There is a storm brewing in financial markets. Surging indebtedness, depleted household savings, rate hikes and excessive leverage. These are factors which will impact both the global economy and financial markets.
After 9 years of gains, there is much greater downside than there is upside.
Plug into our sobering assessment of global asset markets below:
A pdf version is available here: What’s the most you ever lost…
The Heartbeat of America
Ninety percent of Americans drive to work in privately owned vehicles. For many, there is no way to avoid owning a car. Public transportation in most cities is inconvenient, inadequate or non-existent—making our cars and trucks essential. They are also expensive. The purchase of a vehicle is typically the largest consumer expenditure for most households and often involves a long-term financial commitment. When people feel good about their employment situation and overall financial health and are optimistic about the near future, they buy cars. When families become cautious about spending or credit becomes scarce, they get a tune-up. Continue reading
It’s not cool, being a jive turkey…
Consider a flock of free range turkeys fed by a farmer for several months. Day after day, the farmer provides a formulated mix of protein-rich turkey feed for the birds. Over time, the flock will develop a strong attachment to Friendly Farmer and begin to anticipate her behavior in the future. As the birds grow more confident in the narrative of the infinitely benevolent Friendly Farmer who enjoys feeding turkeys, the necessity of a counter-narrative diminishes. It stands to reason, no member of the flock is frantically warning of danger: “Don’t you know what happens to turkeys at the end of the cycle?!” Continue reading
Over the last 300,000 years, Homo sapiens (Latin for “wise man”) have become the most influential species on earth. Our ascent to the top spot is a result of the size and shape of our brains. In the later stages of our evolution as a species, the back of our brains grew—giving modern humans (Homo sapiens sapiens!) a rounder shape than our ancestors. Scientists believe that change in shape was an adaptive one to accommodate the increasing complexity of our brains’ function. Continue reading
You say bologna, I say baloney
The idea that bologna consisted of low-grade cuts of beef or pork—the leftovers—gave it a bad reputation. Over the past several years, however, researchers have determined that the simple “odds and ends” of meat manufacturing were not nearly as detrimental to human health as are added preservatives. Sodium nitrates and nitrites are added to most packaged meats to increase shelf life. In bologna, these chemicals improve flavor and prevent the meat from turning grayish—to the detriment of human health. A growing body of research links these types of preservatives to increased risk of cancer, Alzheimer’s and Parkinson’s diseases. It seems consumers’ bologna skepticism was justified all along even though the real risk was not posed by spare parts of meat. Continue reading
And you know that notion just crossed my mind.
The Grateful Dead
All Time Highhh
In March 2017, a broad indicator of investor leverage, margin debt, achieved an all time high. According to data published by the NYSE, the aggregate amount of debt provided by brokerage firms to investors reached $536 billion. These loans are used by investors to partially fund the purchase of securities. Used in this way, debt can significantly boost the profit potential of one’s investment portfolio. For this reason, rising margin debt is generally considered a signal of investor confidence as many typically avoid leverage when the future appears more uncertain. Continue reading
Over the past six years, favorable credit conditions and steady employment gains have contributed to produce the best period of domestic US auto sales since the mid-1990s. More recently, however, the underlying strength of these and other factors has begun to moderate and households appear to be entering a period of more cautious spending. If we are correct, a pullback in household consumption will have a significant negative impact on US auto sales in coming quarters.
I Believe I Can Fly!
The belief that tax cuts, deregulation, and infrastructure spending will spur a re-acceleration of economic growth has been the prevailing narrative since the US election. For an economy in its ninth year of expansion and late in its economic cycle, we believe this reflation narrative which we’ve termed I Believe I Can Fly!, represents a consequential distortion of reality. Our interpretation of key economic factors suggest the economy is much closer to a period of slower momentum than it is to a sustained period of 3-4% GDP growth. In other words, this is as good as it gets. Continue reading
Rhythm & Rhyme of Economic Cycles
There is a large body of empirical evidence that links the performance of assets to the ten-year economic cycle. Iron Harbor employs a cyclical framework to estimate the medium-term return potential for a broad range of assets. Over the past several years, our methodology has served us well—enabling us to exploit sizable opportunities in fixed income, equities, currencies and commodities and deliver high quality, uncorrelated performance. Continue reading
Investor exuberance appears to be headed swiftly into the realm of the irrational. It may be prudent to reduce risk and buy downside protection.
Estimated Fund Money Flow (EFMF) is a Bloomberg function that tracks investor flows into and out of fund vehicles like exchange traded funds (ETF) and mutual funds. It can be a valuable tool to help quantify the degree of investor optimism for the underlying asset of a fund. For example, investor inflows into an exchange traded fund that tracks the performance of a basket of stocks can be a concrete indication that investors are expecting strong future performance from that underlying basket. Continue reading