Successful investing is about acquiring sufficient pertinent information, analyse it rationally and intelligently and then smartly and rationally measure the probabilities of success of potential actions emanating from the analysis. What’s our knowledge at this time?
We know this is very late in the economic cycle.
We know the Fed needs and wants to “normalizeâ€.
We know the Fed will hike rates, gradually but steadily.
We know that 10 of the last 13 recessions occurred after the Fed tightened.
We know the Fed’s tightening will hurt because excessive leverage is everywhere and worse than in 2007.
We know the U.S. consumer has no savings (cushion), just like in 2007.
We know Corporate America is over levered, worse than in 2007.
We know the U.S. government has mortgaged its immediate future and has little available dry powder if needed.
We know the Fed is also draining liquidity, pressuring long term rates up.
We know loan maturities are significant over the next 3 years.
We know many emerging markets and companies are highly vulnerable to rising interest rates and a strong USD.
All in all, we know that the end is in sight and that it will be painful.
We don’t know when and how it will begin.
We hope trade wars will not be the trigger.
We hope inflation stops rising, keeping LT rates manageable and the Fed flexible.
We hope wages don’t take off.
We hope oil prices stop climbing, even ease off some more, helping all of the above.
We hope good things could happen that we don’t know about.
We hope our politicians and central bankers know what they are doing.
We hope Goldilocks will slowly, delicately, safely navigate us.
We hope somebody knows.
Let’s pray.
*****
We know equities are far from cheap.
We know companies are over levered.
We know bonds are far from cheap.
We know high yield spreads are really stretched.
We know covenants are no more.
We know operating costs are rising.
We know financing costs will bite.
We know all about income inequality.
We know about labor scarcity.
We know about demand/supply.
We know about mean reversion.
We know profit growth needs revenue growth.
We know revenue growth needs economic growth.
We know what leverage ultimately does.
We know all about index and ETF funds.
We know about computer trading.
We know there is little dry powder left.
We hope there will be enough greater fools.
Let’s pray.
*****
We know the scary ending.
But this is such a beautiful voyage.
Good, steady, windless weather.
We know we’re off the Fed’s autopilot.
We hope there’s a real pilot on board.
We hope he knows.
Beautiful sky.
Stars everywhere.
No icebergs on this route, right?
Nice music!
We hope the music never stops!
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,†(Chuck Prince, Citigroup’s CEO, July 2007)
We know all there is to know.
*****
Let’s pray.
Meditation readings:
- WITH THE KING OF DEBT, CASH IS KING
- LIBOR’S LABOR
- SCARY FED
- TOPSY CURVY: SMALL IS NOT THAT BEAUTIFUL
- EMERGING SUBMERGING
- From Evergreen Gavekal:
- Biggest Bubble Ever Quarterly Webinar (February 9th, 2018)
- Bubble 3.0: How Central Banks Created the Next Financial Crisis (April 27th, 2018)
- Bubble 3.0: How Did We Get Here (Part I) (June 1st, 2018)
- John Mauldin: Debt Clock Ticking
- Steve Blumenthal: The Debt Bubble and the Interest Rate Trigger
- The Washington Post: Beware the ‘mother of all credit bubbles’
- Lacy Hunt: