Our steroidally challenged economy
The first in a 3-part series on the steroidization of our economy.
By Vitaliy N. Katsenelson, CFA
This presentation covers the main concepts discussed in the series and shows how we are positioning for this very different economy.
Birds are singing, the sun is shining and life is beautiful again. On the surface, the vital signs of our economy are improving with every economic report.
In some areas, like unemployment, the rate of decline is decelerating; in others, like gross domestic product, decline is turning into growth.
The stock market is behaving as if the history of the past 20 years is about to repeat itself: Recession will turn into a robust expansion.
Stock prices are discounting an expectation of robust earnings recovery to a level only slightly below the pre-financial crisis level, and risk taking is in vogue again as the performance of junky stocks trumps quality.
The global economy reminds me of a marathon runner who runs too hard and hurts himself. But now he has another race to run. So he’s injected with some serious, industrial-quality steroids, and away he goes.
As the steroids kick in, his pace accelerates, as if the injury never happened. He’s up and running, so he must be ok; this is the impression we get, judging from his speed and his progress.
What we don’t see is what is behind this athlete’s terrific performance -- the steroids.
Of course, we can keep our fingers crossed and hope that the runner has recovered from his injury and what we see is what we get – the athlete is at the top of his game – but there are problems with this thinking.
Serious steroid intake comes at a cost: It exaggerates true performance. Steroids can be addictive; once we get used to their effects it is hard to give them up. The longer we take them the less effective they are. Finally, there is a good reason why steroids are banned in sports: they damage the athlete’s body.
Vitaliy N. Katsenelson, CFA, is a portfolio manager and director of research at Investment Management Associates in Denver. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles by e-mail, click here.
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