Before we get into a review of the important facets of 2018, let’s look back and take a look at last years year end letter and take note of what we foretold.
As we noted in last weeks letter, the equity markets looked locked and loaded to test their crucial supports and they did just that. The SP500 tested the 2550 level and the Nasdaq the all-important 6495 level, both markets saw minor follow through. All eyes are dependent upon what the FED does on Wednesday as the markets still see around a 68% chance of another 25bp hike. We read in the WSJ on Monday an Op-ed from Stan Drunkenmiller and Kevin Warsh and it can be summed up via this quote, “the central bank should pause its double-barreled blitz of higher interest rates and tighter liquidity.” As much as we respect the both of them, we disagree whole heartedly.
The FOMC decided to raise rates another 25bp to a high mark range of 2.25%. We applaud the continued move; however, we feel that we could be doing more and doing it faster. Holding interest rates or real rates still negative, some 10 years after the 2008 crisis is deeply concerning. All too often people focus on the Fed Funds rate, but the real rate, the FF less inflation, is still negative. Rates are still very accommodative...although the FED left that word out of the statement today. Watching Powell is like watching your Accounting professor discuss reconciling the balance sheet on a late spring afternoon. He and the FED continue to use words like transitory, gradual and appropriate, a decade into a recovery and we are still using these words. The dot plots are all calling for continued hikes peaking around 3.25/3.65%. We view this as highly opportunistic and we do not think the global economy nor the domestic economy will be able to absorb such a short rate given the sheer size of global debt growth. For those that haven’t seen, we often use our own “dot plot” picture:
In the chaotic world in which we live, we feel that investors tend to over hype the wrong things and under prioritize the right things. For a decade now many investors have finally succumbed to the central bank narrative and the continued and never old mantra of “buying the dip.” The truth has become so self-fulfilling, that there isn’t even a “dip” to buy. Many pundits have attacked these global markets, have doubted the global markets and even more so have doubted the wherewithal of this rally. See here is the thing about the human psyche, we humans tends to be risk averse, and we tend to question everything, up until the very end. The funny thing about time, though, as it moves forward, it seems to leave in its wake, many investors dismayed, many in disbelief. Many will say, I know I should have been long, I knew this market was going up, I didn’t know exactly why it was going up, but it just keeps going. We have a feeling that many doubters, those patient risk averse, 60/40 allocating types have tossed in the doubting towel, especially over the last 2 years.
Let’s just say the enticement has become too much, despite the fundamentals, despite all that is wrong with every value metric out there, who cares, just buy it! Talk to your friends, talk to Joe Blow on the street, nobody and I mean nobody thinks the markets can fall anymore. They say that it seems expensive, that it should fall, but it doesn’t, can you blame them? We don’t! It’s typical of the human psyche to succumb to unwavering pressures. In fact nobody we speak with calls the equity markets a bubble anymore, which means it’s just being accepted for what it has become, that is the defacto money market for the top 10%. We get it, but one thing we don’t is why everyone we talk to calls Bitcoin a bubble, are they joking, a mere $100bln market cap and that’s a bubble? It pales in comparison to the kind of rehypothecated capital that exists out there. So don’t fall for it, let’s just end the bubble talk any further, for any market in fact, Bitcoin, SP500, Real Estate, forget it, Bubbles no more. Fundamentals no more!