I’ve avoided talking about the Federal Reserve over the past couple of weeks. Considering the number of former bottom-up investors who have converted to Fed experts, who needs one more, right? Plus, I’m biased. Think of me as a factory worker whose job was just replaced by a robot. The robot that eliminated my job artificially inflates asset prices, which reduces the need for fundamental analysis and thoughtful capital allocation. For now anyway. Given the robot operates without rules or constraints, I suspect there will be serious quality control issues down the road. Getting the world’s asset prices just right and keeping them there isn’t as simple as turning a screw!
Bill Gross was out again last week making sense. He said the economy “may never walk normal again.” I agree, but I’d also add the financial markets may never walk normal again. And that’s what really concerns me as an absolute return investor who thrives in free markets. I continue to be surprised there aren’t more professional investors like Bill Gross expressing their concern and displeasure with monetary policy overreach. Whether the asset management industry is willing to acknowledge it or not, asset price fixing or support is very bad for business. Although asset inflation can cover a lot of mistakes in the near-term, assuming volatility remains suppressed and fundamentals continue to lose relevancy, passive investing will take market share. Why hire an active manager if asset prices are fixed and markets are controlled?
Instead of taking a stand against monetary policy, some professional investors seem to be spending more time and attention trying to become policy experts. I watched a small amount of financial television last week and couldn’t believe the amount of coverage committed to monetary policy. Leading up to Yellen’s speech, there was a parade of “experts” giving their opinions. It was amazing. I even think there was a countdown clock to the speech on one network. Good grief!
Most of the experts and commentators were focusing on whether or not the Fed will raise rates in the coming months. Although I’m not a Fed expert, this wasn’t what I was focused on last week. Instead, as a proponent of free markets, the news that caught my attention was Yellen’s comments regarding future QE. Specifically, near the end of her speech, Yellen said, “…I expect that forward guidance and asset purchases will remain important components of the Fed’s policy toolkit.” Considering how inaccurate they’ve been, I’m not sure many people care about their forward guidance. However, the statement regarding future asset purchases should have grabbed investors’ attention. And if that didn’t, the following comments she made certainly did. “On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks…”
Some of the additional tools Yellen is most likely referring to is the purchase of corporate stocks and bonds (following the lead of the ECB and BOJ). The thought of our government buying private assets of corporations literally upsets my stomach. First the Federal Reserve monetizes trillions of dollars of U.S. Treasuries and mortgages, and now they’re openly considering nationalizing private corporations (at least partially). Wow.
The other theme that came out of Jackson Hole is that the economy is improving and is better able to withstand a rate hike in September or December. While company news flow has been slow over the past few weeks, on average, the companies that are reporting results are not indicating a change in trend. Based on the fundamentals of the companies I follow, I continue to believe Q3 2016 will not differ meaningfully relative to Q2 2016. Two examples on my possible buy list, Tech Data (TECD) and Big Lots (BIG), reported results last week. Both companies reported stagnant sales with little change in business trends or outlooks.
Tech Data is one of the world’s largest distributors of technology products. Tech Data reported sales declined -3%. Management was disappointed with their results. On their conference call management stated IT spending was weaker than expected. Management noted that as they progressed through the quarter their market slowed more than anticipated with mobility being particularly weak. With $26 billion in sales in 2016, Tech Data sells a lot of product and is a good barometer of technology spending. Big Lots was the other company on my buy list that reported results. Big Lots is a discount retailer with 1,445 stores in 47 states. Sales for the quarter were practically flat with same store sales up 0.3%. During their conference call, management called the retail environment choppy. While Tech Data and Big Lots are only two data points, their results aren’t too dissimilar from those of other companies recently reporting. Organic growth, on average, remains slow.
As I discussed in my July 22 post “Examples Please”, a good defense against financial spin is asking for specific examples. My question for the Federal Reserve is, “If you are data dependent, point to specific examples where you see a meaningful change in operating results? What part of the economy, specifically, is performing noticeably better since your last policy meeting?” In my opinion, operating results of businesses have changed little over the past several quarters. It’s been consistently stagnant. What does the Fed see that businesses don’t?
In conclusion, it appears like more of the same from companies in Q3 and the Federal Reserve post QE3. I continue to wait for The Great Normalization, with its arrival time unknowable. After reviewing Yellen’s comments on Friday, it appears central banks plan to remain very involved in the financial markets and they are open to becoming even more involved. Bill Gross is concerned. I’m concerned. So there’s two of us (yes, I’m very aware I’m not Bill Gross). It’s not much, but it’s a start!
I remain optimistic other investors will gradually come to their senses and say enough is enough as it relates to inflated asset prices and playing a role in the central banks’ script. From the book Extraordinary Popular Delusions and the Madness of Crowds, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
What a wonderful quote and how relevant today.