"What good is money if it can't inspire terror in your fellow man?" - Mr. Burns - Commentary - November, 2016
As each new Holiday season emerges we often reflect on the year that has passed and contemplate the year to come. As far as 2016 goes we needn’t look any further than our favorite idiot-genius Homer Simpson and one of our favorite quotes of his, “Oh, why do my actions have consequences?“ Well, in hindsight, and hindsight is after all 20/20, the emergent consequences of 2016 all began simply with but a few major actions over the last eight years. The first action, from a global monetary standpoint, was initiated by our Fed in 2008 and perfectly described by this auction scene from The Simpsons episode, “Kissing Lincoln’s Penny.”
Homer: Five dollars!
Mr. Burns (the billionaire villain): Five hundred.
Homer: Five dollars, cash.
Host: Sir, the promise of cash is not an endorsement. The current bid is $500. Going once, going twice--
Bart: Dad!
Homer: Five hundred-one!
Mr. Burns: Ten million.
Homer: Objection, Your Honor!
Fast forward through eight years with trillions of Simpson-like auctions where central bankers outbid everyone and a mere 25 bps increase in December 2015 started 2016 with quite a bang. The dollar went higher, China and emerging markets along with commodities got pummeled and currency war talking heads went crazy: oh the horror! Why you ask? Central bankers were still channeling their inner Mr. Burns, “Well, why do I need another penny? I have billions. Still, if I don't take it, that hoodlum over there might.” Needless to say, and the bankers never cease to say it, an unwavering conviction that zero or even negative interest rates along with unending money printing as a global growth panacea actually elicited a not so pretty tipping point with unintended consequences. Eventually rates went negative in Europe and Japan as stocks and bonds were subsequently bought even more aggressively by central banks and the first event for 2016 was quickly resolved.
The second consequence of 2016 came in June as Britain voted to leave the EU. Populism had emerged as the actions of their leaders failed to appreciate the power of the electorate and their developed sense of distrust. The surprise result, in the end, devalued the pound but global markets took less than a week to recover. Over time growth rebounded in Great Britain and proved to be somewhat of a stamp of approval for those on the fence regarding such drastic politically populist decisions. The seeds of populism were planted and harvested successfully and the rest of the globe was clearly watching.
Moving forward to the third consequence was another vote for populism in the form of a Republican US election landslide in November. Many factors have been named but in the end we believe it came down to two of the biggest issues facing a large portion of our population, money and health. Regarding money; increasing regulations, increasing health care costs and the resulting stagnation of wages over the last eight years was once again missed by the media, Fed, and elite. To many, the ill-conceived health care plan had kept wages down for too long and actually acted as a cruel of regressive tax as premiums skyrocketed. Couple higher premiums with stagnant wages, then add in less doctor choice and overall inferior coverage relative to eight years ago and you get a Trump win. A win, that for about 6 hours looked dire for our markets, but in the end resulted in one of the swiftest rallies in market history in November and December.
In the end the markets took 2016 in stride and inevitably fell back on central banker support throughout any adversity. Looking to 2017 we challenge you to look at a 30-year fed funds chart and ask yourself where the risks lie. Last week the Fed shied away from additional fiscal stimulus after begging for it over the last eight years. After all, Fed Chair Yellen knows every one of the president elect’s proposals is inflationary; lower taxes, repatriation of funds from overseas, less regulation, infrastructure plans and tariffs. Couple that with corporate and public debt at all-time highs and the markets half-full reactions to populism globally and we see exactly why the Fed forecasted three rate rises for next year…albeit up from only a measly two. While “Do as I do, not as I say?” has been a remarkably consistent way to doubt the actions of central banks…to assume the VIX and rates remain near all-time lows with populism alive and well calls to mind Mr. Burns once again, "What good is money if it can't inspire terror in your fellow man?"; an interesting thought for 2016 and likely 2017. Stay hedged.
