9-1-1: "Lunada Bay on Fire." Markets...?
Got back to California from an extended trip to Asia only to find Lunada Bay on fire. 9-1-1. Firefighters. Quick action. Lunada Bay saved!! Likewise, financial market firefighters have been tamping out fires as well, helping some markets to move to new highs.
Lunada Bay is a sheltered Southern California coastal village 20 miles south of Los Angeles International Airport. It is connected to Los Angeles, but one feels safer here because of a massive hill which encircles our village to which there are only several roads in to and out of. The people here are very intelligent, educated, friendly and peaceful. There is little crime. The views and air ocean front fresh. The schools top notch. About as pleasant as life gets in the real world.
But vanity of vanities, appearances to the contrary, Lunada Bay is susceptible to the maladies that affect the rest of California, such as wildfires.
Not to worry. The brave firefighters, prepared, fought as the fire roared up the Lunada Bay cliffs, with flames lapping at luxury homes. They stopped the fire before it could do any real damage. All saved. Job well done, thank you. And the fire trucks went back to the fire stations to be refueled, maintained, cleaned, polished, and most importantly, water tanks refilled, positioning in advance for the next fire. Smart.
Financial market firefighters such as the Fed, regulators, politicians and others likewise have been putting out financial fires.
Several months ago I became more concerned about financial market risk rising. Since then, markets indeed sold off, and have been valiantly fighting back as the financial firefighters work to put out flareups.
For example, over the past several months additional monetary stimulus has been added, as well as massive amounts of fiscal stimulus. Markets expect more of this.
Markets have had time to deal with the new reality between China and the US. Some demonstrations continue in Hong Kong, but so far, the situation has not spilled over into international financial markets (which remains a serious risk).
The earnings season for stocks has not been as bad as expected.
The 10 year treasury did not break to new low yields.
Growth is slowing, but the US is still a bright spot compared to most other developed countries.
Does that mean everything is great? No. But the markets have had time to deal with multiple negative situations and remain near record highs for some markets.
The main problem, which is not today's story, is that financial firefighters are slowly running out of tools to deal with the next fire. The financial firefighters are getting low on water. They need to return to the station and replenish their tools. But they are not. Not so smart.
Financial firefighters do not have as much financial water and as thick a water hose as many market participants may believe. There simply will not be enough fiscal and monetary water to fight the next fire if they do not get back to the fire house and prepare for the next fire.
The "new normal" is not normal, and will not go on forever.
The conundrum for investors is that the current market mode can continue for some time. Too much money, not enough investment opportunities for investors. Thus, almost all risk assets have been bid up. (Extreme example: WeWorks.) It all looks good until it doesn't, and there is no exit. Trapped. Inhaling the smoke as investors trample each other to get out the door. Then it is too late.
What does all this mean? Fire? Cliffs? Markets? Be more clear man! OK.
Markets have burned off some negative information over the past few months. The Fed is standing by to help more. The budget deficit is adding support to the economy. While the China/US relationship is fundamentally different than a year ago, there is a relief trade now as the worst case seems to have been avoided (could change with a tweet).
So, while there are still many things to be concerned about market-wise, right now, things are less negative than several months ago.
That being said, there are better alternatives than taking market risk when markets have limited value and financial firefighters are running low on stimulus water after 10 years of fighting the same fire.
Like what? Alternative fixed income. Equity like returns. Investment grade government risk. Yes, it is possible. Stay tuned. We will talk about that in the near future.
In the meantime, the Lunada Bay fire is out. The Palos Verdes Estates Fire Department trucks are back at the station in Malaga Cove. Refueled. Cleaned. Water tanks full. All ready for the next 911 call. Financial market fire trucks? Ehh, not so prepared for the next financial fire, so act accordingly.