This Makes No Sense
April 27, 2016
To say this current market environment is difficult would be a vast understatement. Sure,we’re making money as stocks rise; however, I am not ashamed to admit that I truly am at a loss for what is happening in the market at this present moment. Thankfully this isn’t the first time I have felt like this and I am certain it won’t be the last. Often the market acts in a very strange manner and only in hindsight will it all make sense.
I vividly recall feeling this way at the end of 2007. I had underperformed the market, which was a no-no at that stage of my career because I did not possess the confidence needed to state my case as well as I do now. The ‘global growth’ theme was all the rage and I watched as investors bid up the likes of Monsanto, Chesapeake, Potash and dry-bulk shipping stocks like it was the tech book of the late 90’s. Meanwhile, under the surface, banking stocks were telling a different story and the housing market had already started to collapse. I didn’t understand the disconnect and it made absolutely no sense to me that the general market was not taking into account the real challenges going on in the economy. Thankfully, this disconnect did not breed anxiety which ultimately gives way to a break from discipline. Rather than get caught up in the frenzy, I stayed put in cash and waited. It took a few months, but by mid-2008 my lack of understanding all of a sudden made a ton of sense.
It doesn’t always work out that way.
In the Spring of 2009, after the market had fallen another 25% on the heels of the 30% drubbing in 2008, a bailout transpired and the US Treasury, led by Hank “former Goldman CEO” Paulson, decided to bazooka cash the banking system. The decline was over; but again, the initial rise made little sense to me. What I didn’t understand was how the Treasury could backstop the banks and shore up the balance sheets loaded with billions and billions of non-performing loans. Since it didn’t make sense, I waited and watched. Despite my caution, the market continued to rise and pretty soon I realized that it had anticipated what I never thought possible. Soon after the initial bank bailout, the Fed instituted Quantitative Easing. This was implemented to, literally, buy up the bad debt and push it off on taxpayers. I didn’t have to like it; but again, all of sudden it became so clear that these once possibly defunct banks would soon be cash flush and have stronger balance sheets than even prior to the collapse.
Thankfully, our firm had lost very very little during the crisis. So, missing out on the initial run was a lost opportunity and nothing more. Once it became clear that the Fed would do everything in its power to shore up the US Financial system, we began buying stocks again and enjoyed the bull market.
Now here we are at yet another crossroads, and I’m just as confused as I was in late 2007 and again in early 2009. The market has roared back to positive for the year, erasing the entire 11% loss; yet, under the surface and throughout the globe the deterioration continues. In Europe, Greece is now taking money from the public pension funds to pay its debt, while China is trying to cover up bad debt which is at its highest level in history. US companies, that held the market together last year, are falling under poor financial reports, and the recent rise in crude simply pushes off the defaults and restructuring of debt that is coming down the pike. We have $19T in debt, haven’t a clue how to pay it back and an abysmal 2% growth rate.
All of this information means one of two things, which again, will become clear very soon.
1.) The data is so bad that all Federal Reserve Banks throughout the world will continue to do everything in their power to promote growth; taking rates deep into negative territory, ultimately printing and providing money to banks, inflation will come hot and heavy and stocks will soar.
2.) The recent rise in the market is a mere respite, and we will soon be seeing intense selling which will not end until we have some clear and definite plans to revive the economy, tackle our debt load and find a real solution for our future financial liabilities.
Like you, I too find #1 absurd, but I must remain open-minded to the possibilities either way. In the meantime you can rest assured that I will continue to sit tight, waiting and watching until a much clearer picture develops and I have a real understanding of how to navigate these seas.
If you are not a client and find yourself simply being tossed about hoping for higher prices, may I suggest a second opinion?
Until next time