I entered the used bookstore - the scent of dust and decayed paper, smallish rooms encased with books stretched to the heavens, strangely offering me comfort and lucidity. On the top shelves near the ceiling the quarto volumes of extinct market manuals slumbered peacefully on their sides.
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The 2013 almanac was entitled, “2013: When the Market Moves before the Data Suggests,” while the 2014 edition – albeit brand new – was labeled, “2014: When Psychology Trumps Fundamentals.” Like most browsers, I scoured the books in search for the label, the narrative that will wind up defining the 2015 edition.
This year was one in which equities encountered five deeply worn potholes (February, April, August, October, and December) and likened to the grating remark of the backseat driver, “didn’t you see that road rut coming,” quickly dissipated into the rearview mirror as the undercarriage appeared no worse for the wear while the vehicle (market) drove on to double-digit returns.
A year when U.S. 10-Year Treasury yields opened with economic escape velocity in view; talk of 3.5% was both very crowded and consoling. As things go, US 10-year yields quickly withered from 3.04% in January down to an autumn low of 1.86% only to recently recover to their current level of 2.18%.
It was a year in which gold spent the first quarter catapulting near $1,400, convincing large swaths of its enemies to surrender in the process, only to finally succumb to the twin drag anchors of US economic policy and disinflation.
A year where a combination of events - something that should only occur once in a million years – i.e., increased US production, OPEC production, flat demand, lack of civic unrest – actually came to pass. Just six months ago, WTI spot prices were firmly entrenched near $105 per barrel, only to fall off the cliff to the point where we rubberneck when driving pass gas stations with these new prices.
Reflecting on the year, let alone tomorrow or next week, is a daunting task and ushers memories of my first year of university, wanting so badly to be somewhere else. Everyone in my classes seemed so clever, so sharp, so well read, so eager and capable to ask brilliant and insightful questions. I possessed none of that! I felt like a fraud and often struggled with my own sense of inadequacy. In those 30 years, I’ve learned that my contribution – experiences of making and ESPECIALLY losing money – is well worth teasing out of the shadows. In the markets, context will always trump content!
2015 – Too many atop the widows watch
The global business cycle will remain deeply fragmented and out of step, yet will somehow persist in being supportive of growth. The U.S. will continue to grand marshall the economic upswing parade – however, ultimately running MUCH hotter than expected! While newspapers will overflow with winsome articles proclaiming that the U.S. economy has finally reached, “escape velocity” stocks will drop as virtues including wage acceleration and inflation won’t be as fashionable to stocks as textbooks say they should. The Fed will soon have a multi-alarm fire on their hands and, although they will wave and proclaim, “All is well”, and the smoke will spread while the untrained firemen bump helplessly together in an attempt squelch the fires acceleration.
Many will scratch their heads and consult with old, outdated charts and maps – only to remember the fact that every action has an ultimate reaction and sadly, nothing close has been written on a U.S. central bank policy experiment of this height, depth, and/or breadth. Like the “Wizard of Oz” the man behind the curtain will be pulling levers with feverish force but, at the end of the day, a growing economy will be forced to slam the brakes on equity earnings growth – multiples will shrink and stocks will stink!
One year from now, we may full-well be wondering why Japanese and European equities (in that order) performed so much better than the American variety? It will be then that we will hopefully have a flash of awareness of sorts - reflecting back on just how hard it was to buy – or even get nominally excited about U.S. equities when quantitative easing (QE) commenced only to realize that Japan and Europe have done nothing other than borrow our old and deeply grooved record collection.