Much Ado About Somethings

This article was last updated on April 16, 2022

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USA: Oye! Times readers Get FREE $30 to spend on Amazon, Walmart…There needs to be much ado about somethings amid corporate results releases, scheduled central bank meetings led by the Federal Reserve and political developments from bubbling terrorism worldwide to leadership conventions in the United States and the aftermath of the exit from the European Union vote in Britain. The surprise to us is that market behavior from fixed income to equities to precious metals reverted recently to as if nothing mattered other than quantitative ease. For instance, money managers have even clamored for subzero coupon bonds, including expanded corporate new issues sizes as well as sovereign issuance by countries, lately including Spain.

It is said that in dynasties, the first generation builds, then the second generation consolidates gains while the third generation often destroys capital, sometimes completely. The 1950s-1970s post world war and post colonial generation of political authorities and central bankers built structures of cooperation for prosperity. The next generation from the 1980s-2000s consolidated global cooperation, including deregulation. Currently, political stress is high worldwide and global growth poor despite unprecedented and chronic quantitative ease. This generation of leaders could risk aspects of destruction.

A number of central bank scheduled assessments have been held, especially the FOMC statement of July 27, 2016. Fed funds were left unchanged but with a path of increases overdue, subsidy needs balance against risk. Not helicopter money but a reassessment is in order for the authorities and the markets. From manipulation including expanding quantitative ease without limit, as recent capital markets demonstrate, the collateral effect can easily morph into financial engineering creating dependency on ultra-low rates, especially by weak companies and countries alike.  

Much like Greece prior to 2011, governments have been rewarded by market acceptance, even of subzero coupon debt. Despite deafening silence, this environment is likely not stable. Company releases continue companies reporting high competition and slow revenues but earnings meeting much lowered consensus. However, rising valuations do occur basically in two environments, first around the bottom of an earnings cycle when potential exists for improvement or second when companies have sustained rising results and consensus has to be raised, not lowered. Neither condition applies currently.

None of these observations are rocket science but underscore potential for turbulence and volatility for which diverse portfolio structure should be prepared. Uncertainty premiums need focus based not on ultra-low administered rates nor on subzero sovereign bond yields but instead on qualitative and quantitative business risk. Rotation to new levels have recently eschewed leadership from Financials but they are crucial in the structure of capital markets and to fundamentally facilitate business. Quality needs to be paramount from corporate financial structure to operating standards – aspects  only some companies or countries can meet.