Is the Fiscal Cliff the Y2K of 2012?
Remember Y2K? Interminable meetings discussing scenario tests, date resets on our desktops, and getting new checks printed, all because some punch-card designers decided to save two digits in the date field on an 80 character punch card 70 years ago!
But after the zero-hour came and went, and we didn’t lose power, we didn’t lose our phones, and our bank balances were still there, everyone pretty much stopped worrying. Equities at 30x earnings? No problem! Look at all that cash we have in the economy! The Fed put it there to make sure we didn’t have a banking crisis caused by a massive system failure over the turn of the millennium, but then when they mopped that up with higher interest rates, that caused the recession that popped the internet bubble. We’re still recovering from that one.
The Fiscal Cliff of today looks like Y2K of 13 years ago. Everyone frets about it; some have discounted it; many are planning for it. But it’s not the known unknown like the Cliff that kill your portfolio, it’s the after-effects. And valuations.
The bond market today is reminiscent of the equity market of 1999. Yields just keep going lower, just as equity prices kept rising back then. There are all sorts of rational explanations why bond yields have fallen and they can’t get up–the “New Normal,” global wage deflation (from Chinese labor), natural gas surpluses–just like there were reasonable justifications for the ebullient equity valuations of 1999. Those rationalizations didn’t hold water.
In the end, the market couldn’t sustain equity market multiples that were twice their historic average. And long-term bond yields probably won’t remain at less than half of their normal level, either.
Douglas R. Tengdin, CFA
Chief Investment Officer
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