Stocks the Battle of Two Ideas

The territory, the grand battle field, is now clearly defined and coming into view.

There are a myriad of factors at work. The matrix has never been so complex or more multi-dimensional than it is right now.

The extent of geo-political tensions is unprecedented since the end of WW2, and the sophistication of financial markets is beyond the ability of any individual to fully grasp. The data and news flow is incessant and non-trending. It is a bombardment of the kind investors have never had to deal with before. All of this is making it more difficult than ever, for traders and investors to discern trends and make clear decisions.

It is as if the age of clear decision making is no more. The new pursuit, is merely of the least foggy of decisions.

How to anchor some form of determination then? Out of what has been an historically extreme volatility period, which has seen stocks lower over the past year, and then seemingly randomly sideways for many months now. This sideways multi-month consolidation period containing endless price swings that would once have represented monthly and even yearly ranges.

Markets do seem to have been hit with just about every uncertainty that could have been thrown at them, and are still standing. This alone is reason for many investors to continue or re-commence their investment process toward some form of normality.

Added to this, we have the not so long ago near zero interest rate policies, which, with perspective are actually still at historically stimulatory levels. Though Quantitative Easing is being wound down, it also remains highly stimulatory.

Major central banks have been raising rates, but from extreme aberrantly low levels. Current rate settings only appear to be high to the young and in-experienced. Nothing wrong with being young and in-experienced, happy to swap places, but it is important for all to gain the historical perspective in order to accurately understand where we are at right now.

There have been and remain a multitude of bearish factors. From major banking collapses to re-accelerating inflation and ever higher Federal Reserve and other central bank interest rates, to actual war and growing geo-political tensions almost everywhere. Not to mention a US Manufacturing and Housing recession already underway, and crisis levels of consumer confidence. Wildfire government deficits rage everywhere. They indeed represent the un-controlled burning of future wealth.

It is an awful lot to take in, and much of it is a kind of a rolling train wreck in the background, while people try to get on with their lives and businesses.

Against all of these existing heavy weights and uncertainties, there is the hope for economies to simply recover in their own right. This great hope, is however, largely watered and fertilised by the simple printing of money and the funding of rescue program after rescue program.

For instance, the US fiscal deficit ballooned dramatically in response to the Covid crisis. Everyone accepted that these were extreme circumstances. The problem no one wants to talk about however, is that the US and Europe have not returned to previous more normal expenditure patterns. It is as if the political elite have ceased upon the opportunity to keep spending at obscene levels, and hence the great pressure for the US and other governments to continue borrowing and printing money.

In other words, the idea of a ‘bubble’, where self-perpetuating greed built on ever higher borrowing, just went up several quantum levels historically, and remains bizarrely elevated.

When does a debt bubble burst? Nobody knows is the correct answer. In fact, an amoral approach of forever borrowing and printing, and passing the burden to our children and even Great Grand-children, could go on almost indefinitely.

This is why I would suggest the battle of the two ideas at the moment, is between the harsh reality that there is significant economic disruption that is un-resolved, against the on-going indebtedness and printing of money. The latter seemingly has the ability to inflate asset valuations regardless of what else is going on.

The next few weeks, to perhaps two months, is likely to see an intensification of the boundaries of the current broad trading range in the US stock market.

The eventual break of such a range has never had more profound implications. For it will signal the winner of the battle between government largesse and the printing of money, and the rather more harsh reality of the complex and reduced global economic activity we now find ourselves in the midst of.

The suggested investor and portfolio strategy here, remains one of caution and defence.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

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