Monthly Archives: May 2017

Global Economic Improvement, Steep Budget Cuts, and Unfazed Financial Markets

The Economy: Global economies appear to be improving with Germany and France leading the way in Europe. The U.S. continues to present a mixed picture. The Fed released its minutes on Wednesday. They looked through the data to indicate another interest rate increase in June. While some see the Fed as increasingly hawkish, actions speak louder than words and the Fed has been unwilling to inflict the pain that rising rates will bring. With the explosion of information provided by the internet, a solid case can be made for any position that suits your fancy. Believers who warn of bubbles are countered by equally sage adherents on the other side of the argument. While we’re awash in the rhetoric of change, it’s questionable how much will be legislated given all of the animosity. The Trump budget proposes the largest cuts in decades. But like the rest of the agenda it’s so steeped in emotion that its final form is impossible to discern. Add the Special Prosecutor to this witches brew and you can almost hear the wheels of government grinding to a halt.

Food for Thought: Financial markets are unfazed by this circus and continue their 8-year bull run. Interest rates remain at historic lows. Bond yields remain suppressed. Investors are convinced that Central Banks will continue to inflate asset bubbles into the foreseeable future. Terrorism remains a blight; though the vernacular has morphed from calling them Freedom Fighters to calling them Losers. That’s an accurate step in the right direction. Never give in; never give up; never stop dreaming; never stop believing. Enjoy your Memorial Day Holiday!

Music of the Week: Bob Mamet’s “Day Into Night”

Stock Indices Turn Negative on Trump News

The Economy: Caution over mixed economic numbers continued this week with Housing Starts unexpectedly weak and Industrial Production unexpectedly strong. Looking ahead, one has to ask if U.S. political turmoil will be reflected in the economy. Today, Texas Representative Al Green, speaking from the floor of The House, called for Trump’s impeachment. So it’s official; the knife fight is on. Consequences be damned. Ideology Rules Supreme. The drama weighed on stock markets as a minor pull-back took hold. Indices were down 1 1/2 to 3% on the day. The VIX (S&P500 Fear Index) was up 46%. But this is not a Black Swan; nothing unexpected here. If the past 8-years are any indication, We can expect today’s losses to be erased before the week is out. Failing Buy-The-Dip, we can expect the Fed to announce another round of stimulus programs to save stock markets. If not a stimulus fix like a QE-4, perhaps a suspension of any further interest rate increases for 2017. After all, Nixon’s Watergate only shaved 45% from stock market valuations. So the Fed has its work cut out for it.

Food for Thought: “If The Glove don’t fit, Impeach!”

Music of the Week: Frank Black’s “Frank Black”

The Death of Risk

The Economy: Caution best describes the economy. Mixed economic data is being released into the most toxic political environment in decades. Global central bankers continue to add liquidity at unprecedented rates. $1 trillion in liquidity was injected into the global system in the first quarter 2017. Central bankers are committed to supporting real estate and stock markets at all costs. Tens of billions of dollars have flowed into U.S. stock markets from European Central bankers. As with the binary political landscape, economists and investors are split on how the economic landscape will play out. Will there be a day of reckoning based on historic metrics or have interconnected global markets evolved to a new and unknown model. The result of this is that each data release creates more questions than it answers. Banks are easing lending standards but loan demand is down. Why? The Fed is tightening into the weakest recovery in history. Why? Automakers are coming off a huge selling cycle; but incentives and liar loans have fueled sales. Why? The EU is reporting record growth in many areas yet the ECB keeps interest rates at historic lows while continuing to pump record stimulus. Why? Consumer confidence is up but retailers are closing stores at a record pace. Why? These macro questions eventually filter down to local decision making. Hence our emphasis on how your organization views the horizon.

Food for Thought: The S&P 500 Volatility Index (VIX) is known as The Fear Index. It’s used as an indication of investor complacency. The VIX is now at multi-decade lows; recently touching lows not seen since 1993. In the course of the past 8-years Central Bankers have rescued stock markets with such frequency that “Buy The Dip” has become a sound strategy for many investors. After a 3% pullback stock markets have regularly rebounded to new highs. Black Swans have ceased to be meaningful as investors have accepted that Central Bankers will always, successfully come to the rescue. Investors have the constitutional right to make money by investing in stocks and real estate. The Four Horsemen of the Apocalypse have been replaced by The Four Horsemen of Guaranteed Investment Profits. Risk is Dead and markets will go up forever. Yet, as Bob Farrell famously noted, “When all the experts and forecasts agree – something else is going to happen.”

Music of the Week: Dire Straits’ “Dire Straits”