While the path which assets take to get to 'fair' valuation is very difficult to predict, and not always mathematically rational, we can hazard a guess as to what asset prices/expected returns might look like with a three percent risk free rate (100 basis points of tightening after the assumed 25 in June):

Bottom line:  Expected future returns in the medium-term look unexciting at best.  Any return is going to have to come from 'alpha' or some form of idiosyncratic risk rather than from broader market return.  That implies to us a very cautious stance with time focused on finding hidden gems (which are fewer and farther between), small relative value trades, and enhancing returns on cash while keeping in the back of our minds that sometimes doing nothing is the best thing to do!

With expected future rates of return on most investments at all-time lows and the dog days of summer approaching, we have little to offer as stimulating investment 'commentary'.  There are a few isolated credit stories that we are involved with but, generally, we are erring on the side of caution and preservation of capital.  Along these lines, we refer investors to Howard Marks' latest memo for a good summary of several of the themes we have been highlighting for two or three years:

Oaktree - Howard Marks memo, "There They Go Again....Again"

Interestingly, Marks limits one's ability to claim to be 'early but right' rather than just 'wrong' to six years.  We cannot imagine we do not experience the next 'Minsky moment' (stability leading to instability) at some point before the end of the decade.  However, the current bubble has already surpassed expectations for both size and duration.  Maybe this time it is different...but we doubt it!

Hold the phone!  Tuesday's shocking election victory by Donald Trump has obviously made the markets think very differently about the future.  Specifically, until about 8PM Eastern on Tuesday night, the markets mostly considered a Hillary Clinton victory to be a foregone conclusion.  This would have likely entailed more of the same in terms of policy:  Slightly higher taxes, more easy monetary policy, similar or more regulation, price controls, and consequently slower growth (though her plans for infrastructure spending may have offset some of these drags). 

Then everything changed.  First, the equity markets cratered at the shock of a Trump victory before Trump surrogates started talking up equities as well as the economic stimulus/growth the new President was going to unleash on Wednesday.   Though at least I am skeptical this will happen quite as promised, the markets seem to believe Trump will spend aggressively on infrastructure, deregulate, and press for more domestic production, as well as lowering taxes, and repatriating trillions of dollars 'trapped' overseas.  Apparently, this will create faster growth, higher rates and more profits (and jobs) which are all good for stocks.  It all sounds great, but seems like there are major fiscal reality obstacles between here and that nirvana.  One observer in our office concluded, "There is no guarantee it will work, but at least now the markets think there is someone that's going to be swinging!"  With yet more, and different, government stimulus believed to be on the way, it seems the asset inflation/levitation cycle will linger for a while longer, despite being at already lofty levels.  As with most things Trumpian, we will just have to wait and see!

We appear to have reached the danger zone in terms of Net Worth to Disposable Income:

Historically, this has not boded well for the economy or asset prices and can really only be sustained with cheaper and cheaper capital (debt at a zero rate or equity foolishly provided).  We know Central Banks are the providers of the mispriced capital.  That analysis is easy.  However, unlike in past bubbles where the capital was significantly from private sources that were ultimately subject to market discipline, the CBs have unusual ability to provide mispriced capital indefinitely (QE becoming debt cancellation).  This is why the ratio has already managed to stay afloat at current levels for almost three years and why it is very hard to determine whether the extension of this picture is a crash (of asset values) or just a decade long flat line of asset values as incomes slowly creep up.  Neither is a vigorous economic scenario, but the latter would be more pleasant for most than the former.