“Ain’t it just like the night to play tricks when you’re tryin’ to be so quiet? We sit here stranded, though we’re all doin’ our best to deny it”– Bob Dylan
The Fed is in the middle of increasing its balance sheet shrinkage pace to a massive $50 billion per month and raising rates in an unprecedented tightening process. Economists are overly optimistic regarding economic strength. Median equity valuations approach three times normal. The breadth of the equity market continues to deteriorate and suddenly even the U.S. indices are getting more volatile.
Meantime, it seems like many are “denying” that Quantitative Tightening may cause problems. Nothing to see here, folks, as day turns to night. Increasingly unfriendly markets are playing “tricks” on the Fed as it tries to quietly back away from its insane activities of recent years. The economy and investors are “stranded” in a no-man’s land, stuck between the more real economy of yesteryear and the make-believe one concocted by Bernanke, Yellen & Co. to cover up for the popping of the prior bubbles they created.
Once you addict the globe to free money, and lots of it, it’s tough to go back to the good old days. But they must try to contain the bubble before it gets more obvious. Also, if this dependence on QE madness and holding real rates below zero is not ended soon, the dollar will join other once-dominant fiat currencies like the British pound in “the dustbin of history.” All fiat currencies eventually fail. Even the dollar was devalued in the 1930’s.
Since the Great Recession, the deciders did more of the same and expected different results. They have one playbook with only one play in it: debase currencies and encourage the creation of massive amounts of debt because the global economic engine demands it since organic growth has been fading for years due to demographics and over-indebtedness.
This obvious replay of what got the world into trouble last time is to be ignored say the talking heads. Dutifully, investors followed right along like 2008 was an unpredictable outlier. It seems as though blind buying of stocks has been declared by edict to be a no-lose proposition, just like buying houses supposedly was in that earlier period. Only a fool would not have a preponderance of assets in an index ETF. We do wonder how many of those making that recommendation are currently doing as they say.
The central bankers promised it was going to be like “watching paint dry” when their policies were reversed. We knew it was never going to be easy. Any time was going to be a tough time for central bankers to behave more rationally by normalizing policy after ten years of outright monetary malpractice that was portrayed as a typical economic recovery brought about by the wonders of QE magic.
Bizarre devotion to ultra-easy monetary policy became normalized and considered business as usual by a new generation of investors. Now, with real interest rates still close to zero, numerous politicians and pundits are already clamoring that the Fed is acting irresponsibly by tightening. However, if you took a current snapshot, it would be impossible to find an historical picture showing when the Fed was more dovish other than when QE was still going strong a few years ago.
The reality is that normalization must take place if we are to have any hope of escaping the current economy dominated not by production, but by financialization. Speculation has been confused for investment. It has gotten to the point where fundamental analysis of stocks has been deemed old-fashioned and quaint. Some of the best minds in the investment business have closed-up shop and even the bearishly leaning have mostly gone silent and timid.
When 83% of IPO’s are unprofitable, there might be a problem. That is the highest level ever. When the 100 priciest stocks in the S&P 500 trade at 77 times trailing earnings on average while the least expensive trade at 9 as discussed in a recent Barron’s piece, perhaps index investing and momentum chasing have gone too far.
We may wish otherwise, but the world is now “stuck” with a system dominated by central bank/government intervention because the powers that be simply went too far. They did not let the opportunity to assume further control during the last crisis slip through their hands. There is little value in “denying” that central banks fundamentally damaged the workings of the free market system. That does not mean volatility won’t continue to re-assert itself. “Night” does follow day, and it will “play tricks” on the unprepared.
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.