This Week’s Message: Just a Few Thoughts on Wall Street and the Fed

First, before I dive into what I’m thinking about what I’ll call Wall Street’s current base case, allow me to point out that we are actively investing in equities on behalf of our clients. I’ll circle back later in this missive with more specifics…


Just listened to a Bloomberg interview with BlackRock’s “Fundamental Active Equity CIO” Tony Despirito. Mr. Despirito echoed Wall Street’s present mantra to a T…

In a nutshell, stocks’ valuations are high, but not when you consider how low interest rates are. The world is starving for yield, therefore dividends from stocks make them extra attractive. If you’re worried about inflation and higher interest rates, buy energy stocks and banks. Cash on the sidelines, vaccines, monetary and fiscal policy is all propelling the economy forward. He did stress the importance of maintaining a well-balanced portfolio, but of course his recommendation featured nothing but equities.

BlackRock, by the way, is the world’s largest equity fund manager…

So, the narrative honestly is fine on the surface. The problem I have with its delivery is that it’s typically presented with very little, if any, ambiguity… And, frankly, financial markets are ambiguity by definition…

I find incredulous the pundits’ faith in the notion that record low interest rates justify higher stock valuations. I mean, I get it, but to go there without acknowledging what record low interest rates say about the state of general conditions under which stocks are traded is, in my candid view, utterly reckless! It’s like saying it’s safe to go drink from the river because the alligators have all died, without recognizing that the alligators all starved to death because the bacteria and lack of oxygen in the stagnant water killed all of the fish.

I.e., record low interest rates — in high-quality debt instruments — reflect record economic risk! There’s simply no if ands or buts about it…

Note that I said “in high-quality debt instruments.” Well, that’s because when we’re talking low-quality debt instruments, lower interest rates are indeed a sign of good economic things… And as we sit here today, low quality debt is also trading at record low yields…. Hmm….

So riddle me that Batman!!

Well, the Fed… 

The U.S. central bank, along with the U.S. treasury department, has essentially socialized the corporate bond market. As in the forces of capitalism have been, for the time being, entirely circumvented.

Typically the credit markets offer us really good signals about the state of general conditions. One would think that when some 1.4 trillion dollars worth of corporate debt sits on the balance sheets of literally insolvent companies, well, you’d expect low-rated bond yields to fetch record premiums… Oh, but not when the Fed is willing to print money and effectively buy those bonds at crazy high prices (low yields) to keep the financial market bubble afloat… Only a disinterested “investor” with the power to print, aiming to literally kill true market function, can do that.

Ironic how the Fed says they’re doing what they’re doing to maintain market function.. It’s all semantics…

In terms of our “actively investing in equities”, yes, despite my concerns we are indeed engaged with the market. However, our bias is toward the areas that benefit from a cheapening of the dollar and where the present powers-that-be will be directing their attention going forward… I.e., commodities, energy, financials, materials, industrials, and non-US developed and emerging economies…

All the while, we fully recognize that if/when this bubble pops, virtually all things equities are likely to take a bath (I’ve managed money through all the market’s delivered since 1984 [and of course studied the rest])... Hence we’ll be actively hedging I suspect well into the foreseeable future…

Thanks for reading!
Marty



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