Markets have begun the year in a little more unsettled fashion. Or so people feel. We are not talking about anything abnormal in particular, but the sense is that there is not much to be pleased about – aside from any upcoming monetary stimuli. Ever hugging the short-term as if there was no tomorrow, investors are torn between what appears mundane and what may bring more painful times – are we looking at peaceful and plump puffy sheep-like clouds or at grains of sand falling on the proverbial pile?
I’m on the pile side. In no particular order, here’s what comes to mind:
- What happens when central banks stop being overly generous is anyone’s guess. This monetary stance is the most important reason why stocks are where they are today – especially in the US. The analyses done on what happened in the past when rates rose are probably useless as this tightening cycle, when it arrives, will not be of a cyclical nature. The dimensions involved are huge.
- As a corollary to the previous point, what is the reason monetary velocity has fallen so rapidly in the last few years? Is it just a form of “re-allocation”? Little has been said about this phenomenon. I wonder.
- The Eurozone crisis is entering another round. This will be the norm until [a] we see strong economic growth, and/or [b] member countries agree to move towards full political integration. I’m not putting any money on [b] happening anytime soon.
- Terrorism is finding no rest. The events last week in Paris and this week in Nigeria are mindboggling. One has to wonder if there are not two distinct “species” of human beings in this world. Wherever this leads, it is bound to raise the costs and diminish the tranquility with which we all go about our daily lives.
- Someone somewhere is getting hurt badly: when the price of such a pervasive commodity like oil gets creamed, you know it’s just a matter of time. And it’s not only oil prices that are down significantly in the last 12 months. The economies of a number of major developing nations are being negatively impacted.
- Valuation – once more – is relevant, especially when other consistently favorable elements are becoming less so. On this and on the significance of “value” for future returns, see this week’s comment by John Hussman here.
On the last point, I often wonder what is so magical about valuation being an important variable: isn’t it self-evident that you stand to have a better chance at decent returns when you pay less for an investment than if the opposite is true? Is it just too simple? Another variation of the classic joke where one economist is happy to see $100 on the street while his friend, another economist, dismisses its genuinity on the grounds no one would have left it there?
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