From Scott Reamer Minyanville
The Fed’s reflation efforts have been historic in size, speed, and length
Global reflation among the G7 too, has been historic in proportion
Fiscal reflation efforts are the largest since LBJ’s ‘Vietnam/Great Society’ era
The current account deficit, at 5.3% of GDP, is a record for a developed economy
Foreign public capital flows into US debt is setting records of pace and size
The US$ is declining (q/q) at a pace only seen once before in history
MZM and C&I loans are contracting at near historic rates
The Fed is targeting asset prices in an effort to bolster consumer spending
Household debt and debt service ratios are at all-time highs
Employment trends have never been this weak at this stage of a recovery
Wage and salary trends have never been this weak at this stage of a recovery
Consumer spending has not contracted for 47 straight quarters; an all-time record
Multiple stock market bullish sentiment measures are setting all-time records
VXO at 8 year lows
INDU hasn’t seen a 5% correction since 7/03; longest record since 1987
92.6% of stocks above their 200 day moving average; all-time record
Wall Street strategists recommended equity allocation level at all-time high
Insider sell-to-buy ratio all-time high (36:1 in 2H:03)
55% of tech stocks valuation greater than market multiple: same as March 2000
Junk bond funds record inflows: 60% more than 2000, ’01, and ’02 combined
At current valuation levels, expected total return for SPX is 0.1% for the next decade
If I told you in either October of 2002 or March of 2003 that dozens of all-time records for macroeconomic, financial markets, and sentiment figures would be set inside a year, you would have scoffed. Mostly because the probability of the above taking place was extremely low against 40, 60, and in some cases 100 years of statistics. Just as improbable as the dealer drawing a 5 when holding a 16. It can happen. Betting it will, over time, will make you poor.
Understand that, though I appreciate all of the above risks, and that we are “overdue” for a 5-10% correction, they aren’t helpful from a timing standpoint. We’re in uncharted waters here, so keeping a stern hand on the helm and a watchful eye on the horizon will be pretty important over the next several weeks.
The risk environment being what it is has other costs beyond simply making a long position more risky than at most times in the last 100 years of equity ownership. Those other costs revolve around the stability of the financial system itself: those costs involve systemic risks. John and I have touched upon this systemic risk obliquely in various posts over the last year: the Fed’s intervention creating moral hazards, malinvestments, over-indebtedness, and across-the-board increases in risk appetites.
But there are two new things that investors should note: (1) this risk environment is eliminating the checks and balances that are essential to a healthy financial system by removing the desire to short stocks, to arbitrage volatility, or to play defense with portfolio allocation. These things don’t come back quickly, just like they don’t go away quickly.
(2)The second thing to note, and this is an important development, is Fed Chairman Greenspan’s end-zone dance on January 3rd via a speech given to the AEA in San Diego. When one considers that no central bank intervention of this magnitude in the history of economics has ended with anything other than dire consequences, such hubris is even more remarkable.
The path from gold-standard advocate in 1964, as Greenspan was, to economic central planner in 2004 must have taken an intellectual path of enormous complexity: a Gordian knot of a road. But know this: economic central planning, whether it be from Soviet-era apparatchiks or modern-era central bankers, has never worked. Never.
Joining Greenspan in his endzone dance is akin to betting $10 to win $1 that it will this time. |
