After watching your latest insightful and thought-provoking long term take on the markets, I noticed on Friday there were daily downside key reversals both for the Dow Jones Utilities and Transportation indices. Could this be a straw in the wind for the main US indices?
Thanks to a subscriber for this memo by Howard Marks for Oaktree which may be of interest. Here is a section:
Questions like these can’t tell us for a fact whether an advance has been reasonable and current asset prices are justified. Buy they can assist in that assessment. They lead me to conclude that the powerful rally we’ve seen has been built on optimism; has incorporated positive expectation and overlooked potential negative; and has bene driven largely by the Fed’s injections of liquidity and the Treasury’s stimulus payments, which investors assume will bridge to a fundamental recovery and be free from highly negative second-order consequences.
A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far. The S&P500 closed last night at 3,133, down only 8% from an all-time high struck in troubled-free times. As such, it seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.
In other words, the fundamental outlook may be positive on balance, but with listed security process where that are, the odds aren’t in investors’ favor.
Thanks to a subscriber for this note from Bridgewater which includes a number of interesting discussion points on the outlook for stock market returns over coming months. Here is a section:
This article by Lucy Meakin and David Goodman for Bloomberg may be of interest to subscribers. Here is a section:
Bailey said that while the overall output is holding up better than expected in May, there’s probably worse to come for employment. Jobless claims have risen sharply and the number of workers on the government’s furlough program is higher than the BOE had anticipated.
“We certainly do see signs of activity picking up,” Bailey said. But “we also have quite a strong focus on the labor market,” where the data are “quite mixed.”
The new pace of bond purchases means the total QE target of 745 billion pounds should be reached around the end of the year, and the bank didn’t indicate a possible extension into 2021.
Thanks to a subscriber for this report by Tony Dwyer for Canaccord which may be of interest. Here is a section:
Thanks to Iain Little for this edition of his investment note. Here is a section:
After the recovery from the 23rd March lows (supreme irony: the very date that many countries went into social and economic “lockdown”) and the -6% mini-crash last Thursday, we see stock markets as being in a redistribution phase as “shareholder regret” kicks in. Nervous Nellies who regret holding equities will either exit altogether (“phew, I’m out!”), or switch money into “cheaper”, lagging sectors like banks, oils, real estate, airlines. Optimists will do something similar except that they’ll be more inclined to hold onto the quality (tech, healthcare, FMCG) that has stood them in good stead. These bulls will regret not holding lower quality sectors if their relative outperformance starts to slip. So lower quality could out-perform higher quality for a while. But….Caution!
A man-made Frankenstein (Modern Monetary Theory, which means hiring monetary policy to do the job of fiscal policy) is ringing an early bell for “stagflation” (low growth plus inflation). There may not be enough global demand or monetary velocity to revive stagflation…..yet. But survivors of the 1970s know what this implies for portfolios at the end of the day: inflation-proof growth equities, index linked bonds, real assets and……gold.
Thanks to a subscriber for this note from Albert Edwards at SocGen. Here is a section:
This impressively illustrated article by McKinsey may be of interest to subscribers. Here is a section:
Liberal-market economies
Countries with liberal-market economies face greater short-term risks than do those with coordinated-market economies but have greater flexibility for long-term dynamism. The group includes Australia, Canada, the United Kingdom, and the United States. A key feature here is a limited framework of preexisting measures to protect households—the countries in this archetype spend 17 to 20 percent of GDP on social protection. Their economies skew more heavily toward big corporations than do those with coordinated-market economies, with a comparatively smaller role for SMEs, and flexible labor policies are dominant.
The limited degree of automatic coverage for workers and businesses drives a focus on emergency support-of-wage bills for companies and direct transfers to individuals. More companies will fail in such economies, and the reliance on massive cash transfers in those countries will increase the pressure to build a robust digital infrastructure. However, creative destruction in the least resilient sectors will provide more flexibility to pivot and emerge from the crisis stronger and more competitive, provided that economic shutdowns do not last too long, as unemployment can become sticky, driving up costs and dampening consumption in the longer term.
This article by Jeannette Neumann for Bloomberg may be of interest to subscribers. Here is a section:
European Central Bank Vice President Luis de Guindos said policy makers at the institution haven’t talk about creating a pan-European bad bank to manage the unpaid loans that are arising during the coronavirus crisis.
“We haven’t had any sort of serious discussion about this instrument,” Guindos said at a webinar hosted by the Institute of International and European Affairs
“I am a little bit surprised when I see this kind of information,” he said in response to a question about a report published by Reuters
Bad banks created after the last financial crisis in Ireland and Spain were “powerful instruments to clean up the balance sheets” of lenders
This article by Jim Bianco may be of interest to subscribers. Here is a section:
“If a company like that doesn’t have market access and can’t roll over its debt and can’t have enough cash on hand to deal with its obligations, what they’re going to do is they’re going to lay people off. … So, by announcing our facility and including those companies, the ones who actually need the credit… now [have] lots of cash on their balance sheets.”
So, what if free markets do not want to finance companies with shaky operations? The Fed has decided it will effectively nationalize debt markets by removing the risk for investors so that these companies can get the funds to continue operating. In the Fed’s way of thinking, higher and vibrant markets create and save jobs.
To be sure, that is what largely happened after 2008 financial crisis as the central bank began buying bonds under a policy known as quantitative easing. A steep price was paid.
While the economy grew for almost 11 years in the longest expansion on record, annualized growth was below average. This was attributable to an economy that had become less flexible and more reliant on stimulus.
Another consequence was laid out by former Federal Reserve Bank of New York President and fellow Bloomberg Opinion contributor Bill Dudley last week: The Fed’s choices: not have a recovery, have less inequality; or have a recovery with buoyant financial asset prices and more inequality.
