The operative term here is “MIGHT.” This is about exploring a scenario, not making a prediction. The S&P500 has been wandering around between 2000 and 2100 for the last year. With notable breakdowns in August 2015 (ChinaMacroOil blurk!!!) and January/February 2016 (“The Davos crowd talkin themselves into a tizzy until reality (via 4Q earnings) re-asserted itself!” AIEEEE!!!!). Now we’re back to wallowing around under 2,100. Where to from here?
The consensus remains resolutely glum. It is still a mostly unloved bull market – 7 years in. That alone is a good reason to ask whether the next move is actually up. Some reasons.
- The “pain trade” is UP. People seem to be positioned somewhere between “cautious” and “bearish.” So a sharp shock move upwards is most likely to maximize collective investor pain. And the pain trade has been the most reliable market mover for the last few years. Why? A stew of Davossian group-think, too many algorithmic robo-traders, and probably a few too many right-leaning “investors” confusing crackpot ideology with macro-economic insight (especially around monetary policy)…
- Negative interest rates outside the US = a rising swell of money headed to our shores. Negative rates mean lenders are PAYING borrowers to take their money. If that sounds insane it should. Today’s market environment is (literally) unprecedented. Negative interest rates were a hypothetical, academic thought exercise not the stated policy of TWO major central banks (Japan and the ECB). No-one quite knows how to think about a world where you get paid to borrow. Certainly I don’t. But my guess is people will eventually
- wrap their heads around it,
- get clever,
- find a way to pump a ridiculous amount of money into assets that still pay a positive interest rate. Like the S&P500 with a 2.12% cash dividend yield. Or Microsoft at 2.79%. Because if Microsoft is cutting its dividend in the next 5-10 years the world economy has broken down to the point that you’re better off investing in canned food and shotguns…
- Negative rates negate past historical patterns. I see a lot of bloviating about “unprecedented” valuation levels. Or “x years since a recession” This is inevitably accompanied by charts referencing the past 5, 10, 15, or even 100 years of data. All of which are totally useless. We live in unprecedented times. Because negative interest rates are also “unprecedented.” As is a whole lot else going on right now. The one thing we know about the past is that it is useless as a guide to the future. Because the present is totally FUBAR.
- Dry Brush Piled Up. Normal wildfires should happen on a regular, cyclical basis. But sometimes they don’t happen. So the dry brush piles up. Until you get a massive, uncontrollable conflagration. Central banks worldwide have piled up a whole lot of dry brush (see “negative rates”). But monetary velocity remains sluggish. None of that “money printing” is actually finding its way into the economy. Maybe we’ll have to take the next step to “helicopter money.” This is getting surprisingly serious consideration (because anything is better than – gasp!- fiscal stimulus). It fits the fire metaphor well, with a helicopter dropping big loads of gasoline instead of fire-suppressant…. But maybe those animal forces struggle to life all on their own and a spark catches somewhere somehow. It’d be a big burn if it does….
- Fiscal Stimulus 1: Hah! Just joking. The Davossians ideological blinders keep the idea of serious government spending well off the table, beyond the pale, and unmentionable in polite company. Because the idea of getting paid to borrow and invest in productive repair/renewal of long-lived assets like roads, bridges, rail, telecoms, and sewers is somehow wrong. We should have to sweat hard and suffer for these things because… Ummm… Well. Because I said so! Because I am afraid and uncertain! Because I can never admit a government role for anything! Go away I’m not listening Nyah Nyah Nyah! Its like a bunch of vegans starving to death in a butcher shop (with a grill handy nearby). Not tragic. Just pathetic.
- Fiscal Stimulus 2: It is just possible that the tide turns this year. Germany could come to its senses and start spending some money in response to another European crisis (Brexit?). The US political calculus might shift enough this election. It won’t come from the White House (Hillary et al pretty much wrote the Davossian credo). But it could come from a newly Democratic Senate. Something faux-free-market-y enough to get a “coalition”vote in the House. But maybe something. Which is better than nothing.
- Unloved Bull Market: Anyone who’s been an adult for the last 20 years knows what a bubble feels like. Admittedly, this rules out a lot of millenial hedge fund analysts, but I digress. There is absolutely nothing euphoric about the present day. So maybe we have a bear market without a euphoria? Maybe…. Or maybe we have euphoria before the next big crash. This is one place where past historical patterns might have predictive value…. I’ll wait until I get a stock tip from my
taxiUber driver before I’ll call euphoria.
The biggest problem with the optimistic scenario is the elite’s ongoing crisis of confidence. The January/February “Davos downturn” was a big wake-up call to me on this score. I went to two Institutional Investor conferences those months. The density, urgency, and self-referential certainty of that group-think really stunned me. And I had thought I was pretty cynical going in. I still made a decent chunk of money betting against it (grin), but that bet took more gumption than usual. Fast forward to now. The “elites” are facing the awkward reality that Hillary is their new, best defense against a howling mob they under-fed for too long. The great swing leftward is starting to gather momentum and it ain’t feeling all that good.
A final thought to the inevitable “valuation” counter-arguments.
- On a mathematical basis, negative-to-low rates break any “past history” referential model. I’d be VERY interested in any “valuation” argument referencing the actual present and future. But any model based on past history is worse than useless as a guide. Holding a map you KNOW is bad, its better to just use your own judgement…
- Since when has valuation ever mattered? (over the short run). This is the first lesson of successful tech investing. The market is a huge, messy, volatile thing that goes all over the place. You need to keep an eye on the compass, but the monster waves swinging the ship around are a lot more important in the short term. Note that the most of the arguments above aren’t based on valuation. Because that’s probably not what drives the next big move. That bothers a lot of people. But they probably have very tidy sock drawers….
To repeat, this is not (yet) a prediction. I am positioned for upside more than down in my own portfolio, but I’ve still got some shorts in there… This is also not about whether the market stays up on some high-holy valuation basis. I am just trying to figure out the next lurch of the ship.
I will admit the upside move is also a lot more interesting to consider. The downside scenario is just so depressing. The monetary pedal is down to the metal (negative rates). The government spending tap is so firmly shut (by willful, fact-denying, purblind, ideological stupidity). It’d probably take another crisis on par with 2008 (or worse) to get the “fiscal” stimulus tap really opened up. And I really don’t want to go back there. A blind spot I freely concede. Lets hope for the pain trade instead…
S&P 500 from BigCharts
