Blain's Morning Porridge - Fed says... ouch.. Check your swimmers...
Blain’s Morning Porridge – April 6th 2017
“Only when the tide goes out do you discover who’s been swimming naked..”
Thank you Janet Yellen! After my comments on QE yesterday, the Fed has come-in and done exactly what I expected, but hoped it wouldn’t! Its warning of a stock bubble and cutting the balance sheet. When the Fed says: “price to earnings rose further above historical norms”, that’s about as clear a way of talking “irrational exuberance” as I’ve heard in a long time. Let’s see who is wearing the speedo budgie smugglers…
As The Fed continues to gradually normalise rates (ie hike), the $4.5 trillion balance sheet will be tapered – that’s got to affect markets. There are oh so many reasons the ending of the global distortions of extraordinary monetary policy will impact financial asset values. (Check out y’day’s porridge for more on QE negatives.)
My Macro colleague Martin Malone gave me the attached chart showing the balance sheets of the Fed, BoJ and ECB. Over $13 trillion between them. 40% of global GDP sounds scary.. Very Scary! But apparently not when compared to periods like the Second World War (Did I miss something? Was the GFC really the economic equivalent of WWII?).
Extraordinary Times required extraordinary solutions..
And.. as I asked yesterday: what happens when the ECB gives in to mounting pressure, ends bond purchases and puts the pressure back on Europe? Oh dear indeed.. I suspect the US and dollar markets are far more robust than Europe.. all the breaking strain of a wet sheet of Andrex I expect!
What do y’day’s Fed Minutes mean for bonds? They are talking about changing the reinvestment policy – not a mass dump on the market! But it’s still significant. Martin reminded me that the announcement of the Taper in 2013 caused the US 10-yr rate to double – even though the Fed was still buying $100bln per month! Unless the Fed is very open and flags very carefully and obviously what it is doing, the potential for flooding the market is very real. I don’t expect they will make a mistake… but!
What does it mean for stocks? Wake up and smell the glove… CNBC makes the point, reporting an analyst who: “found six mentions of an overvalued stock market in the minutes going back to 1996.” In every case market returns were modestly down over the following year! Reading the stock pickers technical stuff this morning – well I don’t know what they mean: sentiment indicators are mixed, the technical “picture” is murky and there might or might not be selling pressure. Ah.. they don’t know!
What is the right investment policy?
Stuff remains uncertain.
Politics is one source of shock and surprise, but the real market effects stemming from the end of QE distortion are going to be very direct! This is the time to be picking winners and selling losers. This is the time for looking for real returns.
In stocks, how clever will some of the Unicorns look in a real world where folk want to see returns. And what about the names that have levered to mount stock buybacks..
In fixed income, there would not appear to be many attractions in buying govt bonds if yields are about to rocket as Central banks raise rates while also dumping assets… Corporate spreads remain remarkably tight – meaning more pain as rates dive and CBs decide its time to run. The advantage holding govies is at least you can hope to exit in reasonable shape if and when the pain comes. Corporate bonds might prove, shall we say, “sticky”?
In which case, I’d rather hold a private placement giving a decent 6% return linked to performing assets like regional passenger jets, or renewable energy plants, that a suddenly utterly illquid corporate bond yielding the square root of not very much.. If you’d like to learn more about current opportunities in Alternatives, then my number is somewhere below..
Fraid it’s a short comment this morning - got lots of stuff to do..!
No comment tomorrow – so have a great weekend!
Fastnet Race Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain