Apparently, The Party Is Not Over
Friends and subscribers keep asking me, “How much higher can the market go, especially since you are obviously a raging bear?”
Huh? I am?
This seems to be a popular misconception about me and my cautious statements, I am no raging bear. I am becoming more and more bearish as the market continues to break records but I am no raging bear.
A raging bear is one who believes that the market is going to turn to crap and will stay that way for a while. They look at impending recessions with glee and pretty much want the breadlines of the 30’s to return. That’s not me.
I am looking for a correction, that is true. I firmly believe that this particular market has rallied on artificial strengths and reallocated money is chasing new highs for lack of better choices.
Ok, so earnings are setting records and growth is to put it bluntly, phenomenal but that doesn’t mean that it can continue forever. We all know that it just can’t. Can it?No, it can’t and whoever tells you that this bull market will continue into 2030 and beyond is out of their mind.
We have been the recipients of the most accommodative Federal Reserve in history. Cash is flowing through the system at rates never before seen and that incredible cash flow has lifted many, but not all, boats. Lower interest rates have created balance sheets that look too perfect. Borrowing is at levels that would make your head spin and that alone will should keep the wheels of business spinning freely for a while to come.
Until rates start to rise. Then what happens? Debt doesn’t look that good. Lending becomes a little harder. Those spinning wheels slow down and earnings start to look more reflective of the actual economy and not some adrenaline shot of an economy that we have seen recently.
Obviously, the Fed is aware of what a tighter money supply will do to the economy and that is why they continue to believe that inflation is “transitory” and will work itself out shortly. They do not want to slow the robust earnings momentum and all that goodwill that rising stock markets afford Fed officials and that, my friends, will eventually be Jerome Powells undoing.
Being the head of the Federal Reserve has always been a bit of balancing act. You have two main mandates, keep inflation under control and keep employment at levels that can sustain an expanding economy. In 2019, they had it just right, 2021, not so much and their unwillingness to see that on the ground inflation is a serious threat is going to be a huge problem going forward.
For now, it seems people are dealing with these spikes in food and energy prices fairly well. They are absorbing those costs and maybe they save a little less each month but so far, so good. History will show however, that yes, the US consumer can absorb higher prices in the short term, however, longer term price hikes can have a devastating effect on the economy and on individual spending habits.
The key is to mitigate the higher prices with higher wages and accept the possibility of lower earnings in the process. Ok, thats a nice thought but will that really happen? Don’t think so. Companies answer to shareholders and shareholders don’t want to see earnings impacted by higher wages in the companies they own. They want more productivity, more technology to lessen wage hikes and continue that beautiful string of higher earnings. Good for the company, bad for employment.
There are all sorts of vicious cycles brewing here. Inflation spirals, Interest rate hikes, possible slowdown in hiring and potential increase in unemployment.
You know I like simple and unfortunately simple doesn’t work here. It’s extremely complex and it is getting even more complex when you think about the increased debt the country has taken on as well.
The complexity of it all makes it more and more difficult to find that so called “Tipping point” where the economy and its future growth can no longer support the pricing of equities. I still firmly believe we are getting closer and closer to that point and then watch out.
Pullbacks from lofty valuations tend to be cringeworthy while the soft pullbacks we have seen in the past tend to slowly eat away at prices until a fairer valuation is reached. I am tending towards that cringeworthy move that we experience every 10 years or so. Don’t say I didn’t tell you so.