Growth is dead! Maybe it’s just jobs-anemia.

Q: Is financial leverage the device for growth, or, once again, the tool of destruction?

Q: The economy is adding millions of annual new jobs, but how many are not-so jobs?

Q: Does the US stock market care much about jobs anymore?

Q: Do armed-conflicts (recently known as “geopolitical” events) really matter to the markets?

Bonds beware

The current vogue in FiduciaryVest’s world is a discussion of the (alleged) “New Normal” set of expectations in financial models that we and others use to plan optimal asset allocation for clients. Market history, according to current wisdom, is particularly un-predictive at this juncture, because, well, because the bond folks know their super-bull market of the past 30 years or so (since February 1982, to be exact) is no longer low hanging fruit; in fact, the Fed-controlled bond market we have known for six years looks more like over-ripened peaches that fell from the tree more than a few days ago… the sort you wouldn’t collect in your basket. We imagine this state of affairs is both bitter and scary for those who have spent their budding, or waning careers among bonds and yet have never seen a Real Bear.

Here’s the scenario: If the Fed continues to successfully engineer a 10-year Treasury bond yield of, say 2.5%, for several more years, then

  • the other asset classes traditionally considered to be riskier than Treasury bonds will, we believe, be driven to total returns of about 6%
  • and the volatility range surrounding that return will be historically low, which will actually make those 6% equities attractive.
  • the (formerly) emerging US Government debt crisis will subside, as more and more issues of T-bonds roll down and get re-financed at historically puny interest rates and the government’s incessant annual budget deficits are financed at very low cost.
  • creditworthy American-based corporate borrowers can use a skinny cost of capital to finance almost anything that earns a return, at home or abroad.
  • bond investors will collect interest yields that barely cover inflation and will face the constant risk of capital loss when bond players think they are getting a whiff of near-term rising interest rates.

Stocks on cruise-control

The US stock market is driving under-the-influence and the Fed has pretty much helped Wall Street to set its expectations on cruise control for a 3-year window on the future. Of course, there is no fixed horizon for the market’s forward headlamps, but its rear window has an unfogged view of a bloated, $4.3 trillion Federal Reserve Bank that has more than fulfilled its past promises to the financial world… continuously… for almost six years. Why would the Wall Street brothers who underwrite public securities offerings take up doubts about the future from here (yet)? And, whatever does happen, have we not learned that we can depend on the Fed to lay down a padded runway? Meanwhile, Corporate America must use the continued gift of low cost capital wisely; it must produce real earnings and use those robust cash flows to make sensible business acquisitions; failing that, musical chairs in stock prices could easily turn into a greater-fool contest. 

Despite traditional contrary views, there IS, and will be a free lunch (they say)

The US Fed leads what is now a global fraternity of confessed money-printing addicts who regularly drink from the same vat. Notably, the Bank of England has been giving off signals that it will simply make money printing into a permanent policy. Who can safely say what the European Central Bank will do, but it’s an odds-on bet that, with Italy having just now re-slipped into recession and with EuroStar Germany experiencing basically no growth, the EC Bank cannot dilly-dally for long. Meanwhile, the Bank of Japan needs to fan the embers of its rapidly cooling economy….Industrial output and exports are now declining almost as badly as they did following the 2011 earthquake and tsunami.

The central banks’ common remedy for slow/no growth: Continue to create more money that will fund more borrowing and hence more construction, more confidence, more consumption, all of which will intentionally fatten equity prices that will beget more construction, confidence and consumption (not to mention new equity issues to satisfy the rising demand for them). We remind our readers that every newly-printed dollar (yen, euro, or pound) has a value equal to every one that existed just before the printing occurred, but such value actually exists only IF all thepeople and businesses on earth trust and believe it does.

Baked-in jobs

For so long, Washington politicos doted on every month’s jobs report, in the belief that the economy was hanging on the prongs of those numbers. So, counting jobs became an exercise sort of like counting beans. And, as so often happens, the beans became beanstalks.

The federal government’s Bureau of Labor Statistics (BLS) continuously runs employment surveys which, according to them, follow strictly defined rules, definitions, training and supervision of the surveyors. Its monthly survey involves 60,000 households which rotate in such a way that 75% of the households in the sample remain the same from one month to the next and, from one year to the next, 50% are the same. Key classification definitions are: (1) employed, or (2) unemployed, or (3) not in the labor force. Not counted in any of these 3 categories are active-duty military, those living in institutions and people under age 16. Those classified as unemployed must have been actively looking and available for work within the prior 4 weeks; otherwise, they are not in the labor force. This last group, i.e., those who stop looking for work for more than 4 weeks, are of particular concern because their number has grown to be so significant in recent years. For all its accuracy and comprehensiveness, the BLS survey does not capture or measure under-employment that exists within the employed group:

  1. Hourly workers who…
    1. Had traditionally been salaried,
    2. Had fewer hours than their accustomed average,
    3. Averaged fewer than 30 hours per week,
    4. Accepted a lower hourly rate.
  2. Hourly and salaried workers who…
    1. Ceased earning overtime and/or bonus pay,
    2. Accepted significantly reduced insurance and retirement benefits coverage, or significantly increased benefits deductions from their paychecks,
    3. Are laid off, or cut back from their job for a period of time.

If measured and released quickly, we believe these categories would provide several times the current information-content about where the national economy stands and where it is headed.

What’s a geopolitical event?

It’s the universal in-word which is supposed to explain what’s happening that: (a) is outside the investment world and (b) is outside the cozy confines of the USA and (c) is presumed to have important, but un-measureable impact on both. The Russian incursion in Ukraine, for example, is keeping more than a few market mavens on edge. One hallmark which identifies a geopolitical event seems to be a temporary uptick in the price of gold (always a dependable measure of nerves and uncertainty) and, of course, a surge in trading volume of one or more relevant futures contracts. [Our analysis of that particular situation may be reviewed on line, in our May 2014 commentary.] A related happening that many were prone to classify as geopolitical was the downing of a Malaysian Airlines jumbo jet, with almost 300 civilians aboard, from the skies over eastern Ukraine. The US stock market declined almost 1.5% that day. Syrian horrors are still considered to be a geopolitical event, though they grind on with little to report that is new, or promising. More recently, we had the crumbling and re-splintering of combat-torn Iraq… the country that wasn’t a country, except during Saddam’s iron-fisted regime. Market traders are surely keeping a nervous finger on the buttons, in case US military re-involvement turns up a few notches, or turns into a pattern of casualties.


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Posted in Investment Insights, Market Commentary

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