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NEW YORK ( ETF Expert) -- I have met David Kotok, chief investment officer at Cumberland Advisors, at several conferences in which we have both been speakers. He is intelligent, amiable and approachable.
Recently, I read
an article by Kotok on whether or not
Federal Reserve tapering constituted tightening. He suggested that it may not be. He also maintained that Cumberland would remain fully invested because it will take the world's economies many years before reaching a stage in which they will need to deal with maturing assets on the balance sheets of their central banks.
Mr. Kotok wrote in his conclusion:
"When interest rates are maintained at a very low level, the discounting mechanism to value assets works to raise the prices of those assets. That trend will continue worldwide in the major economies for several more years as all of them go through this process of central bank stimulus, plateauing, subsequent tapering, reaching a neutrality level, and then confronting in the out years how to permit the assets of the central bank to roll off and mature over time without shocking those economies."
For the most part, I agree with the assessment that
rates will remain low in the major economies for many years to come. I also agree that monetary stimulus will be a saving grace for investors during the next few years, though I'm less convinced that tapering will be followed by forward progress toward reaching "neutrality."
Instead, I anticipate more "twists" or "QEs," as any sign of economic weakness will foster central bank unwillingness to let an economy stand on its own legs.
Perhaps ironically, Kotok's primary explanation for remaining fully invested for several years is the multi-step process central banks will undergo before they shore up their balance sheets. Nowhere did I read that traditional measures of stock valuation matter; nowhere did extremely expensive price-to-revenue ratios factor into the fully invested decision.
Come to think of it, the list of non-essentials is so vast, the "all-in" proclamation does not merely ignore fundamental factors like record high price-to-sales ratios (i.e.,
S&P 500 companies are barely selling "stuff"), it also ignores sub-standard economic growth, lower-than-normal asset volatility and higher-than-typical bullishness. Indeed, everything is boiled down to the singular notion that the world's central banks ensure success for the fully invested participant.