Buffett may be buying, but is it really different with the Trump effect?
Billionaire investor advising others to blindly jump into the surging markets
So far, 2017 has been quite kind for investors who have chosen to embrace risk. The election of Donald Trump as U.S. president has sent markets, especially U.S. stocks, rocketing higher, all on the premise that his fiscal policies will cause growth to surge.
While many didn’t vote for him, they certainly have benefited after quickly jumping on the wave of momentum. For example, Warren Buffett, who was an outspoken Hillary Clinton supporter, bought US$12 billion of stocks immediately following Trump’s victory.
With the extra chips on the table he is now advising investors to blindly jump into the market, arguing that stocks are still cheap thanks to low interest rates. Interestingly, Buffett makes no mention of his approximately US$15 billion of net equity sales during the first nine months of 2016 when interest rates were actually lower than where they are today.
Also curiously absent is any reference to the so-called Buffett valuation indicator, which compares the total value of the stock market relative to the country’s GDP, and which he once said was “probably the best single measure of where valuations stand at any given moment.”
This is probably because the indicator is at 1.2 times, meaning the stock market is now 20 per cent larger than the entire U.S. economy and higher than the 1.11 ratio peak prior to the 2008 financial crisis meltdown, according to ETF Daily News.
Meanwhile, commodities such as oil have disconnected from inflation expectations, which is not a good sign. In particular, oil has struggled to break out of its $50 to $55 range despite some major support, including the OPEC production cut, the Saudi promotional efforts ahead of their planned Aramco IPO and speculative long positions reaching record highs. Our experience shows that the demand for oil is an excellent indicator of global economic growth. A great example of this was the strong oil demand and economic growth, especially out of emerging markets, from 2000 through to 2008.
Today, pundits are calling for the U.S. Federal reserve to raise interest rates three to four times, all on the expectation of a return to this high-growth environment. While this didn’t happen last year, we are now hearing the infamous “this time it’s different” phrase ring out thanks to the markets’ new saviour, President Trump.
Actually, we do think it is differ- ent this time, but not in the way many expect, as the only thing that’s growing is the level of debt.
According to a recent S&P Global report, worldwide sovereign debt is expected to reach a new all-time high of a whopping US$44 trillion this year. Sovereign borrowing is anticipated to grow US$6.8 trillion this year amounting to nine per cent of global GDP. To add some perspective, global sovereign debt has expanded approximately 250 per cent in the past 15 years.
A lot of this debt is in U.S. dollars and so debt-servicing costs will be affected not only by higher interest rates but also a higher U.S. dollar. This will hit the highgrowth emerging markets especially hard with a continuation of the exodus of capital from those economies into the U.S. compared to the large inflows experienced during their high growth years in the mid-2000s.
Looking closer to home, the U.S. housing market has responded to the paltry 25-point rate hike by the Fed in December and higher mortgage rates with pending home sales dropping 2.8 per cent in January. Imagine what would happen with four more hikes?
Meanwhile, the level complacency in the U.S. equity market continues to set new records with 48 consecutive days without a one per cent intra-day move in the S&P 500, as measured by Charlie Bilello at Pension Partners.
This complacency is also reflected in the level of the VIX, or volatility index, which measures the future expected volatility in the option market. It is also referred to as gauging the level of fear in the market, which has now reached record low levels not seen since early 2007.
This brings to mind another absent quote from Buffett’s past: “Be fearful when others are greedy and greedy when others are fearful.” Financial Post Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgarybased private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.