Registered Investment Adviser Caleb Lawrence
Yesterday’s late fade erased the markets early gains once again. After opening sharply lower the major averages recovered most of their morning losses to enter the final hour down slightly. Trump is showing himself to be long on rhetoric and short on substance as his hyped tax plan falls by the wayside, one of the primary rationales of the recent market run up.
In the meantime, data from the last 20 or so years shows that without a steady and substantial supply of new debt the developed nations, including the USA, economies struggle to achieve economic growth in an era of high cost energy, falling productivity and increasingly skewed wealth and income distribution. Often heard on the street is “the trend is your friend”, until it isn’t, and this was very true regarding the assumption of debt in an environment of ever lower interest rates ala the USA from 1981 until 2014 or so. The previous financial crisis was caused, at its base, by too much debt. While one can argue nuance extensively the data on debt is unequivocal. Yet the policy response in the post bust period has been the assumption and issuance of ever more debt as the Keynesian model indicates that will “grow” our way out of it and that inflation will diminish its real value over time. This theory works wonderfully in an environment that features continually rising prices and valuations. I have yet to find an environment such as this, anywhere past or present. Prices can certainly be increased steadily for relatively short periods but in the end the ability to increase debt levels and or reduce debt service costs through lower interest rates etc. is lost. Basic mathematics, if price gains are dependent on the assumption of ever larger debts then when this ability is lost, boom turns to bust, as surely as night follows day. Valuation is the most important determining factor with respect to investment return over time. Though it can be measured many ways ignoring it is a dangerous path especially when debt is used in the transaction as it will remain regardless of future price trends.