From David Rosenberg of Gluskin Sheff
As we take out the crystal ball once again to provide our forecasts for the year ahead, it pays to drum up the old adage that to know where you are going you have to know where you have been.
With that in mind, I have to wonder what it means to be heading into a new year with the global economy in sync, the Fed tightening policy, the U.S. Treasury curve flattening, the equity markets hitting new highs, the credit cycle peaking out, extremely low volatility and investor complacency equally high, excessive valuations across most asset classes, and a U.S. labour market that is drum tight. As I dig into my memory bank, this backdrop is eerily similar to 1988, 1999, and 2006. And what we know about each of those years is that the one that followed was the last of the cycle.
So if the past is a precedent, we had better enjoy the next twelve months. The economic expansion and bull market won’t necessarily end in 2018, but they will be on their last legs, nonetheless. Expect strains to emerge as the lags from the tightening in Fed policy expose the excesses in various corners of the financial markets. Constantly thinking of how to invest late in the cycle is the most prudent advice we can give, and how we are positioning our asset mix and portfolios.
Ten Late-Cycle Signposts
Expansion turning nine in June
Decade-low savings rate
Cycle-high consumer confidence
Flattening yield curve
Excessive P/E multiples
Very tight credit spreads
We also have a new and untested Federal Reserve (with a virtually unprecedented four of seven Governor seats on the Federal Open Market Committee (FOMC) vacant at the moment), midterm elections looming in the United States (where the Democrats stand a reasonably good chance of retaking the House), ongoing investigations into the Trump team, and questions over how tax reform will play out as well as the central bank’s reaction to the stimulus. Not only do we have a relatively inexperienced Fed given that it just lost a combined 35 years of monetary policymaking with the departures of Yellen, Fischer and Dudley, but only three FOMC members are still around from the group that built up the now bloated balance sheet nine years ago. So we have a crew dismantling the balance sheet who simply lack the knowledge and gravitas of Ben and …read more