Market Commentary for the week of February 8, 2016

Do you see a problem?
The market's current fixation on China and energy prices has left unaddressed, at least temporarily, the other elephant in the room...and the former number one nemesis (how soon they forget) of the stock market....interest rates.

The policies of accommodation and" easy money" that were required (?) to drive the economy out from recession have now become punitive to the cause.  Low borrowing costs, at a minimum, have exacerbated stock price spikes while limiting the alternatives for investors to park savings and build yield.  Since the credit crash, central banks have infused billions into the financial markets, most of which, unfortunately, went into "paper" investments rather than brick and mortar projects or human relief.  As a result, a significant portion of the debt market evaporated, as the reward for purchasing those instruments hovered at or below 1%.

In this reviewer's opinion, our erroneous focus upon oil prices and regional global earnings patterns has clouded the real reason that stocks are fluctuating so violently: low interest rates increase stock valuations and make the market reliant upon the liquidity they create.  Whatever the initial well-meaning benefits accommodation might have produced, these monetary policies are increasingly becoming the metaphorical axe held over our heads.

Worse, still, there is increased doubt, anxiety, and confusion about the future direction of central banks' policy.

Play by the rules

We saw this past December how the US Federal Reserve glowingly spoke about domestic fundamental and fiscal advances in employment, productivity, and investment.  As a result, they moved cautiously by raising interest rates just enough to signal a reversal in austerity policy and an acknowledgement of future actions.  To be sure, conditions had long dictated that change.

However, there is little consensus around the world about interest rates, nor are regional conditions uniform throughout.  In Europe, ECB policy makers are strongly in favor of lowering interest rates, while Italy and Japan have already moved into negative interest rate territory.  That means that you are now paying to lend money to those countries rather than the other way around!!

My conclusions about the China debate is that as they, too,  jump on the bandwagon of austerity to maintain a hold on economic viability, analyst's concerns should emanate not so much from one nation  as much as a lack of uniformity and clarity about global monetary policy overall.   Without question, every nation has the right, the duty, to promote economic traction and solvency.  But I would also assert that a constant micro-manipulation of monetary policy worldwide is leading, or will lead, to asset bubbles, distorted valuations, and unsustainable cyclical patterns which deviate from nominal quantitative analytics.

I further believe that regional discrepancies in interest rates and currency "pegging" destroy competition and trade amongst nations.  Countries that utilize monetary policy to devalue their currency gain only a temporary competitive advantage in trade and product demand.  In fact, a "race to the bottom" in currency and borrowing costs helps no one in the long run, and only extends the period of remediation and normalization of debt levels, GDP, and securities' valuation.

Low interest rates by definition reflect a period of slower growth and economic weakness.  But, curiously, listening to the experts and reading the data today, one clearly comes away with the perception that the economy is getting better, even if the pace might be slower than desired.  At some point, however, a period of reassessment, rebalancing, and asset equilibrium will become necessary.  It's the power of today's unknowns that we believe is creating a climate of uncertainty and volatility in the financial markets.

The topography of where interest rates reside has become a stealth player in the equities market, influencing enthusiasm and the insight of how we reach certain valuations over time.  Vast regional differences do exist, we recognize, but the net result of monetary moves worldwide should be to create buoyancy and recovery uniformly which turn localized anemic conditions into a sustainable macroeconomic lift-off.