With the exception of the Federal Reserve in the US, Central banks across the world have embarked on an almost unified effort to stimulate their economies by firing up the QE machine (again). What does it mean for US investors?
Let me first say that I don’t believe this grand experiment in central bankers buying their own debt and expanding balance sheets on this scale ($Trillions) is going to end well.Like many, I’ve been expecting some form of serious decline in the price value of government issued bonds but that simply hasn’t happened yet.Since 2009, following the lead of the USA, the rest of the world has been working to fill economic holes with freshly printed currency through direct purchases of their own bonds, forcing long term interest rates down and cutting short term rates artificially at the same time.The logic goes that easy money will encourage investment, borrowing and stimulate financial markets.To some degree, these desired effects have occurred offering central bankers more motivation to continue and now double down on the program. Does it stimulate real economy?Hard to say.The US is going the other way and has already ended their Quantitative Easy program, for now.Effectively, central bankers are shifting private economic hardship to themselves and tax payers as a whole.As Europe finally admitted their economies were headed even further into recession, the ECB hit the panic button and fired up another round of QE last week.The Bank of England issued some stiff warnings of their own on the same day while the Bank of Canada and Bank of India also cut rates by .25%.The Peoples bank of China followed as well doing something called a “reverse Repo” in their liquidity markets, which I don’t understand but is similar in focus.In the previous week, the Danish Central Bank cut rates to NEGATIVE .20 basis points.
Courtesy of Bespoke.com
Of course, we also saw what happens to a financial system when any of these banks makes any attempt to unwind their growing debt bubbles (bombs).The Swiss National Bank shocked their financial markets by lifting their currency cap all at once causing massive distortions in their stock and bond markets not to mention the peripheral carnage among hedge funds and Forex trading firms that got caught on the wrong side of that trade.There is no such thing as gracefully deflating a financial bubble and that is what makes me QuEasy as I watch these government debt bubbles inflate even more.I will reiterate that investors of any kind, from this point forward, must have robust risk control systems in place to protect their capital.“Holding and hoping” once these bubbles begin to unwind will be an unrecoverable experience.Now let’s look at the bright side in the short term.
New and Old Opportunities
For as much as we might hate the nature of these drivers of stock market price appreciation, they are good for stocks.I have spoken in recent weeks about the NEW relative strength of the internationals and developing country funds.Now, these economies have the strong tail wind of their central bank policy and prices are much more attractive on a valuation basis than the US.Investors would be wise to consider re-engaging lightly with international exposure as we have already done on our client portfolios.Preference should be given to those countries with the strongest economies, younger demographics, relatively lower total debt, high growth rates and more attractive stock market valuations.Our short list for now is Asia Pacific, ex japan, Eastern Europe except Russia, Emerging markets, South Africa and India.These countries all rank higher than the US on all metrics and offer much more upside in our opinion.
Domestically, all the QuEasy money spraying across the globe is going provide additional strength for the US dollar.Beyond short term corrections, this OLD trend is likely to continue as it has since July albeit at a slow pace.A rising US dollar is supportive of cyclical stocks, growth, small caps, interest and dividend paying securities, healthcare, technology, utilities, and consumer groups.It is bad for commodities, metals, gold and silver and energy as we have seen grotesquely over the last 6- 9 months.There is a slight rotation in relative strength in the last few weeks toward material and industrial names so be watchful for the markets to show preference for late stage cyclical groups.I’ll give more detail on this in coming weeks.In sum, we should remain focused on our leadership groups from the second half of 2014 for domestic issues as the rising trend of the US dollar is dominating most price trends still.
Adding some international exposure to a portfolio now is a smart diversifier as correlations to the US market are much lower and now the price trends are stronger.Against a rising US dollar, these internationals do have a bit of a headwind so keep position sizes smaller if possible.
Watching Claims for Unemployment in the US
As a final cautionary note, remembering that we are NOT bearish on the financial markets, there is some slight concern coming from recent reports on Claims for Unemployment in the US.Last week marked the third weekly report showing claims above 300k.The same thing happened in 2007 when “Claims” sat at that level for almost a year refusing to fall lower before the US economy headed dramatically south in 2008 -and saw Claims rise to almost 700k weekly.This is not a cause for alarm but simply something to watch closely for change as Claims have tracked the performance of the S&P 500 almost exactly week to week (inverted)
All Time New Highs Again
I’ll finish by taking a moment to reiterate our value proposition to our clients.In our communications we often talk about our mission as building Wealth, rather than simply managing money.Our motto is “Build Wealth, Defend It”, right there embedded in our company logo and images.We are about generating consistent modest returns in all markets, adjusting to risks and opportunities as they come, in whatever magnitude.Managing money can mean many things but I often find myself looking at portfolios of prospective clients which are hovering near their high levels of 2007 and some at the same levels as 2000.These portfolios have been “managed” but they have not seen any real wealth accumulation year over year.They are simply churning in place year after year, making money and then losing it over and over again.Today, we are facing a market that is high by any standard but has yet to break down.The odds are strong that some portion (average retracement is 48%) of gains made in the current six year bull market will be given back in the next bear market.Are we close to that event?I have no idea but I do know that we have the systems in place to recognize when and to what degree we should be cutting exposure.Last week, our flagship strategy, “All Season” (shown in Red) made another all time weekly new high on top of the previous weeks’ all time new high.The US stock market did not (nor the Global Stock index shown below in Green).We do this by focusing investor capital dynamically toward the strongest asset classes, sectors, countries, and securities.Sticking with leadership is a good way to stay out of trouble and make those consistent returns we all want.
That’s it for this week.If we don’t get some snow soon, we’re all going to become experts in Xeriscaping this summer.Time to do the dance!
Cheers
Sam Jones
