Yesterday evening I listened to the latest Grant Williams and Bill Fleckenstein "End Game" podcast; their guest was Simplify Asset Management's Harley Bassman.
While I didn't necessarily agree with all of Harley's assertions, I nevertheless found him to be an exceedingly sharp, very deep thinker on markets.
The following exchange resonated with me; i.e., with my view of present Fed policy and the hazardous setup it engenders:
Bassman: They (the Fed) could still keep the front end (short-term treasury yields) low, but if you remove this certainty of sorts, you create moral hazard. If you have moral hazard, people take too much risk. So to some degree, you have to take the training wheels off and let people go figure things out for themselves. I think you can do that and still have some moral authority and thoughtful clarity. I do not think they're two different things.
Fleckenstein: I completely agree. That's kind of my underlying theme is that they don't understand the risk. When I say risk, I mean they don't understand that when you tell people what's going to happen and you take any uncertainty out of the picture, they're going to get out over their skis and take on too much leverage.
That's kind of what I mean when I say I don't think they understand risk. They don't understand moral hazard and those sorts of things. So the policies that they're doing that they think are the right thing, they don't understand the unintended consequences, and we keep coming back to the same sorts of problems.
Bassman: Well, let's be clear, I would not say that they don't understand. I would say that they don't appreciate them or value them as much as we do.
They value current stability more than this uncertain risk in the future.
As did this one (particularly Bassman's last point):
Fleckenstein: ...what you said of them and their thumb on the scale is not really debatable. Why isn't this a big topic of conversation in bond land? There's been very few people that have made that point here. Why do you think that is?
Bassman: ...it is what it is and we can't change it. Clearly, you've tried to. You've written about it. You've spoken about it a great deal, about the Fed. You've said they don't understand risk. I'd say I think they do, but they don't care. Or they value it differently.
Fleckenstein: I think you're right.
Bassman: It's like, what are we going to do? We're not going to change their minds. So now with the situation we have, how are we going to invest, protect ourselves, try to make money, be clever... most of all, not get our hands chopped off by a surprise?
While, indeed, the Fed's utter lack of stomach for market stress makes for epic moral hazard, in our view it gives us some real clarity going forward.
As we continue to stress, the Fed simply can't support the equity market, the credit market and the dollar ad infinitum. I.e., something's got to give. And that something in our view has to be the dollar. Which makes the overall (long-term!) setup very favorable for foreign (emerging market in particular) equities, industrial materials (given the direction of fiscal policy going forward), commodities and related equities, and precious metals far into the foreseeable future.
As for the very short-term, well, like I keep saying, we feel very good about our present allocation over the next 5 years. As for the next 5 weeks, or 5 months, however, I dunno.
And, yes, we think it's critically important right here to hedge against getting "our hands chopped off by a surprise"...
For more on the short-term setup, please take a few minutes and take in today's technical market update below:
Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: