The Fed meeting, for the most part, was a non-event; i.e., no surprises. I noted earlier the message being expressed when monetary policymakers offer an assurance that rates will stay at zero for nearly 3 years to come.
As clients and regular readers know, we rely heavily on macro conditions as we see them to develop our ongoing risk/reward thesis. Therefore, present conditions have us remaining notably guarded right here. Clearly, however, not everyone shares our present view.
I just listened to a RealVision interview with Jay Pelosky, CIO and co-founder of TPW Investment Management. I would classify Jay as an absolute raging bull!
“Nice to hear a passionate bullish view. No surprises; Jay essentially checked all the boxes in terms of the views one would have to have to be bullish right here. “Balance Sheet Recession” would be the subject for folks like Jay to dive into. Plus, man, just to lend credibility to his case, I would counsel Jay to dispense with the word “absolutely” and the words “absolutely not” when discussing the prospects for his favorite sector(s). Humility is a must for those of us who make our livings investing other peoples’ money. That said, I do respect that he clearly has the courage of his conviction!”
What today’s raging bulls — and, by the way, they “absolutely” could be spot on — are virtually all about is the fact that the world economy is going to be the recipient of record fiscal and monetary stimulus for quite some time going forward. Now, to have that view, one has to believe that the world economy will continue to be in a world of hurt going forward, at least that’s what you’d think.
My last sentence is where I struggle with the bull case right here. Reason being, while today’s bulls predict that stimulus will be a huge part of the landscape as far as the eye can see, in the next breath they explain how rapidly and robustly the economy is going to bounce back from here. Well, therein lies the problem: If the economy is half as good as today’s bulls suggest, I can virtually guarantee you that they won’t see half the stimulus they’re banking on going forward. That, frankly, hugely conflicts with their overall thesis.
For us it’s never about being bullish or bearish, per se, it’s always about being as intimate as possible with the trends in data that reflect general conditions, and understanding what they portend for the economy and for markets — asset class by asset class, sector by sector — going forward. Such understanding can come only from intense never-ending study of market history, and a firm commitment to never allowing one’s proclivities and/or biases to cloud one’s thinking.
I mentioned “balance sheet recession” in my comment above. Here’s Richard Koo, a renowned expert on the subject, on the subject:
“The mechanics of balance sheet recession
On the economic front, when a debt-financed bubble bursts, a large number of businesses and households realise that the liabilities they incurred during the bubble days are still on their books, while the assets they bought with borrowed funds have collapsed in value, leaving their balance sheets deep underwater. In order to climb out of their negative equity territory, they have no choice but to pay down debt with their cash flow as quickly and quietly as possible. In other words, they are minimising debt instead of maximising profits.
Although this is the right thing to do for individual businesses and households, when everybody does it at the same time the economy falls into a massive fallacy of composition problems. This is because in a national economy, if someone is saving money or paying down debt, someone else must be borrowing and spending the same amount for the economy to move forward.”
“During this type of recession, monetary policy is largely ineffective because, as stated earlier, those with balance sheets under water will not increase borrowing at any interest rate, and financial institutions are also not allowed to lend to those borrowers with balance sheets under water. In addition, the government cannot tell the private sector not to repair its balance sheets because the private sector has no choice but to put its financial houses in order.”
This fits the potential, if not likely, outcome of the corporate debt narrative we began presenting herein long before entering the current recession.