The consensus on the “big picture” economic and market views have rapidly moved more in line with our base case over the past couple months. Worries over weak global growth and high equity valuations are being expressed frequently by many who seem surprised that extreme monetary policy since 2009 did not lead to sustainable growth. Faith in the central bankers is waning. U.S. GDP likely grew at less than 1% to end 2015. A lot of economists on Wall Street are completely baffled about the fact that they were so wrong about consumer spending in the U.S.
It sure looks like the Fed tightened policy into a manufacturing recession and commodity depression and global trade remains very weak. At the same time, based on what we are hearing about office furniture sales from the managements of our short positions in the sector, a softening in the “white collar” world is likely at hand. Even subprime lending boosted auto sales lost some luster into year end. CSX management indicated they have not seen such weak rail traffic outside of a recession. Energy lending exposure at the banks has become a big issue and it appears as though credit provisions will have to rise by a lot.
While many pundits seem to want to say the current market tumult is just a China growth adjustment issue, as we have been saying for a couple years, we are confident that it is much more than that. China’s unraveling is simply additional evidence that central banks created an unstable global economy that is now facing inevitable corrective forces. While there were once too many U.S. dollars during the Fed’s fascination with QE, now there are too few as QE ended. Trouble spots have been emerging for well over a year as debts became quite burdensome for the heavily leveraged without the economic growth the PhD’s assured us would come.
It was not just a crude oil or junk bond problem in the U.S. last year. One can “connect a lot of dots” to make the current situation quite easy to understand if one simply is at least willing to entertain the notion that extreme quantitative easing since 2009 was going to have market and economic downsides. QE never helped the real economy in ways that would drive organic growth and led to enormous malinvestment globally. It seems that the major stock indices are simply the last to recognize this. With earnings estimates still coming down, holders of equities have continued to become less willing to stomach further pain.
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.