Consider
the complementary skill sets and factors that go into today's finished
products, and you might have technology from Japan, metals from South America,
engineering from Germany, and manufacturing from China all in one unit. In fact, many multinational corporations
might have supply chains that consist of thousands of companies spread around
the globe.
Further,
complementarities might span several capitalization realms, and spread amongst
developed and emerging markets. The
numeric advantages to these workforce harmonies drive globalization and product
innovation. This division of labor
between low cost manufacturing and highly sophisticated product modeling makes
it possible for mass market distribution and fulfillment of consumer's needs in
a variety of everyday products such as telephones, appliances, automobiles, and
clothing. Recall that it was just in the
last generation, the 1980's, that a halcyon call was proffered by governments,
financial institutions, and ethicists that we mobilize that generation's
economic recovery through globalization and intra-nation
commerce. Emerging markets were all
the rage, the topic of all commercial conversations, the savior of a stagnant
economy and financial structure...or so it was hypothesized.
Most
everyone agrees that these confluences and synergies produce jobs and corporate
profits. As long as the economies of connected
nations are growing, the trend for profits, consumer savings, and financial
market activity can sustain. To withdraw
from a vibrant free trade, as we are hearing in the political forums, might
pass the "nationalism" test, but does little to make an integrated
global marketplace whole.
Markets
The
financial markets are fond of earnings.
But some are fretting that global economies are actually heading down a
persistently different direction, one in which earnings growth is occurring
without top-line revenue growth. This
worry is coming from a variety of sources not the least of which is a failure significantly
to push consumer spending despite historically low interest rates. Unfortunately, the gap between incentivizing spending and actual
spending is at its widest in
generations. That is not good news for
market (earnings) watchers, who desperately want to see an upsurge in consumer
confidence and commensurate levels of inventory expansion and discretionary expenditures.
Right
now, any concerns about inflation have been temporarily put on hold while
bankers and politicians try to figure out the right mix of monetary and fiscal
stimulus to apply.
In
the meantime, investors are seeking "safe", consistent returns from
an asset class (equities) not known for assuaging conservative investment
objectives. Lacking anything better to
do with their money, investors are forced, by default, to buy stocks, which
suggests that they grudgingly are willing to tolerate short term risk for
ultimate long term gains. However, as
January showed, most are not willing....or certainly not comfortable enough
to withstand capital depreciation in what they call "non-risk"
assets.
Thus,
the market is caught between two missions: (1) worrying about economic growth
and true earnings acceleration and (2) seeking alternative vehicles with which to
generate yield and capital preservation.
Not exactly the kind of definitional either/or that textbooks told us is
the difference between stocks and bonds!!
I
have argued for a long time that the linear acceleration in stock prices over
the past 3-5 years has been a counterfeit choice and mainly the product of speculation,
not investment, in securities classes that could not sustain. Without commensurate increases in interest
rates, economic demand, and psychological reassurance, the global bourses are
in uncharted waters.
The
problem with the market's performance in 2013-14...if you were to say that
there was a problem....is that it set up an unrealistic range of expectations
on the part of those who clearly benefitted, but who later complained the
loudest when the inevitable capitulation occurred, decimating both their
portfolios and their prospects.
If
only the fundamentals, not just the lowest valuations, had been the engine of
equity price appreciation....
Strategy
Digging
below the obvious set of data, however, I anticipate a sea change occurring which
might offer a different set of interpretations about the current and future
landscape."As tangible assets go, so goes the market". This is not simply a phrase or slogan, but a statement about the relationship between how we burn fuel, raise cattle, harvest corn and other crops, horde gold, mine for metals, produce "safe" chemicals, build steel bridges, construct homes, etc. These are the indicators of political policy and economic vitality that might reinvigorate a moribund basic materials sector and a stagnant economy.
The
same goes for a turnaround from the credit markets. Additional yield, although initially punitive
to borrowers, would add significant value to savings accounts and bond
portfolios, and perhaps spur an equilibrium between stocks and bonds, also
known as the "alternative investment scenario". Rather
than the markets being engulfed by panic and anticipation, rising rates might
leave only the "players" to buy stocks while the rest of the field
could find a stable, more serene, place to park non-risk monies.
The
psychological compensation, alone, would be incalculable, not to mention the
trillions of dollars worldwide that would be amassed from return on bond
yields.
Additionally,
our research posits an economic shift developing from technology that inspires a
greater efficiency in healthcare, aerospace, industrial development, and
alternative energy. These generational
shifts are different from our grandparents' industrial revolutions. These paradigm transfers signal that new and
innovative tools are being applied to old concepts to produce better
results. My research into agriculture
and water topics, for example, has generated a host of corporate brands which
epitomize an optimization of social and financial trends along with maximum
capital gains opportunities. This type
of "quantitative" target modeling has worked in the past, and will
work going forward, to uncover a variety of sectors and stocks that parallel
the unique opportunities for our future.
Conclusion
So,
what's holding back the markets and global economies from expanding widely
beyond the borders of their own current limitations?
I believe it is the way we, as consumers, have
held check on our hope and expectations.
Despite the best efforts of scholars, religious leaders, and politicians
to inspire us, there is much less hope...and less altruism...than at any time
in our generation. We act as if we have
seen this before, "been there, done
that", "what's the point", and "who is there to protect my interests?" Lingering public anger at politicians and
financial institutions is blunting the efficacy of policies and programs
orienting around economic revitalization.
There
is so little empathy in the world today that any expression of sympathy is
looked upon as weakness, and with skepticism and disdain. It seems as if the citizenry is mistrustful
of anyone who thinks differently than they do.
The
financial markets are being held hostage to that lack of empathy. Consumers buy only the necessities, not just
because that seems only to be what they can afford, but because they are turned
off by the greed and profit motivation of the companies from which they are
purchasing.
Freeing
up interest rates is the domain of the Federal Reserve and global central
banks. Releasing our suspicions is
another sphere of influence, altogether.
Suggested
Balanced Account Asset Allocation, Q2, 2016
Equities: 55%
Fixed Income: 25%
Cash: 20%
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