The Economy: The U.S. economy appears to be accelerating from its modest expansion over the past several years. While purists may argue the validity of the numbers that are released, they are the numbers that move markets and investors. After years of insisting that inflation is too low, we may be seeing that monster rearing its ugly head. The Fed’s Beige Book shows inflation increasing across a broad range. Consistent with increasing inflation, the Fed is now warning that higher interest rates are on the way. They have 4 hikes planned for 2018 and are leaving the door open for more. In the meantime, information overload is the order of the day. The actionable news is further confirmation that the Fed is in a tightening cycle. Loans of all types will continue to become more expensive. Those economic sectors that benefited from a decade of low rates may see increasing headwinds as rates continue to ratchet up.
Food for Thought: Stock markets are suddenly a hot topic of conversation. After years of the lockstep rise in global asset values, stocks have shown that they can go down as well as up. But let’s face it, making changes to an investment portfolio is like watching paint dry when compared to wine tasting or hiking Nepal. Sailors know that a rising tide floats all boats … and the reverse is true. The last bear market showed that diversification is no protection when all asset classes are getting crushed. But that message will have to be relearned. The FANGs may be particularly vulnerable. Regulatory issues could loom as Americans are waking up to the privacy/government surveillance/freedom of speech issues posed by big tech and social media. Anti-trust happened to the railroads, big oil, autos and airlines.
Music of The Week: Govi’s “Andalusian Nights”
We Quarterback Money®
The Economy: The numbers were again mixed and eclipsed this week by politics. Housing starts and building permits were down. Jobless claims up, Industrial Production down. Fed minutes were, as usual, a sleeper … watching Yellen kick the can down the road is tedious at best. The excitement was reserved for the NOKO Doughboy, who blinked; for the rewriting of U.S. history that occurred in North Carolina and for the continuing Circus on the Potomac. With the exit of Steve Bannon from the White House, Chief of Staff John Kelly appears to have consolidated his control. If true, we may begin to see a unified message from the Trump Administration. Even if that message is via tweet, it may be an improvement over the noise that has become a distraction. With the uncertainty of the past few weeks, stocks have weakened while bonds have been in a holding pattern.
Food for Thought: Stocks are making some investors nervous. After relentlessly moving up this year, markets have stalled. Is it because August is usually a weak month, or is something else at play? U.S. markets have failed to hold their highs and the FANGs are down about 10%. Bulls see Dow 30,000 around the corner. Bears are salivating for a 20% correction. Central Banks continue to pump trillions into the global economy. As long as Fed Policy is “Free Money Forever” there will be an upward bias to stocks. Yet warnings abound. Fiscal policy along with Trump Initiatives are DOA. Political gridlock under Obama was astonishing; under The Donald it is simply unbelievable. Clearly stocks can’t go up forever. This begs the question for investors who are on the sidelines or short, “Do you want to be right or do you want to make money?” Which of course leads to the caveat, “Markets can remain irrational longer than you can remain solvent.”
Music of the Week: Shakira’s “Can’t Remember to Forget You”
The Economy: The news this week has been all about Q2 corporate earnings … with a nod to the Fed’s 2-day meeting and announcement … and of course the Circus on the Potomac. Earnings have been strong with most beating expectations. The FANGS have led the way. Whether earnings justify stock valuations is up to you. Goldman Sachs thinks the market is overvalued with the market PE at 22.1 versus a 10-year average of 16.7. The other side of the coin are those saying, “This time it’s different.” The Fed’s 2-day meeting was a non-event. On Wednesday they announced no change in interest rates with a hazy comment about normalizing the balance sheet. In short the Dovish Fed is firmly committed to doing nothing. The Circus on the Potomac has continued its dazzling performance in the Theater of The Absurd. The Republicans were given a mandate to do something but seem to be incapable. Amazing. The Donald is moving closer to firing Apprentice Jeff Sessions. Sean Spicer is toast and The Mooch is sharpening his knives for future victims. There are no Summer Doldrums.
Food for Thought: As the poker player says, “Read ‘em and Weep.”
The Overvalued Market
This Time Is Different
Einhorn down 4% Q2
David Stockman on Peak Bull
A Bearish Citi Warns
Passive Investing poses risk
Music of the Week: Don Henley’s “Building The Perfect Beast”
The Economy: “Summertime and the livin’ is easy.” Economic data has been scarce. The Fed continues to indicate that they are now in a tightening cycle. We’ll believe it when the stock market has a correction and the Fed actually continues to raise rates; rather than follow their usual action of doing everything possible to support the asset bubble. The Fed has also indicated that they will be shrinking their bloated balance sheet. This will also have a tightening effect. Again, we’ll believe it when we see it. In the meantime, stocks continue to move higher led by the FANGs. Stocks remain a pure-play in central bank manipulation with the Bank of Japan now buying stocks like never before. Oil, on the other hand, entered bear market territory this week; crashing to $42/barrel WTI. The ripple effect has yet to be felt in the economy. A few short weeks ago oil was the biggest bull story around. … goes to show how quickly the story can change.
Food for Thought: We’re officially into summer. Time to find a good read and relax. “The Fourth Turning: An American Prophecy …” by Strauss & Howe frames today’s world in a way that you might find thought provoking. Are we in an era of increasing instability or is it simply a matter of the ever-present media. Most of the time, things tend to change only at the periphery. Occasionally events are life altering: wars, economic collapse, revolution are three macro events that come to mind. It’s all happened before … on numerous occasions … and the world is still turning. We’re cockeyed optimists and far beyond the sky-is-falling. Having said that, we continue to encourage you to have an exit strategy for these financial markets.
Music of the Week: Michael Allen Harrison” “Horray for Hollywood”