Medication
Oops, they did it again?
The Federal Reserve Chairperson Janet Yellen deferred an interest rate increase . . . that was no big surprise. Obviously, pre-election moves by the Fed might very well be considered political. Notwithstanding the above, the economy is hardly robust and might be struggling for the foreseeable future. Are we living in a manipulated economy?
One might think so as public spending, deficit spending that is, is crowding out the private sector. Public sector debt issued so far this year represents 50% of total U.S. new issuance, the highest proportion since 2011. A growing share of our economy is controlled and heavily regulated by Uncle Sam. Businesses, increasingly wary of government policy or lack thereof, are not making capital investment to keep pace . . . stock buybacks and mergers are becoming more important to future earnings than investments.
Troubling, of course, but a new acronym T.I.N.A. has taken hold regarding the stock market because low interest rates are forcing many retirees into equities as opposed to fixed income. T.I.N.A. stands for: There Is No Alternative!
Obviously, that is not true . . . it is a timeless rule that when people think that this time is different, they are ultimately proven wrong – very wrong. As of this writing, the ten-year treasury note is 1.55%. That is way below the 2.29% that it was on January 1 of this year.
The stock market rally is starting to show signs of tiring as we have had 6 consecutive quarters of down earnings for the S&P. The medication, if you will, for the stock market has, and will continue to be, low interest rates. The stocks of the S&P 500 have a cumulative yield of 2.14 – a yield which is approximately 38% higher than the ten-year treasury.
Deutsche Bank, the largest bank in Germany (with over 100,000 employees worldwide) is having major financial problems related to its past dealings. These headaches are causing ripples through the international financial markets. While closer to home, Wells Fargo is dealing with its own prior bad acts. We reduced our exposure to the financial sector earlier in the year, and we will keep a close eye on this situation because it has the potential to snowball.
The central banks of Japan, U.S. and Europe are closely coordinating their moves. Negative interest rates on government obligations in Japan and Germany are confiscating capital from savers. This is tragic.
Be mindful of your capital allocation. We, as guardians of your wealth, attempt to keep you on solid footing. Sometimes this may mean sitting on cash while others are diving into a pool that is very shallow.
The Presidential election is upon us, and this one brings to mind a famous quote by Adlai Stevenson who said, “I’m not an old experienced hand at politics. But I am now seasoned enough to have learned that the hardest thing about any political campaign is how to win without proving that you are unworthy of winning!!!”
G-d bless America.
Votingly yours,
Seymour W. Zises
