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The latest note from Cumberland Advisors’ David Kotok is pretty heavy. In it he demonstrates that current market conditions couldn’t be further from any sort of normalcy, new or old.Rather, a complete “idea shift” has occurred:
“The old idea was that the official sector would intervene, rebalance the system, and then exit. The old idea was to get the private sector back in the game quickly. The old idea was to recover the official money and then let the market resume its functions of pricing and clearing and providing capital.
“The old idea is dead.”
The new idea involves an intrusive market role for the “official sector” — governments, intergovernmental organisations, supranational organisations. Think ECB, IMF — even GSEs, which Kotok notes are single-handedly supporting housing finance (although as we pointed out last week, it’s technically Treasury that’s fulfilling this role).
“The new idea is to crush the private sector and to keep the official sector in the game for a prolonged period,” he writes.
Under the “old idea” regime, such intervention would likely have resulted in inflation and weak currency. Kotok says these may yet come to pass — “but it will take a while.“ because “officialdom” will remain in the market for an indefinite period of time.
He continues, using Greece as an example, but adds it will likely apply in Portugal, Spain and even Italy.
“[Greece] will need more subsidies. It will be offered that assistance through negotiations under strenuous terms. Such is the power of officialdom. Greece will have little choice, since the alternative of leaving the Eurozone will always appear to be worse. That process will continue for years unless a new Greek government repudiates the decisions of the previous ones and a new political crisis undermines the official European coalition.”
Meanwhile, the private sector will remain frozen out, only allowed back in when officialdom permits it.
“Investors’ capital spent on hope in this uphill fight to preserve hope will be lost. Ask the private holders of Greek debt if you need proof.”
What does this all mean for investing positions? As it turns out, Kotok doesn’t offer anything terribly exciting, for now:
“We are still fully invested in the US stock market ETF accounts. And we have positions in the energy sector and believe they must be maintained for all the strategic reasons we know. Believe it or not, we are overweight healthcare. And regional banks. And homebuilders.
“We are gradually reducing durations in the bond arena, and we are tactically hedging spreads where we can do it. We expect officialdom’s commitment to very low interest rates to persist for a while. That is part of new-idea application.
His final call suggests less an endorsement of the “idea shift” than a realisation that barring any new shocks, “officialdom” will remain on cruise control in its current posture:
“We expect a mild, single-digit per cent correction and then a higher level of stock prices by the end of the year. The bull market started on October 3, 2011. It is probably only half over.
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