How many people believe investing is easy? No one who has done it for any amount of time. Investing is one of the hardest dollars available. No? Are you back yet–we mean back to where you were prior to February 3rd.? Did you enjoy the trip? Here’s what we’re all collectively facing now.
Equity investors’ attention is now on inflation. The U.S., Europe, and Asia, are joined in what’s being phrased as a “synchronized global acceleration.” Our bull market is old by historic standards. Economists suggest the business cycle driving that growth is mature. On February 2 a report was released that there is upward pressure on wages.
Neither the fed or the ECB has any bullets. With interest rates near historic lows, neither has room to lower rates if/when inflation grows beyond 2%. Let’s keep in mind the fed’s “Duel Mandate.” Our fed has two tasks; 1. Maintains price stability, 2. Maintain full employment.
Rising interest rates create a battle between stocks and bonds. Money hates risk and rising bond yields will siphon cash from corporate issues, particularly dividend payers. That means packaged foods companies, utilities, REITs, or pipeline players. Still want yield? Hate volatility? You’re not alone.
None of this is new. If fact, it’s prosaic. Here’s the new. The tax cut just passed by Washington represents a very large FISCAL STIMULUS. Simultaneously the fed is proceeding with a gigantic bond divestiture. A large fiscal stimulus, a possible 5 rate hikes in succession, and a massive federal reserve treasury sale.
The Economist labels as “profligate” the unpaid for tax cut/fiscal stimulus. Anyone who has been tracking developments also knows that this unpaid tax cut adds 1.5 trillion to U.S. long term debt, in a quickly rising interest rate environment. Get it? With every fed rate hike our monstrous national debt becomes more expensive to service.
The election, cuts to regulation, presidential promises, and the subsequent huge tax cut, have together proved invigorating. That’s good. It’s always very good when those working in the economy also feel enthused and optimistic. Unemployment hasn’t been this low since the ’70’s. Equity valuations are elevated as a whole, yet many bargains exist. Once again, the Economist expects volatility to persist. They did not say for how long.
Perhaps the most important element here are the people now making decisions. Our new fed chief Jerome Powell has no formal monetary policy experience. Hum. Our Secretary of the Treasury Steve Mnuchin arrived in Washington lacking any national financial experience. Does working at Goldman Sachs truly qualify anyone to take sweeping national financial policy? Not really. Further, partisanship remains a question concerning Mnuchin’s comments as they relate to the U.S. economy.
So, we have rising rates, creating a stock/bond tension, a repatriated cash/tax cut juiced equity market, amid a synchronized global acceleration, an aging bull powered by a “maturing” business cycle, an equity market at elevated valuations, and a savage revaluation of said equities that has left many investors wondering “what’s it worth?”
Thanks for reading. Keep looking.