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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 !!!

Tuesday, October 31, 2017

Longer Term -- Monetary Policy

It is gospel among central bankers that provision of excessive money growth over time will
eventually lead to price inflation which will tend to accelerate to levels that are unacceptable to
the execution of sound monetary policy. The period of major quantitative easing of policy in the
wake of the Great Depression and lasting until the end of WW2 swelled the monetary base hugely
and was never corrected. There were a number of factors that contributed the dramatic inflation
of the 1968 - 82 period and it can be argued that the swelling of the monetary base in years prior
probably contributed to it. Looking out longer term, today's central bankers are concerned that the
major QE programs of recent years, if not corrected in some form could provide the raw material
for a new round of major inflation at some point down the road. The thinking here is that even if
there is no immediate risk, inflation could well up again even if it is ten years out or longer.

The mammoth excess reserves that now  sit in the world's major banking systems are of major
long term concern to the central banks. Programs to reduce the size of central bank balance sheets
directly or hold them in check by paying competitive interest rates on these reserves are two
methods under review. Suffice it to say that plans can be expected to be developed which will
provide far less proportionate liquidity than investors and traders have become accustomed to
over most of the last decade. Since such tightening of policies have not been tried before on a
major scale, there are elements of sizable risk that may only become apparent as these programs
unfold.

The Fed currently plans to experiment with reducing the size of its balance sheet in the months
ahead in combination with a program of continuing to gradually increase the level of short term
interest rates as the cycle of the economic expansion cycle plays out.

With the economic depression of 2008, the world entered a pro-deflationary environment because
the preceding global economic expansion and the initial bounce of economies after the 2008-2009
downturn resulted in the development of large excess global productive capacity. The issue
of low operating rates is next on this exploration of the long term.

Sunday, October 22, 2017

The Long Term -- Overview

This post begins a series of notes on the long term outlook for the capital markets and the
economy. It is based on a half century of analytic work, hopefully informed conjecture, and
of course, sprinkles of pure imagination.

I think that by 2025 - 2027, the stock market and the global economy will fall into serious
trouble. I foresee a credit crunch that bring the stock market and an overheated economy into
steep downturns. I am looking toward China to have large scale economic and financial blow-
outs that take the US and the rest of the world down with it. I also am projecting an end to a
longer term bull market in US stocks to come to a an end which will see highs that are not
surpassed for a good several years. As well I am, projecting the broad financial environment
to become increasingly volatile by 2020 if not a little sooner.

This view presumes that inflationary pressures will gradually increase going forward and bring
about a long, long overdue capital expansion cycle which will add to the world's production
capacity and thus set off central bank tightening of the credit reins.

Through this all, my deepest concern would be for China where the odds favor up and coming
technocrats who will decide to bring President Xi's expanding political power and reach to an
end. This is projected to be an introspective and deeply unsettling period.

Although I do foresee the US bull market in stocks coming to an end until 2025, I suspect an
overvalued market to have a serious decline over 2019 - 2020 as the economy shifts away from
nominal inflation and super low interest rates up toward more "normal" levels.
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Note On The Near Term
The SPX is getting a touch pricey...Note as well that the intermediate term stochastic (bottom
panel) rarely goes through a calendar year without heading down toward the 20 level.
SPX Weekly