“The national budget must be balanced. The public debt must be reduced. The arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced. If the nation doesn’t want to go bankrupt, people must learn to work, instead of living on public assistance.” – Cicero, 55 BC.
Is Debt The New Equity?
I have been negative on credit for what seems like an eternity now. I have stated many times that, “if you are not being compensated to take risk, particularly credit risk, do not take credit risk”. And so for a long time we have been void of credit risk and to be frank, remain so. But for those that must take risk, the credit market is starting to seem like a far better bet than do equities.
Before the equity market began its descent this spring, I believed the credit market was sniffing out something that the equity market was not. Please click the link for more on “The Tale of Two Markets“. When asked why I believe the stock market has corrected so swiftly, my answer has been, “it had a lot of catching up to do”.
The big question on my mind these days is whether or not the equity market has corrected enough in order to make equities cheap relative to other asset classes, particularly credit. My answer is a resounding NO!
I have stated and still believe that we are in a secular bear market in equities that will not end until 16-year trailing returns for the Dow Jones Industrial Average and S&P 500 are in negative territory. In other words, this would mean that when we marked the high for the S&P in March of 2000 at approximately 1500, a secular bear low assuming a -4% annualized trailing return for 16 years would place us at around 795 in 2016. Pretty sobering, right?
Looking at the graph below, courtesy of Ned Davis research, we can see that secular lows have been established in the DJIA when the 16-year trailing return range is between -4% and 0%. Considering that the secular bull market party that went on from 1982-2000 was the greatest on record, one must expect the secular bear to accompany it to be the nastiest on record as well.
Notably, in the secular bear market, lows stemming from the Great Depression (the most similar pattern I can come up with for the mess we face today) and the 16-year annualized trailing returns in the range of -4% seem to be the most appropriate level to use. Since this credit unwind may actually be more painful this time around, I think that is the best we can hope for. So, while equities may seem “cheap” to most, I can accept that they will rally from time to time, perhaps fiercely, but the sad truth is that the “buy and hold” approach that has scorched so many during the past eight years is still not the best risk/reward proposition. This leads me to ask, “what is the better proposition?” Debt. Yes, that 4-letter word I have been avoiding for so long.
Click here for Bennet’s full report.
* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. While working for PaineWebber as a Senior Vice- president, Bennet was a member of the Chairman’s Council for four consecutive years. During his years with Salomon Smith Barney as a Vice-president, he established an institutional fixed income presence in Central Florida.
In 1997, Bennet formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions. He is also a contributor to the financial website, www.minyanville.com and is regularly quoted in Wall Street Journal Online, Barron’s and Bloomberg.
Bennet graduated from Rutgers University in 1982 with a degree in Economics and was a member of the International Honor Society of Economics.