Juggling Dynamite

Household wealth is more concentrated in equities today than at any time in the last 50 years, including the 2000 tech bubble top.  This is great for firms who make the richest fees issuing, trading and holding equities in client portfolios.  As shown below since 2005, from Bank of America, 65.3% of client assets under management are in stock-based products today compared with a peak of 56% at the cycle top in 2007.

Unfortunately, for the holders/clients, this record exposure to stocks (S&P 500 below) comes at a time when the securities are priced to deliver negative returns over the next decade, as they were, and did, from the cycle peak in 2000.
This will be super hard on financial plans and prompt many to reduce spending and/or work longer than they presently imagine.  Asset bubbles are no free lunch or dinner.

Ongoing revelations that politicians, central bank heads, and federal judges have joined corporate insiders in using advance notice of non-public information to execute self-enriching trades confirms what many of us have known for some time:  markets are rigged in favour of those who cheat, break laws and abuse the public trust.

In the process, respect for public institutions and systems is dangerously and deservedly crumbling from the top.  See more in Bloomberg Businessweek’s:  Most Americans today believe stock markets are rigged, and they’re right.  Here is a direct link to an audio reading of the article:

Time and time again, insiders appear to exploit private information for opportunistic gain.  Cheating…they discovered, seemed to be everywhere.

While the evidence is plentiful, as shown above (red line), the prosecution has intentionally lacked, so white-collar offenders have become ubiquitous.

The only meaningful deterrents to this are public embarrassment, enforcement and punishments that include disgorging of ill-gotten gains, stripping of positions of trust and jail time, where deserving.

It’s really basic:  those who abuse positions of trust, do not deserve to have positions of trust.

The hosts in this segment make the common misnomer of talking about bonds without specifying that they are talking about government bonds or “Treasuries,” but not corporate bonds.  Corporate bonds trade with the equity cycle and do not attract safe-haven inflows during negative financial shocks and bear markets.  Few acknowledge this critical distinction between Treasuries and corporate bonds.  Otherwise, the discussion here is worthwhile.

This month we were joined by Dr. Lacy Hunt, an internationally known and award-winning economist. Dr. Hunt is the Executive Vice President and Chief Economist of Hoisington Investment Management Company. He also is the author of two books and numerous articles published in Barron’s, The Wall Street Journal, The New York Times, and The Financial Analysts Journal among others. Here is a direct video link.

An important point made by Hunt is that the much-anticipated spending bills expected from Congress will be less supportive of inflation and growth than widely suspected because while they mete out spending over the next decade, they start tax increases right away.  Moreover, back to Hunt’s larger point, they pay for spending by increasing debt.   More debt and increased taxation from here (while politically necessary) are both disinflationary–reducing room for future spending and growth.

The top panel in the chart below shows the change in global M2 supply since 2007 (discussed by Hunt).  When the money supply is contracting, as it has been most recently since March, stock markets (S&P in lower panel) have lost lift.