Last week I said that investors have plenty to worry about, but also that many of the traditional reasons to abandon ship—chiefly extended valuations and political paralysis and risk—perhaps weren't as valid as many think they are. The most convincing argument for not panicking despite extended valuations is that ample global liquidity and low interest rates remain as support for equities and credit markets. I imagine that his idea has been put down on page one of most investors' playbook since the financial crisis. The argument is pretty simple. As long as central banks are on the bid, their purchases of bonds—and other assets—will drive private investors into riskier markets. Known as the portfolio balancing effect, this is recognised to operate via both the stock and flow of central banks' balance sheets. Finally, front-end interest rates that are locked at the zero bound—or slow to rise even as the economy recovers—also translates into higher equity prices and tighter spreads. Low rates mean an increase in the future discounted value of cash flows and also encourages investors to pay a higher multiple for the same level of earnings. It also forces investors to seek out yield in private debt markets to reach their return targets, despite the higher risk profile of corporate bonds.
Read MoreIt has been three weeks since I last updated these pages, and as I leaf through my charts, I am tempted to conclude that nothing substantial has changed. In the global economy, headline leading indicators signal stable and relatively robust growth. The first chart below shows that my diffusion index of macroeconomic leading indicators is rising gently, indicating that the pace of industrial production growth in the major advanced economies will rise to slightly above 4% year-over-year in the next few months. The two following charts show individual leading indicators in the large economies. They are all rising year-over-year, and momentum has accelerated, with the notable exception of the U.K's leading index still stuck below zero. Finally, I throw in charts of real M1 growth—arguably the best single macroeconomic leading indicator—and these data also are constructive. We have to watch the slowdown in China, but M1 growth rose in July, which does not suggest a liquidity crunch, at least not in Q3.
Read MoreThe second quarter finished with a tricky question for markets. Did last week’s price action signal a significant change in tune or was it just insignificant noise in an unchanged trend of lower global long-term interest rates? One the one hand, it’s tempting for me to run a victory lap. Here I was musing about a steeper U.S. yield curve and outperformance in financials and energy. On that background the most recent price action has been a slam-dunk. On the other hand, I also said that I thought yields would fall over the summer, and that the reflation trade wouldn’t re-rear its head until Q3. So perhaps I shouldn’t raise my arms in celebration just yet.
Read MoreI am still willing to give Mr. Trump the benefit of the doubt. We have no actual policymaking to judge yet, and at least some of the people he is surrounding himself with look capable. I admit, however, that the burden of evidence is getting heavy. The president-elect's tweets, on their own, are evidence that he has tendency to act long before thinking. Last week's presser also provided a timely reminder that we are dealing with a volatile character. I understand that infuriating "soft" liberals, such as yours truly, is exactly what Mr. Trump and his strategists want. I have no doubt that the incoming administration's communication "style" is carefully planned. The base loves it! But problems are brewing, chiefly among which is the growing chasm between Mr. Trump and the intelligence apparatus upon which he will so desperately depend for policymaking when he takes office.
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