Market Notes

July 8, 2019

Eagle, Colorado

After sitting for Level III of the CFA® Exam on June 15th I decided to take a week off from writing this blog. I hope you don’t mind. The test was as hard as anything else I’ve done – but I think I did well. We’ll will find out if I passed sometime in September.

It has been great having some time to spend with my family and just think about other things – basically it’s great to have my life back.

Halfway through the year, the S&P 500 index is up 19.29% for 2019 after losing 6.24% in 2018. For June, the market recovered most of what it was down (-6.58%) in May and has reached new all-time highs as of July 3. The second quarter of 2019 was not terribly strong, but the index managed to finish the quarter with a gain of 2.39% despite being down as much as 5.93% from May 3 to June 3. I guess we can call that resilient?

Today we are (and have been) operating within the most headline driven market I have encountered in my career. It can all change so quickly, and we are paying attention to things that never used to matter – like twitter feeds from the White House. There are so many headlines coming out of Washington every day that many of our clients have already forgotten what 2018 was like. Here is a chart of the S&P 500 for last year – for a refresher.

Click to enlarge

While I continue to think that we are a long way from a substantial and “good-for-America(ns)” trade deal with China, the market seems very optimistic after the comments following the G20 meeting at the end of June in Osaka, Japan in which President Trump and President Xi met and agreed to re-start the stalled trade discussions between the two countries. We take our cues from price action and the price action has suggested a move higher – against any personal opinions I may have about the strength of the US and global economies.

Which leads me to the next point – the Federal Reserve is being played like a fiddle by the president. It is something to see. I have never been one to believe that the Federal Reserve is in any way truly independent of influence from government officials but it is interesting to see the pressure on full public display. At the end of the day I think the folks at the Fed are as human as anyone else (although you may not be able to tell from their speaking engagements) and they will look for ways to appear to maintain independence while seeking to deliver on the requests of the folks who put them in their offices.

If the FED is going to come to the rescue of any market correction of 10% or more, then we certainly may have much, much higher to go before the next bear market arrives.

But this just means the economy isn’t so good. The idea that we are all living in the greatest economic period in history because the stock market is at all-time-highs is nonsense. Income inequality continues to worsen and has led to a number of ideas including Modern Monetary Theory (MMT) that would have us believe that there are no consequences to printing money because of the US Dollar’s position as the world’s reserve currency. Well, even if that were based on sound economics (it’s not) have you ever heard the saying “just because you can, doesn’t mean you should”?

Think about who that hurts the most – our savers. Who are our savers? Our elders – many of whom have hardly enough to get by with their social security checks let alone if they are struggling with a medical situation or require long-term care. So, the answer is to reduce what these people can earn on their savings and incentivize them to take risk with what little money they have been able to scratch together? No. What happens is they earn even less and fall further behind. Because they have lost it all before and can’t afford to do that again. Meanwhile, they earn nothing over 10 years loaning to their government after inflation:

2% 10-year yield - 2% target inflation = 0% real yield.

And it’s not just the elderly. The average American hasn’t gotten any wealthier in over 4 decades. If you use ounces of gold instead of FED CPI to measure, per-family income actually declined since 1971. And that is with almost every household having 2 incomes these days.

The new head of the European Central Bank (ECB) and former/current leader of the International Monetary Fund (IMF), Christine LaGarde recently said this (no kidding):

“Subzero interest rates in Europe and Japan are ‘net positives’ for the global economy.”

This is an astounding comment. In the article in the Wall Street Journal, she goes on to say that the policies don’t come without side-effects, but the comment is just absurd – and the WSJ taking it and making the headline what they did is also sort of a sign of the times.

Negative interest rates are not a “net-benefit” to the global economy, rather negative interest rates are a travesty of the global economy. The only folks who benefit are the risk-takers who borrow money cheaply (or even get paid to do it) to speculate on ideas, many of which will never pan out in the long run. And who loses? The savers. Our parents and grandparents pay for this speculation – and later, so too will our children. Negative interest rates are a symptom of a very bad global economy, not a benefit to the economy. It’d be like calling a cast a benefit of a broken leg. It makes absolutely no sense. And these are the people calling the shots...

Negative (real) rates and  MMT are perversions of capitalism and (I think) they are indicative of a terrifying trend which I see occurring right before my eyes. Capitalist democracies are losing their economic dominance over the world. I probably could not have articulated that point so concisely before reading this article which I encourage your consider.

There are plenty of reasons to be optimistic about the market, like a resolution to the trade war or a lowering of interest rates. But there are plenty of underlying reasons to think that after a 20% run in 6 months to start the year, the next 6 months might not be quite so good.

One example of a short-term concern for the markets is the spread between smart and dumb-money confidence as provided by

Click to enlarge

With that, I will let you get back to your busy day.

Thanks for reading.


Shane Fleury

Chief Investment Officer


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