By Steve Blumenthal
Last week’s mention of the great Art Cashin sent a number of emails my way. The one that touched me most was from Richard who worked for Paine Webber from 1974 to 1987. Back then every broker had a small speaker on his or her desk. We in the industry know it as the “squawk” box.
That early technology made Art available to all the reps all day, every day. Richard wrote me that Art would close each day saying,
“You know the rules, take care of yourself, put some joy into your life and all those around you that you think deserve it, and never, NEVER pass up a chance to kiss someone you love!”
Richard added, “I look forward to his wisdom being accessible once again.” Pretty great.
I had dinner with Art several years ago, along with my good friend John Mauldin. Art is as humble and likeable as you see him on TV. I wonder if he has any idea how many people he has touched. Shoot me an email if you’d like me to forward your name and email address to Art.
The big news this week is Mario Draghi and the ECB. Let’s look at that, but first let’s see if we can take a 30,000 foot view at the problem and how the markets might behave going forward.
Collectively, the number one global problem is DEBT. Can we grow our collective incomes in a healthy way that we are able to cover our debts? For long periods of time, debt helps to fuel growth but at some point it becomes too big. Think in terms of what you earn and what you have to spend after you pay your bills. When you have too much debt and more of your income goes to pay off your debt, you have less to spend on other things. Your economy slows.
On a larger scale, this is what is happening to economies most everywhere – Japan, U.S., Europe and China. So, in steps the central banks to goose the system. Step one, central banks lower rates. However, when rates go to zero, central banks have lost the power so they move to step two. Step two is quantitative easing “QE”, also known as large scale asset purchases. The Fed did this in the last recession and again recently. The ECB is doing it now and Japan on and off since 1991.
Step two causes asset prices to rise, but they then reach a point when valuations grow too rich and forward return potential is low. Steps one and two hope to activate our collective animal spending spirits.We feel wealthier so we spend…so the theory goes. After you’ve done step two several times, subsequent moves are less powerful. As Ray Dailo says in a recent Bloomberg interview (link below), and I mentioned several months ago, the central banks reach a point where they are “pushing on a string”.
So what comes next? We are likely moving to step 3, or “helicopter money”. This amounts to direct government spending to stimulate the economy. The idea is to force spending since the private sector isn’t doing enough.Who does that spending? The government. Print and spend.
I share some bullet point notes from the Dalio interview. Cutting to the chase, like me, he sees a low return environment (see mention and Expect More Money Printing), slow growth, low inflation and choppier markets for a period of time. He also talks about step 3. But check out the interview and/or my notes (links below).
Steps 1, 2 and 3: The point is that there are a few “bazookas” yet to be fired. It was all about the European Central Bank this week. Janet Yellen and the Fed step to center stage next week. One giveth and one taketh away? We’ll see. How it plays out remains uncertain though I have my thoughts.
Front of mind is that debt on top of too much debt won’t work. Zero to negative interest rates destroy price discovery and it hurts retiree income (further slows the economy). If 75% of the investable assets are going to be in the hands of pre-retirees and retirees (per Blackrock) by 2020, I just don’t think they are looking to spend more. Animal spirits? Right. Their income is being squeezed. Pensions, significantly underfunded, need 7% to 8%. No chance unless they meaningfully overweight to non-constrained alternative strategies (and they are not).
