“Reality in Politics”?
Economic Reality Returns
But the Federal Reserve still has a different narrative
So … bizarre conditions where Stocks AND Bonds AND commodities trade down
Cyclical downtrend continues. Health CPI + Rent CPI lead consumer discretionary stocks
ADP Employment Sinks To Weakest Since April 2013
US construction spending contracts YOY for the first time since 2011
Economic Ivory Tower, don’t wait for an economic policy solution.
Porter Stansberry radio interview a great guide for investors and portfolio strategy
Passive investment “negligence” craze
Astonishing shift to passive investing, “Increases systemic risk will make crashes worse” JPM
Meanwhile institutions sell on mass
Investors really need ….
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“Reality in Politics”?
“I’ve always gotten a kick out of oxymorons – phrases that are internally contradictory – such as “jumbo shrimp” and “common sense.” I’ll add “political reality” to the list. The world of politics has its own, altered reality, in which economic reality often seems not to impinge. No choices need be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real world, politicians seem to feel free to ignore them.” Howard Marks
https://www.oaktreecapital.com/insights/howard-marks-memos
Economic Reality Returns
Whatever the result of the presidential election next week, the “altered reality” of politics will give way to economic reality. The downturn that started 2 years ago has still not hit bottom.
But the Federal Reserve still has a different narrative
The Fed keeps saying they don’t even see the downturn. From this week’s FOMC:
“The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
Our recent notes have overwhelmingly shown this statement to be mainly a narrative. We have shown the data if anything shows an opposite interpretation, in as far as the economy continues to slow, and the fed’s own labor market composite index has a clear 5 year down trend and is now negative! Explain, for example, how you get “improvement in labor market conditions” from the chart below:
So … bizarre conditions where Stocks AND Bonds AND commodities trade down
This means we remain in bizarre conditions where the Fed is accelerating a slowdown with tighter policy! Unsurprisingly, this has never worked well and it isn’t now either! Both stocks AND bonds are hitting 3 month lows.
http://www.zerohedge.com/news/2016-10-29/balanced-investors-stuck-between-rock-hard-place
If you are invested you are almost certainly losing money! Blame the Fed.
Cyclical downtrend continues. Health CPI + Rent CPI lead consumer discretionary stocks
The cyclical downtrend may still be early. The header chart shows that Health and Rent costs are a tight leading indicator for consumer stocks, which have a long way down to go to fall in line.
“Retail sales will suffer in the months ahead due to rapidly rising medical and rental CPI. Whenever rental and medical costs have risen significantly in the past, they have led to a big decline in retail sales. You can see from the chart below that Medical CPI plus Rental CPI provides a nine month lead on Redbook Same Store Sales. Consumers will start cutting back spending on non-essential items in order to pay for medical care and housing.”
ADP Employment Sinks To Weakest Since April 2013
Whatever the Friday jobs data shows the far more stable ADP statistic has just hit a 3 year low.
http://www.zerohedge.com/news/2016-11-02/adp-employment-report-sinks-weakest-april-2013
US construction spending contracts YOY for the first time since 2011
http://www.zerohedge.com/news/2016-11-01/us-construction-spending-contracts-yoy-first-time-2011
Economic Ivory Tower, don’t wait for an economic policy solution.
Economic policy circles are clearly failing spectacularly. This article explains why that is and why it is unlikely that it can be fixed from within. So don’t wait for an economic policy solution.
“We are experiencing deep economic problems and it is the fault of the economics discipline. Their macro theories suck. But, there is no mechanism forcing it to alter its models when they don’t appear to work. This is so because economists basically write for each other in a language only they understand and their jobs depend on impressing a limited number of journal editors and referees, not correcting real-world problems. The academic inbreeding that has resulted has led to dysfunctional theories and, despite the fact that there were economists who accurately forecast the Financial Crisis, because their work is incompatible with what is published in “good” journals it has been all but ignored. Economics is broken and there is no internal incentive to fix it.”
Porter Stansberry radio interview a great guide for investors and portfolio strategy
Investors should listen to the founder of the world’s biggest independent investment newsletter advisory. Insight and clarity in what he sees likely to happen over the next 2 years and how to structure a portfolio.
Passive investment “negligence” craze
However, most investors are ignoring Porter.
“Nobody is going to ring a bell at the top of a market, but there are plenty of warped investment strategies and narratives from history that serve the same purpose — remember internet companies with no earnings and sub-prime CDOs to name two. Investors need to be cognizant of them and understand why the chorus of arguments in favor are short-sighted and flawed. The meteoric rise in passive investing is one such “strategy” sending an important and timely warning.”
Unfortunately, instead investors are running to “passive” investment.
Astonishing shift to passive investing, “Increases systemic risk will make crashes worse” JPM
Meanwhile institutions sell on mass
“According to BofA, last week, during which the S&P 500 fell 0.7%, BofAML clients were net sellers of US equities for the third consecutive week (-$0.9bn vs. -$0.4bn the prior week). Of these, institutional clients continued to lead the selling; this group has now sold US stocks for the last 21 weeks.”
Investors really need ….
It is very understandable from a behavioral point of view why investors have shifted to passive investing. Active managers in general have produced poor returns as policy makers have not only failed economically, but also the central banks have, in effect, brutalized the markets, making relative value and macro much harder to profit from.
Active managers have to adapt to extremely difficult conditions and prove their value, but investors need to also understand that passive investing is very far from a safe haven.
As we have shown in recent notes, prospective returns from passive investment are not only the lowest in history, but involve enormous risks of severe account value drawdowns, at the highest valuations in history.
Investors need to find highly adaptive tactical asset managers who can navigate through a bubble. This is a very challenging period for all investors. Investors need to think very carefully what it will take just to have a good chance of surviving the current investment predicament, let alone prospering. Find an investment navigator with a proven track record through an entire bubble period.
