Saturday, March 4, 2017

MAD Economic Review 3/4/17

" But how do we know when irrational exuberance has unduly escalated asset values" - Alan Greenspan

That's a great question Alan. In fact it's so good you had a hard time figuring it out yourself. Many people remember that fateful speech December 5, 1996 when Alan Greenspan claimed stock markets were under a state of irrational exuberance. Of course that comment was made mid dot-com bubble in December 1996, and rightly so as shares appeared overvalued for that period of time. Of course stock markets rallied 4 more years after his comments, and many investors heeding his advice missed out on the S&P 500's 82% gain from December 1996-December 2000. If you include dividends your total return would have been 93%. 

Visit to see more great charts.

Lo and behold shares were not really overvalued back then when you look forward 21 years. This week we saw the S&P 500 hit an all time high just a smidgen above 2,400. Compare that to Alan Greenspan's speech when the S&P 500 was trading in the low 700's we've seen a 221% gain in the last 21 years. I wonder if Mr. Greenspan still thinks the markets are "irrationally exuberant"?

While on the topic of Fed Chairs, chairwomen Janet Yellen  made a speech this week in MAD Consulting's hometown as she spoke at the Executives Club of Chicago. I was to busy to attend 😉. On top of that other Fed speakers (Dudley, Kaplan, Brainard, & Powell) have recently made remarks that a rate hike is more imminent that we believe. Obviously the market is paying attention and priced in the odds of a March rate increase above 70% when recently as two weeks ago it was around 16%.  Most people previously thought a June increase was the earliest we'd see a hike, and the Fed's previous claim to raise rates 3 times in 2017 was overly optimistic.

What's changed all of a sudden?

Well a lot of things all at once. Inflation increased 2.5%, a level not seen since March 2012. Consumer Confidence continues to surge post-election. Then we actually had good news on the housing front with existing home sales rising 3.8% to a seasonally adjusted rate of 5.6 million units. That's the highest level of sales since February 2007. Think about that for a moment. It's the best number we've seen in nearly 10 years! It looks as if on the whole the economy is finally getting the steam it hasn't had in a long time.  How quickly things can change.

Of course it wouldn't be right if I addressed this weeks headline grabbing event. Snapchat(SNAP) went public and soon after surged 59% in it's first two days of trading. Of course there is plenty of talk about the company being overvalued. With a $30 billion valuation and zero profits I'd say it doesn't take a rocket scientist to figure that out. Of course shorting the stock is not necessarily an easy ticket to riches. The market can keep driving the price higher longer than you can stomach incurring losses.

One last thing is let's not forget the bond markets. Yields on debt continue to scream higher at the short end of the curve.  For example the yield on 1 year government paper has surged to just a hair under 1%.  If anything it shows that bond markets are certainly expecting rates to increase.  Crazy to think just last summer yields were at a low of 0.4%. 

I see one problem with all of this. We have a government heavily reliant on borrowing money.  The last 10 years have given Congress access to cheap money to fund whatever they dreamed. It looks like that parade is finally over.  In the future I can see budget deficits getting worse if spending isn't reigned in. Fortunately with Donald Trump he's not one to let pennies fly out the door. Just take a look at the deals he's struck with Boeing and other suppliers to reduce costs on government contracts. Of course those are small items in the grand scheme of things. It will be important to see some control over spending the next 5-10 years. Otherwise we might be in for a whole new world of pain that no one is talking about. 

Have a great weekend!

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