Asset prices
(especially stocks) clearly have risen because of Quantitative Easing (QE, the
Fed lowering ST interest rates and purchasing bonds). So, if
that is the case, why doesn’t it make sense for assets and stocks to decline as
the Fed, and soon other central banks, will reverse their stance and sell the
bonds previously purchased? As the Fed,
and other central banks, are planning on raising interest rates and tightening,
by reversing what they have been doing for the past 8 years, it is obvious to
us that assets and stocks will surely decline substantially. Clearly, the QE that has been taking place
for years will be reversed and it will probably be called Quantitative Tightening
(QT) (and it will be called QT for a reason—if they don’t tighten, inflation
could be next).
Our Fed is
slowly tightening, as the other large central banks, such as the Bank of Japan
(BOJ), the European Central Bank (ECB), Peoples Bank of China, (PBOC), are all moving
much more slowly than our Fed. It looks
like these central banks are listening to our Fed, and plan on following them. After all, this QE started for most of these
central banks about the same time as our Fed (because of most of them following
our Fed) and so far it has worked well to help all of the countries using it to
boost their stock markets and prevent recessions. It is the reversal of all of these
QEs that may wind up having “unintended consequences” since the QEs, and the
reversal of QEs have never been tried before. We expect the “unintended
consequences” to take place before, or during, the first quarter of 2018.
The other
potential problem we have trouble understanding is that most of our country
believes that President Trump will be successful in achieving his broad agenda
items such as Tax Reform, Repeal and Replace Obama Care, Infrastructure Spending,
and much more. We don’t believe that most
of these agenda items will be passed at all (just as the repeal and replace was
stopped cold). Many stock market mavens
are putting a number on the “Tax Cut”, or “Tax Reform” and incorporating the
increased earnings into their forward valuations to give stocks a lower P/E
multiple for next year. And even if the “Tax Cut or Reform” comes
close to being approved many in Congress will realize that the Budget Deficit
will skyrocket, and will clearly be a major factor in potentially leading to a
downgrade of our debt (just as what took place in the U.S. in 2012, and more
recently in China and Hong Kong). We
also expect that much of the tax cut will only benefit the very rich such as
with the “estate taxes”. And also, if interest rates increase as the Fed keeps tightening,
the dollar will also rise and restrict the US multinationals from selling goods
abroad.
As far as the
U.S. stock market, we are still concerned about the extreme valuations, and the
fact that we don’t seem to be able to grow fast enough to break through and achieve
our “old norm” of GDP 3 % or higher, and get to the goal of "escape velocity".