Let's try not to think about an elephant. Let's imagine a number, a concept, anything but try to avoid thinking of an elephant. We can do it. There are infinite numbers or, as Giordano Bruno wrote, infinite worlds to reflect on and it is hard to see why right now, with all the things we have to do, we really have to start thinking about an elephant. Just concentrate, use a little willpower, help yourself with meditation techniques and the elephant will not appear in our thoughts.
Easy, right? No not at all. Virtually impossible. We might as well give in to temptation, think freely of all the elephants that come to mind and see what happens. Sooner or later, if we haven't decided in the meantime to make elephants our reason for living, something else will come to mind.
The idea of the end of big stock rally (and bonds) of these years is so painful for many investors that they prefer to try not to think about it. However, the more you try to drive the idea out the door, the more it comes back through the window. And then let's try to consider it.
It is known that humans, when suddenly faced with something very unpleasant, first try to deny the possibility of it but then, when the reality principle takes over, they try to negotiate. That's what Bergman's noble knight of the Seventh Seal does when he tries to buy time by convincing Death to play chess with him.
For a big stock rally, dealing with the End means drastically lowering one's expectations and trading a long period of flat bag (or, as they say in jargon, lateral). Much less fun, of course, but not to be despised for stock pickers, long/short traders and dividend hunters. In short, something in which earning is more difficult, but not impossible.
However, it also happens that economists and strategists, with all their apparatus of models, equations and noble aspirations to scientificity, are subject, like everyone else, to strange superstitions. If for 86 years no economist or strategist or manager has ventured to predict a flat stock market in the long term, it is due to the ominous precedent of irving fisher.
Fisher (1867-1947) was an economist extraordinarily prolific with brilliant and creative ideas. Starting from a solid quantitative background and a neoclassical setting, he became a forerunner of econometrics and monetarism, but he also elaborated concepts, such as debt deflation, from which radical post-Keynesians such as Hyman Minsky (1919-1996) departed. to develop a theory on the intrinsic instability of the economy and financial markets.
Fisher's greatness has always been recognized by insiders. Schumpeter, Friedman and Tobin, although starting from very different approaches, have defined him as the greatest American economist of all time. In the general public, however, damnatio memoriae fell on Fischer for his unfortunate prediction of a stable stock market at a long-term high, released just days before the great crash of 1929.
These famous last words cost Fisher much of his personal fortune in addition to his reputation. Since then, we said, no one has the courage to predict long-term side effects. Which, on the other hand, have practically never existed in nature, not even in relatively stable historical periods with little debt.
The lesson of Hyman Minsky, after all, consisted precisely in ascertaining that a stable economy does not generate a stable stock market but a rising stock market (or real estate market) until the moment when the bubble, bursting, feeds back on the economy and sends it into recession. It is curious, incidentally, how Minsky started from Fisher's lesson to draw completely opposite conclusions on long-term stability.
If laterality is therefore an exception (such was the case on Wall Street between December and mid-August), then we need to decide if we can go back up or if we should prepare to go down even further. Our understanding is that we will go up and down with ever larger swings, with the possibility of modest new highs and that of period lows asymmetrically lower than the recent lows, but not catastrophic, until the next recession.
This, in other words, is not the End, but rather the beginning of an end that can be quite long. At 15 times 2016 earnings, the SP 500 isn't stratospherically high, especially when you consider that the average multiple, from 1960 to today, has been 16 times.
In our opinion, however, the market has plateaued because earnings will struggle to grow and because any hike will be blocked by the Fed, which will take advantage of the favorable moments on the stock market to raise rates. In the end, that's always the problem. Fiscal policy is paralyzed, monetary policy is less expansive, the credit tap is no longer usable on a large scale anywhere in the world and in America, Germany and Japan we are close to full use of production factors.
This means, at best, low growth as far as the eye can see and, consequently, the continued risk, in the event of an accident, of a recession. In this context, it is rational for the risk premium to increase and for equity multiples to be brought back to more defensible levels.
That said, all is not lost. Europe has lower valuations than America and can legitimately expect an even better 2016 than 2015. The ECB has already hinted that, if necessary, it will extend and make the Quantitative Easing policy more aggressive. Japan, for its part, will maintain an ultra-expansionary monetary policy while China, if it has the courage to adopt the right policies, will be able to settle on a decent and defensible level of growth.
The real miracle, the white knight who runs to the rescue of the economic cycle and the stock bull market, the antioxidant which prolongs their life, would be the productivity growth, today sadly at zero.
Trying to wear pink glasses we could say that one of the two. Or are we really in full employment and then investments in productivity are about to restart. Or, as the doves say, there are still many hidden unemployed or underemployed people, so we are not at full employment and rates can still remain low for a long time. We'll see. For the moment we remain invested in equities with the idea that 2015 on the stock market can end 5 percent above current levels.
