Just a few observations:
I was waiting for the numbers this morning. As one can see, the US consumer seems to be doing just fine. They are actually buying real goods and services, taking advantage of increased income, transportation costs are down, and there is a generally okay outlook.
I think we are seeing some major macro bets being made and pressed, which is pushing up volatility. The big macro bet seems to be that we are heading toward a global recession. I just don’t see it at this stage. We are clearly in a global industrial recession already with oversupply relative to demand and an inability or unwillingness of countries to spend on infrastructure as an offset to the lack of corporate expansion. But this is in a global economy that is more and more services oriented of which the US is a poster child and China is on an accelerating path in that direction. China may also be one of the few countries that has a major infrastructure initiative around the Silk Road.
In addition, as I have said before, given the low prices of oil and other commodities, I believe we are seeing liquidations of sovereign wealth portfolios from those countries dependent on revenues from these commodities, in order to meet fiscal budgets. Oil prices at these levels are not a company problem away from the oil patch, but they are a country problem, which will add to volatility globally. The volatility is actually opening up some very interesting investment opportunities for those investment managers who actually look at individual companies on both the credit side and the equity side. When we get into these slow growth, but volatile periods, we begin seeing real dispersion. Look at last year: 250 of the S&P 500 stocks up on average 18% and 254 down on average 17%. I suspect we will see the same this year and for many years to come as we work our way out of the overcapacity on the industrial side and the heavy debt burden that has been accrued during this low interest rate environment. WE have started off this year with less dispersion. Anytime you see the market move up or down in double digits you do get less dispersion, although it doesn’t totally disappear. There are close to 100 stocks up this year—even 25% of the energy stocks. It’s a different environment and we are somewhat captive to a very heavy bet being made that the world is collapsing. I don’t think that is the case.
This is a very thin market and therefore, should show greater volatility than broader markets. The Chinese have tried to manage the market similar to the Limit Up/Limit Down rules that we have on our markets, but theirs is much smaller and can expect to see high volatility given the lack of transparency. I think the Chinese stock market is a side show; what is actually going on in their economy is not. China is on a path to slower growth. The mechanics are complex, but the objective is achieving a high enough level of employment against a decline in the savings rate, which by itself, should be a stimulant for growth. The rest of the world, which has been dependent on this high rate of growth, will have to adjust. That is what we are going through now globally. This is complex and my level of knowledge (frankly, most people’s level of knowledge) is very superficial. It is an important driver for the global economy, but folks cannot count on it being the super driver and it is not the only one.
A Side Comment
I don’t quite get Janet Yellen’s remarks regarding the “surprise” low oil prices and how low negative rates have gotten in Europe. I also do not understand her giving any weight to the possibility of the US moving to negative rates. This is not good for the markets. We are in a slow growth environment that could go on for a long time, and without much fiscal help, the Fed has managed to get the employment numbers back up to a decent level. We need to get into the spring to really see how the numbers look given the bizarre seasonal adjustments that take place in December and January. I am looking forward to the spring. It might take a little longer for us to understand exactly where we are, but I don’t see us in a bad spot. I think the second half of the year could be very different from the first half if we can get the macro bets under control. We just have to Pay Attention.