Is It Different This Time? Don’t Bet On It!

Summary:

·      Domestic fiscal policy over the last eight years produced the lowest economic growth ever recorded coming out of a recession.

·      Wall Street has a history of script writing a bunch of codswallop that suggest history will be different this time.  If this is a viable explanation for the lack of adherence to fundamentals I don’t believe it is sustainable from current levels.

·      As a fiduciary for client assets, we posit among ourselves the outside possibility that there is simply too much money chasing too few viable investments.

 Domestic fiscal policy over the last eight years produced the lowest economic growth ever recorded coming out of a recession.  Yet both equities and bonds rallied to record highs. I believe monetary policy played a significant role early in the process with a declared approach of lowering interest rates to increase the attractiveness of equities and in the process build “the wealth effect” which in turn was expected to drive consumer spending and juice economic growth. What we got was more debt ($20 trillion), anemic economic growth (under 2.0%), a Fed balance sheet that has ballooned to $4.5 trillion, and an equity market that appears to be devoid of investment fundamentals. I think the Fed has basically made themselves irrelevant. Their forecasting track record is horrendous on both a short and long- term basis and the “bubble” in equity valuations is a direct result of their failed policies over the last eight or nine years. It failed because its stated goal “above trend economic growth” never materialized but debt grew unabated.

 The Fed has raised rates three times since December of 2015 and equities have continued to rise with total disregard for fundamental analysis, the direction of monetary policy and despite below trend economic growth. Interest rates a (10-year treasuries) are the same yield level currently after three rate increases despite warnings from analysts and the financial press that rates were about to rise precipitously. Under almost any historically based metric equities valuations are severely overvalued even under the most optimistic economic growth projections. Currently, the political climate for meaningful fiscal policy to drive economic growth seems remote with the Kaos in Washington. Ironically, we could have fiscal and monetary policies going in opposite directions. In addition, attempting to reduce the monetary base in parallel with weak economic growth doesn’t portend an ideal investment environment

Do I think it is different this time? No I don’t – but Wall Street has a history of script writing a bunch of codswallop that suggest history will be different this time. It’s the ultimate in marketing, selling a dangerous mix of “hubris, euphoria and amnesia” as suggested by Reinhart & Rogoff in their book “This Time It’s Different”. As a fiduciary for client assets, we posit among ourselves the outside possibility that there is simply too much money chasing too few viable investments. If this is a viable explanation for the lack of adherence to fundamentals I don’t believe it is sustainable from current levels.

  Some Final Thoughts -

 ·      We are in the latter stages of the business cycle

·      It is time and prudent to emphasize risk/reward

·      Stay conservative and preserve gains – stay with quality

·      Fed remains in tightening mode but not for economic reasons

·      Almost 75% of Fed tightening programs have led to recessions over the last half century or more

·      Don’t expect accelerating growth in Q2 to be a new trend

·      Equities are substantially overvalued by historical standards

·      The yield curve continues to flatten

·      Inflation will not be a problem in 2017 – Sub 2.0% economic growth is not an incubator for inflationary growth

·      Don’t bank on a tax cut in 2017 or that enactment it will bring expansive growth

·      Don’t ignore US debt burdens or the Geo-Political environment in your investment calculations

·      Know that one is always better-off investing in corporate

and high yield securities in the early stages of a business cycle and when spreads over treasuries offer substantial increment returns – The complete opposite exists today

Bob Andres - 5/24/17  www.andrescapital.com