I promised when we started this electronic newsletter that we would not clog your inbox just because some amount of time had gone by since our last Insight. We write when there is something of meaning that bares commentary. I also promised not to weigh in on newsworthy subjects outside of our expertise, so while this summer has been full of geo-political events, the lack of action in the financial markets has left us, well, speechless. However, at some point the lack of action itself becomes worthy of notice.
Some of the boredom is masked in short-term headlines. The initial estimate for second quarter GDP just came out at 4 percent growth. Isn’t that exciting? Well it is, until you remember that first quarter GDP shrank 2.9 percent, according to what was supposed to be the final number. They revised that number to 2.1 percent in the latest report. So depending on which final number one choses for the first quarter, the first half of 2014 saw growth of somewhere between 1.1 percent and 1.9 percent. In other words, this seemingly never-ending slow-growth slog just keeps going on and the markets seem to have become numb, as if everyone is just stuck in a wait-and-see mode.
Consider the following: First quarter GDP down 2.9 percent; Workforce participation at forty-year lows; Russia trying to take over Ukraine; ISIS on the rise in Syria and Iraq; Rockets hitting Israel from Gaza; Every major investment asset class providing positive returns. Which one of those statements doesn’t seem to fit?
CNBC keeps celebrating new market highs and they keep asking whether this is different from 1999 or if is it another bubble. Well, it is completely different. In 1999 the world, not just the financial markets, seemed a brighter place. The cold war was over. The globe was mostly peaceful. The promise of the Internet was brand new, optimism was everywhere. That is what a bubble looks like. Bubbles are euphoric, this is not. This feels more like a wait-and-see market.
Globally we are swimming in easy money as near-zero interest rates have become the international norm. Most financial historians will tell you that never ends well. They will tell you that easy money is the fuel for most economic destruction. They may be correct, but fuel alone won’t burn; there must be a spark. For inflation as an example, a nation needs a large supply of cash, but it also needs velocity. The money has to move. The fuel needs a spark.
In financial markets that spark is usually what Allen Greenspan called “irrational exuberance.” This market may or may not be irrational, but the one thing it certainly isn’t is exuberant. I’m not even sure it has a pulse. As we repeatedly said when the market dove during the financial crisis: This too shall pass. The spark will eventually come, and we will all comment about how obvious it is in hindsight. The question remains: Will all this fuel launch us to new heights or consume us? It is hard to know at this point, and that is why we wait and see.
Chuck Osborne, CFA
Managing Director
