Thoughts on the market.

The chief

After the 1907 crisis, there was a strong need to anoint a chief in town, someone who will take care of our monetary policy. Since December of 1913, after every financial meltdown, the Federal Reserve was there to help the markets and restore both the consumers’ and investors’ confidence.

With ~3/4 of the total U.S. GDP relying on consumer spending, you can tell why the consumer confidence is the blood that keeps the economy’s heart alive and pounding. The notion of a good economic conditions in the future is a must to convince the average Joe to spend more and save less.

Don’t break your piggy bank

The personal savings rate has been going down. Although spending is a very important factor to keep the economy alive, savings is also a critical thing too. On the other side of the aisle of saving, heavy spending and higher rates on debt will burn your cash flow and might make you fall short on your payments.

savings rate

This leads us to two things; the first is the 2008 financial crisis, that was all about leverage and greed which came mostly from the likes of investments banks (for example: Lehman Brothers), they loaded up on risk to the verge of collapse, And sadly that’s exactly what happened. Those shocks came after increasing interest rates caused people to default on their mortgages. The second is the future of the U.S. with lower tax base and soaring debt things might go south if interest rates start creeping higher.

The Economy is all about cycles

If history accounts for anything, by this time you must have realized that the economy isn’t always rosy and blooming. Comparing the materialistic economic machine with Nature, in nature there are seasons, and in our economic machine we have cycles; and a different approach must be taken according to the risks that are hovering on top of our heads.

In the bible in Ecclesiastes 3 it’s written:

“There is a time for everything, and a season for every activity under the heavens: … A time to plant and a time to uproot… A time to tear down and a time to build… A time to embrace and a time to refrain from embracing”

Every once in a while an adjustment must be made, as an investor you must decide when it’s the best time to plant your cash in a certain investment or uproot it to reduce risk. You should decide whether it’s the time to embrace a certain amount of risk when everyone is fearful, or refrain from embracing it at all, when everyone is greedy.

In active investors we trust (some of them)

If you hold X amount of money and for some reason you decide to adjust your portfolio, believe me no one will pay a lot of attention to your changes because it will make no difference in terms of the changes that will happen in the price of the stock when you buy or sell. Unless you earned your reputation as a successful investor throughout the years, market participants would follow your decisions.

GE

(source: CNBC)

For example there is the Buffett stamp or the Icahn stamp, and whenever they buy or sell some stock or “adjust” their portfolios everyone looks closely, and many more follows; this very week an intraday percentage increase in General electric (GE) stock price caused a wave of speculation that Mr. Buffett or another active investor was “up to something”, the same thing happened with Newell Brands.

Big market mover

Now the Fed is adjusting; they’re unwinding their $4 trillion balance sheet, selling Treasuries and Mortgage-backed securities in other words tightening the economy, and hiking the interest rates which in term will increase the cost of lending. But there is another kind of rates that are going up and might cause some unrest, it’s the London Interbank offered rate (LIBOR), in short if they go up they cause the corporate lenders to pay a higher interest on their debt. If inflation won’t be on check and interest rates start soaring which might be our case with the Treasury issuing more debt and the Fed selling bonds, things might get a little bit uncomfortable in the market.

The Sentiment

Although the sentiment now is that the economy will keep on expanding and the earnings are going to increase, yet one should always ask, until when? Risk is really not expectable, and it comes from the least expected places. It comes in a form of instruments that are like wolfs in sheep’s clothing of our financial system (e.g. mortgages in 2008). Some may think that you can somehow predict and manage it, and we just got a reminder that you can’t fully do that, in the first Quarter of 2018, when the ETNs that bet against volatility lost 90% of their market value in one day, it led to a heavy selling from hedge funds that deployed their money into those instruments and led to a selloff which dipped the markets into a correction territory.

So where are we heading now?

Ill end this article as the markets starts its trading day: with opened ending, and with all of the options on the table.

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