He Passed
Posted on Sunday, August 30th, 2020
I took my son for his driver’s test this week. I can still remember my driver’s test over 30 years ago. As you can imagine it was full of tension. It was also absurdly easy. The hard part was in understanding the directions from the monitors. The monitors did not ride in the car with him due to the virus. He found it difficult to understand them while they stood outside the car, in the rain with a mask on. He needed to stop at a stop sign, drive the car in reverse as well as parallel park and then, back into a parking spot. While it was a very simple test it did not raise my confidence in the government’s ability to administer or to monitor anything.
The Federal Reserve went to the mike this week in what is traditionally their meeting from Jackson Hole, Wyoming. Chair Powell did not disappoint markets as he has made it clear that the government will let inflation run to make sure that the economy keeps humming along. Inflation is great for people (or institutions) that owe a lot of money. There are only two ways out for indebted governments around the world. One is to default on their debt – which is frowned upon. The other is to inflate away that debt. The US government is the biggest debtor and needs inflation to pay down its debts. For you and I, the consumer, we hate inflation. I personally eschew debt and will, some day perhaps, be on a fixed income. Inflation is your biggest enemy in retirement as your fixed income dwindles in its purchasing power. While the Fed has not been able to raise inflation in recent years they have been successful inflating asset prices which now sit at extreme valuations. The funny thing is, valuations have a way of reverting back to their mean over time. Like an ever rising sandcastle asset prices are prone to frequent collapse. We just don’t know when that grain of sand will become one too many.
We are ever in search of ideas to figure out this grand puzzle we call investing. We came across this piece form Bank of America’s currency strategist Athansios Vamvakidis.
However, this is a scenario of recurring bubbles. The real economy is weak, but asset prices are strong because of loose macro policy support-more decoupling between Wall Street and Main Street. This will continue until unexpected shocks take place, asset price bubbles burst, which then needs even looser macro policies to avoid an even weaker real economy, leading to new asset price bubbles.(emphasis mine) The result is a vicious cycle spiralling to even higher debt levels, lower interest rates and larger central bank balance sheets, without inflation, but with an even weaker real economy and even worse asset price bubbles.
We see no easy way out. Again, we wouldn’t start from here. This is not a good place to be in for the global economy and it is getting worse with every shock, despite the market euphoria in the meantime. An already bad situation before the pandemic has now become worse. We are not sure how and when we will see the end-game, but in our view this is not a sustainable situation in the long term.
Valuations are out the window. The only thing that matters is liquidity and the repeated bursting of bubbles growing ever larger with each incarnation. The central banks are committed to this path and no politician will let them deviate. It is left to us as investors to invest accordingly and prepare for liquidity crisis’.
The S&P 500 was up 3.3% last week so chalk another one up for the bulls as they were able to break thru to all time highs. The target for the chart gurus on the S&P 500 is was 3500. We closed at 3508 as the market was up every day this week. Their new target is 4000 on the S&P. We are not saying that it is going there but it is the next level of resistance. Market has run very far since March and is a bit overextended. CNN Fear and Greed index closed at 78 which is labeled Extreme Greed. Markets stay greedy longer than they stay fearful. Warren Buffet is often quoted as having said, “Be fearful when others are greedy and greedy when others are fearful”. It’s getting closer and closer to fearful time as we were greedy in March. For now, we stay patient. These greedy moments can stick around longer than you think. Just look back at 1998. That rally stuck around for another 2 years.
Stay safe.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.