A Year of Living
January began with a sharp sell-off in the market
prompted by fears of a looming recession. These fears
proved unwarranted and the market rallied. Then there
was the unexpected vote by the UK to leave the European
Union, Brexit. A surprised and unprepared market sold
off sharply again only to rally back after a few days.
The market remained wobbly due to uncertainty as to
whether or not the Federal Reserve would raise interest
rates in September in the face of sub 2% GDP growth. It
did not; the market rallied. Recently the market
stumbled as the largest German bank and pillar of the
European banking system, Deutsche Bank, was hit with a
$14 billion fine by the US Department of Justice, a fine
which threatened the bank with insolvency and could
possibly trigger another international financial crisis.
The market soon rallied when rumors surfaced that
Justice would settle for a mere $6 billion.
Coming up in about a month is the presidential
election between two historically disliked contenders.
Clinton promises more of the same: larger government,
more debt, more regulation, more free stuff, hardly a
recipe for growth. Trump promises to disrupt the status
quo but lacks consistent policy and presidential
gravitas, to be kind. Both belittle the benefits of free
foreign trade. How the markets will respond to the
winner is anybodyís guess. This is beginning to look
like an unfunny version of the Perils of Pauline!
On the macro level, growth has been low and tenuous
in the US and even more so in Europe. Asian growth is
higher but well off the level of previous years. Demand
remains subdued and there is an oversupply of capacity
in many sectors. This is why there is so much focus on
the Fed. Many investors fear that raising rates under
current conditions will push the world economy into
recession. Others are advocating higher rates. They are
of a mind that low rates are dangerous, causing a
misallocation of capital which could lead to a financial
bubble like 2007. We are sympathetic to both schools of
thought. It is possible that both can be right. The Fed
is in a very tight spot.
Internationally, not much has changed over the past
nine months and we donít expect much to change in the
year going forward. The massacre in Syria continues with
Russian duplicity and bad faith. China continues to
challenge US interests in the South China Sea. The
Philippines are drifting out of the US circle of
influence and currying favor with China. A lack of a
muscular foreign policy by the US is eroding Pax
Americana. This is a fertile field for unexpected
developments that could roil markets.
These are dangerous times for investors. Market
valuations are high but the market is astonishingly
resilient. Whatís going on? One thought is that the
market is expecting an upturn in corporate earnings
after six consecutive quarters of decline. The negative
impact of a fall in oil prices on aggregate earnings is
dissipating. Perhaps GDP growth is poised to accelerate
in the quarters ahead allowing the Fed to raise rates
from a position of strength and without fear of
Our strategy remains unchanged. Market valuations are
too high for us to be very bullish. Client cash
positions remain high. We will take profits when
appropriate and buy in periods of confusion. 2016
continues to be a year of living dangerously but it
might turn out OK after all.
* * * *
PR Herzig & Co. has moved to another office in the same
office complex. Our phone and fax numbers remain the
same. The ADV Part II has been adjusted accordingly. The
new mailing address is:
PR Herzig & Co., Inc.
4 Expressway Plaza, Suite 220
Roslyn Heights, NY 11577
Please read our important notice
about these letters and the securities they mention.