Deep breath. It’s all going to be okay, in fact probably better eventually. We’ve done this before, and been through much worse. It’s never felt good at the time but survive and advance we did. Sometimes in bold style. It’s what we do. Source: iStock nazlisart Before we drop into the dirty bits of the economy, let’s all take us a quick little whip around the markets to remind ourselves how stellar it’s been for owners of assets. First up, equities. The Dow Thirty: Looks rather robust to me. The S&P 500: Broad based fiesta. NASDAQ: The Cool Kids NASDAQ 100: The REALLY cool kids For equities over the last decade, it’s been all ice cream cones. Ones in different flavors, but ice cream nonetheless. And if you don’t like ice cream, we can’t be friends. Source: iStock GMVozd Next up, the very honest land of fixed income. Because as Micheal Milken once said, ‘Equities can lie, debt never does.’ Good job, Mike. Turns out you were right. Just should have kept the trade to yourself. Source: Wikimedia Commons Ten-year US Treasury Bond Yields: Steady for four years now trading on average between 4% and 4.25%. That’s like Ted Williams type consistency. For those not in the know, ‘Teddy Ballgame’ was the last major league baseball player to hit .400 as was otherwise very reliable.
AAA Corporate Bonds: Average yield higher at 5.5%, but not outwardly frightening given the 4.5% to 5.5% range of the last four years. Remember now, down in price on the bond, up in percent of the yield. Even I remind myself of that occasionally. Getting old, babe.
Yield Spread from AAA to BBB corporate bonds: Nothing here to say we are on the edge of economic collapse. Keep in mind, this isn’t he overall yield of anything, just the percentage in interest you are getting paid to take greater risk.
When there are big problems brewing, this spread blows out as there is a rush to buy Microsoft bonds, while you sell the EPA Superfund site ones you picked up to reach for more yield. Then again, there may be a bull market in Superfund sites and I don’t know it. While all that is being showered on investors and owners of assets, this is by far one of the biggest clown shows in the history of clown shows. Just a complete random walk with lefts and rights being made every single day that make no sense. And I’m not the only one who thinks so. Lanky the clown is down with that idea too. Source: Highsmith Library of Congress Collection. Source: Highsmith Library of Congress Collection. For reasons both good and bad, some people equate the quality of the underlying assets as proof that it’s ‘sunny and 72’ in the real world. It’s not. Back in the day the S&P 500 was 500 stocks, today it’s not. More importantly, the index itself is deeply anchored to the massive artificial intelligence trade that is going on. Source: iStock hapabapa Here is the proof. Of the top ten components of the S&P 500 index, nine of them can be tied to the AI redwoods ‘growing to the sky.’ That’s an old traders expression. More importantly, those ten components make up 37% of the index, give or take depending on which day of the week it is. Source: Slickcharts In terms of fixed income, the markets haven’t shown anything in the way of ‘failing’ since the Global Financial Crisis when the liquidity froze up on a very regular basis, at times overnight. That was eighteen years ago, seems like a lifetime. Try trading this moment. Yields fell off the cliff when the government stepped in and bought everything they could. Everything. Back to equities really quick. As the credit markets were getting throttled in early 2009, so were stocks. Just brutalized. But you know who called the bottom? That’s right, haters. The man with his hand in the air said on April 4th, 2009.
“What you’re now seeing is profit-and-earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.” Source: Creative Common While he screwed up ever so slightly and said ‘profit and earnings’ versus the commonly used ‘profit to earning’, the dude called the bottom of the S&P 500 by three days. We should have set him up with a Bloomberg, trading lines, and a fat slice of the Treasury Departments house account. Lord knows someone else is out there with the ask that keeps getting filled. Where are we going with all of this? Going to a place of peace and serenity in a non-peaceful and un-serene world out there. First off, a dose or reality. And I mean every ounce of this from a watcher of markets and the economy. Beware anyone this election season who says one word about ‘fixing’ the affordability crisis. They can’t. And that is a tough, and expensive pill to swallow. Carnival barkers, every single one of them. After all, I read this morning that this esteemed body has an ‘approval rating’ that has a single digit handle. Meaning 9 out of 10 people disapprove of the job the people who call this place ‘the office’ are doing. Source: Creative Common The only body that has any control over consumer prices is the Federal Reserve. Understand this chart, you will understand everything you need to know. Inflation was out of control in 1980, and the only answer was for Fed Chair Paul Volker coming in and jacking rates to an unimaginable 19%. Keep in mind, the Fed has run a ZIRP (Zero Interest Rate Policy) for the better part of 20 years. Notice the trend from 2000 on and ask yourself when did asset prices really start to pick up. Bingo and Yahtzee all in one place.
As the Elvin Bishop song went, they Fooled Around and Fell in Love one too many time. The reality is the pandemic did very little to impact the economy in a negative mid to long term. The Fed took a flesh and treated it like a heart attack and stroke all at one time. Since it worked before, why wouldn’t it work this time? This time the adrenal drip backfired. We got problems, and the second coming of Paul Volker is pretty much the only thing that can break this wild pony. Notice the rather stellar record of a 2.5% annual increase for 20 years. Notice the brutal blowout starting in late 2001. That’s when free, or really cheap money flooded the economic system. And that economic system took it down like a booze hound with a fresh plastic handle. And just like the hangover from that, there is a hangover from what I hope is the final ZIRP. And keep in mind, a 2.5% current rate of growth is not inflation coming down. It’s the rate of growth is less that it had been. But there is now a perpetual pig in the python that is going to take a one of two things to process. Time, or a recession. The former can be dealt with, the latter is going to be a problem as the true economy is more fragile than you think. Looks about right. Source: Creative Common The upside, and the point of what has now become a manifesto, is that the Federal Reserve and the government in general want you to make money. Nay, they need you to make money to support the long-term health of the economy. They needed the ownership class to take over, and they did. The wealthy run the economy now. If stocks and houses keep going up, the party will continue. A 10% pop in average hourly earnings is nice, but that didn’t change who is month to month much. In the real economy, the aspirational dream of joining the ownership society is getting harder and harder. Let’s put a nice bow on this wander down the rabbit hole of intellectual curiosity as to why we are so rich in assets we’ve become. For all the yearnings that this was equitable, it’s not. But that’s okay as well. Something has to keep this party going, and the ‘gubmint’ is there to see it happen. So sit back and enjoy this ride. Turn down the noise and realize that the people of the United States are about to put up a 250 year record of changing the world for the better, and that deserves a toast. And that guy changing my oil at Jiffy Lube did it, just as those did the people who call Wall Street and Sand Hill Road professional home. Land of the free, because of the brave. All of us, every day. Source: iStock artvea