Market Commentary for the week of September 23, 2013

More money?
The Federal Reserve kept its word last week: until they see an improvement in jobs growth and wages they simply won’t budge on their mission to keep interest rates low to stimulate borrowing and economic expansion.  What this means to the markets, however, is more ambiguous.

Growth, by any measure one might apply, has been anemic this year, and has failed to exceed “nominal norms” for at least 5 years.  By the standards used at the Federal Reserve, unemployment and inflation, there has been a relative improvement in each, but not sufficient enough to take their hands off the rudder completely.  This doesn’t satisfy those who believe that such artificial machinations of monetary policy ultimately do more harm than good by limiting the effect of free market supply and demand, survival of the fittest.

The best measure of how the Fed’s doing would be to see if more “free money” actually filters into the pocketbooks of average citizens.  In this regard the policies have been woefully inadequate.

The disconnect is not simply with Fed policy, however.  We know the money is there, aggregating in corporate treasuries, savings accounts, equity markets, private finance, and tangible asset price inflation.  Why, then, is there stagnant jobs and wage growth?  Because, it’s more profitable to hoard the cash, than to deploy it.  The missing syllable is the rotation of that cash through the system to the end-user, the consumer.

The Federal Reserve and corporate governors have dramatically increased valuations of inert securities, while creating an asset bubble of historic proportions, the ramification of which might have horrific blow-back possibilities.  The two most glaring of these negative consequences is the loss of consumer confidence in the egality of financial institutions, and a soaring rate of inflation, which I believe is already quantifiable in everyday purchases.

The tools the Fed needed to combat the credit/financial crisis in 2008 are not necessarily the same tools they need to deploy to deal with our current economic quandary.

Who cares?

The bright side to this is obviously the magnificent year the equity market is having.  The market becomes a default investment decision when bond interest rates don’t/can’t compete.  Shaking off their concern about any net worth volatility, investors are chasing after stocks as if the train has already left the station.  Such lofty heights converge equally, I believe, over a giddiness about making money, and an absolute dread that we’ve seen this mania before…and it doesn’t end well.

Recall that when the Fed first started “tapering”, or “easing”, the market failed to respond because many feared a snap-back repercussion of rates rising at the back-end of those policy initiatives.

Well, we are at the back-end of those initiatives, and cycle-phase analysis tells us that interest rates will go up.  We simply don’t know, now, when.  And last week didn’t make things any easier.

Do you really believe there is no inflation?  Over 70 shopping items have already exceeded the “stated rate” of this year’s inflation figures, and one might extrapolate from others, such as tuition, lodging, clothing, pharmaceuticals, etc., that those reported numbers are not accurate or certainly without relevance for the average consumer.

We might be heading into self-denial which plods us along into a generally unknown, or oft-repeated, morass.

Market Commentary for the week of September 16, 2013

Good week.

Depending upon where you reside, or on which side of the issues you fall, it was a good week last week.  We averted a military strike on Syria by the U.S., at least temporarily; we had reasonable adjustments to economic growth statistics; and most made some money in their portfolios.  While cyclical dynamics are relatively benign, the broader secular outlook continues to build a solid foundation for recovery.

The odds that an exogenous news event might derail long term prospects are diminishing, further still.

However, as noted above, where you reside also might influence your outlook upon, and prospects for, optimism and recovery.  Amongst the under-developed economies, for example, the gap between robust recovery and outright despair seems to be widening.  The main goal of local economic authorities seems to be to consolidate costs, protect the affluent, and increase isolationist propaganda that maintains the status quo.

Hence, while there is no specific threat of economic collapse in most regions of the globe, the socio-economic gap between the haves and the have-nots is exacerbating, while more are going hungry or homeless, and a centralized accumulation of capital leaves many without good paying jobs or hope.

The rate of acceleration of this disparity is also quickening.

Survival and selection.

My goal is not to write political or social commentary.  However, the impact of these societal and moral regressions is having, or will have, a mighty influence upon capital formation in the world’s financial markets.  Consider the cost of military incursion into nations far away, and you might anticipate a reverberation upon homes, schools, healthcare, infrastructure, and science back home.  The great enemy of a growing economy is taking one’s eye off the moral tone of the environment in which those decisions are made.

The bull market is gaining traction, and we need to appreciate that it has to be a bull market for many in order for most to feel prepared to accept their responsibly of keeping it vibrant.  Even small actions can have a magnifying impact upon one’s neighborhood, a kind of “pay-it-forward” attitude about one’s prosperity and place in the world.

The structural backdrop for the market’s resurgence is gaining momentum.  Productivity and employment are rising, inflation is low, and many sectors which had been dormant (Industrials, Financials, Cyclicals) are starting to see bases being built around a new vitality and capital expenditures worldwide.  As noted, the likelihood that one event might derail existing velocity is quite remote.  Change takes time, and the time spent building out of our most recent (man-made) global recession has proven to be impressive.

Meanwhile, competition for goods and services globally, is redefining the transfer of, and access to, wealth.  Profit margins are widening and the location of those profit centers is diversifying into regions heretofore not known as powerhouse industrial clients.

The only concern we might have about far-reaching successes is a widening of the slats in the floor which could allow the unseen and underrepresented to fall through.

Market Commentary for the week of September 9, 2013

Yet again.
The Syrian war crisis has prompted another “moment in time” for the markets to reflect and digest both the near-term and long term consequences of our response from a political and economic perspective.  What’s most worrisome is the precedent of previous actions the U.S. has taken in global conflicts, and the potential catalysts for negative consequences for the markets.

The direct impact of our response, of course, would be the humanitarian reasons we give as reason for action in the first place.  To that extent, any justification for intervention would be viable.

However, not only have we learned from previous incursions that there is a short-lived reaction, but we know now that repercussions might have a decades, if not generations, long effect.  Even if the “first strike” response is successful, we know not which threat might metastasize from the event.

With stocks nearly overvalued because of a remarkable year-long run, the probabilities are likely that a negative, or downside, capitulation is likely.  Sometimes investors flee into quality for protection, and sometimes they simply flee altogether.

Whether the market’s response is because of or in spite of the United States’ actions, prevailing relative strength quotients still dictate a cautious approach to investing while equities remain at the top of their parabolic rise.  If the markets could successfully digest all possible permutations of this crisis, then they might resume a fundamentals-based logic for optimism in the long term.

The biggest surprise to the global debate about Syria is how marginally other bourses seem to be affected.  Not only is the conversation focused upon a U.S. response, but the economic impact seems also to be narrowly focused. With that region half-a-globe away, only the S&P and Dow seem to be held hostage to emotion.  On the other hand, nations which should care about disjointedness in their region are acting like business as usual.

Accident or design?

There are only a few historical comparisons by which to compare this buildup of tensions followed by a “delayed reaction” to the crescendo of political and economic discourse.  Most recently, of course, was the drumbeat and buildup to the Iraq invasion in 2003.  We know that all-out war is not even being considered in this instance.  Knowing this, the markets can migrate without concern about total global conflagration.  Nevertheless, only a few have the conviction to put all they own into the financial markets right now.

Going back a generation, it didn’t matter what side you were on in the Cuban missile crisis…everyone was scared that we faced an “Armageddon-like” outcome.  As it happens, one year after that crisis, a steady economy and stable political situation netted a Dow gain of over 30 percent.

History redux.

Markets are constantly traversing parabolic hurdles.  Such is the framework of quantitative statistics and cyclic-based portfolio management theory.  The impact of fear, or war, cannot be mitigated by scientists, politicians, market theorists, or economists.  But we know that the reaction to such exogenous global events, while real, are usually fleeting and sometimes overdone.

This is not to suggest that the Middle East events shouldn’t be taken seriously.  In all likelihood there will be immediate ramifications to this crisis in the economic and political landscape, most likely a short-term spike in oil prices.  These events reverberate into military, household, and corporate spending, not to mention the psyche of disruption and unease.  But, similarly, they do not derail traditional fundamentals or existing secular trendlines simply because of their shorter-term effect.

We have just had our global recession.  Multipliers might exacerbate regional outcomes, but today’s global economic, political, and social priority is on maintaining peace and opportunity for all players.  If sanity prevails, this crisis will pass as others which came before.