No Parking

Another week in this surreal time in the investing world, another serving of the surreal.

Despite $17 trillion of negative yielding bonds in the world, the ECB cuts rates again and the President of the United States, self-proclaimed ‘King of Debt’, wants to know why his “boneheads,” more commonly referred to as the Federal Reserve, are allowing America to pay interest on borrowings rather than get paid.

While not to parse all his chosen prose, he did claim there was no inflation. Yet this morning core CPI clocked in at a 2.4%, also known as decade highs and particularly interesting because this comes at a time when many have become yield curve experts and are on recession watch.

Potus has an election to win, and a trade war to figure out. Hence the talk of possible further tax cuts and of course ongoing pressure on the Fed to drop rates.

Remember Greenspan’s Fed, that said bubbles could only be identified when they burst? And Bernanke’s Fed that didn’t see the housing and subprime crisis coming only to write a book about Courage after it did? And Yellen passing the torch to Powell suggesting there would be no new financial crisis in our lifetime?

Well, this cumulative body of work has done it. After almost a decade of wealth-affect and income disparity driving asset lifting policies they’ve taken us to the No Parking zone.

What do I mean by that? Well investment advice tells us to divesify. And that asset mix determines most of return. And to stay invested for the long term. It’s a marathon not a race, right? No one can really consistently time the market anyway. So fiddle with the mix if you must, but park it and stay invested. A decade of Fed market meddling has created a Passive world that has taken this all to heart.

So, here’s a current two asset world of US 10 yr Treasuries and the US stock market.

Given today’s core CPI print, we sit an modern era lows in real 10 year interest rates. Not very compelling. And remember, the Fed is working diligently to get and keep your cost of living up.

And yet despite the recession watch and trade wars, and pleads for further rate cuts, the US stock market sits at all time highs. If you are thinking of parking for 5 or 10 years, both Shiller’s Cyclically Adjusted PE ratio and stock market capitalization relative to GDP suggest now isn’t historically the most promising of metrics to move forward with.

While elevated valuations can persist and the Fed is clearly on a mission for that to remain so, typically this would all suggest very low equity returns over 5 and 10 years forward.

Pension funds, mutual funds, the insurance industry…they are all-in. They’ve no alternative. You and I may be more nimble, and can easier play with our mix, but we’ve essentially few alternatives either.

Remember, when you park in the no parking zone, you get towed.

Decades of the Fed fighting debt with more debt, somehow blind to building bubble upon bubble. Boneheads indeed, just not at all for the reasons Potus intended. (While bonehead would normally be construed as unprofessional and disrespectful, it is now presidential, in more ways than one.)