There is No Rising Tide

There is no rising tideFor the past two years now that stock market has traded up and down within a range. Bulls keep talking about an impending breakout and bears keep talking about an impending breakdown. So far, we’ve gotten neither. What’s next is anybody’s guess.

What we do know is that economic fundamentals are not meaningfully improving and that asset prices are relatively high when put aside growth rates. Eventually, something has to give. Either the world economy gets meaningfully better or many asset prices fall.

In the United States, economically, we are partially insulated from what is going on around the world. Our shelter is due almost exclusively to the beginning of the Millennial generation entering the adult economy and our reduced dependence on foriegn oil. Throw those two things out and we’re in as bad a shape as most everybody else. 

So, while our shelter is firm, it is not going to float our boat. Rather, we will see the Millennial ascent offset the Baby Boomer decline. Around the rest of the world, things aren’t very good even if we do muddle through.

In China we have seen growth numbers fall and the likelihood is that those numbers are lower than reported when you examine trade data. The People’s Bank of China recently reduced their peg to the dollar even more than they did the last two times – lending credence to Donald Trump’s argument that China is behaving as a currency manipulator. Ultimately, China’s foreign currency reserves should offset their internal debt, but the days of China being the “other growth engine” are over.

Europe and Japan have no real growth. Virtually all nominal growth is due to the creation of monetary stimulus by the European Central Bank and Bank of Japan. In addition, their populations are getting increasingly older with no generational offset. Both economies could see a deep recession within the next year or two. Brexit certainly doesn’t help Europe.

South America is in economic shambles and likely years away from full recoveries despite slightly younger populations. The Zika virus is also no small thing. There is a potential for crippling economic consequences if that cannot be brought under control. 

In the Middle East, low oil prices have stunted growth, caused increasing debt and led to even greater geopolitical uncertainty. Russia is also feeling the pain of low oil prices and is once again rattling sabers in Eastern Europe and Central Asia, interestingly, just as they cut defense spending because they are hurting so bad economically. To think that there isn’t a potential for worse outcomes in those situations is naivety of the highest degree.

Other places around the world are stuck in neutral just like America. Canada, Mexico and Central America benefit from their proximity to the United States and are firm but not growing much. Australia is still largely tied to the commodity economy, so despite generally good governance, they face headwinds and a lot of running in place as well.

Despite the weakness of the global economy, which very well could be heading into a recession soon, asset prices are up in many places, the U.S. especially, to valuations not seen since – BUHM-BUHM-BUHM – since 2007. That is not good for investors who are so afraid of “missing it” that they don’t realize that “it” could be very bad.

At some point, central banks be damned, the prices, earnings and growth are going to matter. When? I don’t know. Maybe after the next round of useless, confidence killing central bank money, maybe just before. 

What I do know is that I am holding onto my high cash position until risk has been reduced by either higher economic growth or lower prices. I suspect it will be the lower prices.I do still own a few assets, however, one of them is gold and another is a company that has nothing to do with the economy (I think I want more of those).

As Brian, a subscriber and friend, said on Twitter (@faminvestor) today when I asked him about his latest article, he wouldn’t be surprised to see a rally, but he’s “not going to risk money on it.” I think that sums it up for me still too. I’m waiting for lower risk opportunities to get more fully invested. Who knows when that will happen given the experimental nature of global central banks? I’ve set limit orders based on the companies in our Very Short List and ETFavorites. While I wait, I’ll have some fun in the sun. I think that’s a very good strategy too.

Prayers and thoughts for all those suffering tragedy, especially the Dallas Police and their families.



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