The Economy: Amidst weak economic numbers the DOW punched through 22,000 and is holding as we go to press. The Fed, which backed off their intent to normalize monetary policy, has provided another leg up to the markets. During the election Trump castigated Yellen for keeping interest rates abnormally low. Now he supports lower for longer. Likewise stock market valuations. During the election Trump called stocks, “a big fat ugly bubble.” Now he’s taken ownership and claims credit for the surge since the election. Yellen, who is decidedly anti-Trump has the power to crush this market. Yet she also has her legacy to think about. Trump has vowed to replace her in 2018. The question is, “Does she want her legacy to be that of the Fed Chair that crashed the market or is she going to manipulate things so that her successor has to face the music?”
Food for Thought: Shoot the Messenger! The MSM is aflutter about the blowout earnings season. But the Financial Times has this to say in the section titled, ’Reasons to be Skeptical About the Earnings Recovery,’ “These are far from reassuring numbers. The picture they reinforce is that US large companies have been able to grow earnings through financial engineering even though their cash flows are flat, or even declining. …the apparent earnings recovery of large US listed companies … may have been something of a mirage.” For example, the DOW is a price weighted average, so Boeing (BA), with its $235 price has been responsible for ¾ of the DOW’s recent 278 point increase. After eight years of the bull market, no one is thinking about risk anymore.
Music of the Week: Dean Martin’s “Italian Love Songs”
The Economy: Central Bankers dominated this week with the ECB’s Draghi reiterating that more stimulus is sure-fire Nirvana. Then Yellen and her crew called the stock market expensive while continuing to talk up higher interest rates. They ignore that higher interest rates have been the death knell of every bull market. Now that he’s in the Oval office and staring down the barrel of the Federal debt, The Donald has become an advocate of low interest rates. Higher interest rates jeopardize all of his campaign promises and programs. History teaches us that when the Fed begins to talk about stocks being expensive, the bull has further to run. Yet, we’re perplexed that the Fed would warn of an overpriced stock market. After all, they have finally achieved their objective of a runaway stock market that continues to race higher. Risk has been banished as investors have finally accepted that Central Bankers will always do whatever it takes to keep stocks going up forever. … to infinity and beyond!
Food for Thought: 4th of July! All Citizens are Patriots; regardless of which side of the aisle. Just ask us. So we can safely say, without being accused of hate speech, “My Country right or wrong, still My Country.” Have a great 4th of July!
Music of the Week: Rod Stewart’s “It Had to be You”
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”