InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
AUGUST 23 , 2017
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
We continue on the theme of Investing and the Markets in this issue of IntelDigest. Over the “Dog Days of Summer,” we have re-published a series of articles from the IntelDigest archive discussing investment theses for 2017, and covered the topic of Exchange Traded Funds (ETFs) in two new issues in August.
This issue will be shorter than usual, concentrating on the broad market climate for the rest of 2017 and into 2018. Over the next few weeks, we will analyze specific opportunities in the markets … in technology, biotech, interconnected systems, and commodities … explain the blockchain and cryptocurrencies … and discuss the market for autonomous vehicles.
Today, we’ll discuss both the short-term Market “Melt Up” on the positive side, and warn of troubles to come … probably in 2018 … because of endemic problems related to Debt.
Market “Melt Up”
As we discussed in the August 9 issue, there are well-known market strategists who expect the stock market to stay strong through the end of this year, attributable in part to a “melt-up in earnings.” We have experienced the second-longest Bull Market in history, but this Bull is still pretty healthy. Plus, interest rates remain at historically low levels. For these reasons, we wrote in our April 26 issue:
“As we expect 2018-19 to feature both a Credit Default Crisis and a cyclical Recession, we think that these last few months of the expansion bring us the best opportunity for significant investment gains for quite a while.”
So, with Stop Losses on our portfolio tightened up, we expect to ride the last few months of the Bull Market.
Reckoning and Recession
Our long-term thinking must acknowledge the endemic problems in the U.S. economy. The economy has been fueled by Debt for much of this century.
On the corporate side, American businesses have borrowed vast sums of money in recent years. Some of those funds have helped to grow companies; some have been used to buy back shares. Too many companies have used borrowed funds to pay dividends or enhance the “bottom line” without actually growing the business.
Individuals have also borrowed heavily during this period. American consumers now carry more than a $Trillion of credit card debt. Total household debt … including housing, auto loans, student loans … now exceeds the Debt that Americans were carrying when the Financial Crisis hit in 2008.
Fortunately, we are still in an era of ultra-low interest rates. Despite raises in the Fed Funds Rate over the last nine months, that rate still stands no higher than 1.25%. Any interest rate increases over the coming years will be slow and infrequent, because the economy and markets would incur significant damage if rates rise too fast.
The governors of the Federal Reserve know that the economy, the markets, and American borrowers … including Federal, state and local governments … need real interest rates to stay low. This accommodates business growth, and consumer spending, and the ability of governments to pay the interest on their Debt.
Although the Fed talks a big game about its mandate to keep inflation in check, the governors know that Inflation is the only means by which we can manage the current massive debt levels. If Inflation rises, the value of each U.S. dollar will go lower. Each dollar of debt becomes smaller in an inflationary environment, and that much easier to pay off.
A Reckoning is surely over the horizon. Whether the catalyst is an emerging-market recession or a monetary crisis or political chaos, eventually we will have to deal with massive Debt and unfunded liabilities.
But, in the meantime, this is how the system works. So, “make hay” while you can.