Maybe this time is different? It is, but not in market friendly ways. This time around, without any difficulty we can identify clear instances where the powers-that-be refuse to allow major known risks to come to the surface. It has gone on so long that even smart people who normally know better have forgotten about the fact that numerous beach balls are being held below the surface of the water. Many investors mistakenly treat this environment as a normal cyclical recovery.
However, about 3/4 of the move in stocks in this cycle has been based on multiple expansion as opposed to earnings improvement in spite of EPS being boosted by stock buybacks in a big way. It’s different alright.
GDP rates have run about half of prior cycles even with all the supposed stimulus, yet practitioners do not reduce future growth expectations. Nothing from 2008 has been fixed. Trillions of dollars of debt have been created to simply paper over the problems and keep the foolish ruling elite in control.
Ask yourself a few questions… What happens to asset pricing globally if the Fed were to follow through on meaningfully shrinking its balance sheet as it is beginning to do, the ECB simply allowed sovereign and corporate debt in Europe to trade at market-clearing levels without intervention, the BOJ gave up on QE because it’s not working and is hurting bank profits, or the leadership in China finally became willing to deal with problem assets there?
Like earlier bubble periods, we would rather focus on relative bets between expensive stocks and those that are cheap based on enterprise value or free cash flow with a smaller bet on market direction for now. We are convinced that if Ben Graham or Warren Buffett were just taking off their warm-up jackets, they might devote themselves entirely to hunting for value on the short side nowadays. It’s not that hard to find!
We look forward to the fourth quarter of this cycle while readily acknowledging that based on the historical record of bubbles past, valuations can continue to get more irrational. We remain unwilling to risk significant amounts of our capital to play along particularly as the Fed drains liquidity from the system and other central banks turn tighter this year.
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.