The furious post-election stock rally/bond crash leveled out in late December, but has not yet reversed.
Conventional wisdom for much of the financial industry is that tax cuts, deregulation, and fiscal stimulus will change everything this year, particularly for banks and energy companies.
Proponents of this view think the US economy has plenty of pent-up demand and is ready to grow—enough so that we may actually see a little inflation for a change.
ADW Capital’s 2020 letter: Long CDON, the future Amazon of the Nordics
ADW Capital Partners was up 119.2% for 2020, compared to a 13.77% gain for the S&P 500, an 11.17% increase for the Russell 2000, and an 8.62% return for the Russell 2000 Value Index. The fund reports an annualized return of 24.63% since its inception in 2005. Q4 2020 hedge fund letters, conferences and more Read More
David Rosenberg of Gluskin Sheff—whose insightful research appeared in my free publication, Outside the Box, many times—disagrees. He thinks the widespread optimism among investors and business owners is no reason to change your plans.
These are not normal, stable times
The markets are indeed forward-looking, but this latest leg of the risk rally has a certain speculative feel to it.
Now, some full disclosure. I actually find it senseless to provide a forecast for the entire year ahead at this time.
We are not in normal, more stable time periods.
We have been in a heightened state of volatility, and that will intensify in 2017 because of the political dynamics in the US, as well as in Europe. We have a president who tweets the first thing that comes to his head, has appointed a cabinet filled with billionaires even though it was rural blue-collar voters that pushed him over the top, and every pro-growth promise was met with an anti-growth measure.
We go into the New Year with investor optimism and equity market valuations running at extremely high levels, so initially the risk is that disappointment sets in, but that may not happen until we are well into 2017.
I will go on record to say that sentiment and market positioning are so radically negative on Treasuries that it wouldn’t take much to elicit a countertrend bond market rally. We are way oversold here.
The economy isn’t that strong, and anyone who thinks one man can reverse, on his own, the structural forces that led to the multi-year disinflation trend—and I’m talking about excessive debt, globalization, aging demographics, and technology—needs to go back to economics school right away.
I think it is very dangerous to be basing investment decisions on expectations of government policy. What is done and when it is done is far too uncertain, and uncertainty is inherently difficult to price.
Manufacturing could return to the US, but it may not help
I have to agree with some of this. Rosenberg is right that the structural forces favoring disinflation/deflation haven’t changed. A different trade policy is not going to restore all the jobs our Rust Belt states lost. Eighty percent of the jobs that have disappeared in the Rust Belt were were lost to technological shifts, not to offshoring.
Please note the difference between offshoring and completely new manufacturing businesses being set up in China. The jobs were never here. They first appeared in China (or pick a country).
The irony is that Apple may indeed start making iPhone 8s or 9s in the US at some point in the not-too-distant future, but they will do so on robotic assembly lines and with nowhere near the number of jobs created at Foxconn for the first iPhones made in China.
In fact, Foxconn is now installing robots because they are cheaper than Chinese labor. Can you see a trend here?
Demographics are what they are, too. We Baby Boomers will keep getting older, some of us retiring but others, by choice or not, staying in the labor force and not giving younger workers a chance to take our places.
Meanwhile China and Japan will face steadily worsening labor shortages. Chinese businesses are trying to move up the economic food chain, away from the dependence on cheap labor. That trend will further advance automation technology, which will then find its way to the US.
I think we will get tax cuts, but they may or may not stimulate growth. Details are critical. And plenty of other priorities could get in the way of deregulation efforts.
I wish I could prove Rosie wrong, but that’s a feat I have rarely accomplished in many years of trying.
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