With eight years of rising debt worldwide amid political stress from wars to elections, discussion about relief has increased sharply. Still, central bankers have in effect engaged on redistribution from savers. We see an excess of reliance on theory as conflicting with the rough and tumble of finance. More successful economies and prosperity have historically had sink or swim as base. The capital markets are currently replete with distortions. Review can be seen in the recent discourse from the Bank of Japan, the ECB and the Bank of England. It should also include 25 basis point at-a-time rate increases from the Federal Reserve, ideally as soon as September 2016. Volatility has increased as seen in equities, currencies and even in government fixed income like German bunds that were supposedly to be stable due to insatiable demand.
For portfolios, we underscore a need to focus less on momentum and more on quality standards. For equity markets, we have long underscored and reiterate today that consensus earnings start too high and in effect are managed ahead of reporting. It lays the ground for valuation volatility when the momentum trade fades for whatever reason. On sink or swim and restructuring, we find energy from distribution to upstream properties to be interesting. At peak a few years ago, organizations were calling for $200/Bbl. oil and then earlier in 2016, many of the same at bottom were calling for $20Bbl. oil. Crude oil has had a history of acute volatility. Still, a range of $60-70 Bbl. or even present prices of $44/Bbl. likely present opportunities for the stronger companies. By contrast, sectors like healthcare had but no longer possesses valuation appeal as a sector undergoing restructuring. In asset mix, we favor above average allocations to cash and alternate assets.