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 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: 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”