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Hedge fund manager, macro, MacroDynamics Capital
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Summary

  • The Bull, the Bear and the Duck.
  • The World after QE. More QE?
  • Earnings growth is all that matters.

I am most likely not the first to think about this, but the financial jargon needs a third animal in addition to the bull and the bear. Something that moves sideways. A crab would work, but being "crabbish" somehow doesn't feel right. What about a duck? A duck wobbles along...it muddles through.

The latest ECB decision comes with comments of "lowflation" - a relatively new word. Why not "noflation"? Another term I've read somewhere today is "sideways growth". Probably because combining "low" and "growth" is challenging.

It is disconcerting that 6 years after the flat tire of 2008, many developed countries are still failing to reflate. There is an unprecedented amount of liquidity in the global financial system, and debt - both corporate and government - is at pre-2007 levels (so much for deleveraging).

However, there is a disconnect between the real economy and financial markets, which appear to no longer allocate capital efficiently. While equities have recovered all the losses of 2008 and then some, the economy has not. Optimists will say that the unemployment rate has been falling. Pessimists will say that the problem with that argument is that the unemployment rate has been dropping mainly because workers have been dropping out of the labor force. The argument can go on, but it is worth looking at the data and beyond the headline numbers. Growth is still below average, inflation dangerously low, social inequality on the rise.

It does appear that firms borrow on the cheap (see corporate debt levels) only to return capital to shareholders via buybacks and dividends (these are at very high levels in the US). According to corporate finance theory, this should happen when firms don't have good projects to which to allocate capital (not to mention that this encourages mismanagement, overcapacity, etc.).

Should the market reward corporations that cannot find sources of growth? Equity markets appear to be rewarding corporations for the wrong reasons, and the excessive liquidity in the system has certainly not helped. The key investment theme over the next 5-10 years is to reward healthy earnings growth, not efficient balance sheet management. Reward visionary CEOs, rather than creative CFOs.

After 2008, some degree of monetary stimulus was without a doubt necessary. What if the Fed ends its buying program and the economy stutters - again. It happened after every QE. Will the Fed do another QE? (with a new name?).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Sideways Growth And Noflation