Since I’ll be devoting much of my writing time over the next several days to our year-end letter, this week’s main message will be some highlights of our recent messaging:
“Economist Peter Boockvar called out the Fed in his note this morning:
“I want to reiterate my belief that all Fed policy is doing at this point is only helping those large companies that have access to the capital markets, those that own stocks and bonds (or Wayne Gretzky hockey cards), those that own a home and they are monetizing the US budget deficit. All of this is fine if you’re included in this group. If not, sorry.”
Well, I’d argue that in the longer-term scheme of things, “all of this” isn’t fine even for the group with assets and access to credit. For history suggests that artificially-boosting asset prices far beyond valuation norms (read bubbles) tends to end badly, especially for those who got coaxed onto the bubble (by Fed policy) in its latter stages…”
“…the fact that we’re getting more cyclical in our weightings means that we do see opportunities ahead — amid still extreme macro and, call it, balance sheet, risk, mind you — yet we have our concerns right here when it comes to timing the entry.
Allow me to bullet-point a few reasons why:
1. Our fear/greed barometer reads -50 (high greed): I.e., the market is hugely crowded to one side of the boat.
2. Ditto #1; the Citigroup euphoric-panic index is at 1.61: The highest euphoria reading in 21 years.
3. Portfolio managers are 2% cash. A record low!
4. Our latest technical analysis has the market beginning to look heavy.
5. While I’m not picking tops here — just assessing risk — my experience over the past 36 years has me sympathizing with Peter Atwater:
“As confidence rises we become increasingly optimistic about the future. And at the top, everyone believes the best is still yet to come.”
6. There’s a massive amount of passive-fund quarterly rebalancing that’s bringing a mountain of new supply (stocks being sold) to market between now and year-end. Whether or not the liquidity (the willingness) exists to gobble it up at present levels will be telling.”
“In a nutshell, Annie Duke captures what I view to be probably the greatest, albeit hidden, danger that more than any other explains how too many folks ultimately fail at the game (the art) of investing.
It’s the too-often destructive (eventually) — at times devastating — belief that short-term positive results always stem from quality decision-making:
“…as I found out from my own experiences in poker, resulting is a routine thinking pattern that bedevils all of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day, potentially with far-reaching, catastrophic consequences.””
“A brief must-read Axios article titled A Growing Insolvency Crisis echoes what we’ve been warning.
Here’s a chunk (I highly recommend the entire article):
“Companies around the world are increasingly at risk of failure, and the size of the problem is growing.”
Driving the news: That’s the message being delivered by two of the world’s most respected monetary authorities — former European Central Bank president Mario Draghi and former Reserve Bank of India governor Raghuram Rajan — and a flurry of other top economists.
What’s happening: “There is a growing corporate solvency crisis in most of the world, as balance sheets are hit hard by losses and the resulting need to pile up debt,” co-chairs Draghi and Rajan, along with a group of economists, academics and central bankers that includes former chair of the Council of Economic Advisers Jason Furman and People’s Bank of China governor Yi Gang, wrote in a report for the Group of 30 (G30).
“In addition, many companies entered the coronavirus recession with unusually high levels of leverage.”
Between the lines: Further, the actions taken by central banks and governments in response to the coronavirus pandemic are masking the true state of the economy — a disguise that cannot last forever.”
What we’re hearing: While central banks could continue to pump money through the financial system for a long time, businesses can’t survive on liquidity alone, Draghi told Axios during a meeting with reporters Friday.
“You can do a certain amount of what’s called evergreening but after a while the corporation will remain unviable no matter how big is the liquidity support.”
“At this point in time the next issue we’ve got to be worried about is a surge in nonperforming loans all over the banking system in most parts of the world.””
“Of course we’ll be careful with our narratives — related to both short and long-term market setups — for
“it is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.”
“As our macro index has been climbing its way out of virtually unfathomable depths of late, I suspect you’ve noticed an air of skepticism in my commentaries.
That largely stems from my awareness of the sheer enormity of support the powers-that-be have brought to bear in their efforts to avoid what seemed destined to be a deep, protracted recession and historic bear market in asset prices.
I.e., the recovery has been entirely thus far void of any semblance of organic, fundamental underpinnings.
It also stems from my study of major financial crises past and the fact that without exception they were the culminations of years of unrelenting buildups of private sector debt.”
“Here are a couple of quotes that capture these unique times in equity markets:
“…people are good at coming up with awesome stories. That’s part of why Tesla is worth two-thirds of a trillion dollars, and the market is at an all-time high with 10 million people unemployed.”
Actually, it’s now 19 million folks unemployed factoring in all programs...”
And here’s economist Dave Rosenberg this morning on the dangers of artificial sweeteners:
“If interest rates were ever allowed to “normalize” and take the prevailing P/E multiple along for the ride, the S&P 500 would be at 2,700. Just so that you know how much artificial sweetener there is in your equity portfolio.”
Actually, it’d be much much lower… Hence my expectations regarding the Fed controlling the yield curve (buying down the longer-end yield) as we meander into next year…
Thanks for reading!