Hope Amid Dangerous Times – June 30, 2023

Hope Amid Dangerous Times – June 30, 2023
Morgan Lewis Posted on July 1, 2023

Hope Amid Dangerous Times

The pre-party was alive and well in financial markets this week as America looks forward to Independence Day celebrations. The merrymaking featured economic optimism, a re-embrace of the dream of a reinvigorated “everything bubble” 2.0, and a widespread buy-in to the promise that while interest rates may be headed higher for longer, so too are stock prices under seemingly any and all circumstances.

There is no such thing, however, as a soft landing to a super bubble. They always end in tears. The only question at this point is whether the bubble is still inflating—even as higher interest rates increasingly manifest their lagging effects—or whether air is starting to leak out of the balloon. In HAI’s view, probability greatly favors the latter. Market participants appear to be mistaking an echo bubble and bear trap for a brand spanking new bull market. Unless we’ve initiated a devastating terminal Austrian crack-up-boom dynamic (something no one should want), a fresh “new” bull market is extremely unlikely. HAI sees the current market set-up just as John Hussman described it this week: “a narrow, selective speculative blow-off—a bear market rally driven by fear of missing out on the resumption of a bubble that is actually in the early stage of collapse.”

These are dangerous times to be playing in the shark-infested waters of financial markets. It could be different this time. It’s possible. But, for those heavily long financial assets amid the promise of a new lasting bull market, it had better be very different in almost every conceivable way this time. Valuations are a wee bit stretched (as in, higher than the bubble peak valuations as measured by the Buffet indicator), equities are decoupled from the credit market (high-yield corporate debt has not confirmed the rally in equities), the 2s30s yield curve is now at a record inversion, commodity markets (despite grave longer-term supply concerns) are now down in four of the last five quarters due to overriding demand worries, and the Leading Economic Index has been contracting sharply for over a year and is absolutely screaming “incoming recession.”

“This time is different” is a notoriously dangerous game, and, as Warren Buffett says, “What we learn from history is that people don’t learn from history.” Right now history warns at full volume of a massive bubble running into the sharp pin of a Fed policy tightening cycle that will end in tears.

This week, Fed Chairman Powell said, “Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.” If Powell and the Fed don’t cut rates and instead follow through on the higher-rates-for-longer policy guidance, then the lessons of history are likely to repeat in extremely painful fashion.

The buzzword now anchoring bullish arguments for stocks is abundant “liquidity.” History doesn’t repeat, but often rhymes. In July 2007, Citi CEO Chuck Prince famously told the Financial Times that global “liquidity” was enormous, and that, “As long as the music is playing, you’ve got to get up and dance… We’re still dancing.”

Well, the music was already winding down and Chuck prince was still dancing as Citigroup stock proceeded to collapse from $415 to $7.86 a share in less than two years. These are dangerous and deceptive times, and extreme caution is warranted. Wealth preservation should be prioritized above all else. To that end, there’s no substitute for gold as financial insurance.

As we celebrate the upcoming 4th of July holiday, lets pull the lens back and widen the scope to appreciate what the United States was founded upon. As Dwight D. Eisenhower said, “Freedom has its life in the hearts, the actions, the spirit of men, and so it must be daily earned and refreshed—else, like a flower cut from its life-giving roots, it will wither and die.” Freedom is central to the American experiment. Free markets are a corollary to a healthy, free society and representative government. Let us hope the principal of freedom reigns, the American experiment prevails, and that free markets and a free society thrive in the years ahead from a renewed “life-giving root.” HAI sincerely hopes individuals of character will emerge to champion and renew the cause of freedom for the benefit of all. HAI hopes that in the land of the free and the home of the brave the principal of freedom will not be allowed to “wither and die.” As long as freedom has its life in the hearts, the actions, and the spirit of individual Americans, HAI remains stubbornly hopeful. Best wishes for a fabulous Independence Day!

Weekly performance: The S&P 500 surged 2.35%. Gold held nearly flat, down 0.01%. Silver gained 3.0%, platinum lost 1.14%, and palladium was down 4.46%. The HUI gold miners index gained 1.03%. The IFRA iShares US Infrastructure ETF popped by 4.05%. Energy commodities were volatile and mixed on the week. WTI crude oil was up 2.14% while natural gas lost 1.58%. The CRB Commodity Index was down 0.38%, and copper lost another 1.05%. The Dow Jones US Specialty Real Estate Investment Trust Index popped 4.93% on the week, while the Vanguard Utilities ETF was up 0.78%. The dollar was little changed, up 0.05% to close at 102.59. The yield on the 10-yr Treasury was up 7 bps, ending the week at 3.81%.

Best Regards,

Morgan Lewis
Investment Strategist & Co-Portfolio Manager

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