I love "new record highs"
If the market simply moves 1-point higher, we have a record high. And this becomes news each night. But what's the data point we are not talking about:
The DJIA needs to be above 32,000 for us to be back on track.
Yes...32,000. How did I arrive at that number? Take any index benchmark in 2008/2009 and extrapolate an 8% equity return to today.
Is this crazy math that I am suggesting? No, this is exactly what every pension plan did prior to the Great Financial Crisis. Each pension then made its financial commitments to its constituents (police, teachers, firemen, etc.) and the politicians adjusted taxes accordingly.
But we never got 8%. And we are certainly no where near a DJIA of 32,000.
Yet, here we are with "new market highs" and a fixed income crisis on the horizon. Remember, how will the US pay for Puerto Rico? That's right, the US cannot.
As you watch TV now, and are experiencing the classic definition of a "wealth effect," you will be coerced into a set of behavior that is irrational: Spend more. Save less. Take riskier bets. On top of it all, why not vote yourself a tax break? It has no impact on yields right? Think again.
This is the quandary that the central banks have placed all investors in today. This game of fixed income chicken will continue as this asset bubble races higher.
But who will call the chips in? Which sovereign will say "enough?"
We all know that answer. It was made easier for us this with as one-man-rule took place in China. Watch as Xi Jinping slowly and methodically tightens the noose around the US credit markets. His weapon of choice? Trade.
Despite our concern, our market view is the same:
- Long equities, with a focus on Europe and Asia (and, If you can, financials and consumer staples)
- Short duration (the infamous fixed income pivot)
- A weak dollar
Have a great weekend!