Equities are absurdly overvalued as are large segments of the global bond markets. Because we take our job of finding compelling investments very seriously and use historical valuation metrics as the primary driver of our overall risk position, we have been more than willing to materially hedge our exposures for quite some time. However, when we also consider the foolhardy “musical chair” dynamics driving markets, we are even gladder to swim close to shore because current monetary policy is not a stimulant, but an economic depressant.
When we look back one day on this sad period of U.S. history with the worst growth since around 1949, it will be obvious that this nation never should have let a bunch of academics at our central bank with no real world experience take control of things for seven years. We will call it the “PhD Bubble” because we were led around by econ professors and their pet theories. As we have been saying for far too long, it is silly. The deciders built a system that reduces market volatility. It helps them sleep at night but cripples capitalism.
Importantly, the tide is clearly turning some more against the monetary policy belief system that holds markets aloft. The Washington Post recently contained a piece titled “The Old Fed is Dead” and a long-time Fed groupie at the Wall Street Journal penned “The Great Unraveling: Years of Fed Missteps Fueled Disillusion with the Economy and Washington.” We think the titles speak for themselves. Even the cheerleaders on TV often mock a Fed that talks about tightening policy, but never does.
The view that bureaucrats leading the Fed, the ECB, and the BOJ can save the world has come under intense scrutiny in political circles. The rise of populist, anti-establishment politicians across the globe is largely a direct result of monetary madness. The average person suffers from the slow growth while the deciders take solace in the illusions they have crafted. In addition, more of the central planners themselves are conveying doubts as their confusion about what to try next builds. The BOJ floated a bunch of grand ideas for weeks before its announcement yesterday, but its desperation has become apparent. In the end, it merely tweaked current policies.
Obviously the central banks have been allowed to assume entirely too big a role in the world economy, driving most asset prices to very overvalued levels, but likely hurting economic growth in the process. The damage to savers from rate manipulation is monetary malpractice that thwarts consumer spending. Home prices are once again absurdly priced in many locales globally, making them quite unaffordable. How does that help the homebuilding industry in the long run? Banks and insurance companies are having more difficulties making money because of flat bond curves and negative rates. What does that do for lending? We could go on, but our point is simply that policies are having pronounced real world impacts that are being discounted and ignored by those in charge.
Most stocks and bonds are priced to produce very low returns with lots of risk and that does not bode well for future growth. Paying twice the price for half the growth or less is making equity investors a grumpy bunch and rightfully so. Market participants are beginning to realize that not only have extreme monetary policies done very little to help the real economy, but also that there is very little else that the deciders can do anyway. We are only surprised by the fact this took so long to become obvious.
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.