Last week, we attended Charles Schwab & Co. Inc.’s IMPACT investment conference. My perception was that the “consensus” opinion by experts there was for very low returns to all generic investment classes for the next decade. We should keep in mind that the “consensus” is often wrong. Now I’m watching overwhelming news which indicates that whoever is elected President next week is likely to have a very tumultuous four year term, complete with possible violence and impeachment. If Wikileaks is correct, then our system of government is indeed corrupt. What this means for our investment plans for the next four years is impossible to decipher. My plan is prepare deeply and steer a middle course. It is entirely possible that we might find bargains in all this, and it is also quite possible, as is so often the case, that we will all muddle by, and in fact find diamonds in what seems to be a gigantic steaming manure pile of social unrest. With shovels in hand, on we go.
With apologies to the 1963 movie, “It’s a Mad Mad Mad Mad World” starring Spencer Tracy and Milton Berle, we are currently in the midst of something new: the Federal Reserve is in control of our stock markets. Their quantitative easing and low interest rates have not boosted the economy as much as intended, but they have certainly been wonderful for stocks, bonds, and real estate.
In today’s Wall Street Journal, page A-13, in the article “Trump Tees Up A Necessary Debate On The Fed”, economist Ruchir Sharma of the investment bank Morgan Stanley writes:
“Since the Fed began aggressive monetary easing in 2008, my calculations show that nearly 60% of stock market gains have come on those days, once every six weeks, that the Federal Open Market Committee announces its policy decisions.Put another way, the S&P 500 index has gained 699 points since January 2008, and 422 of those points came on the 70 Fed announcement days. The average gain on announcement days was 0.49%, or roughly 50 times higher than the average gain of 0.01% on other days.
This is a sign of dysfunction. The stock market should be a barometer of the economy, but in practice it has become a barometer of Fed policy.”
Yep, you weren’t just imagining it. How this all unwinds is unknown. Meanwhile, we should be very cautious, and enjoy the gains. This will probably end nicely. Perhaps not.
The Bank of Japan issued its plans for future economic stimulus last night. Consider the rather stunning implications of the Japanese 10 year bond having a 0% yield. That means they expect the economy to grow…0%. Another thought to be derived from all this is that the giant increase in debt in Japan over recent decades and the vast complexification of Japanese society hasn’t worked, yet the Bank of Japan is doubling down on the same policies. Individual stocks may do quite well, though. Most importantly, the same phenomenons are playing out all over the world. Stock markets are going up globally because cheap money means that there’s more to support current values. I’m wondering when the electorate will truly realize the meaning of this.
Few people are considering that regardless of which candidate we elect in November, she or he may possibly be a weak president because an iron wall of hatred has been nourished into existence in our society. As a result, the central banks may run the global economy by default. Then you get guessing games like today. Note that this was originally written in 2015 and has been updated.
Where we are all dependent upon a handout. They’re in charge of what happens next, since the investment markets are dysfunctionally addicted to low interest rates. Meanwhile, Andresen & Associates is now AGGRESSIVELY rebalancing our portfolios in anticipation of…something. Today’s downturn is an indication of restless spirits, but whether it turns into anything meaningful is dependent upon news…and especially interest rates.
In 1994, when the world was awash in optimism and military funding was in decline, I read a small book, “The Transformation of War”, and its relatively radical predictions. At the time I wrote a newsletter to my investment advising clients suggesting that the “peace dividend” and the “kinder, gentler world” might be illusory. I had no idea how right Martin Van Creveld would be. Now I’m watching the current expansion of China and the rise of even more social anger, and I’m thinking that we need to be emotionally and financially prepared for war in the coming decades, especially since military spending is again so reduced. Historically, we have wars when we are weakest. What does this mean to our portfolios? Stay flexible, stay liquid, keep at least part of our money overseas. At the moment I’m on a campaign to diversify and streamline our portfolios. If there is no storm and there is no war, we’ll thrive even more fully. Here’s hoping and praying.
We’ve had all-time highs in the stock markets in recent days. Valuations are stretched. Some sort of correction is more likely. But we can’t just sell out of the stock market and wait for better days, because markets often ignore valuations in the short run. Instead it’s better to rebalance and diversify, and BUY when markets fall.
We appear to be in the Mother Of All Bubbles in the bond markets. The fear-mongering of negative interest rates created by central banks is having genuine and unforeseen consequences. We genuinely haven’t been here before. This means…well, we don’t really know what it means. Except that bond prices are sky-high and bond interest rates are historically low.
Our investment response is that we aren’t trying to guess interest rates in the short run. We own some short-term funds and some funds with longer durations. But we are also watching carefully for an interest rate spike!
At this point all our asset allocation and hybrid funds are looking great too. Yes, they are boring. In a crisis they do quite well. When any interest rate rise occurs we’ll be watching these funds as well.
Embrace the MOAB! DO NOT buy long term bonds! 🙂