This approach is built on economic financial data available since the end of WW 2. But,
since 2008, the US economy has behaved more like the Great Depression era of the 1930s.
My traditional core fundamentals gave a buy signal around year's end 2008. There has been
no sell signal, and the fundamentals have not shielded us against the sharp, temporary price
breaks witnessed in each of 2010, 2011 and 2012.
The economic / financial system has been liquidity starved when it comes to private sector
credit demand and funding. Recognizing this, investor confidence has tended to plunge
periodically when the Fed has stood back from providing large infusions of monetary liquidity
needed to keep the economy afloat and to stave off the onset of deflation. Fed liquidity policy
has thus been the dominant variable.
As of 9/30/12, only two of my five central variables were positive -- short term interest
rates and the trend of "bottom of the barrel" BBB bond yields. On the negative side, yr/yr %
change measures of monetary liquidity have been decelerating and the trend of credit quality
spreads between investment grade bond classes has been deteriorating. In the latter case,
players have been chasing yield with short rates so low, but have strongly preferred quality.
(The junk bond market has been an exception as players have been plainly using this sector as
an equities substitute).
Net, net the economy has been through a period of monetary quantitative tightening since mid -
2011, save for the large but temporary liquidity swap program with foreign central banks that
came around the end of last year. In my view, this is a major reason for the deterioration of
economic recovery momentum that brought the US within "spitting distance" of a more serious
downturn this past summer.
The rally in the stock market since early Jun. has reflected growing investor and trader
confidence the Fed would initiate a new new QE program which it announced in mid-Sep. and
is about to implement now. It is a major open ended QE program that will boost monetary
liquidity measures back to positive readings, and one which should aid the economic recovery
and confidence. My core indicators should thus be turning more positive where it has most
counted in this cycle. In this case, investors got out ahead of the fundamentals thanks to
"coaching" from the Fed.
If official Washington flubs the 1/1/13 "fiscal cliff" -- scheduled tax increases and "mandated"
spending cuts, -- the US economy will be harmed. Since we could face a lame duck presidency
and congress after the Nov. 6, election, it is still too early to speculate on the workout of the
"cliff." Since I favor more fiscal stimulus rather than the introduction of any more fiscal drag or
austerity, I am in a small minority and am in no way enthused about what the turkeys in D.C.
may come up with. Do no harm boys.
More on fundamentals to come over the course of the week...
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!