September 2019 Commentary
August was a month of anxiety across the capital markets as it impacted valuations in predictable ways. Equities were far more unstable and ended materially down for the month. Safe haven and flight to quality investments benefited as a result. Ultimately, the health of the global economy is ailing, and the headwinds are increasing. These are forces we have identified over the past several months, so we are not surprised by these developments. The tactical and risk management opportunities will be many in the coming months. With the recent drop in US Treasuries throughout August our duration targets have been reduced and our equity exposures altered to become more defensive.
Brief Market Recap for August
August proved to be a volatile month for domestic equities ultimately ending the month meaningfully down. Popular equity indices experienced multiple troughs and peaks throughout August reflecting a level of anxiety over the global economic outlook and the lack of potential policy prescriptions available to address it. Not surprisingly, the Treasury curve experienced a general downward shift particularly the intermediate to long end of the curve thus rewarding our strategy recommendations from last month. Precious metals also reflected the same anxiety and ended the month up. Foreign equities experienced a similar path as domestic equities ending the month generally down. Crude oil was slightly up for the month.
Geopolitical Instability, Monetary Madness, The “New Normal” and the Wizard of Oz
Policy by way of social media, sovereign interest rates hovering below zero, trade wars, and the end of monetary discipline may be the new normal. We don’t mean to repeat ourselves, but monetary authorities seem to have decoupled themselves from the realities of financial economics. They seem more interested in serving as market psychologists than offering truly simulative economic solutions. What’s particularly dumbfounding is that the capital markets don’t seem to properly value what we believe is taking place. As long as the Fed, ECB, BOJ, and other monetary authorities (even the People’s Bank of China is now participating) simply state that they will address any economic weakness the markets react positively. It seems to us that it is only a matter of time until the markets experience that there really is no Wizard of Oz. August seemed to indicate that perhaps this moment is approaching.
We marvel at the economic rationale behind negative interest rates to the average investor. Rational investors would be financially better off holding onto cash than to invest in most short to intermediate government bonds in several countries. It is no mystery why so much money is flowing into equities. It’s the only game in town where investors aren’t certain to lose money. Moreover, the cost of credit for consumers has held at historical lows for several years now. How then can interest rate based monetary policy stimulate or trigger economic growth by manipulating rates lower? We would argue they can’t. It is time for the capital markets to at least consider that the limits of monetary stimulus may have reached its asymptote.
Hong Kong continues to descend into a series of increasingly violent demonstrations tempting the comparison to the possibility of another Tiananmen Square. Italy’s political instability continues to approach farcical proportions. History does indeed repeat in Italy. Germany is on the onset of recession, if not already there, and seems to by unwilling to address it with anything other than nonsensical Keynesian remedies. Brexit still haunts the UK as its political leaders seem unwilling to implement the will of the people. None of the alternatives there are positive for their economy in the short term. The Middle East continues to be a source of violence and geopolitical instability – in other words the same as it has been for millennium.
As we enter the fall and the dog days of summer are behind us, we face an extremely interesting set of circumstances surrounding the capital markets. Offering disciplined risk management that objectively balances the risk and rewards to different investment exposures will be essential in the months and quarters ahead. Opportunities will abound and we are excited about the subsequent investment implications as we navigate the capital markets going forward. We believe that the end of the dart board trending market approach to portfolio management is quickly approaching.
 The New Normal has reached pop culture status to mean just about anything to anyone. Here, it refers primarily to the historically unprecedented low interest rates due to unconventional monetary policy.
 We are aware of the technical reasons that have been put forth for negative rates as it pertains to institutional market participants.