A Two Team World

A Two Team World

February 14, 2024

As 2024 is well on its way and we celebrate Valentines and President’s Day, I wanted to share some thoughts with how I see our current capital markets. I’ll first say that, from where I sit, these days, the world has seemingly been split into two camps, tribes, and world views on almost every topic imaginable. Everything has become binary.  Now, we can debate the reasons why this phenomenon has occurred, but I suspect that there are many culprits on both sides attempting to monetize the whole affair. However, as I see it, many of the answers on topics financial (and otherwise) lie in the middle wrapped in nuance.  Let’s dive into two.

 

Interest rates

The two teams are; (1) Higher for Longer and (2)  Rates Will Decline.

The higher for longer side see a world of de-globalization, geopolitical conflicts, trade wars, etc.  They’re not wrong. The Rates Will Decline side sees an aging population in the U.S. and China, technology reducing inflation, and a national debt service costs that isn’t sustainable at these rates. They’re not wrong either.  I don’t have a dog in this fight but I’m more convinced that rates will decline because of the consequences of higher rates on our debt-ridden economy. The cycle will have to play out but, at the end of the day, I would predict that rates will move lower over the next 24 months as most roads point in that direction; national debt service costs, politicians, voters, commodity prices etc. In the meantime, we may stay in a range of 4 to 4.5% until the economy slows or recesses.  However, I think the end game, whether by design or default, is rates that start with a 3…or even a 2.

The stock market

The two teams: (1) Overvalued and (2) It Doesn’t Matter

The Overvalued (O) team sees the stock market multiple, the equity risk premium, the CAPE ratio, market breadth, and most valuations metrics in the red zone. They are definitely not wrong from a historical perspective. The market isn’t cheap. The It Doesn’t Matter (IDM) team would say, the U.S. will continue to print money and drive up the balance sheet. This continues to devalue the currency, so stocks are the only place you preserve wealth. They “may” not be wrong either. Time will tell. I see their argument. It’s worth noting that Turkey’s stock market exploded the last couple of years while inflation ravaged the country. The lesson here was that people did well by owning stocks versus their currency. It protected their purchasing power. Obviously, we’re not Turkey (although we’ve got many turkeys in Washington running the government. Ha!) Lastly, the IDM team would say that the national debt doesn’t matter, at least for now. We’ve been concerned about our debt for decades. The dollar is still the world’s reserve currency and this isn’t likely to change during the lifetimes of anyone born last century.  The Euro won’t be it nor will the Yuan. Bitcoin? Please stop!  The reality is that both sides could be right, it’s just a matter of timing. Team IDM could be right for days, months or years and then the O team could abruptly take the victory like Kansas did at the end of the Super Bowl.  The future is not written.

What’s most important is to manage your investments according to your time frame, stage of life, and risk tolerance.  If you’re in your 20s, 30s, or 40s, perhaps you can afford to be on team IDM as you’re still accumulating wealth and dollar cost averaging into your retirement accounts.  However, if you’re approaching retirement or in retirement, you’ve got to design a portfolio that will provide income you can’t outlive. If the Overvalued crowd is right and something finally tips the scale to their side, the market could decline by -50% as has twice already this century. The IDM team will quickly realize that valuation does matter and nothing is guaranteed. They also might want to borrow some of O’s money.

*The information provided in this newsletter is based on carefully selected sources, believed to be reliable, but whose accuracy or completeness cannot be guaranteed. All information and expressions of opinions are subject to change without notice and are those of Dwight Rich