CAMS Weekly View from the Corner – Week ending 3/24/2023
March 27, 2023
In today’s edition we take a step back to fully remove ourselves from inspecting the proverbial trees so we can focus our view on the financial and societal forest if you will. (As a general FYI In light of the larger discussion this edition is longer than normal.)
It is easy to get caught up in the daily, weekly or even monthly noise (the trees) of what is taking place throughout the broad econ/market/societal landscape and lose sight of what has developed in a larger sense.
We have strewn throughout numerous editions over the previous year and a half the observation that we were heading towards and then evolved into a true bear market.
We have left this topic on the shelf for some time now in light of the endless streams of data points and various societal talking points (more trees) to share as recent months have unfolded. That is a common characteristic of a true bear market in that there are always various storms to discuss and even get lost in as the noise of such storms easily distracts attention away from the much larger storyline that is unfolding.
A true bear market is basically an in-house phrase we have bandied about to describe a stock market that goes down and struggles for many months to years. This contrasts to what has become more of the norm in the previous couple of decades or so whereby the stock market goes down rapidly for X time only to then revert right back up on a fast track trajectory.
Reduced to the bottom line of those quick reversals was the printing press. The Fed was always there to backstop the downturn with more doses of easily created money to “fix” the problem. The fix was never in rather the problem was pushed downstream and in so doing sowed the seeds of an even larger problem as time rolled on.
Through recent decades strange phrases became the norm and when “strange” is the “norm” rest assured problems – larger problems will be coming. Reducing this to the bottom line in the name of brevity a top contender of strange was ZIRP – Zero Interest Rate Policy.
Zero interest rates became such a norm that throughout society it became the expectation. We cannot emphasize enough how strange that is in particular when viewed through history. For example, dating back to the early 1950’s we had never employed such a policy on the monetary front. What could go wrong eh.
Society Reacts Accordingly
Faced with zero interest rates society does what society can be expected to do – it goes crazy in a speculative nature.
Yet again to get to the bottom line (to save from writing a book here) societal speculation became the norm. We have to emphasize, really emphasize, speculation became so normal that broad speculation was no longer viewed as such any longer.
The citizenry, broad financial system participants and collective market participants were knowingly and sadly often unknowingly forced to speculate. On this front, interestingly, more and more of the citizenry were forced to participate in the speculative backdrop.
Speculation became a societal norm with many not even realizing how much they were participating in speculation.
As one example that broadly offers the spirit of the entrenched speculative way of life is what used to be normal in that soon to retire and actual retirees would back off on their exposure to risk assets. They were approaching or were already at the end of their primary earnings years and hence knew they could not take on such risk in light of their position on the life timeline.
That historical norm has largely gone by the wayside in light of a widely developed view that risk assets are not that risky. If they go down they will go right back up as society has evolved to believe courtesy of an easy Fed.
Zero Interest Rates
Zero interest rates or even ultra low interest rates have been far more the norm than an outlier for the 21st century in particular. Adding to this and only accentuating the speculation was negative real interest rate policy. This is simply where the Fed sets their interest rate policy below that of the price inflation rate. Again, for the bulk of the 21st century this had become the normal policy approach.
The two combined – ultra low interest rates in tandem with being consistently below the rate of price inflation offered high intensity fertilizer for broad financial system speculation.
To place these historically strange bedfellows into context, for many decades previous we had never seen each one consistently utilized individually let alone be deployed together!
Financial System Adages and Acronyms
With the citizenry consistently faced with next to zero interest rate offerings for their various savings vehicles at the local bank (as one example) they were forced to speculate in risk assets to a degree they would not have done otherwise.
As an important aside, at the same time the consumer within were highly incentivized to take on more and more debt – “The interest rates are so low!” – How can you not, inviting its own additional household/financial system/societal issues. Think an entire society that is massively leveraged with debt which invites additional downstream issues. We digress but an important digression nonetheless.
The stock market has been one such risk asset destination for otherwise would be cautious savers but certainly has not been alone.
Everything from raw land to the housing market to rare cars to collectibles – the list is long – have been included in the speculative backdrop all under the banner of attempting to achieve some rate of return on their money that they could no longer attain in a relatively risk free account such as the aforementioned and long historically standing option of a local bank savings account.
When asked “Why are you doing X investment?” the reply became resoundingly consistent – regardless of age or financial wherewithal to bring on such risk – “Where else am I going to put my money?” Interpretation: I have to chase a return somehow someway because the financial system offers no other options.
This brought on the FOMO acronym – Fear of Missing Out – within general market landscapes in particular the stock market. Speculation became such the norm that FOMO had a feel of “Well of course, duh” only underlining the downstream entrenched speculative fervor from historically strange Fed monetary and broader government policies.
As those policies were continually implemented the logical conclusion was broad participants and the citizenry came to experientially understand the “Fed Put” even if they didn’t know of or understand the phrase first hand.
This simply equated to when risk assets ran into any issues the Fed would be there to crank up the printing press and lower rates even lower if they were not already at or near zero. This only invited more speculation with even more participants pulled from the general citizenry forced to participate in risk assets (where else are we going to put our money) and more runaway price behaviors in you-name-it risk asset category.
Honey, We Forgot the Real Wages
What didn’t go on a runaway price trajectory were wages. Most notably wages when adjusted for price inflation. And even more notably wages when adjusted or placed into context of asset price growth.
With this the runaway asset prices left more and more of the citizenry unable to participate in historically normal behaviors such as aspiring to own their own home in light of the solidly entrenched, speculative nature of asset prices to include housing.
In light of these wages continually struggling relative to the general inflation rate and certainly falling behind asset price inflation other historically normal aspiring behaviors such as funding retirement savings fell by the wayside as well for more of the citizenry.
No Conclusion
To be forthright there is no certain conclusion to offer for this edition. The above, as offered at the outset is meant as a step back view of the forest which offers a historical bent on just where we are and how we arrived here as succinctly as possible.
If you notice, the Fed and their historical policy decisions are right in the epicenter of the societal storyline.
As we stand current day the Fed cannot easily rollout the printing press as they have many times previous because asset price inflation has crossed over to actual goods/services price inflation. They are in a conundrum and so are society and financial system participants.
The economy is weakening and price inflation is remaining stubborn. Historically that is known as stagflation. Markets do not thrive in stagflation backdrops.
Furthermore, we have never seen a notable price inflation period end without a recession. Markets also perform poorly in recession type backdrops, in particular with a simultaneous uncertain price inflation storyline.
All told there is a wealth of uncertainty all around the forest landscape if you will.
Markets also do not like uncertainty – it is too hard for collective market and financial system participants to see the future and price assets accordingly to what they think they see. With this, volatility – up, down, all around – is experienced and can be expected to continue as it is murky out in econ land.
As offered, there is no certain conclusion, in particular to the much larger speculative societal storyline that has entrenched itself over recent decades but the general landscape view offers our aforementioned true bear market observation remains in play and seems like it will be here for some time to come.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.