Turbo stage? But wasn't there talk of secular stagnation until the other day? Secular stagnation was the official doctrine of the Washington Consensus (IMF, Federal Reserve, Obama administration) from 2013 to the end of 2016 and it still inspires many of Trump's opponents, above all Lawrence Summers, who consider the acceleration of growth since last spring to be dope.
The European version of the theory of secular stagnation has been austerity, in the practical version of internal devaluation, i.e. wage deflation. In short, both in America and in Europe the idea prevailed for a long time (which until Abe was also dominant in Japan) that growth would remain low for the entire foreseeable horizon.
Public opinion accepted this narrative for a few years, but the growing impatience, at a certain point, led to a break. The deflationists left the political scene and in their place were the reflationists Abe and Trump, while in Europe the German leadership has managed to survive only with a watering down of austerity, a sharp devaluation and a green light for Draghi's "Whatever it takes" and Quantitative Easing.
The fruits of this policy change are evident in the acceleration of global growth, which for almost a year has been even higher than that of the golden age of the three decades XNUMXs, XNUMXs and XNUMXs. On the fire of this acceleration Trump's United States pours new fuel every day in the form of deregulation, tax cuts, repatriation of capital, devaluation of the dollar, continuous rise in the stock market and monetary policy aimed at keeping real rates at zero.
We have therefore entered the turbo phase of growth. No one knows how long it will be before serious signs of overheating show. What can be argued, however, is that there is the political will not just to go and see these signs, but to welcome them on the day when they come to us in the form of wage inflation, general inflation and labor shortages. Someone said that the biggest bond bear market looms of the last thirty years.
It could be, above all if, as everything suggests, the political will prevails to postpone the next recession as much as possible over time and raise inflation and interest rates. Two observations, though. The first is that the episodes of bond declines over the past XNUMX years have obviously been unpleasant, but bearable on the whole. The real big decline dates back to forty years ago, during the stagflation of the XNUMXs and no one today but Greenspan thinks we are destined to relive that experience.
The second observation is that the normalization of monetary policy will be slow and gradual, almost imperceptible on a day-to-day basis. What is the debtor to do? He must stop thinking that on the safest bonds, those ten trillion that today have negative yields, there will be other capital gains. It must avoid emissions with a residual life of more than five years. It has to learn (or re-learn) to live with a certain volatility. You must try to take advantage of this volatility with trading. It must give way to inflation-linked bonds.
It must radicalize its choices and focus on the two extreme poles of cash-equivalent on the one hand and hybridization with equity (as in the case of convertibles or bank subordinates) on the other, avoiding what lies in between. It must exploit the weak dollar phase while it lasts to take risks on local currencies and good quality emerging market bonds. The Chinese 4-year yield is XNUMX percent. Can we start buying dollars again? For now only for trading operations.
For investment it is better to wait for 1.30, a level where the dollar will start to be undervalued, especially in light of the tax reform, which structurally strengthens it. The dollar is not weak due to problems in the US economy, but due to the recovered strength of the rest of the world. Added to this is the will of the Trump administration, actually expressed as early as January 2017, to bring the dollar out of its evident overvaluation to give a further boost to the American economy.
Why does the dollar go down when its rates keep going up? For two reasons. The first is that US rallies have long been embedded in prices. The second is that America is trying to avoid suffering the simultaneous rise in rates and the dollar. For the same reason Europe agrees to anticipate the strengthening of the euro while its rates remain below zero. When European rates begin to rise, the resistance to further strengthening of the euro will become stronger, precisely to avoid the double slowdown on exchange rates and rates.
Will stock markets go up forever? Only if inflation and rates stay low forever, but that's not the case. Secular stagnation, with its melancholy intellectual climate, was in its own way perfect for justifying a continuous and orderly swelling of equity multiples. Now, in the turbo phase, the multiples will no longer inflate (if they do, it will be possible to legitimately call the bubble) and the weight of the stock market rises will fall entirely on profits. Fortunately, earnings, particularly in America, will have an excellent 2018 and a good 2019.
Everyone wants to get on the stock market, even those who have been out so far. All American children know the tale of Rip van Winkle, George III's loyal subject who falls asleep on an Appalachian mountain shortly before the Revolutionary War and wakes up twenty years later to find that George Washington is in the White House. From a management point of view, a Rip van Winkle who had fallen asleep in 2009 with no shares with the SP at 666 and woke up today with the index at 2840 should immediately adjust his portfolio and still buy a good share of shares, given that the equity outlook is still broadly positive.
Psychologically, however, whoever enters the market today is in any case exposed to the most volatile phase of an upward cycle, one in which, precisely because we are approaching overheating, we periodically abandon ourselves to temporary scares of various kinds (on growth, interest rates, inflation). And that's when ratings are high. Now, those with much lower book prices are better equipped to endure a 10-15 percent correction and wait for the subsequent recovery.
Anyone who enters an already high market and sees a correction that brings their stock below the book price is more inclined to
sell it at a loss. For this, to the converts of the last hour, we recommend a certain caution. There is nothing worse, from a managerial point of view, than being extremely cautious on the lows and greedy close to the highs.
