What Worries Me — December 16, 2017

Really nothing has shaken my confidence in the secular bull market that started in 2013 with the S&P 500’s decisive breakout above 1550. This has been a prominent theme in Kort Sessions since Session One (February 1, 2013). My optimism then and since has derived from the belief that monetary policy, providing a near-zero interest rate environment, in support of a slowly recovering economy was a good thing. Because the economy was in recovery from the worst and potentially deadliest financial crisis in my lifetime, most pundits and investors refused to believe the recovery and the slowly improving numbers for fear we would relapse into even worse conditions. They were, as usual, fighting the last battle of the last war. The media, all media (financial, conservative, liberal and mainstream), were very complicit in driving this theme … laying bricks in the ‘wall of worry’ every bull market has to climb. Paying attention to this noise cost a lot of people a lot of money.

What has been so bad about the last eight years?

Let’s examine this through the lenses of two metrics, the unemployment rate and the stock market.

• The unemployment rated peaked in the first year of the Obama administration, 2009, at 10.2%. It had fallen to 4.9% by October of 2016, the month before the surprise election of Donald Trump (4.9% happens to be the exact same unemployment rate with which we entered 2008). Since the election that rate has fallen to 4.1%. In the past 5% was considered full employment, that rate beyond which the tight labor market would spawn inflation. For the most part these low unemployment rates were baked in the cake long before the business-friendly Trump administration was even contemplated. This was due to the stimulative effects of low interest rates and huge deficits being run in the G.W. Bush administration and also those deficits run up during the ‘Great Recession’ to provide additional push to get us out of that hole. Regardless, the unemployment stats were good. None the less, the media, right, left and in the middle could not be satisfied, and the JOBS issue was a key talking point as we completed the 2016 election cycle. It is a key issue today, a raison d’être for cutting taxes now even though our current unemployment rate is very low. Ergo, on the employment front the news has been very good.

 

• Meanwhile, metric two, the market, has recovered all of its losses, from 666 0n the S&P 500, through the old all-time-highs (of 2000 and 2007) of 1550, closing at 2675, Friday December 15 … not too bad a result for the past eight years, unless you were listening to the naysayers.

What is concerning to me?

• Bitcoin Worries Me — It worries me because I don’t understand it. There appear to be many people smarter that I who don’t get it either … people like Warren Buffett who says, “You can’t value Bitcoin because it’s not a value-producing asset.” One may say that same thing about the dollar, but at least it is backed by the “full faith and credit” of the United States of America. Even though this ‘full faith and credit’ may be suspect, at least it is backed by something (the power to tax). Also, there is a lot of confused thinking out there on the part of supposed opinion leaders and pundits, like this bit from Robert Shiller —

“Bitcoin has aspects of a bubble, but it’s OK to ‘play’ with it: Economist Robert Shiller”

 

• Speculation and Confidence returning to markets — After the S&P has quadrupled from the 2009 low we are finally beginning to see animal investor spirits rise. Investors could easily turn their attention to more speculative stocks – 2nd, 3rd and 4th tier companies in our markets, bolstered by the story that the proposed corporate tax cuts will be a boost to  small cap companies that usually pay more taxes than larger multi-nationals. When and if this materializes, it will knock out a key support for my past bullishness … lackluster investor sentiment. If this goes full bloom it will mark the beginning of, and may mature into, a real equity bubble. It will also mark the ending stage of our great bull market. 

 

It is unbelievable that we are almost nine years into this recovery cum secular bull market and are not there yet … at the point of extreme optimism and bullishness. We may not get there before the next major correction knocks the wind out of the sails of emerging enthusiasm for risk, but it is something to be keenly aware of. Beware the cocktail party talk that always turns into stock and market talk, stock tips from your taxi driver, a preponderance of bullish talking heads on CNBC and man/woman-on-the-street interviews where the subject always concludes, “I’m in stocks for the long-term.”

What’s your take?

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