http://globaleconomicanalysis.blogsp...nd+Analysis%29
Snippet:
The effect of years of zero interest rate policies has been to progressively drive investors toward securities of greater and greater risk, in the belief that “There Is No Alternative” (TINA). In every other market cycle across history, once an “overvalued, overbought, overbullish” syndrome emerged in the stock market, market internals were either already deteriorating, or collapsed in relatively short order – meaning that investors became more risk averse. When overvaluation was joined by increasing risk aversion, air-pockets, panics and crashes typically followed.
In the market cycle since 2009, however, central banks aggressively and intentionally promoted speculation by holding interest rates at zero. That reduced the overlap between “overvalued, overbought, overbullish” syndromes and the eventual deterioration in market internals. Our own rather painful lesson from the recent cycle was that in the presence of QE, one must actually wait for internals to explicitly deteriorate before taking a hard-negative outlook on stocks.
After years of speculation, we currently estimate a 10-year nominal expected total return for the S&P 500 close to zero – much the same as we projected in real time at the market peak in 2000. The Federal Reserve seems to have no idea what it has done. Poor long-term market returns and severe interim losses are now baked in the cake as a result of obscene valuations. There is no way to undo this outcome – only to manage the consequences.
The real problem isn’t what the Fed may do, but the ultimately unavoidable consequences of what the Fed has already done. The cost of reckless Fed-induced yield seeking will likely be felt first in the financial markets as previous paper gains evaporate, while defaults on excessive low-quality covenant-lite credit will emerge over the course of the economic cycle, and the impact of malinvestment will be to limit productivity and economic growth over the longer run. This is all rather inevitable except in the eyes of those who haven’t watched and memorized a dozen adaptations of the same movie.
In short, my view is that activist Fed policy is both ineffective and reckless (and the historical data bears this out), and that the Federal Reserve has pushed the financial markets to a precipice from which no gentle retreat is ultimately likely. Similar precipices, such as 1929 and 2000, and even lesser precipices like 1906, 1937, 1973 and 2007 have always had unfortunate endings. A quarter-point hike will not cause anything. The causes are already baked in the cake. A rate hike may be a trigger with respect to timing, but that’s all. History suggests we should place our attention on valuations and market internals in any event.
Read more at http://globaleconomicanalysis.blogsp...voGDqQcG7fG.99
Snippet:
The effect of years of zero interest rate policies has been to progressively drive investors toward securities of greater and greater risk, in the belief that “There Is No Alternative” (TINA). In every other market cycle across history, once an “overvalued, overbought, overbullish” syndrome emerged in the stock market, market internals were either already deteriorating, or collapsed in relatively short order – meaning that investors became more risk averse. When overvaluation was joined by increasing risk aversion, air-pockets, panics and crashes typically followed.
In the market cycle since 2009, however, central banks aggressively and intentionally promoted speculation by holding interest rates at zero. That reduced the overlap between “overvalued, overbought, overbullish” syndromes and the eventual deterioration in market internals. Our own rather painful lesson from the recent cycle was that in the presence of QE, one must actually wait for internals to explicitly deteriorate before taking a hard-negative outlook on stocks.
After years of speculation, we currently estimate a 10-year nominal expected total return for the S&P 500 close to zero – much the same as we projected in real time at the market peak in 2000. The Federal Reserve seems to have no idea what it has done. Poor long-term market returns and severe interim losses are now baked in the cake as a result of obscene valuations. There is no way to undo this outcome – only to manage the consequences.
The real problem isn’t what the Fed may do, but the ultimately unavoidable consequences of what the Fed has already done. The cost of reckless Fed-induced yield seeking will likely be felt first in the financial markets as previous paper gains evaporate, while defaults on excessive low-quality covenant-lite credit will emerge over the course of the economic cycle, and the impact of malinvestment will be to limit productivity and economic growth over the longer run. This is all rather inevitable except in the eyes of those who haven’t watched and memorized a dozen adaptations of the same movie.
In short, my view is that activist Fed policy is both ineffective and reckless (and the historical data bears this out), and that the Federal Reserve has pushed the financial markets to a precipice from which no gentle retreat is ultimately likely. Similar precipices, such as 1929 and 2000, and even lesser precipices like 1906, 1937, 1973 and 2007 have always had unfortunate endings. A quarter-point hike will not cause anything. The causes are already baked in the cake. A rate hike may be a trigger with respect to timing, but that’s all. History suggests we should place our attention on valuations and market internals in any event.
Read more at http://globaleconomicanalysis.blogsp...voGDqQcG7fG.99
