Sometimes,
any theory which espouses spontaneous, random market behavior gets put to the
test. Conversely, it is my belief, and
my science, that markets, while certainly influenced by exogenous and disparate
events, are not random at all, but rather quantifiable and somewhat
predictable.
The
past two years have certainly been a statistical aberration to that notion, but
not in any way un-measureable or undefined.
While
the supply side of the economy has
been expanding, the demand curve has
been quite restrained. As a result,
spontaneous discretionary spending behaviors have largely been imperceptible. Despite heavy influences and persuasions from
monetary and fiscal authorities, consumer spending has been a bore, and not
consistent with producing the kind of vibrancy and enthusiasm that austerity
and cheap money policies might usually expect as their legacy. Incentives are only as good as the value
people place upon them, and in this instance discretionary spending has not
been inspired.
"Free
money" and the "free market" are not free. Nor have they been the progenitors of
wealth-building we might have expected to see as an outcome emerging from this past
recession.
Instead,
the markets are hung up on creating capital gains at any cost... layoffs,
accounting engineering, and budget cuts, for example. This obsession has set the stage for a
continuous downward trajectory in the standard of living for the less-affluent,
diminished expectations for their heirs, and created a kind of disposable
underclass of citizens, goods, and services.
Profit at any cost, indeed has
a cost.
I
would argue that the stock market's recent success induces repeatable,
oftentimes vile, outcomes such as class warfare and structurally inefficient
production. Witness, for example, the glut in oil production worldwide or the
housing boom several years back. We are
simply obsessed with making more, of anything, simply because we can. If it seems "normal" that we just indiscriminately
discard those who fall short, or can't or won't participate in the global
marketplace, then maybe we have to look at our own value systems and ask "at what point are we creating too much
stuff?"
A
fair race is not necessarily where the winner is the fastest. It is one in which everyone follows the same
rules for getting to and finishing the race.
While
it is entirely appropriate that subjective evaluation of success is different
for everyone, our greatest contribution to the planet would be to ensure that
no one voice or special interest represents a greater value than any other.
Markets
Today,
a significant percentage of the globe finds itself beset by problems and
internal conflicts that have a direct bearing upon the well-being of its
citizens. Guns and revolutions are not
the things we have in mind when we think about economics, free markets, and
providing our platform with comfort and opportunity. In fact, because of the burden placed upon
governments by war and terrorism, global production capacity has become
terribly skewed.
Demagogues
and dictators who promise religious salvation, or jobs, or panaceas for poverty
are only using the "rest of the world" as scapegoats. But rather than increasing the production
schedules of their populations, the unequivocal net effect has been to stifle
GDP. Thus, selected regions of our
planet are running behind schedule in providing education, healthcare, housing,
food, quality of life, and peace of mind to their citizens.
Even
as the global recovery accelerates, the rewards have mostly been heaped upon a
select few. While the private sector has
effectively been able to manage its budgets, the public sector has become
gridlocked by austerity, ideology, and plain old politics. It was praiseworthy that we were able to
avert a global banking collapse in 2007-2008, but today we find that those
institutions that survived the crisis seem somehow unwilling or unable to
reinvest and/or lend their capital. They
don't realize that they not only are the holders of our money, but they also
hold the key to our expectations and aspirations for a better future.
The
retention of money by the banks costs the economy by limiting projects and
hope. Their failure to take a longer
term perspective of risk is sullied by the follies of their previous lending
practices, thus ruining the velocity of what could be a faster moving
economy. Because of them, the rest of us
are partially stymied by policies (fiscal and monetary) that are short sighted
and apprehensive. Watching the
"experts" be tight with their money also influences our spending
habits. Heck, if they are going to be
frugal, so then should we. And despite
fancy banners and balloons at the local bank, no matter how inexpensive it is
to borrow money, you can lead this horse to water, but you can't make him spend!!
A
massive redistribution of wealth is occurring right in front of us, but not the
kind which forewarns of gloom and doom.
Money localizes with money, making the capitalists feel better about themselves
and the things they possess. However, the
stage is being set for a change in our social contract because many people are
not having their basic needs met, and that could seriously impede the global
recovery.
When
this condition exists, as indeed it has during other periods in our history,
political discourse becomes more harsh, less compassionate. "Aren't
we, after all, responsible only for ourselves?", say many of us. Ethics have become disposable in this
survival climate. Bureaucrats argue for “local" needs, against an altruistic mindset which
seeks common ground for everyone. Certain
belongings are becoming more expensive because things are hoarded and more
closely held, and in the case of commodities, more difficult to find and
depleting in quantities.
While
it is certainly advisable always to be biased against profligate spending,
limitations upon civic spending can only be supported if those limitations lead
to responsible allocations of law and order, food, and the common good. A balanced budget is always preferable to
taking on debt, but alleviating chaos by being creative and proactive on behalf
of citizens is preferable even more.
Summary
How
come so many of the world's stock markets have been doing so well in the face
of such underwhelming confidence and limited breadth of participation? Are bull markets impervious to fundamental
inconsistencies, full speed ahead always?
The
answer might lie in the temporary displacement of the bond market because of
low interest rates. Professional
investors and traders are the embodiment of a narcissism that believes that traditional
investment in energy, infrastructure, emerging markets and business formation
are less desirable than a reasonable rate of return and collecting
"unrealized" portfolio gains.
They appear to worry less about the rest of us...the environment, energy
alternatives, agricultural shortfalls, global disease pandemics, housing and
homelessness....than making sure that their stakeholders are rewarded with
fatter portfolios.
All
the while, stocks have proven them correct as a suitable alternative to capital
spending. There really is no other game
to play.
There
is no end in sight to this "paper profit" mentality, either. My measurements show an array of sectors not
yet having participated in the capital gains bonanza. Because we know that there will always be
"rotation" in the markets from productive sectors reaching full
potential back into the laggards, we can quantify the flow of funds and anticipate
the valuation potential of the markets.
Absent a suitable alternative in bonds, investors are likely to stick
around a bit longer in the stock market.
During
the next few months, the relative performance of equities is less likely to be
influenced by long term objectives, remaining mostly oriented towards immediate
and quicker capital appreciation with relatively little drawdown. A return to long term demographic
"theme" investing is difficult to sustain in an environment of
hysteria and hyperbole.
More
significant, though, would be to see a recognition of moral and ethical
responsibility between the markets, investors, and their community. That kind of seismic shift would resonate
with the public, and help to create dialogues that might provide solutions to
economic and social problems which heretofore have been thwarted by the basest
of human behaviors.
Suggested
Balanced Account Asset Allocation Q2, 2015:
Equities: 65%
Fixed
Income: 15%
Cash: 20%
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