“They are going to tax yourself out of existence).” Buy some Monets and hide them. This is how a famous economist would have expressed himself in a recent meeting with major American investors. This was reported by Fred Hickey, who was present at the October meeting. We don't tell you the economist's name, so we give you an incentive to go read The High-Tech Strategist, Hickey's monthly, always very stimulating.
Luckily Monet was a prolific painter and left us more than 500 works. He died rich, but the buyers of his paintings were or became even richer than he was. Le bassin aux nymphéas was sold in 2008 for $71 million.
As for hiding his works, let us suppose that the economist was referring to thieves. The taxman, in fact, often has an eye for art. The Impôt de Solidarité sur la Fortune, the French patrimonial law (the strictest in the world), applies to household furniture, cars, motorcycles and any horse (as well as houses and securities, of course), but exempts the works of art. Every year a few deputies present a bill to the National Assembly to eliminate this exception, which is punctually confirmed by socialists and Gaullists alike. France wants for itself a cultured and elegant bourgeoisie. And he knows that within a few generations the works owned by private individuals invariably end up in museums open to the public and visited by millions of foreign tourists.
That taxes will rise in developed countries is a quiet certainty (Germany and Sweden are the only possible exceptions). Just as it is certain that welfare will continue to decline and that inflation will rise again. The American public debt has reached 17 trillion (it was 10 in 2008) and has reached 107 percent of GDP. The implied health and social security deficit is $70 trillion. The market and the politicians pretend not to see it, but the elephant is already in the living room.
If this is the future (which could be much less gloomy if there is a little more economic growth) it is good to put hay on the farm for the winter by buying shares and strategically avoiding assets with limited and predefined earnings potential, bond.
Mind you, in a year's time bonds won't have to suffer particularly and will even be able to give some satisfaction here and there. Indeed, the spectacular rollback on tapering by the Fed has produced two important results. The first is that the next time (if and when it arrives) tapering will be offered in homeopathic doses. The second is that the market will be much more composed in its reaction.
However, the upturn in color of bonds these days should not be confused with that of equities. On the surface everything looks like a throwback to the post-2008 halcyon days when bonds and stocks rose hand in hand, but what we seem to see beneath the surface is that the bond rally will stall soon enough (spring at the latest) as the equity rally, albeit in the midst of growing volatility, could continue throughout the current decade and perhaps into the next.
Indeed, inflation is not particularly an enemy of stocks, but it is lethal for bonds. But where is this inflation, one wonders? Are we not at the minimum? Well, we are at the minimum. As David Rosenberg notes, inflation is within the reach of any central bank. If Zimbabwe succeeds, even the Fed will be able to bring it back. It's just a matter of overcoming certain shyness and finding the right amount of monetary incentive. Then you taste it and everything comes by itself. As long as there is an output gap, that is, as long as there are unused resources, inflation manifests itself only on assets, but from a certain point onwards it quickly affects everything else. We will therefore make it, and already in 2016 we will begin to see its reawakening.
In the end, in short, it always comes back to the share. Earnings are growing slowly, the economy is mediocre and valuations are becoming less and less attractive. Patience, there are no alternatives. There are areas of new technology where it feels like the year 2000, with IPOs priced at 200 times sales and eagerly contested even if they won't see a profit for years and years to come. It doesn't matter, just avoid them and go on the cyclics that are still cheap. The big American banks, which are doing very well operationally, are now being fined every day for staggering amounts by all the competing federal and state prosecutors. It doesn't matter, just go to the regional banks, which are left alone. And so on.
As Brian Belski recalls, there are 40 financial advisors in America who call their clients every day to announce the good news of the Great Shift from bonds to stocks. In this context, any upward resistance is in vain. Fred Hickey, who as a connoisseur of the technology sector is very good at predicting black where everyone sees blue, goes short on the stocks following the day before earnings and covers himself shortly after the open, knowing full well that this market forgets within hours of each disappointment and immediately begins to look forward to the next quarter with ardent hope.
We will gradually get used to finding normal valuations that seemed too high a few months ago. The companies will continue to embellish their accounts with purchases of treasury shares, we will not take this into account and will think of great managerial ability, good products and conquered new markets. We will adopt daring metrics, such as those used again in the new technology, where we have resumed thinking not about profits but about contacts, as if contacts could be distributed as a dividend. In short, we will make all the tics and tricks typical of the collective self-deception of bubbles our own.
If all goes well (and it cannot be ruled out a priori that everything could go well) the upside will be slow and fearful and the expansion of multiples will be accompanied by growth (even if only modest, but growth) in turnover, margins and final profits. If so, the corrections will be bearable and will perhaps constitute good opportunities for further purchases.
Coming to the short term, the next two weeks will see macro data relating to the period of the shutdown and therefore practically useless. The stock exchanges will close the year at probably higher levels than at present, but will not be able to grow linearly between now and December 31st. November will therefore be mainly dedicated to consolidation and rotation processes in preparation for the year-end hike. The first quarter will perhaps be less brilliant than usual due to the gradual reopening of the political conflict in Washington and the possibility, remote but not to be excluded, of a tapering start.
With the dollar weak and central banks launched towards monetary expansion, gold will recover, but will remain penalized by the taxes and restrictions that India has adopted for precious metals.
As for Europe, the dual track policy followed by the ECB and governments on banks is interesting. When one speaks to the Germans it is said that the stress test of the coming months will lead to the closure of some banks, when one speaks to the others it is emphasized that there will be plenty of time for an orderly recapitalization of the weakest subjects.
The stakes are high. At one extreme, one can hypothesize a period of anxiety for bondholders (and even depositors) of weak banks, with risks of contagion for government bonds. At the opposite extreme, one can instead think of a process of real strengthening of the system with positive repercussions, in the medium term, for the ability to finance the economic recovery.
Germany is positioning itself in the negotiations with very aggressive and dangerous requests (mandatory penalization of bondholders and pejorative revision of the risk parameters for government securities in the banks' portfolios). In general, in the Eurozone, the initial German requests are greatly reduced during the negotiations and it is to be hoped that this time too it will be the same. Assuming a compromise, at the end of 2014 we will have a European banking system that is less fragile than today, but one that won't leave us too calm yet.
