Forthright Forsyth Hindsight in the Spotlight

Randall Forsyth at Barrons always does a good job of laying out the issues with which investors have to grapple. He doesn’t have answers, but he does provide food for thought. Forces considered are shown in bold.

A lot of what he writes he's written before and we've read before - but - let's face it - progress by and large is plodding when we talk about genuine thinking.

His Aug 3, 2020 Up & Down Wall Street column deals with new manifestations of phenomena he and others have been tracking for weeks. That is the disconnect between the stock market and the real world.

READ https://www.barrons.com/articles/for-the-first-time-ever-uncle-sams-aid-to-u-s-tops-quarterly-gdp-51596244795?

In the wake of the COVID-19 pandemic]came massive Government stimulus and near-complete economic breakdown while the stock market, after an initial stumble pretty much blasted back into overdrive.

Investors have been modeling quarterly GDP, and now they have actual numbers, and it aint pretty.

“Dismal First: Uncle Sam’s Aid to U.S. Tops Quarterly GDP” appears on a weekend that sees unemployment bonuses of $600 per week expiring, and coronavirus counts (aka COVID-19, or the Pandemic) charging contagiously upward. It comes when Apple, Amazon, Facebook and Alphabet delivered startling strong earnings. And the stock market’s capitalization it two times nominal GDP, a record.

Never before has fiscal and monetary stimulus matched the nation's nominal output in a single quarter. - Joseph Carson

Wages and salaries plunged, but personal income soared because of Government transfer payments – which particularly galled the Republican leaders who pretend to live in a Norman Rockwell painting. But, Forsyth notes, a 32.6% jump in personal income was accompanied by a 34.6% decline in household spending.

“Some of those stimulus checks evidently found their way into stock speculation, especially among bored sport gamblers …” he writes, and notes, like others, that the stock market seems to have more of small player/speculative cast these days.

The rate of greenback printing finds Fitch Rating revising its outlook for the nation’s credit to ‘negative.’ Although the dollar remains a go-to currency haven, a downgrade seems due.
From this discussion the columnist segues to the 60/40 portfolio ratio. He notes that a positive correlation, rather than a negative correlation has come to exist between the stocks and bonds in recent years. Corona virus has caused bond yields to plummet.

Piths Forsythe “Traditional fixed income investments are neither fixed nor provide much income.” And a small uptick in yields would wipe out the small income offered today. And of course, we will have to dig up Isaac Newton if we are ever going to understand that.

Bond proxies include utilities, REITs and consumer staples stocks, he said. But noting works when bond yields approach 0% - 10-year T-notes are 0.54%. Things may change, if active investing comes again to surpass passive investing.

Most of this just above comes via a presentation by Marko Kolanovic at JP Morgan. The bottom line is a familiar one…diversify away from stylish FANG stocks (with which bonds are now positively correlated) toward [Value] and …drum roll … financial shares.

Some Monday morning stock holders will wake up to an over-valued market, that the Fed can't bail them out from.

Among questions I’d ask Mr Foresight is: 

1.If people save more..then what?

2.If the rotating 60/40 stock bond 40/60 bond stock is done, then what? How do you hedge a portfolio (without going with put options)?

3.What are alternatives to passive investing?

4.Which measures best inform planning?

Spot plays

The Quarterly GDP  conundrum to which Forsyth refers gets 'long-term' treatment on the Barrons web site. Uncertainty, one of markets' most intense and atmospherically tangible ghosts is 4 horseman on the horizon. Conventional measures and models are taking some time off, like our senate representatives this weekend.

Until the U.S. economy gets back to previrus levels (in mid 2021?), it will remain largely a fool’s errand to use conventional measures to predict where the economy is going, and thus how markets should be reacting to it. https://t.co/HJ12beY3QF

— Smiling Jack Vaughan (@SmilingVaughan) August 2, 2020

Some headlines on Sat from Market 

Why August in a pandemic is a time for vigilance for stock market investors
2:25 PM ET
What does a stratospheric rally for gold mean for the stock market?
1:36 PM ET
Gold has 'no role' in portfolio of wealthy clients, says Goldman manager
11:59 AM ET
10-year Treasury yield plunged to its lowest in 234 years, says Deutsche Bank
10:01 AM ET
The Fed treats investors like ‘foolish children’ by propping up stocks despite ‘dreadful fundamentals,’ hedge-fund heavy Seth Klarman says
9:33 AM ET
Stocks stage a late-day comeback to end higher one day after a Big Tech earnings blowout
9:01 AM ET
This innovation could do for investing what Napster and the iPod did for music — and financial services may never be the same
9:00 AM ET
6 Companies That Raised Their Dividends This Week, and 2 That Cut Theirs