For the past couple years, the stock market has seemed to defy gravity. And, since President Trump was elected, it has outright defied logic too. There really is no political or policy reason that stocks should have rallied so much since November. However, the stock market doesn’t care and rally it has.
Readers know that I don’t give much credence to the “anti-Fed, the whole world is in a bubble crowd” (see last Friday’s piece The Bubble in Bubble Calling is Bubbly). Those folks have successfully missed a massive bull market and called crashes that still haven’t happened (pssst, that’s because they don’t understand the economics of it all). That’s not to say I don’t think we could have a very significant stock market correction. I do. I think that a large portion of global equity markets are overvalued by 20-30% and eventually that should matter.
The question I have today, as we approach the cyclically slow period of the year that is being led off by a Fed meeting which will likely include an interest rate hike, is: Is it time to sell more stocks to avoid a summer swoon in share prices? I think the answer is a resounding “probably.”
A Rally for the Rally
The stock market is up about 13% since President Trump’s election. Since then, almost nothing has been done on the economy. Sure, there’s been some deregulation, but the health care plan hasn’t been improved, there hasn’t been a tax simplification (I’m on board with that), there hasn’t been a tax cut for the middle class (like that too), there hasn’t been an even bigger tax cut for the super rich (huh, are we really talking about that again?) and we haven’t committed to improving our deteriorating infrastructure so the economy can grow more efficiently.
But, 13% is 13% and that can’t be bad can it be? Well, if valuations are near all-time highs and we are in fact stuck in the “slow growth forever” I keep rambling on about, then yes, a rally can be bad. Why? Because when the snap back occurs, it’ll be worse than it needs to be. That won’t be good for the psyches of the emotionally fragile and generally under educated investors of America. I’m afraid that if we get a sharp bear market coupled with a recession – that’s usually how it happens – then we will see capital formation through the markets dry up again. That is the last thing the global economy needs.
I hope that the next correction and the next recession are both shallow and fast. I suspect that they will be (keep reading). So, when the next correction occurs, that will be a great time to put money to work quickly. As clients, subscribers and readers know, I have been holding about a quarter of my portfolio in cash for darn near two years now. Thank goodness for a couple stocks that have crushed the market to keep me on the high side of the indexes the past year. That Peter Lynch guy is pretty smart after all.
What about those Darn Central Banks?
Yesterday, European Central Bank Chairman Super Mario indicated that ECB stimulus would go on a long time. GOOD! All of these folks who keep saying the central banks are holding back the economy are simply and categorically wrong. If it weren’t for the post financial crisis central bank interventions and stimulus, “slow growth forever” would have morphed into “Great Depression 2.0.” If you don’t understand or believe that, please, please, please, read The General Theory of Employment, Interest and Money, then click your heels until you’re sure you are out of the Bubbleville Believers Club.
If you’ve never read Keynes missive, then hear me now and believe me later, it’ll take three reads. I first read it in college. Then read it again when I was 31 and again last winter (much to my chagrin, I have continued to get older, I only hope the wiser is keeping up). I now feel as if I’m a lot less stupid than I was before. It really is a great read and food for a very complete thought process. If you actually read it a couple times in the next year or two, I guarantee you’ll be better read than 98% or 99% of the population on economics and by extension investing.
So, here’s where I stand on bubbles, slow growth and central banks.
I don’t think we’re in a bubble – yet. Really, not any. Bubbles imply that there would be a liquidity event if there were a popping of the bubble. I don’t see that at all. There’s so much money floating around that any corrections should be bought with some of your money because somebody else’s money is sure to follow.
Slow growth is a product of aging demographics, I’ll pull a chart to convince you. But, think about this, the four largest economies, the U.S., China, Europe and Japan are all undergoing massive aging in their populations. At the risk of boring the folks who understand this already, as people get older they spend and work less, that’s a drag on the economy. We have more and more people getting older. It’s that simple. Growth will be challenged for a very long time because of aging demographics, maybe forever, until it just seems normal. Incidentally, 2% GDP growth was normal until after World War II.
The central banks, particularly the Fed, the ECB, the BOJ and Bank of China, have filled two holes the past 8 years. The first was the hold created by the financial crisis. The second was to actually create a pile of money to put on top of the aging demographics hole. So far, it is working. We do have massive wealth inequality, so we need to be mindful of that and not fall for letting the super rich skim the economy again, but we have a chance for very good things to happen for standard of living, even if we’ve seen most of the asset inflation already.
I have a lot more to say about this, but it’s Friday.
What I’ll Think About While Looking at Stars Tonight
Because the Fed is raising rates next week and it’s summer, I will be thinking about what stocks to sell. Not because I think we’re doomed, but because we’ve gotten ahead of ourselves on asset prices and because there is a general misunderstanding about what is really going on with the economy. As I’ve said before and will say again and again, the world is in a “slow growth forever” period and until we adjust our mindsets to be more focused on sustainability rather than the cult of growth, we will still be very subject to market and economic cycles. I suspect that’s forever too.
I am currently about 25% in cash holdings, so I don’t have much to sell, if anything. However, I know a lot of folks are suffering from “I’m-missing-it-itis” which I wrote about on MarketWatch years ago. It’s an emotional and psychological disorder that makes people afraid of missing out on something so they get over-invested. This happens in money and love. Nothing should be the same about money and love, yet there you have it. If you want to be afraid of something, be afraid of a flash crash or the 20-30% reversion to mean that is bound to come. Get ready for it and stop guessing when it’ll happen, one or the other will be here soon enough. And remember, being ready includes having a shopping list that you’re emotionally prepared to shop from when prices fall.
Have a great weekend, it’s going to be a hot one here in Wisconsin.
Kirk
