Michael Lewitt: Navigating the Current Madness in Money Markets
Michael Lewitt is the founder of The Credit Strategy Group and was one of the few investors to forecast the credit crisis of 2001-2002 as well as the financial crisis of 2008. It’s always interesting to hear from someone with a track record and unfortunately, he has a far less than optimistic view of yield situation today. You can read more about him here.
I feel today the way I felt in 1999-2000. The way I felt in 2007. Where the cycle is getting very extended. Things feel really excessive. And it’s really frustrating, because I feel that the markets are not pricing risk properly, and yet they keep going up. And I really feel like banging my head against the wall. In the most recent issue of my newsletter, I say I spend more time at the gym because the alternative is banging my head against the wall, and that’s really bad for the wall.
– Michael Lewitt
Here are some of the few key messages from Michael Lewitt and our thoughts on them:
1. Quantitative easing isn’t working; financial markets are getting pumped up but the economies are not growing. Worse still, Europe and Japan have followed the U.S. down the path of wrong-headed policy making.
In the most recent FOMC meeting, interest rate hike was deemed inappropriate due to weak economic data. How many times have we heard this? A rate hike is a bitter pill that markets eventually have to swallow. The only question is when, and the longer this drags on, the more dangerous it becomes. Companies which should be dead can still survive on a diet of free capital and lax borrowing now. But as Warren Buffett puts it, it’s only when the tide recedes that we see who has been swimming naked.
2. Market valuations are getting frothy – Shiller’s PE of 27x vs 10 year average of 17x, Market Cap/GDP of 1.25 vs 0.75 average.
Markets in general are no longer cheap. However, we believe there are always pockets of opportunities within the market. Between the different industries and the different geographies, there is bound to be something that still tickles your fancy.
Considering the unsustainable yield environment, there will be investors who will prefer to wait for markets to drop and it will be interesting to listen to their perspective. Warren Buffett would probably stay out of markets, what would you do?