No Crash?

October has come and gone, and the market rally goes on and on. Numerous observers and pundits have warned of a crash or strong correction, given the length of the rally and the fundamentals of the economy, which have been noted in earlier Newsletters. The FANGs and Microsoft seem not to be influenced by any disturbing geo-political news. The Fed will probably announce another rate hike in December and possibly three more in 2018 in addition to QT at 10 billion a month.

So what if the bulls and risk-friendly investors are right and there will be no downturn or at worst a 3% correction? What sort of environment can investors expect if the Fed pursues its policy of slowly raising interest rates and trimming its balance?

This question has been tackled by some experts, and the news for investors is not encouraging. Future ROI will likely be not much higher. The nomination of Jerome Powell as Fed chairman will mean business as usual, and the Fed rate might go up to 2% by the end of 2018 if it gets that far. A recession will probably follow.

Future prospects for investors, assuming that there is no crash, are therefore not positive. The fundamentals remain the same, namely, high government debt with the US touting 105% of GDP, large government deficits, consumer debt unlikely to decrease, extremely pricy equities, a small number of market leaders with the FANGs and Microsoft accounting for the advances and very low volatility. With investors desperate for yields, capital markets will be inefficient, and the high debt, as researched by academics, will probably result in slower real growth.

The Japanese central bank (BoJ) has acquired 40% of its government`s debt and 71% of the ETFs available. If the SNB (Swiss National Bank) intervenes on the US markets and increases the 87 billion US dollars of stocks that it already holds and possibly other central banks buy the dips, then markets will no longer function properly and price discovery will be a thing of the past. Equity prices will not reflect reality as the central banks will continually support the market and inject new capital

The dilemma for investors will be to anticipate when the central banks withdraw their support from the markets, which may or may not happen. Progressive monetization of the stock and bond markets may avoid painful crashes and corrections, but coupled with excessive debt it is to be expected that growth will be slowed. Government statisticians will be tempted to camouflage inflation as growth. If value investment is no longer a criterion for selecting stocks, then one can assume that even slower growth and stagnation will be the result.

Walter Snyder

info@swissfinancialconsulting.ch

 

Disclaimer
This Newsletter has been prepared by WWS Swiss Financial Consulting SA (the company). Even though every effort has been taken to ensure the accuracy of the content of the Newsletter, there is absolutely no guarantee that the information contained in it is correct, up-to-date, accurate or otherwise applicable. It is not intended as a solicitation, invitation or recommendation for the purchase or sale of any investment fund or product or security or financial instrument or to participate in any particular trading strategy or banking product in any jurisdiction. It is not to be distributed in any country or area where it is legally prohibited. No liability whatsoever is or will be assumed by the company for any damage, loss or negative result of any sort ensuing from following views expressed and contained in the Newsletter. Investors themselves assume the full risk for any decisions that they take (caveat emptor). The Newsletter may not be reproduced or published by anyone anywhere in any way or form without the express written permission of the company.