Sunday, August 6, 2017

Investment Views: The Good, the Bad, the Impossible

  • Last week, Alan Greenspan, former Chairman of the U.S. Federal Reserve chairman said, “By any measure, real long-term interest rates are much too low and therefore unsustainable… 
  • "When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace … 
  • "The real problem is that when the bond-market bubble collapses, long-term interest rates will rise … 
  • "We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s. That is not good for asset prices."
  • Separately, Nouriel Roubini, a professor at NYU’s Stern School of Business and a Senior Economist at the White House during the Clinton Administration said, “the main puzzle is the disconnect between the performance of financial markets and the real [economy] ... 
  • "While stock markets continue to reach new highs, the US economy grew at an average rate of just 2% in the first half of 2017 – slower growth than under President Barack Obama – and is not expected to perform much better for the rest of the year ... 
  • "It is little wonder that actual and potential growth is stuck at around 2%. Yes, inflation is low, and corporate profits and stock markets are soaring. But the gap between Wall Street and Main Street is widening. 
  • "High market valuations that are fueled by liquidity and irrational exuberance do not reflect fundamental economic realitiesAn eventual market correction is inevitable. The only question is whom Trump will blame when it happens.”
  • Finally, Jim Paulsen, a Leuthold Chief Investment Strategist (formerly with Wells Capital) said the stock market "has an awful good gig going …
  • "We've got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We've got strong confidence among business and consumers … 
  • "The kick is we can do all of this without aggravating inflation and interest rates, If that's going to continue, I think the bull market could continue to forever … 
  • "Ultimately the bull market does continue until we aggravate some inflation, and until we have to raise bond yields and interest rates some more … 
  • "I think that's going to happen eventually, but it doesn't look like it's going to happen anytime soon. So I think the bull probably continues through the end of this year."

MY TAKE:
  • Regarding Greenspan’s comments -  Given that equity markets may have benefited from a multi-decade trend of declining interest rates, it is unclear that a rapid rise in interest rates could also be good for stock markets.
  • Regarding Roubini's comments – His concern that the stock market does not “reflect fundamental economic realities” is somewhat valid  but factors driving stocks include liquidity (which he says there is too much of) but also increasing corporate profits (which come from revenue growth, cost cutting, financial engineering and tax cuts).  However,  depressed wage growth can contribute to corporate profits while also widening the gap between Wall Street and Main Street.
  • Regarding Paulsen’s comments -  he is generally bullish on the U.S. equity market, but his comment that “the bull probably continues through the end of this year” seems more appropriate (but perhaps too bullish) than his enthusiastic comment that “the bull market could continue to forever.

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