In our research, we’ve been mentioning that we believe the most powerful force in the markets right now are the world’s Central Banks. And, in fact, we think the economic and financial maneuvers they are making are taking us further and further away from traditional economic principles. These “new” economic concepts are designed to provide more flexibility and options for Central Bankers in their attempt to grow the global economy.
These new economic concepts can cause traditionally trained economists to have serious issues with how much debt the global economy has accumulated. However, there are some interesting caveats and, dare I say, tricks embedded in their strategies.
Ask yourself this; our Central Bank (The Federal Reserve) has been accumulating assets on its balance sheet. What happens when the U.S. Treasury bonds they own mature?
Well, one scenario is that the bonds mature and the Treasury makes good on their obligation to pay the principal to the Fed in full. But if the Fed elects not to roll those funds into more bonds, they, by mandate, must pay that money back to the Treasury. In this case, the bonds/debt disappear and the Treasury is paid back in full.
In our last quarterly newsletter put out in October, we mentioned that the biggest risk to the United States financial system was the dollar losing its status as the world’s reserve currency.
Yesterday billionaire investor Sam Zell seemed to echo our thoughts almost verbatim and was widely quoted by many media outlets.
As we’ve mentioned in the last newsletter, we thought International Markets would outperform U.S. Markets if Biden were to win the presidency. As we type this now, since the election, the S&P 500 is up 6.5% while International Markets (as measured by IEFA) are up 11.8% and emerging markets (as measured by IEMG) are up 21.5%.
One month is not necessarily a trend, but something to keep an eye on.
As we’ve been discussing all year, we thought the markets would rally after the election. After the election, the month of November saw the S&P 500 appreciate approximately 11%. This was one of the best months in stock market history.
However, two things to watch are 1) short interest in the market is at an all-time low and 2) November saw a record amount of cash flow into stocks.
Nevertheless, we think 2021 looks like a potentially great year for the market.
Election Update – November 16, 2020
In regards to the election, we still do not have complete clarity on who will be president. However, the markets have been quite strong. We believe this is because it appears the government will be split; with the house controlled by the democrats, and senate controlled by the republicans. Generally, with a split government there is not a lot of radical changes and the market likes this. As we’ve been discussing, we don’t think the president impacts the markets (regardless of who it is) as much as people think because we believe the central banks are the primary driver of the market.
A Noisy Market Approaching an Election – October 6, 2020
Over the last several years, the intensity of the news flow and information streams seem to have increased to an absurd level. There are constant updates of “Breaking News” and the media strives to tap into people’s emotions on the positive and negative side.
With that as a backdrop, we are less than a month away from our Presidential election. The mood of the market seems to be that if Biden wins, his tax hikes and policies will crush the markets. And conversely if Trump wins, the markets will rally.
Maybe that is true, but we believe that the most powerful force regarding the markets are the world’s central banks. And given their actions since 2008, including their actions this year, it appears they will do whatever it takes to support markets and asset prices.
Why? We believe that is because the global economy is a debt based economy. And inherent in that kind of an economic system, you need adequate collateral in order to function. Obviously, that collateral are the assets of the world. If those asset prices decline, there can be no more asset backed loans and that would put tremendous pressure on the global economy.
Given that, it is our mindset that the Fed, and all the other central banks in the world, will continue to support asset prices…at almost any cost. Therefore, we believe you need to own assets that can inflate in price…no matter who the President is.
Reflexivity is something we’ve been discussing for nearly 7 years. Stanley Druckenmiller is known to be one of the most highly skilled people in money management. There is an article that’s based off of Stanley Druckenmiller’s ideology attached that shows that we’re on the path toward reflexivity. For more insight on reflexivity, read our research report as well as the article!
Article Link: https://www.cnbc.com/2020/09/09/stanley-druckenmiller-says-were-in-a-raging-mania-and-the-next-3-to-5-years-will-be-challenging.html
Research Report: Path to Reflexivity
In the last few research reports, I have been discussing and alluding to the need for liquidity, and a non stop supply of money to keep the economy functioning. It seems to me that the entire world is moving toward embracing modern monetary theory and as time passes I think this economic theory could become mainstream.
The link below exhibits a good outline of what modern monetary theory is:
As time has passed, we’ve been getting more and more information on how the economy is performing since the virus has spread across the world. There is no question that the global economy has contracted significantly during this time period.
However, the absolute collapse of the markets has been buoyed by the world’s Central Bankers. Almost every asset and form of liquidity has been backstopped by the Fed and its global counterparts. These moves to shore up the functioning of the Capital Markets has had an incredible impact on the confidence of the markets.
This confidence has been inspired by the Fed’s seeming unwillingness to allow almost any asset class to depreciate in price. They’ve backstopped overnight money markets, municipal bonds, corporate bonds, international trade markets, to name a few of those asset classes. We’ve even had a former Fed Chair suggest they should buy stocks.
Add all that up and it seems pretty evident why asset prices across the globe have appreciated so much from the market’s bottom in late March.
It is likely that the elections will come into focus now, so we might see more downside volatility as election approaches. Nevertheless we feel the Central Bankers around the world will continue to support the markets, regardless of who is President.