Submitted by Taps Coogan on the 3rd of May 2019 to The Sounding Line.
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Julian Brigden, co-founder and head of research at MI2 Partners, recently spoke with Real Vision in a wide ranging interview in which he expresses his concern that the move up in markets since the beginning of the year may be a ‘bear trap,’ that comparisons to 2016’s recovery may be unfounded, and that more QE is likely to follow any downturn in markets.
Some excerpts from Julian Brigden:
“…The supposition in the equity market is that central banks have once again pulled the rabbit out of the hat and successfully reflated the bull market just like… they did in early 2016. I think that’s possible. I am not sure we are there yet. I think some of the assumptions that are being made are a little preemptive…”
“…When you push unemployment well below Nairu, which is the non-inflationary rate of unemployment…, traditionally, that hasn’t ended well. It’s almost always ended up with a recession, very simply because you create one of two things. The first thing that you create is… inflationary pressures which forces the Fed to… be ‘overly muscular’ and the second thing it does is you create mis-allocations of resources in the process of holding those rates super low, and as you try to normalize, or as some exogenous event comes along, the system tends to tip over and the net results is… you end up in a recession… We’ve already run this economy too hot. We’ve pushed unemployment down to levels not really seen since the mid 60s and… while the Fed kept it going for a couple more years (in the 60s), it really didn’t end well. It ended up with the massive recession we saw in the late 60s and early 70s…”
“What you can see is US equity out-performance the like of which we have essentially never seen before. We are at levels that surpass anything we have seen in the last 50 years on a relative basis… Is this similar to 2016? The answer is: It could be but we are a lot more extreme in the cycle. Those valuations and that extreme divergence are a lot more extreme than they were back then… We’ve had this big growth in the growth sector (of the stock market)… these companies, somewhat counter intuitively, grow in low growth environments. They grow because nothing else is growing and they do that because they can get hold of super cheap cash. And they take that super cheap cash and they basically burn through it at a very rapid rate. We can see these companies losing billions of dollars a year. But they do it to generate revenue and that’s how stocks are valued. We saw this ironically back exactly in the 2000 Dot-Com period where the same sort of companies, analysts would look at them and say ‘you can’t look at them from an earnings perspective, you have to look at them from a revenue growth perspective.’ Well that didn’t work out very well at all. And actually, if you look at some of the ratios between growth and value, we’ve actually come right back, to the tick, to the same levels that we saw in March of 2000 and the Summer of 2000…”
“…We’ve pushed up the prices of a lot of products now to pre Global Financial crisis highs and yet incomes have not grown accordingly, and even now, a relatively small increase in rates has destroyed affordability… Affordability is poor… when you take income into account, when you take deposits into account, and you stress it even with the small amount of rate hikes in absolute terms that we’ve seen, (housing) affordability just imploded at the end of last year… You’re going to have to get rates a hell of a lot lower to get affordability to where it was back in say 2015 or 2016… This affordability metric, which is a lot more extreme than it was in 2016, houses were (almost) at their peak of affordability in 2016, is another thing that makes me question this automatic assumption that it’s game on, a 2016 redux…”
“Ultimately I am convinced that central banks will do whatever it takes. I honestly don’t think that they’ve got a choice. The choice is between the devil and the deep blue sea. The devil is they fail to act, the economy slips gently into recession, and then we are back into this deflation game… In the United States the Trump administration would rip the Fed apart and I think they are highly conscious of their independence… Or, the alternative is they reflate. That may not seem like a bad option… but when you’ve already got under 4% unemployment, when you’ve got inflation at 1.5%-2% versus 0% in 2016… there are risks… You could catch inflation early, which is what happened in the 1960s, and it becomes embedded in the system relatively quickly.”
There is much more to the interview, so enjoy it above.
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