First warning. Dallas Fed Chairman Fisher says rates should start rising as early as the first quarter of 2015 and that the stock is expensive in almost every way you want to measure it. Fisher is the leader of the Republicans in the FOMC, he is the most political and the most able among the opponents to the hegemonic line of the doves. His descent into the field marks the end of the truce within the FOMC.
The ceasefire had been in place since late 2013, when the tapering compromise (simultaneous with the fiscal compromise between Republicans and Democrats and between the legislature and the executive branch) had satisfied both the hawks (who wanted an end to Quantitative Easing) and the doves ( who wanted to manage its end as gradually as possible). Then followed, in the first months of this year, a period of low inflation and falling growth during which the Republicans of the FOMC had lined up and covered themselves. Now Fisher breaks the truce noisily on the very day Yellen testifies before Congress and a short distance from the inflation concerns expressed by Bullard (the group's technician).
Second caveat. Carl Icahn, the activist investor who never misses a move and spots companies large and small with an expert eye that have unexpressed value within them, says that finding opportunities is increasingly difficult and that it's time to be cautious on the stock market. Warren Buffett, for his part, prefers not to expose himself, but it is significant that for some time now he hasn't bought anything important. Buffett never sells anything and not buying is his way of being bearish.
Third caveat. The number of successful managers who say they are concerned about the Fed's policy and the continued rise in financial assets is growing. Among these Stanley Druckenmiller, former manager of Soros. Even more curious is the case of permabulls like James Paulsen who, perhaps for the first time in their lives, say they are disconcerted by the increase. Faced with this offensive, dangerous for now only at the level of opinion but capable of having real effects in the near future, the doves of the Fed are reacting by stalling, invoking the remaining weaknesses in the economy and showing attention to what is happening on the markets .
The Fomc who turns into an equity strategist and notes the overvaluation of social networks and certain areas of biotech and Yellen who claims to keep an eye on high-yield bonds with some apprehension are the doves' way of demonstrating that they have the situation in hand even in the details and that the bubbles are limited to limited sectors. There is something very defensive about this attitude. It is the same attitude that leads the doves to gather behind the macro-prudential banner, the last defense before the rate hike.
Macroprudential means, beyond the name, microsurgery. Raising rates to bring down Facebook's stock prices, say its standard-bearers, is like amputating a leg for an ingrown toenail. In his frontal attack, however, Fisher also demolishes macro-prudentialism. It's like the Maginot Line, he says, the massive defense line that was supposed to make France invulnerable and that the Germans easily bypassed via Belgium. In short, once a bubble is removed, if the basic conditions remain ultra-expansive, a new one immediately forms elsewhere.
So we're just one more strong jobs or inflation number away from when the debate heats up. The condition of invincibility in which the markets have been living for a couple of years, the one whereby if the economy does well the stock market goes up and if it goes badly it goes up all the same because the cavalry of the central banks arrives immediately, risks turning into its opposite . With such high prices, both weak growth (where is, we would all say, the acceleration you promised us?) and truly accelerating growth (what do we do, we ask ourselves, with bonds at these levels?) can become indefensible? .
In short, the current situation is not tenable for long unless inflation offers a respite. Even a single month with a slight slowdown (probably after the drop in crude oil in recent days) would be enough to make the doves say that a non-existent case has been assembled on a false alarm. In reality, the doves want more inflation, but they know that the dose must be increased without jerks if the patient is not to be frightened. In any case, the time for a correction is approaching. The good news is that, in the absence of structural failures that could only come from Europe or China and which, however, do not appear to be a risk in the short term, the correction should be superficial, especially if due to too much (and not too little) growth .
We talk about the rest of the bubble every day but, at least for equities, the scenario is not so serious. If we accept the evaluations of the end of 2013, the increases this year are so modest that a small correction would eliminate them without difficulty. Tokyo is 6 percent down, London is even, Frankfurt is 3 percent up, and only the SP 500 among major markets is up 7 percent. their two weeks of glory and they set new highs. After the parade, the winners retire, return to the shadows (go down) and leave the spotlight to the winner of the day. Now is the time for vintage technology, personal computers, but to make room for them other sectors, which are doing well, are going down, so as not to make the general index rise too much.
In this way, the pathology of the market remains contained overall and manifests itself in a more serious way only in the areas actually indicated by the Fed. Even the most optimistic, in hypothesizing possible further increases between now and the end of the year, do not go beyond 5 per hundred. After the stock market has tripled since 2009, it's not the icing on the 5 percent that will necessarily bring everything down. The condition is that Europe, which hasn't changed its model one iota, doesn't collapse again and that America doesn't confirm the suspicions about the lack of acceleration. Many managers have now resigned themselves to this very slow rise and to the perfect stability of bonds of all levels. They don't fully understand but they adjust. They have daily, monthly and quarterly results to show and cannot fall behind seeking refuge in cash for too long.
However, several of them have vowed to sell when the Fed changes policy. On that day, however, it could happen that a storm causes the interruption of telephone lines, that the cell phone battery is flat, that we are on a transoceanic flight, that we have come up with appendicitis or, simply, that the lines of the broker to switch the sales order are all filled because thousands of other managers, all over the world, must be having the same idea. We haven't seen a rate hike in seven years. The younger ones have never seen one in their working lives. We repeat to ourselves that they are a fact of life, that there is nothing to be afraid of and that stock markets can continue to rise just the same. However, those who seem to be most afraid of all are the central banks and this is not very reassuring. Selling part of the portfolio, under these conditions, and bringing it back to a neutral or moderately underweight level is equivalent to leaving the table with still some appetite. All dieticians recommend it.
