One of my favorite scenes in the Pixar movie Finding Nemo comes at the end. The fish had managed to outwit the Dentist (who was holding them captive in a tank) by dirtying the water enough to force a water change. In order to do that, the Dentist had to bag the fish and leave them outside the tank, at which point they jumped out the window and into the harbor below. Unfortunately, they hadn’t considered how they were going to get out of the plastic bags. The movie ends with one of the fish asking, “Now what?”
How does that relate to investments? As forecasters of market cycles we are forced to think creatively through different scenarios, both positive and negative. One of the more negative scenarios facing us at present is if the economy fails to gain traction, even with the massive dose of stimulus running through the system. In my opinion, a good amount of the run since 2009 has been predicated on a belief that poor fundamentals are usually trumped by massive amounts of central bank liquidity. It’s hard to argue that it hasn’t worked, with many markets up in excess of 100% since the start of this Bull Run. One of the scariest scenarios that could unfold would be if we begin to see a serious decline in the business cycle, even as rates are at zero and central bank balance sheets are exploding. With the Fed out of bullets and the Bernanke Put dead, investors might find themselves like those fish in Nemo asking themselves, “Now what?”
That isn’t our base case at present and despite a short-term pullback that could occur at any time, we are positioned for the game to continue and for markets to be constructive over a cyclical horizon. And just so I don’t inherit the tag of Dr. Doom, in my next column I’ll run through another, much more positive scenario.
Stay tuned for that.
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