The Economy: Mixed news on the economy as we count down to the mid-terms. The Fed has made it clear that tightening is here to stay at least through "neutral." Smart money is saying this is another 1.75-2% on Fed Funds. Mortgages are through 5% and markets have finally begun to take notice. Are these storm clouds going to pass by or are they going to prove more problematic. Word is that real estate in NYC, Seattle and San Francisco has hit the wall. According to some, San Diego commercial real estate is already in the tank. But these numbers are difficult to quantify. It's another reason to have a plan and stick to it. This is particularly true with financial assets where you have the liquidity that is lacking in hard assets such as real estate. Corporate memory is about 3-years. Few remember 6-years ago when their real estate was hopelessly underwater and "Walk Away" referred to giving it back to the bank. Reagan gave Volcker carte blanche to bring inflation under control. Volcker's solution was to raise interest rates 1% every time the Fed met. Based on the current meeting schedule, that would be 8% a year. What would this type of scenario do to your organization? Perhaps it's not inflation that drives interest rates. Perhaps it's simply mean reversion; which is as normal as the sun coming up. If we've had 10-years of financial repression with zero interest rates, how high and for how long do interest rates go to revert to the historic norm of a 4% long bond?
Food for Thought: It's said that history doesn't repeat but it does rhyme. So, in the pendulum swing of liberal-conservative-liberal-conservative it may pay to entertain the notion that conservative is on the ascendant. If that's the case, it may pay to entertain the notion that Central Bank manipulation of financial markets is on the wane. If Central Bank manipulation is on the wane, is it possible that the days of TBTF banks are over? After all, the sacred cow status of TBTF Banks is the creation of bankers feeding at the trough of taxpayer bailouts for decades. If conservatism is ascendant, is it conceivable that the Trump Administration would stop the bailouts and let the markets decide the fate of the TBTF banks? Do you wanna be right or do you wanna make money? That's the age old question.