the year progresses and many big, well-known investors are publicly bearish, arousing our contrarian nature to some degree. It seems a bit odd when paid optimists at the major brokerages admit the Fed may not be quite as heroic as once seemed and equity markets appear vulnerable. Even Goldman Sachs recently discussed how equities have rarely been more expensive than they are now. Blasphemy!
We guess it is getting easy for everyone to see that once the central planners pushed rates towards zero and now openly manipulate markets in a despotic fashion with timely chatter, expected returns of many assets approached levels where one is simply paying a high price for the “pleasure” of taking risk with very little upside and a lot of downside. Equity markets seem designed to keep politicians in office at these mandated prices and the deciders certainly don’t care about our efforts to find investable securities or the potential for future losses for those who blindly adhere to the “there is no alternative” dogma. That seems to have caused a bit of a buyers’ strike from traditional investors.
The executive summary of many research pieces is that in spite of central banks trying like mad to spur growth, it is not working and equities look risky because earnings are sinking and valuations are rich. They also often point to events like the U.K. potentially voting to abandon the EU in coming months or the U.S. Presidential election this fall as potential catalysts for higher volatility later in the year. At the same time, news stories about how negative rates in Japan and Europe are causing confusion and angst, but not increased business activity, are making the rounds and that continues to take a lot of the “steam” out of that strange central banker perversion that was supposed to be the next great thing for the bulls.
We suspect that the soft business conditions on Wall Street may have forced a change in thinking in some places in recent months. Trading revenues are weak and IPO’s are few and far between. JP Morgan recently noted that:
“During this cycle (2Q07 profit cycle peak to present), revenues expanded at 2.5% with total cumulative growth of 24% (vs. the prior cycle at 7.8% and 66%, respectively). While sales growth was robust in the initial years of this recovery, the steadily declining trend has been less encouraging. More recently, top-line contracted during each of the last four quarters and is expected to decline further in 1Q16 (-1.8% y/y) and 2Q16 (-1.1%). The prior recovery in comparison was more robust and consistent without any intra-cycle contraction.”
We could not agree more and would add a couple of points. First, with this in mind, based on historic price-to-revenue data, investors are paying twice the normal valuation for about one-third of the revenue growth. Secondly, this state of affairs has transpired in the face of trillions of dollars of fiscal and monetary efforts to stimulate growth, including about $60 trillion in new global debt since the last recession. The Keynesians are beside themselves trying to rationalize how this debt binge failure could be possible by suggesting that even more fiscal irresponsibility is in order.
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.