Spring Is In The Air 3/16/18

The big events last week have been able to power us higher – again. We saw a thawing of tensions with NK, a crack in the exemptions on our steel and aluminium tariffs and a great jobs number on Friday. They combined to give us that feel good feeling that has us up again on a Monday morning as I write this piece.

It is interesting to listen to the chatter on both sides of the aisle as to whether Russia had a hand in the outcome of our elections. I think that it is fair to say that Russia has been trying to influence our elections for a while now and I guess I would be more surprised to hear that they had stopped. For the initiated, the Russians reportedly have struck an ex double agent in London with some sort of nerve gas that has rendered himself and his daughter both in comas. The threat is real and must not be taken lightly and to the extent they had a hand in our US elections will be debated forever. Mostly because it is hard to quantify. And the reason that I bring this up is that for all the time and effort that has been spent on the Russian influence issue, we have another huge influence that has affected us all – directly. That influence has been the Federal Reserve and its manipulation of interest rates – Quantitative Easing. Now QE has been over for a while now, but the scars remain. It has distorted investor behavior and not in a good way. QE in both Europe and Asia is still distorting things and the longer it goes on the more normal it seems. Let’s not make the mistake of falling asleep at the wheel, this is abnormal behavior – central banks buying bonds to artificially keep interest rates low. Just this last week the Bank of Japan bought bonds at a negative interest rate. Let that sink in for a second. Now as those that are thinking about how much influence the Russians had on the US elections about how much negative interest rates around the world might have on their pensions. It seems to me to be a ‘let’s worry about something that we can actually see happening’ issue. But hey, I digress.

After the beginning of the year and the beginning of the wobble, things have started to quiet down. It is hard to get out from underneath the nearly $1 trio annual bond purchases from the ECB and BOJ in keeping interest rates muted around the world. A great jobs number here in the US has done little to move things in the short term. Equities are just happy not going down as there is a distinct lack of interest on either side of the fence. What will ultimately get investors to move? That is the billion-dollar question. There are so many things out there that threaten to be the next black swan but that is the very definition of black swan – something we didn’t ever really see happening. So, we sit and wonder.

I still feel strongly about this move to normalization. I guess I do take a little pride in the ability of the US economy to both stop the QE program and then go on to raise interest rates. This has all been done in an environment of other big central banks still waffling on about rhetoric. All the while this market takes a break and stands pat, it gives investors the chance to recalibrate. I have talked a lot about this in the past, but it is true. We still have a lot of investors that have never really seen interest rates take off and constituently move higher. That is why we saw the nerves and that is what I mean when I talk about velocity. We all want to normalize. We want to go back to the way things ‘used to be’. But we have two huge problems that are in the way and that is the ECB and the BOJ. So, we are in purgatory in the in-between bit. The bit that will be the velocity of the change in interest rates. So far, as I have been talking about it, the velocity has slowed down, and we have seen some decent economic figures come in and help support asset prices at their current levels. Don’t get me wrong, there are still some silly numbers out there. With a broad brush I can think of two, Netflix and Amazon. I love both of those disruptive companies and apparently everyone else does as well because last I checked, Netflix was up close to 60% and Amazon over 30% and those are YEAR TO DATE numbers. I mean really? C’mon. But, alas, we let the market learn these things on its own while I will sit back and watch this re-calibration – including those two stocks. Those are the growing pains that I see on the way to something more normal. We still have the BOJ – as I said above – buying bonds at a negative rate and the ECB purchasing with both hands. These will both help to support and distort valuations until the piper is paid. But what I do know is that the US is miles ahead when it comes to that state of normalization.

Lastly, this is going to be a year of higher volatility. Things are creaking and groaning like they haven’t done in a long time and this is good. I look at breaking this ‘bad is good and good is bad’ mould of investing as soon as possible. The only problem I see is that it is going to take a lot longer than I would have liked to have seen. And with that, as I write, there is more bad weather forecast on the Northeast coast and Europe just survived the ‘Beast from the East’. It is March and we have the calendar on our side. The days are getting longer, and the feeling of spring is in the air. Maybe the markets will also put a little spring in our step and give us something to look forward to.

About Scott Shellady

Mr. Shellady has a broad and strong range of technical and trade experience in both commodities and financial products in the three main geographies of North America, Europe and Asia.