Growing Disconnection
Pfäffikon SZ, Switzerland – After almost ten years of central bankers modifying the economy, we can ask what was the effect? The conclusion is that the effect and the trust central bankers enjoy is waning. The political developments in the USA, UK, Greece and the Netherlands can not be seen separated from the current monetary policy. Citizens are dissatisfied and restless.
Buying Time
Central bankers have bought time in the hope that the economy would continue to recover. The fact is that for years, the economic growth is stable but insufficient. Slowly we enter a period where time is running out, and the economy is coming under pressure again. When we look at the recent price rebound in stocks, there seems nothing wrong. In January and February of this year, investors were startled, which was a first warning signal. The market needs an accident to realize the situation investors are facing.
Dissatisfaction
The key question remains how far should worsen some developments to awaken investors. Receiving money at closing a mortgage is simply not a healthy situation. Many citizens have inflated their obligations, without realizing the downside risks. When we look at the political landscape, I observe a lot of dissatisfaction. Pension and purchasing power have been under pressure for years now, and in particular, the more affluent citizens took advantage of the broad monetary policy of central bankers. The disconnection between a large group of citizens and the incumbent establishment comes as no surprise.
Debts
Remarkably, I think, is the growing disconnection between in particular the important S&P 500 and the real economy. Shares have simply become more expensive, a process that we see more often at the end of a bull market. Coca-Cola, for example, is trading 27 times earnings, while the S&P 500 notes more than 24 times “LTM Earnings” and this is, historically, expensive. Especially equity investors take an advance on the future while bond investors are reluctant; who gets it right? The fact is that several factors show the same patterns as in 2007. This does not mean that 2007-2008 will repeat itself, but still. The China of 2016 is very similar to the U.S. in 2008; a devaluation of the yuan is not inconceivable and could have far-reaching consequences. In addition, I would like to point to the growing number of defaults due to the high indebtedness of companies in the U.S. The downgrades of U.S. companies by Moody’s have doubled in one year, which has not been the case since the summer of 2007.
In different areas, the disconnection is being put in place. The popular comparison of Warren Buffett is the relationship between market capitalization and the GDP of the U.S.; the S&P 500 would be appreciated approximately 72% too high at this moment. This is perhaps somewhat short-sighted because the S&P 500 covers more than just the U.S. The risks have increased for investors, even though many other technical signals tell you that nothing is going on. The growing disconnection has undoubtedly become a focus of attention.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
