It is clear to us that holding a long-only, broad-based equity portfolio is nothing more than some sort of “wink and a nod” understanding between the holder of those securities and the central bankers. Given that valuations are twice normal levels and GDP growth is half of what it used to be, many investors are making a bet that they likely do not understand and with an amount of inherent risk that would have made many informed analysts over the last hundred years or so cringe.
True, for now they can still apparently depend on the methods of some hedge funds and high frequency traders whose computers seem to be programmed to bid stocks at regular points throughout the day in a fashion that makes the market appear as manipulated as any we have seen. However, with earnings estimates coming down substantially, many seem in need of reminding that the bankers and central planners will not cover losses and have conveniently not put their names on any “line that is dotted” suggesting so. If they had signed, they would likely disavow having done so when things got tough anyway.
After all, as the current President of the European Commission, Jean-Claude Juncker, once said in an unusual bout of truthfulness about being a decider, “when it becomes serious, you have to lie.” We are guessing a lot of lying is going on now as the muckety-mucks decide Greece’s fate.
As we have said before, based on the signals of the powerful Treasury bond rally, narrowing equity market strength, wider credit spreads, and falling commodity prices, the planners are losing some control with everyone but the stock index chasers. The cracks in the foundation of the financial system remain wide because all that has happened since the darker days of 2009 is the equivalent of “painting over the problem.” Debt has grown by enormous amounts to try to make us believe things are fixed, but debt growth is not income growth and the two should never be confused.
According to recent research from the consulting firm McKinsey and Company, since 2007 global debt has grown by about $57 trillion, bringing the total to about $200 trillion with a “T.” Roughly $25 trillion of that new debt was of the government variety. All that we got for it is a global economy lucky to hit 2% growth when we used to aim for 4%.
Nice recovery folks!
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.