Macro Minute – 3 Market Thoughts

After approaching all-time highs just a few weeks ago the US markets suddenly seem to be in turmoil. Maybe not a proper “Markets in Turmoil” situation, but the fear appears palpable again. Here are some random thoughts that may or may not help you navigate some of the craziness:

1 – Brexit Won’t Alter the Valuation of Corporations in the Long-Term. The term Brexit is the new buzz word surrounding the market’s recent declines. This is in reference to the possible exit of Britain from the EU. The estimates of the economic impact vary to some degree, but are all generally negative for Britain. I suspect this is true in the short-term and less impactful in the long-term.  But the one thing that should be abundantly clear is that the largest corporations in the world aren’t going to stop operating and trying to earn a profit just because Britain leaves the EU. At 3% of global GDP the UK is not unimportant, but the macro impact here will be minimal in the long-term.

2 – The Biggest Risk to the Bull Market is the Bull Market.  Throughout the last year I’ve consistently emphasized that this environment reminds me more of 1998 than 2008. China wasn’t going to crash the global economy. The flash crash in August wasn’t the end of the world. The commodity crash wasn’t the end of the world. But the broader point was that we’re not on the verge of a great big financial crisis and instead we could be on tail-end of a big bull market. There’s a big difference there. From this vantage point it doesn’t shock me that Janet Yellen has expressed concerns over financial instability. After all, bull markets don’t die of old age. They generally die from excess. And the biggest risk to the US economy right now is excess in the financial markets which could lead to future instability.

3 – The Fed Has Become a Tremendous Distraction to the Implementation of Effective Policy. This is another drum I’ve consistently beat on for the last 7 years, but the problem persists. While Congress gets away with doing virtually nothing we’ve consistently focused on Fed policies. And a big part of this is the result of flawed economic theory which overemphasizes the powers of Central Banks. I think it’s time we all recognize that Central Banks aren’t the policymakers with the right tools to help the economy. Yes, they can help at the margin and were crucial during the crisis, but how much more economic weakness do we need before we recognize that their tremendous efforts just aren’t enough?