IN THE UNLIKELY CASE
What legitimacy can a positive scenario have? At each take-off, the Alitalia flight crew informs us of what to do in the event of an accident. In the unlikely event, a recorded voice tells us in both Italian and English, do this and that. The voice is calm and the choice of the adjective "improbable" is designed to further reassure the passengers and set up a rational conversation with them. We are a serious carrier, is the implied message, we keep our aircraft well and we train our pilots well but, as US Defense Secretary Rumsfeld once said, "bad things happen" (the English original is more colorful ) and we can only try to limit the damage.
Natural selection has accustomed us to always pay close attention to the dangers and pitfalls around us. However unlikely, unpleasant events have a tenacity of their own. They let us win once, ten, a thousand times, but in the end they win on large numbers. That's why we keep umbrellas in our bags even if it doesn't rain and we buy insurance policies on everything that is insurable. This is why the precautionary principle makes us run to the doctor even in the presence of a probably trivial symptom. However, a clear asymmetry remains. While we have contingency plans for negative eventualities, perhaps only sketchy ones (such as pajamas to take with you in the event of a sudden hospitalization), we do not have a contingency plan in the event of a big lottery win or a sudden inheritance from an uncle of America we didn't even know we had. Improbable events as long as you want, but not impossible. Markets, being bullish by construction (I don't buy a stock if I think it's going down), rightly spend their time wondering about all that Equinix NY4 Strategy Weekly. All transactions on the American stock exchange pass through this data center. Photo Payne for Bloomberg Markets.
IN THE UNLIKELY CASE that could go wrong. The future appears to them as a via crucis of traps and obstacles to overcome. In 2016, for example, we spent the first few weeks worrying about everything and its opposite. Nothing, absolutely nothing that has worried us has so far happened, but that doesn't stop us from continuing to fear. China, Japan, Greece, Brexit, Spain without a government, Italian banks, US elections, uncertain earnings, anemic growth, declining auto sales, scarce investment, zero productivity, they are not missing. Gilles Deleuze said that men are desiring machines. Markets, for their part, could be described as machines programmed to worry. The last time they tried to organize for a positive structural reversal was in 1999-2000. It ended badly, as we know, and since then, for 15 years, we haven't tried again. Even the rally of the last decade ended without euphoria.
The upswing that began in 2009, for its part, has been constantly accompanied by skepticism, fear of relapse, fear of inflation and deflation. Now that Wall Street is one step away from the highs, however, it is reasonable to ask whether a virtuous scenario, capable of taking stock markets to even higher levels, could have its legitimacy. To answer, let's try to draw it. Let's start with China. Its most serious problem is overcapacity in mining and metallurgy. They produce at a loss, but employ 25 million people. They absorb resources that could be destined for more productive investments and consumption and therefore block any serious reform process.
The good news, reported by Goldman Sachs in a recent note, is that the plans for the closure of excess capacity, although even more aggressive than previously thought, are practically also approved at a local level and will start soon. Ironically, the reform has been accelerated by the protectionist measures recently adopted by the United States in the steel industry. China will no longer be able to export below cost and will necessarily have to accelerate the conversion of its economy. Second chapter, the United States. The data for the day, unemployment benefits at low levels and consumer prices below forecasts are reassuring data, but even more significant is that the stock market welcomed the below-estimated inflation. Recall that we come from a long year in which markets have expressed concern about inflation being too low. Considering lower than expected inflation now positive is a sign of a return to normality, the end, at least in America, of the extraordinary 2009-2016 period. Equinix NY4. Photo Payne for Bloomberg Markets.
3 IN THE UNLIKELY CASE With inflation stabilized at 2 per cent and with an expansion of the labor force sufficient to stave off wage inflation even with 200 additional workers per month, the Fed could slowly normalize real rates with a modest increase in nominal ones. At that point, growth could also remain close to 2 per cent for a long time to come. Corporate profits, for their part, after the setback of the last three quarters, could start growing again in 2017. As for multiples, their structural expansion would not be impossible if the markets, as Warren Buffett said, were to convince themselves that rates will not rise above a certain level for many years to come. Coming to Europe, it is obviously a question of overcoming the Brexit obstacle. In any case, we will arrive at the referendum having resolved, or at least started to resolve, the Greek question and that of the Italian banks.
Closing Greece and Italy quickly is essential to deal with a possible success of the Outs with greater structural strength. In the event of a victory for the Ins (still given as probable by the majority of polls) the European stock exchanges and credits will have a good argument to close almost completely , between now and the end of the year, the divergence in performance that opened up with America a year ago. The stabilization of emerging markets, so important for our exports, could also help European stock exchanges. What has been said so far is not, mind you, our baseline scenario, which is constructive but decidedly more cautious. What we mean is that assuming a surprisingly positive scenario, even assuming even a 20 percent chance of it, has intellectual legitimacy again after a year in which even moderately positive thinking was at times reputational. Portfolio managers won't hurt to keep this scenario in mind as well.
By dint of thinking about the hypothesis of a United Kingdom at war with Europe, of gigantic bail-ins in Italy and on the continent and of upcoming recessions, we could in fact lose sight of the idea of Another image of Equinix NY4. The Facebook data center. Lulea, Sweden, Arctic Circle.
4 IN THE UNLIKELY CASE a positive, if not perfect, solution to some of the great problems that afflict us. Sure, the cycle is seven years old and you might want to sell everything and wait for the next recession to come back. However, in the not so unlikely event that growth were to continue for another two-three years, it would be a pity to leave the unexpressed value on the table which, if not on the indices, is certainly present globally in some sectors, from banks to cyclical.
