The Big Picture

“This time it’s different!” – A plethora of financial and economic pundits…

A long standing joke in the financial community is the phrase “this time it’s different.” It has been uttered numerous times over the years when one is trying to explain an abnormal or excessive observation in the markets or the economy. Many times used to justify a valuation of a stock that is by all practical measures at a lofty price. Or frequently uttered to explain away some troubling economic or recessionary data that stubbornly shows up right when the party is really going! Nobody likes that… While it is understood that no one wants the party to end, all parties inevitably do.

This is the longest economic expansion on record. So there’s that…

While economic expansions do not die of old age, the longer the expansion goes on the more frequently we hear statements that the expansion “has much more to go” or that the expansion “should be over soon!” A market commentator recently stated that this expansion “has at least 5 more years”. Interesting he is able to predict the future in this way…??? The simple truth is there is no assured method to predict when or how this cycle will end.

What is different about this economic expansion? There is always something different in every expansion. The ending is what is the same! This cycle in particular is rather interesting and will likely be studied closely in time to come.

Have a Plan and a Process!

From the Trenches

“The four most expensive words in the English language are this time it’s different.” – John Templeton

The endings of economic expansions are all generally the same; Resulting in an “economic and market reset” where extremes are set back to a “norm”, or even another extreme, before regaining balance. This is a common aspect of our capitalist system. While economic theorists have attempted and claimed to have found the answer to eliminating recessions from our economy; unfortunately no solution has been found. Humorously, yet tragically, not long before the great recession in 2008, this claim was again made!

“We’ve perfected the smoothing of economic cycles!”
CRASH!… and silence.

If we wanted to delve into what is different this cycle; There are a couple of observations not common to a “normal cycle” (whatever that may be!):
1. The unprecedented monetary and fiscal stimulus we have witnessed since 2008.
2. Very low interest rates, or very low costs of capital (relative to recent history*), which also correlates to stimulus efforts.

Bottom line, stimulus!

The below chart will give you an idea of the extent of Central Bank’s expansions since the financial crisis in 2008. The primary culprits here are the U.S. Federal Reserve, the European Central Bank, the People’s Bank of China, and the Bank of Japan (they are the bottom 4 colors in the chart below making up over 80% of the expansion). While it can be argued that without stimulus the “Great Recession” may have turned into an economic depression rivaling the Great Depression of the 1930’s; economic and fiscal stimulus has continued in one area of the world to this day.

Has central bank stimulus become the avenue of choice to continue an economic expansion no matter the cost? For the moment it appears so. A deeper dive altogether likely worth taking…

A material point to make here is the Federal Reserve has begun to reverse the size of its balance sheet.  It will be critical to monitor this progress as well as assess the impact it may have on the markets and the economy. One significant question is how a reduction in the size of the Fed’s balance sheet affects the prices of those assets. Adding supply to the market generally does what to the price?!

The second trait of this cycle is the prolonged period of very low interest rates we have experienced. Or low costs of capital relative to recent history. What is interesting when we look back in history is it wasn’t low rates that were abnormal, it was the period of very high rates beginning in the late 1960’s through the 1980’s. In the early 1980’s the Fed aggressively began a campaign to lower interest rates. This had a very positive effect on the economy. There is no more juice to squeeze from falling interest rates!

The Aberration?*

We have now likely seen the bottom of interest rates for this cycle. Interest rates appear to be back on the rise. Rising interest rates have a direct effect on the economy.

Bottom line: Two primary factors helping the economic expansion to continue may have changed course. We are entering a new phase or inning of the market cycle.

The Weeds

“Time is more valuable than money, you can always get more money but you cannot get more time” – Jim Rohn

This is well said, hat’s off! One of the cornerstones of our investment process is the understanding of time and it’s effect on investment planning. This has nothing to do with “timing”. Instead the issue here is lost time due to the impact of material market downturns! There is much to be discussed here.

As we are discussing cycles: If you subscribe to the notion that our economy is cyclical and there has been no discovery of a prescription for preventing downturns and recessions, then thinking about risk management is worth your valuable time!

Every cycle is different from the standpoint of the specific drivers of growth and the particular make-up of the economy overall. Where we have not seen a difference is the ability to prevent downturns in the economy and markets! Not even once. I would recommend being very skeptical of those telling you that “this time it’s different!”

Bottom Line: Our economy is and likely will remain cyclical. There is no assured way to “time the market” or “time the cycle”. That said, this does not mean you surrender a prudent risk management approach and tempt your financial-fate! Lost time cannot be recovered. It is lost time that we focus on avoiding.