I enjoy writing about the markets but, frankly, it is quite laborious. Several hours to construct/edit a timely and relevant post. So many times I wish to write but am pulled in too many other directions. Managing Money + Client Interaction + Business Operations = Not much time left to write…although I try.
Also, I regularly receive questions from clients, prospective clients + professional associates.
So I am introducing a new feature answering a variety of queries…seemingly most topical…in a briefer but singular format…still publishing longer form posts when appropriate.
Topic: Global Bond Yields
Question: 10 Year Treasury Yields, A Proxy For Many Loan Products, Still Seem Exceptionally Low. How do they compare with the rest of the Developed Economies?
Actually…Absolutely Low But Relatively High.
Topic = Technology Stocks As A Proxy For Market Risk
Question = Can you explain the rationale behind many technology company valuations and recently sharp price moves upward notwithstanding the recent sell-off? Especially interested in FAAANG-CMT?
For Those Unaware…The Acronyms = Facebook [FB], Apple [AAPL], Amazon [AMZN], Adobe [ADBE], Netflix [NFLX], Google [GOOGL] – Salesforce [CRM], Microsoft [MSFT] and Tesla [TSLA].
In this market environment Revenue Growth = The Most Valuable Metric Irrespective Of Whether That Translates Into Profit Growth.
And all of the names above are growing revenue…some generate a lot of cash [i.e. FB/AAPL/ADBE/GOOGL/MSFT] while some generate very little cash…if any [i.e. AMZN/NFLX/CRM/TSLA].
But all share the same trait of “rich” valuations [EV/EBITDA].
However the MOST IMPORTANT factor driving equity valuations is Global Liquidity = Central Bank Money Printing [U.S. U.K. E.U. S.N.B. Japan and China] collectively equal to 40% of Global GDP.
Despite The Fed’s looming Balance Sheet Reduction…that no legitimate market professional believes will ever amount to their $2T trimmed goal…there is little indication the Global Printing Presses will halt anytime soon.
Nevertheless…The Market Red Flags Are Mounting:
- Compressed Risk Premia
2. Massive/Growing Global Debt Levels [Sovereign + Private]
3. Sovereign Debt Monetizations = QE
4. Positive Yield Curve Compression in the U.S.
5. Historically Low Actual/Perceived Volatility
6. Excessive Equity Valuations…Any Rational Measure
7. The Lack of Any Meaningful Equity Capital Draw-Down
[last 18 months] reflecting a robotic Buy Any Market “Dip” Mentality…As The Draw-Downs = Increasingly Shallow
8. The Advent Of Black Box/Passive Investing…That Portfolio
Management =Science [purely symptomatic of a sustained trend]
9. The Recent Volatility Associated With The Tech Sector [XLK] Is Actually < Volatility Of Both The Sleepy Utility [XLU] and Consumer Staple Sectors [XLP]
10. Stalled/Modest U.S. GDP
11. Wage Growth < 1.75% Despite “Full..Close To Full” Employment
12. Backward Focused Inflation Measures Ignore Soaring Financial Asset Prices [Equities + Real Estate + Corporate Bonds]
Still…the GREATEST FACTOR contributing to the seemingly insatiable risk appetite is the perception that Central Banks have trapped the bears.
That an uptick in global growth will be greeted positively by the equity markets while any slowdown will be met with more Money Printing…further propelling stocks. That no matter what occurs in the future = it can only be positive for stocks.
That precept is certainly debate-able but it does seem to be a current consensus belief…and in its own right…is just another sign of the market excesses. Perceived Equity Market Risk…according to many measures = Virtually Exterminated.
It could even be said that the Global Central Bank’s Greatest Achievement, in this 8 year economic cycle, was NOT their ability to positively impact asset prices but their ability to Intentionally Destroy Moral Hazard…with no shame.
Because If You Believe This QE Driven Economy Is A Function of Unadulterated Capitalism and Animal Spirits…then you are Very Badly Mistaken.
I frequently wonder what the Central Bank’s end game truly is because, even in a reasonably optimistic economic scenario, there is no escaping the Monumental Global Debt Burden…as it serially grows well in excess of Global GDP…and the servicing costs of that debt [even with historically low interest rates] more deeply bite into Private Income/Public Tax Receipts.
Topic = The Economy
Question = Do you believe the U.S. economy’s performance relies on QE and, therefore, without it will stagnate?
The economy has become too reliant on The Fed’s stimulus and without it will assume “stall speed”. The irony of QE…one of its goals was to suppress interest rates below market achieved levels but I believe QE is was never required to suppress rates. The economy was stagnant enough to achieve that on its own.
The primary motivation of QE was to shift dollars from “lower risk” assets to “higher risk” assets via increased liquidity…and that has occurred…but now the gap between asset values [equities, real estate, etc] is widely detached from an economy that can sustain these heightened asset values …which were driven by money printing. Withdraw the printing press and subsequent liquidity the asset values ought to decline. The Big Question…By how much?
Topic = Your Blog
Question = Why have you password protected most of your content?
Because a lot of other sites were using my content without asking me [which was fine] + editing it [which was not fine]. Most requesting to read the posts [as many already are aware]…happy to provide a password.
Also, this is not intended to be a commercial site. There is no advertising, etc. It is primarily intended for clients + professional associates…to get a view into my market insights…as described in my “Mission Statement” tab.
Topic = Central Banks
Question = You’ve been quite critical of Central Banks for a long while. However the global economy has improved dramatically. Since the advent of QE [or you like to say Money Printing] in March 2009 what do you believe is their biggest accomplishment?
That they’ve quashed just about any dissent regarding the non-conventional use of Money Printing to acquire financial assets [public + private].
That it has continued for eight years has transformed many market participants views that it is a legitimate policy…since it has not met too much resistance [that is…other than just prior to its initialization in March 2009].
And now they wish to institutionalize it further [frequently suggesting that they must now taper asset purchases in order to create room on the balance sheet for further asset purchases, when necessary, in the future…rather than considering it as a one time “emergency” tool…as it was initially characterized].
The economic emergency was over long ago. That QE has continued for so long is likely tied to monetizing sharply higher U.S. budget deficits since ’09. Correlations between the two are quite high.
The Fed cannot let go, it seems, as it will likely cause some market pain/volatility. For some reason they refuse to tolerate any market turmoil even going as far as stating that if the markets do not cooperate [that is…go down] then the balance sheet reduction pace will be purposely slowed. Their sensitivity to market volatility is obvious and disturbing as it is NOT part of their mandate.
Further, The Fed points to the capital markets’ positive response, to their actions, as a rationalization for their strategy…despite enormous global capital markets distortions i.e. negative interest rates.
I say they’ve breached Moral Hazard & that the markets would have properly reset without their steep financial stimulus. Let’s face it…if interest rates at ZERO [for many years] are NOT enough to stimulate the economy to ESCAPE VELOCITY…then there are, likely, serious structural problems