The We Market (WM)?

Lost amid our justifiably obsessive focus on such matters a 0.1% outlay for border security, the frantic search for someone – anyone – willing to host the Oscars, and other matters of vital importance, was a one-two punch, which, depending upon how it plays itself out, could make or break us. Early this past week, Softbank Inc. announced a slight revision to its funding plans for new-age commercial real estate venture We Work Inc. Oh, it still intends to invest, but at a lower magnitude. $16B has morphed into $2B. Apparently, according to published reports, a couple of players in the deal backed out, compelling Softbank to go it alone. And it decided, in so going, that it wasn’t going to go big.

In this, the world’s most powerful and prosperous nation, where government agencies spend $8T a year and where total unfunded liabilities (including such trivialities as Social Security and Medicare) exceed $120T, we might need a larger unit of account to measure these metrics. So, if a southern border wall is said to cost $5B, let’s just say that the We Work raise came in light by about 3 Walls. There’s the elegance of logic in this. After all, what would We Work be if not for its access to Walls?

For the uninitiated, We Work, over the last several years, has joined the ranks of millennial iconoclasm by – get this – securing huge swaths of urban commercial real estate, and leasing the space to business enterprises. And if this concept fails to sufficiently blow your mind, consider this. We Work doesn’t simply provide workspaces and office accessories, it actually offers a feel-good sensibility to these realms. No doubt the feng shui of each unit is meticulously calibrated, but there’s more – much more. Each office features such work/life balance essentials as ping pong tables, nerf guns, well-stocked beer taps and bean bag chairs. Thus, WW lessees are not just renting space, they’re investing in a business ethos – one that is almost guaranteed to facilitate their success.

Unfortunately, however, they have yet to solve one intractable challenge of commercial real estate – when you use debt to secure large commercial spaces and seek to amortize these obligations through short term revenue streams, you create what is known in the banking biz as a gap funding challenge. Even nerf marksmen with the deadliest aim might flake off – particularly during periods of economic difficulty, but your bankers will expect you to meet your repayment schedules with unfailing precision.

I’d long been wondering about how the Company would get around this, and will admit, in the wake of the previously announced $16B Softbank deal, to thinking that these guys and gals may just have mad skills that elude my cognitive capacities, honed, as they have been, over nearly six decades.

And this remains a possibility, because just when I thought that an 82.5% downsizing of a critical funding round might be problematic, Team WW pulled off a coup of which they perhaps alone are capable. On the heels of the Softbank doink, they announced that they are rebranding and expanding. What was once We Works is now The We Company, with plans to extend its feel-good vibe beyond the grubby world of office space, and into banking, hotels, residential real estate, social media, and the Big Enchilada: Yacht Charter (the last of these under the sublime moniker of We Sail).

What on earth could go wrong?

I think it’s time to give these guys their props, and expand their concept to the entire capital economy, which, for the purposes of this argument, I will rechristen The We Market.

Here in the We Market, financial conditions, business prospects and matters of supply and demand don’t much matter; it’s the lifestyle, people, don’t you get it? It’s time to unshackle ourselves from the oppressive restrictions of valuation, solvency and growth. After all, we only walk this earth for a short time, and if we can’t recognize that markets are nothing more than another way to connect people with people, then we’ve lost the opportunity of turning our daily struggles into something more meaningful.

I do have a hunch that rather than having created this concept, I am merely reflecting what has already transpired. The WM has started to form, having begun with the extension of a V-Bottom upon which I threw shade, but which has nonetheless managed to sustain itself through the first 7 trading days of 2019:

SPX, NDX, RTY, JNK: V’s Abound… … Even in Junk

Connecting the dots for the pattern-recognition impaired, a V is a half of a W, so, from a certain perspective, we’re 1/4th of the way through the formation of the WM construct, and who’s to say we won’t complete the sequence?

In fact, I’m more than optimistic that the next leg is coming to a theater near you. Unfortunately, however, in order to turn a V into a W, one is next required to travel a few flights on the down escalator. And, as I see it, over the next several weeks, there’s every opportunity for such a downward movement to transpire. At the conclusion of that wretched Christmas Eve half-session, the Gallant 500 resided at a putrid, almost unthinkable, 2351. We’ve since rallied more than 10% — nearly 250 handles, but get this – we haven’t even recovered half of the cumulative losses from September’s all-time highs. We still have a weary ~335 index points to scale to reach those lofty elevations, and this through treacherous terrain filled with enemy combatants behind every rock and tree.

The earnings season is now upon us, and it kicks into high gear this coming week, with a lot riding not only on the tellings of beleaguered banks, but also of such We Market-critical components as Netflix, which itself V-bottomed in impressive fashion off of giddiness over the release of something called Bird Box. Its stock is up over 30% in 3 weeks, re-enriching the faithful to the tune of about $50B. At the recaptured $150B capitalization threshold, Team Bird Box is worth twice the value of the entire U.S. Auto industry (Tesla, of course, excluded) and if that isn’t a re-affirmation of the We Market sensibility that has overtaken us, well, then, I just don’t know what.

Nominally, it is also an interesting week for economic data, with scheduled releases of the all-important December Retail Sales being of particular significance. Unfortunately, however, at the point of this correspondence, the odds-on likelihood is that Retail Sales data will not be released this week because the portion of the Federal Government that calculates this data – the Census Bureau – is currently shut down. Moreover, even if it were to magically re-open, the results are likely to be obscured by the diminished participation of the 800,000 poor souls who expected to collect taxpayer-funded checks, but didn’t – at least this week. The shutdown has now extended sufficiently to render this portion of the workforce unemployed by the standards of the Bureau of Labor Statistics, so even when/(if) the Jobs Report drops in a couple of weeks, the numbers will be off.

Did I mention that there’s a government shutdown underway? Well, if I didn’t, shame on me, because as of this weekend, it has entered the pantheon as the longest running incident of its kind since we decided that this was as good a tool as any to resolve legislative impasses, back during the Clinton Administration. I don’t know that we’ve been much harmed by it, but will stick to my long held call that it is illustrative of what I believe will be a full-on showdown over the next several weeks, as to whether or not Trump should be allowed to retain the office to which he was duly elected. I expect a lot of tape bombs on this topic, but if nothing of this sort transpires, we can at least look forward to Attorney Michael Cohen’s testimony on Capitol Hill during the first week of February. Here, it will only be a question of how much mud he can sling at the President, and how much the new Congress and the media can make stick.

But for me, as for everyone else, all roads lead to China. Almost unquestionably, the fortunes of the market (and, for that matter, the We Market) will turn on whether or not we can come to some sort of accommodation with them. There are virtually infinite numbers of outcome possibilities here, but one thing is certain: over the next 5-6 weeks, the two countries must come to some sort of accommodation that removes the threats of an escalating global trade war, and negates any possibility of the contingently scheduled tariff increases taking effect. I sense that if those tariff increases are indeed imposed: a) Trump won’t be living in the White House to see the cherry trees blossom; and b) the down leg of the W will take the markets to excruciatingly low levels.

On the other hand, if, as is entirely plausible, the two sides come to terms, then this here V could travel upwards a fair distance before it even begins to start transforming itself into a W. But we’ve got a lot of wood to chop between then and now, and if earnings disappoint, if the rhetoric between the Chinese and ourselves takes a nasty turn, if Mueller drops a damaging report and/or Trump Jr./Kushner are indicted, then that W will begin to form with a vengeance. I feel that any combination of these is plausible, I don’t think investor risk appetite is sufficient to absorb the blow, and I strongly suggest that the risk sensitive orient their portfolios accordingly.

For what it’s worth, I’m also rooting for the Crude Oil markets here. It’s not that I enjoy paying more at the pump, but given the widely discussed credit tsunami forming on the horizon, and the likelihood that energy company defaults could be the trigger for a game of default dominoes, higher prices strike me as a small price to pay to ensure that the crude cowboys are able to refinance their debt. If not, then the financial oil could spill into other asset classes, and pretty much negate any hopes we may have for P/L.

But there’s more to the markets, The We Markets, than risk-adjusted returns, now isn’t there? There’s the quality of the experience, which of course is more important. I close by advising my friends at the We Company to bear this in mind as they wend their way through the new world they are so heroically creating. They lost $1.2B through the first three quarters of 2018, and that was before the markets started to take in water. Their debt trades at levels currently consistent with a high default expectation, and they will need to borrow/refinance to beat the band if they are to sustain themselves, much less achieve their grand vision. I kind of like the sailing thing, but I’d advise them, as their grandstanding risk manager, to think again about the hospitals, banks and housing concepts. These things cost money, which I think is in shorter supply at The We Company, than, say, good vibes.

In the meantime, for the rest of us, while the WM remains a possibility, we can perhaps take comfort that it is not yet a reality. After all, by the time we finish the M, we’re much worse off than when we started. So forget about the life experience, and in God’s name be careful about your risks. Things are likely to get much tougher somewhere in here, and if you don’t proceed with due caution, those beanbag chairs will collapse, the beer will not quench your thirst, and all the nerf guns in the world will not protect you.


Jobs: The Good, The Bad and The Ugly

“Whoever double-crosses me and leaves me alive, he understands nothing about Tuco”.

— Tuco, from “The Good, The Bad and the Ugly”

Well, for better or for worse, the epic western drama of Good, Bad and Ugly, also known as the 2019 global capital markets showdown, is hard upon us. I will confess to waking up on Wednesday morning wondering whether or not I was up to the fight. I’ve been at this a long time, and there are elements of what I see on the horizon that rendered springing out of bed on 1/2/19 an iffy proposition at best.

But then I remembered Tuco; good old Tuco: The Ugly element of Sergio Leone’s 1966 masterwork. He was a stone-cold Mexican bad @aa, who, by my count, was murdered at least a half a dozen times in his unwavering and ultimately successful pursuit of The Gold. He paid a steep price, but in the end the prize was his. As a further element of inspiration, it should be noted that Tuco was portrayed by Eli Wallach – a Brooklyn-born Jew who lived to be nearly 100. He absolutely stole the show in TGTGaTU (nearly dying himself on three occasions during the filming), and then pretty much disappeared.

But he got The Gold; that’s the important thing. He. Got. The. Gold.

And as such, I reckon it is incumbent upon us to follow his example, marauding our way through the treacherous terrain of this market, whose main inhabitants are desperados, banditos, snakes and other vermin, and try to grab that stash at all costs.

It didn’t take long for the action to begin in earnest, and a good deal of it ties directly or indirectly to the concept of Jobs. So, in typical mash-up fashion, I have chosen to review the recent proceedings through a Jobs-inspired week that featured The Good, The Bad, and The Ugly.

Ideally, I’d prefer to follow the flowing sequence of the film’s title, but for a number of reasons feel more strongly compelled to track these events in chronological order.

We thus begin with The Bad. Sometime around the close on the first day of trading, Apple CEO Tim Cook dropped an astonishing negative pre-announcements on the market. Apple never does this, but chose, in this incident to top even that unfortunate incident last spring, when Facebook’s management decided that >$4B of free cash flow per quarter and an embedded user base of >1B souls notwithstanding, it had no visible means to re-energize itself, and guided down for the subsequent three years. I reckon Mr. Cook had no choice; by all accounts, the company has missed Q4 numbers and missed them badly. He was therefore duty-bound to share these tidings with the investment world. As was perhaps inevitable, he placed most of the blame on our burgeoning trade war with China. I’ve no doubts that all of this is legit. However, I cannot help but wonder if there wasn’t something of a political element in terms of the timing. If so, if he wanted to begin the New Year with a message to Washington that this whole tariff thing has real consequences for the glittering board rooms of the Silicon Valley, which will devolve into sufferings for the great unwashed, then I’m OK with this.

But the smart guys I talk to had been expecting Apple to receive Newtonian gravitational blow for the last several quarters. Their consensus is that the Company is out of tricks, and will need to come up with something not in its visible bag of tricks to regain its lost luster. And I can’t help wondering what Jobs, Steve Jobs would have made of all of this. After all, he was the wizard, and whether he might’ve been able to bring to market some bright shiny objects that would’ve changed the equation, we’ll never know.

Because he’s gone, he’s go-one and nothing’s gonna bring him back. So investors, already terrorized by factors too abundant and varied to inventory in this space, took for the hills. Global equity indices plunged in sympathy on Thursday, and at that precise moment, all the key elements needed for a real crash were in perfect configuration.

But then came The Good: a December Jobs Report that played to the unmixed delight of any objective observer in its orbit. Non-Farm Payrolls blew the doors off expectations, the previous two months were revised upward, the Labor Force Participation Rate rose by several hundred thousand, Average Hourly Earnings surprised to the upside as well. Investors everywhere sucked in a huge sigh of relief.

But if market participants were becalmed by the Jobs Report, they were rendered positively giddy by Fed Chair Powell’s remarks at that afternoon’s American Economic Association’s annual conference in Atlanta. As is widely known, Chair Pow used the opportunity to walk back the interpreted-to-be-hawkish comments that accompanied a rate hike at December’s FOMC meeting. Of course, we’re flexible here, he cooed, and, for the most thick-headed among you, this means that if the economy starts to take in water, we’re prepared to bail on both further rate hikes and balance sheet reduction.

Investors swooned like teenage girls at a Beebs concert. Equities surged, and suddenly, what began, after the first two days of trading, as the worst start to a new year this century, transformed to a point where all major indices are actually showing gains for the first partial week of ’19.

Well, I’m a little skeptical here. As prophesied in these pages, volatility surged in Q4, and I think that pattern continues for the next several weeks at minimum. In early December, and in the wake of a Bad/Ugly/Not Good rout this fall, our Fed Chair issued similar soothing set of comments, only to kill the buzz when the FOMC met later that month. Now he has reversed course yet again, and perhaps not, given the pattern he’s forming, for the last time.

I was unilaterally encouraged by one element of his comments though. When asked if he would resign if requested by the President to do so, he responded with a resounding “No”. Good on you, Jay! You’re the Big Dog of the Fed, as appointed by the Bigger Dog at the White House, and he cannot justifiably play you as a political football. You were appointed to do a job, and, absent some palpable malfeasance on your part, you should do all in your power to keep it. I may not agree with the steps you take (and didn’t when you raised rates in December), but with the wearying prospect of yet another presidential election now taking form, your unimpeded presence and focus is vital to our collective concerns.

And speaking of elections, it was hard to miss the fact that the 116th Congress took their oaths of office on Thursday, and wasted no time in (predictably) making spectacles of themselves. Within 36 hours, they had introduced bills for Impeachment and the elimination of the Electoral College. As indicated in recent columns, my biggest fear for the markets derives from the reality that of many of them believe that Job 1 for them is removing 45 from his current job. This, my friends, is The Ugly of this essay.

While the wizened heads that beat down the unhinged progressives for leadership positions are, wisely in my judgment, taking a wait and see attitude about how hard to attack The Prez, my guess is that they won’t be able to hold the discipline of their caucus. A lot of these folks were elected for the express purpose of taking Trump down, and one can forgive them any urgency they feel in starting the process. The time for them to attack, at least in my judgment, is now. If they don’t seek the removal initiative over, say, the next few weeks, then they may have lost their best opportunity to do so. Team Trump also wants to get the showdown under way, most probably as a better construct then allowing the removal forces to hold their fire until the 2020 election battle is fully joined.

Nobody can quibble over-much about the state of the economy, and the Trumpsters must use this to their advantage. But if Trump really wants to end this nonsense, he’ll move quickly and aggressively to cut a deal with China. This, in and of itself, will not solve intractable issues with them guys and gals; whatever we sign will likely be worth not much more than the paper on which it is printed. But it would be an enormous boon to the markets, offering the dual benefit of removing the specter of tariffs that have dampened down valuations, and tearing up key portions of the track on the Impeachment Train.

Conversely, if those tariffs, set tentatively to be implemented in mid-February, do become the law of the land, I think the markets will be in full panic mode. Prices will drop, companies will begin to shed Jobs, and the bonfires outside the White House will burn White Hot.

So I think the big risks for 2019 play out, in rather dramatic fashion, over the next several weeks. If we can get through to spring without having to deal with the Emoluments Clause, the 25th Amendment, or Impeachment proceedings taking form, if we cut a deal with the Chinese that has even optical teeth in it, then 2019 could be a very good year for the markets indeed. Stocks, against the backdrop of a strong economy with still-ridiculously low financing costs, are if anything cheap, as illustrated by the following chart, showing P/E’s below their 10-year averages for the first time since 2013:

Sharp-eyed readers will note that the last time these metrics resided at the 10-year Mendoza Line of ~14.5 it was on the way up; catalyzed by a recovery from the crash.

It doesn’t take the skills of a wizard technician to understand that piercing a 10-year time series average from below and above are very different constructs, and ones with polar opposite implications.

Again, I believe that if we can somehow muddle through this geopolitical mess, there are happy tidings for stock market gold hunters out there. And again, I’ll point to one of my core premises for believing that significant rallies are any rate, plausible: the alarming and increasing shortage of investable names to trade in the equity complex. Case and point: while it drew scant notice, this past week, Bristol Meyers Squibb announced a $74B purchase of Celgene, combining the world’s two biggest cancer drug companies under a single ticker. Now, in my experience, nobody has traded or invested in Bristol for a long time, it missed the biggest part of the Bull Market and resides at valuation levels of a 2014 vintage. By contrast, everyone trades Celgene – long and short – that is until now. It will soon join the likes of Red Hat as an innovative company that is subsumed into a mushy global conglomerate.

And those companies that aren’t in acquisition mode are likely to continue their buy-backing ways. Consider, if you will, the case of Apple. With no Jobs to pull new rabbits from the product hat, but still generating >$60B of free cash flow, they almost have a fiduciary obligation to continue to buy back and retire their inventory of free floating stock.

So I say that The Gold is out there, but we will likely be compelled to channel Tuco to harvest it. Yes, we will pay a price, as Tuco himself discovered. Fans of the movie will tell you that Blondie (Clint Eastwood) left him hanging by a rope over bags of it, and then liberated him with the unfailing aim of his bullet. Tuco didn’t like this, but presumably took The Gold anyway. Perhaps a slightly easier path will light our ways in 2019. But I doubt it will be so by much of a margin.


This Week’s Column Brought to You by the Letter V

Sharp-eyed readers will note that for my last piece of this wretched year, I have borrowed liberally from the good folks on Sesame Street. I hereby apologize for any unseemly liberties that I have taken in this respect, because, let’s face it, everyone loves Sesame Street: a bona fide American Institution now in its 50th year of continuous production. Far be it from me to exploit its good name and good works.

As is the case with many transcending forms of children’s entertainment, what SS perhaps does best is to address its audience without talking down to them. Most every adult who has not yet reached 60 years of age has passed through its portal, and, for our current breed of adorable little shavers, the show, by all accounts, continues to inform and delight. It targets, of course, preschoolers, but there are also little bitties in there for their guardians – ones that extend beyond the divine blessings of distracting the young ones so that mommy, daddy, auntie or grannie can grab themselves a few minute’s rest.

It occurs to me, though, that in light of the many infantile doings that have abounded this rapidly expiring year, many of us past the age of majority could stand to benefit from a Sesame Street content refresher course. Hardcore fans are aware that most episodes are based upon alphanumeric themes, and I did think long and hard about starting at the beginning, with “A”. However, upon further consideration, I felt that such a return to the rudiments of would be overly insulting to my constituents.

So, as indicated by our title, I have chosen a single letter: “V” for this week’s sponsorship, and if you hang with me, you’ll soon know the reason why.

First and foremost, my selection is a tribute to the near-miraculous V-bottom registered by the indices in the three-day sprint that took us from Boxing Day to the point of this correspondence. For the nonchartists among us, and focusing on the S&P 500, it looked something like this:

OK; so as V’s go, this is hardly the most elegant representation of the 22nd member of the King’s 26- letter arsenal. Moreover, Linguistic purists, noting the double dip, might even justifiably call it a W, and could also further quibble with the modest descent socialized in Friday’s session.

But for me (and, I suspect, other market-obsessed participants) this is unambiguously a V as I’d ever hope to see. And boy was it ever timely in its arrival. As everyone knows, after an abbreviated, horrific Christmas Eve session, the SPX was experiencing its worst December in about 70 years, capping off the worst quarter of the worst year in a decade.

So the ~7% rally from the pre-Saint Nicholas ride lows, hard won as it was, evoked an enormous sigh of relief for most every professional investor and associated paymaster in my wide acquaintance. Unless Monday’s New Year’s Eve session generates a never-even-contemplated single day rally, it won’t save December. Or the 4th Quarter. Or the entire year of 2018. But it may have breathed renewed life into any number of presumed-to-be-toe-tagged portfolios, so I reckon we’ll take it nonetheless.

And now for the bad news. Particularly insofar as it applies to their abilities to generate sustained rallies, I’m not much of a believer in V-bottoms. They tend to work over shorter periods of time, but in my varied experience, they peter out rather quickly. Sustained recoveries, as I have long lectured, do not often materialize until the wide price dispersion has dissipated, large capital pools are able to examine at the carnage, come to the conclusion that price levels are compelling, and start shopping in earnest.

And this particular V-bottom strikes me as being especially transient. Regarding the regathering of buying forces towards the end of last week, I believe we should take note of a number of technical tail winds that indisputably aided our cause, but which will probably run their course rather quickly. First, it generally agreed that Monday’s half-day puke took equities into deeply oversold territory, which, from a forward-looking perspective is always a good thing. Next, as had been widely reported (including in this space), the ~20% correction in the equity complex forced pension funds with fixed allocation targets (e.g. 60% stocks/40% bonds) to purchase tens of billions of dollars of stocks before year end. Further, I’ve no doubt that there were any number of short sellers out there who got their nuts squeezed and had to cover when the buying began to materialize on Wednesday. Finally, and as always, we can (as a matter of convenience if nothing else) be pretty well-assured that buy signals of the algos, long in hibernation, arose from their slumbers to lend their always helpful assistance to the cause.

Well, if the markets were oversold on the morning of 12/26, they are less so now. I’m not sure whether or not the pension fund rebalance is yet complete, but you can bet your boots it will be over by Monday’s close, because that’s the deadline. If you’re long, short squeezes provide the dual benefit of positive returns accompanied by a measure sangfroid, but once the covering is over, there is, by definition, no more squeezing to be done. Finally, what algos giveth, algos, of course, can taketh way.

So I think whatever happens Monday, we will usher in the new year with the slate will be, so to speak, wiped clean. Which brings us to our next V in this -themed note. Volatility has been ascendant for several months, and it says here that Volatility will continue to make its formidable presence felt once the calendar turns. In fact, as we enter 2019, about the only thing which I can predict with any confidence is that sustained Volatility will prevail. I can’t remember the last time that I felt we were entering a new year with as much opacity as that which confronts us as 2018 winds down, and I’m not gonna lie: it’s not exactly giving me a warm, fuzzy feeling at the moment.

We’ve covered the problems confronting the global capital economy in the coming months, so I won’t tax your patience with a reiterated, detailed inventory of same. But some contextualization is necessary. The odds-on likelihood is that the world will experience an economic slowdown. Most jurisdictions are feeling the bite, and important ones such as Germany are already in recession. Whatever is or is not happening in Japan, it bears mention that 10-year JGBs actually went negative on Friday, and that our friends in Switzerland now want ~25 basis points for the privilege of using our money for a decade:

Now, with the Land of the Rising Son’s rate rising ambitions yet again failing, when the Swiss extort investors into paying them for stashing cash in Zurich, it hardly portends glad tidings for the global economy. But that’s not all. Draghi is on the hook with his pledge to turn off his money-printing machines – at a time when all member nations are feeling the pinch, and while the U.K. dithers about how – or if – to turn in its membership card. Meanwhile, in this here monetary jurisdiction, the psychodrama catalyzed by a skinny little 25 bp Fed Funds hike has generated more Central Bank agita than any time perhaps since Andy Jackson shuttered an earlier version of the outfit back in eighteen hundred and thirtythree (ah yes, I remember it well). As mentioned over the last couple of editions, I think the Fed made a mistake with its latest stunt, but it wasn’t, and shouldn’t have been that big a deal. The real damage was done in my view by virtue of the President attacking an institution which of course is political, but must avoid publicized political battles if it is to do its job competently.

Oh yeah, and there’s a government shutdown unfolding at the moment. And the point of dispute is so infantile that even newly-minted Sesame Street watchers might turn away in disgust. While it shouldn’t affect most of my readers overmuch, its optics of it are unilaterally bad. I don’t expect it to be resolved in the foreseeable future. And the 116th Congress will be sworn in early Thursday afternoon. And they will be out for blood. And they are likely to draw some.

On the other hand… …by all accounts, the U.S. economy does not appear to be evidencing any signs of rolling over. News reports over the last week have brought forward a gusher of glad tidings respecting holiday sales. Earnings will almost certainly fail to match ’18 out-performance, but I suspect when Q4 numbers start dropping, they’ll shade positive relative to expectations, perhaps significantly so. And, for what it’s worth, absent some unforeseen catastrophe in the economy, while one can claim that our final V-word: Valuations, are rich, they are much less so than they were a few weeks ago. There’s also happy talk about settling matters with China, which I would discount excepting the significant reality that the incentives are high for both parties to fix this thing. Gun to my head, I think they will, and it will help.

So maybe we can skate through what is bound to be an emotionally overwrought January, and get back to normal. I think a good deal of this turns on how hard Mueller and Congress hit Trump in the new year. I’m highly convinced that he will be compelled to absorb a body blow the likes of which he has yet to experience, and it is far from a sure thing that he can withstand it. At this point, few would much lament his absence, if the script holds, if he does go down, he won’t go alone. If so, it could be look out below.

But on balance, I think I’ll hold to my faith in private enterprise to prevail. Yes, the V-bottom may be winding down, while Volatility is likely to sustain itself for at least a few more weeks. But Valuations are now within reasonable ranges, and know this, my children: there’s hope in that.

And so ends our Sesame Street lecture, brought to you by the Letter V. And I’ll leave you with this. After nearly five decades of being owned and operated by Public Broadcasting, in 2016, the rights to the show were acquired by HBO, which itself is a subsidiary of AT&T’s Warner Media. In a more perfect world, its corporate ownership would be that of Verizon or Viacom, thus completing the symmetry of my analysis.

Unfortunately, boys and girls, the realms we occupy are seldom as tidy as we wish, and yet we carry on. My kids of course watched Sesame Street, as do, now, my grandsons. There’s some comfort in this (among other things, HBO/AT&T/Warner do not appear to have bitched up the show). So, if you’ve nothing else to do, and if the meaning of my rantings has escaped you, it may behoove you to download the episode dedicated to the Letter V. I suspect it’ll do you no harm. In the meantime, Happy New Year and, as always…


Exit, Pursued by a Bear

A sad tale’s best for Winter: I have one of sprites and goblins”. And so begins Shakespeare’s “The Winter’s Tale”. It is not, for my tastes, among his finest efforts. With its convoluted narrative of childhood friendship between kings, accused adultery, uxoricide, banishment and reconciliation, it is part comedy, part tragedy, part romance, and even part history, but perhaps not enough of any of them to rise to the sublime level of Hamlet, the pathos of Othello or the retributive morality of Macbeth. On the other hand, even the dregs of Willie Shake’s pen probably compare favorably to most of the written output produced before or since, so there’s that.

However, as last week ended on the Winter Solstice – the shortest day/longest night of the year: a point in the calendar that we denizens of the Northern Hemisphere deem to be the first day of Winter, it seems like as good a place as any to point our tortured, thematic wanderings. And the exception that proves the rule. If Friday was indeed the shortest day of the year, you could’ve fooled pretty much anyone paying attention to the markets.

“The Winter’s Tale” also features what is almost indisputably the most famous stage direction in dramatic history: our titular “exit, pursued by a bear”. And I’m guessing that in this holiday season, I am hardly taxing the associative powers of my readers by asking them to connect the dots. The singularly wretched year of 2018 is about to take its leave, and nobody in any way connected with the financial markets can doubt that as it prepares its egress, it does so with a big nasty bear in hot pursuit.

In fact, as it applies to certain market realms, The Bear has already arrived. Longstanding convention defines a Bear Market as one that experiences a >20% decline, and, with Captain Naz now moored 22% below its Q3 highs, the NDX already resides within ursine clutches. The same can be said, in this jurisdiction, of Ensign Russell, and, across different oceans, of Herr Dax and Citizen CSI.

Many other indices, including our own beloved Gallant 500 and General Dow as well as their opposite numbers across Eurasia are not there yet – but The Bear is in hot pursuit, and may overtake them before we close the books on this ghastly, bounty-less train wreck of a year.

I hardly need to inform you that the collateral damage has been brutal, removing any doubts that 2018 will be remembered by historians as the worst performance year in a decade. In this respect, is even giving the 2008 crash a run for its money. But at least back then, we had excuses: the global banking system was in full collapse, a housing market waking up to a cold reality after a years-long trip into fantasy land, and an orgy of dubious financial engineering enriched the hundreds while impoverishing the tens of millions.

While one can quibble with current conditions, nothing of a similar nature is appears to be looming on the horizon, at least to me, which begs the question: this time, what’s our excuse?

Plus, it’s not as though periodic 15 – 20% type corrections hasn’t been part of the price of admission for risk-takers since time immemorial. But I won’t lie: this time it feels sorta different; sorta worse.

So what gives? Well, for one thing, virtually every major capitalist jurisdiction is in one form of crisis or another. We know, but don’t know, what ails the U.K. Germany is for all intents and purposes leaderless, and in recession. France is in complete turmoil. The sharks are circling around pseudo-capitalist China, and it wasn’t doing that great before those menacing fins appeared on their horizon.

Then there’s the good old U S of A, once and always the head of the dragon. From certain vantagepoints, the economics of this country don’t appear to offer much cause for consternation. Q3 GDP was revised down last week, from 3.5% to 3.4%. There is some softness in the Housing Market, but nothing even remotely approaching what transpired last decade. Durable Goods Orders were light, but the Jobs Market remains historically strong, inflation, by any important measures, is under control, the consumer spending parade marches on, and confidence remains high. Yet, as has been widely reported, last week was the worst interval for equities in a decade (dating back to those heady days when Bernie finally came clean and Treasury Secretary Hank Paulsen threw himself at former/future House Speaker Nancy Pelosi’s well-shod feet, to beg her bail out his former employer and pals), and is closing in on the worst December since 1980 (when Nancy Reagan was measuring drapes for the East Wing). So, again, what gives?

Well, I have my theories, and, pending yuletide rituals notwithstanding, duty compels me to lay them on you. To me, the American capital markets are cracking more than anything else, as a direct result of observing, in real-time, the pending disintegration of the governance structure in Washington.

As I have pointed out in past editions, while I could not bring myself to pull the lever for 45, I did consider myself a supporter, and remain terrified by the prospect of the ascent of his most strident political opponents. So when I take shots at the big guy, I do it in sorrow. But facts is facts. By my reckoning, Trump just experienced had the worst week of his turbulent presidency, and I don’t think the contemporaneously-manifest market rout can be viewed, in any way, as being a coincidence.

Three headline-grabbing episodes defined the cycle, and each was worse than the other two. First, without consulting or even informing anybody in the know, Trump announced a withdrawal of our remaining troops in Syria. Now, I won’t presume to lecture on the folly of this policy decision (mostly because I don’t know), but his having done so without seeking the input or even giving a heads up to his military heads, was ill-advised and classless. And his people responded accordingly. Mad-Dog Mattis resigned in a justifiable hissy fit within 36 hours, reinforcing the increasingly undeniable reality that competent, talented and dedicated public servants cannot operate effectively in the Trump White House.

Next of course came the FOMC decision, which I believed would catalyze a further drop in equity valuations no matter what they announced. And of course, we all know what happened after that. The FOMC went through with its hike, and, with barely a pause, asset prices dropped. And kept dropping.

I am on record as standing with my betters such as Jeff Gundlach and Stan Druckenmiller in believing the Fed made a mistake. While reasonable minds can debate, myriad problems in the global capital markets that would not be eased (and might be exacerbated) by higher yields at the short end of the U.S. Treasury curve made it fairly apparent to me that continued accommodation would far outweigh any potential benefits deriving from rate normalization.

But Powell did what he did, but you know what? I believe that any blame from the fallout devolves directly on the shoulders of Donald J. Trump. I had dearly hoped that he would comport himself, at minimum, in such a way as to recognize and respect the Fed’s independence. But here he failed miserably. He’s been in Powell’s grill for months, and that on an increasing basis. Matters have now deteriorated so thoroughly that plausible rumors are afoot that Trump is actually considering firing him.

God help us if he does, because at that point, the consequences are too frightening to contemplate, but as of now, he appears to have thought better of this lunacy. However, he’s done plenty of damage even as matters now stand, and I strongly suggest that if he would’ve minded his big fat business, the carnage extracted by the Fed’s latest action would’ve been significantly mooted. Yes, the Fed probably made a mistake, but it’s one we can live with, I believe, and now I think that they’re boxed in: I don’t see them raising rates – and may in fact be lowering them – unless the economy heats up, at which point it would be the type of high-class problem for which we can only pine in the present moment. The President, however, publicly shoving himself into monetary policy is a potentially more permanent and damaging blow.

If all of this weren’t enough, we ended the week with a straw man government shutdown arising out of a dispute over a funding item that is: a) a mere few basis points of our total outlays; and b) is and can be financed without all of the psychodrama. All parties appear to be spoiling for this stupid battle, and of course no one will feel any impact from the shut-down – except, of course, the already put upon investor clas.

And all of this is transpiring in advance of the reign of terror certain to be brought down upon the Administration’s head as soon as the new Congress is sworn in – an event now a mere 10 days away.

So investors can certainly be forgiven for wondering whether >230 years of effective governance on these shores is collapsing, and the decorum of the proceedings is deteriorating before our very eyes. I now think it’s a fair bet that Trump won’t make it out of 2019, and, if he were to vaporize tomorrow, I doubt that there are many remaining among us who would strongly lament his absence. But the uncertain path towards his removal, guaranteed to be accompanied by a great deal of infantile machinations, is a spectacle that cannot be filtered through a risk-taking lens with anything but fear and loathing.

So on the whole, I’m starting to feel that the lower we close a week from Monday, the better the return prospects, meagre though they appear to be in 2019, are likely to present themselves. But even here, the path is wrought with frustration. Given the alarming outperformance of bonds over stocks this year the domestic pension fund complex appears to be compelled to add ~$64B of equity exposure to their portfolios over the next few sessions:

Going into Monday’s truncated Christmas Eve session, this may be about as joyless a stock purchasing cycle as any we’ve experienced in our lifetime. These pension funds will have to sell bonds at the same time, but a look at the continuing juggernaut of a rally in global govies, it says here that the Fixed Income markets can absorb the blow.

Yes, there are cheap stocks to own, and for my money, current valuations may offer as favorable an entry point as one could hope for.

But as Jim Morrison reminds us, the cold grinding grizzly bear is hot on our heels. Yes, he’s out there, he’s hungry, and he’s intent on capturing his dinner. And in closing, all I can think of is the old joke about two campers running for their lives from such beast. One says to the other “you know this is a waste of time: you can’t hope to outrun a bear” to which his partner replies “I don’t have to outrun that bear, I just have to outrun you”.

And this, my friends, all things considered, is about the best risk management lesson I’m able to offer at the moment. So, Merry Christmas, and, as always..


Vegetable Spirits

So? How’s everybody feeling out there? With two weeks left in this wretched year, how many of you are ready to channel former Salomon Brothers Chairman John Gutfreund’s marching orders, and wake up ready to eat the a$$ out of the proverbial bear? If you are, you have, at least from some perspectives (but not from others), my full admiration.

In the current paradigm, The Gutfreund Principal is more widely, in fact ubiquitously, referred to as Animal Spirits, a phrase first coined by iconic economist John Maynard Keynes, in his seminal 1936 treatise: “The General Theory of Employment, Interest and Money”. Since the Crash, the term has been serially abused, in the written and spoken word, by commentators too numerous and outrageous too inventory in this family publication. Over this period, other cringe-worthy terms have come and (mercifully) gone (“green shoots” for instance), but Animal Spirits, for better or worse, abides.

However, in these troubled times, the term has been applied most commonly through its obverse: with the wizened among us lamenting the lack of Animal Spirits across this fair investment land as the primary case for our ills. Well, OK; fair enough, but you will never hear this term uttered from my lips. In fact, though I may fail within the realms of this very piece, from this point on, I will strive mightily not to even type the letters into any electronic device within my current or future disposal.

The wizened ones are correct, though, at least insofar as that the absence of the never-to-be-mentioned-inthis- space phrase is, today, among the market’s most prominent characteristics. This got me to thinking that what we really are looking at, more than anything else, is a case of Vegetable Spirits – a condition I will define as one where risk-taking agents lack perception of their surroundings, and thus the ability to adapt to them, and must simply accept the caprices of natural forces. The financial peaches, tomatoes and yams of the investment universe may win prizes at county fairs, or they may be unceremoniously chucked into boiling pots along with the turnips and cabbages, as part of an undignified, unsavory, unsatisfying Mulligan Stew. We just don’t know, and anyway, there ain’t a great deal we can do about it.

So yes, I’d say that the markets as a whole, and not in a good way, are currently wallowing in Vegetable Spirits, but perhaps the condition is more broadly applicable to the full range of human activity. A couple of examples should serve illustrate my point. This past week, I met up with one of my oldest and dearest professional chums, at the social gathering locus of his alma mater: The Manhattan Yale Club of Yale University. The place was buzzing, and upon greeting my friend, I mentioned that it appeared that business was good at The Club. Not so, he responded; in fact, times are so tough that the custodians of this sacred meeting place, where stone cold Eli ballers have been gathering for more than 5 generations, has now become a shared dominion with (wait for it) Dartmouth University.

I’m not sure when this happened, but I will say this: it shocked me. By everything that is holy in this world, Yale needs its own, exclusive NYC clubhouse. And, though the oil paintings of famous Eli’s ranging from William Howard Taft to the Bushes – Junior and Senior – still stare down at those imbibing in the Great Room, they have now, at least for me, lost some of their luster. I never had the juice to make it to Yale myself, but, other than some sympathy for the recently banished Andrew Jackson Vice President John C. Calhoun (dispatched due to his stance on slavery, while the University’s Founder: slave trader Elihu “Eli” Yale’s name remains on the door), I have heretofore had no particular quibble with the place. But I’m not gonna lie: letting the modestly down-market Dartmouth Big Green into the previously exclusive Bulldog House kind of brought me down. And I blame Vegetable Spirits, which apparently have now seeped into the Ivory Towers of the Ivy League.

More closely aligned to our immediate concerns, I’d be remiss if I didn’t take note of Friday’s 16% drop in the price of Johnny John, as the maker of virtually every consumer product under the sun felt the wrath of investors — for covering up an apparently liberal use of asbestos in the production of their talcum and baby powders. However, it bears mention – pursuant to our theme – that the key ingredient in these marvelous items is corn starch. And corn, according to my own protocols for determining these matters (my phrase; my rules) is unambiguously a vegetable, and therefore by its very nature guided by Vegetable Spirits. So it could do nothing useful to impede the assault on its corporate paymaster.

And so it goes for the markets as a whole this past week, which, after a couple of sessions that gave rise to hopes that perhaps the menacing volatility cycle was winding down, sold off hard on Thursday and Friday. The Gallant 500 is now not only to its lowest level since March, but also — albeit by the merest titch — sporting an undignified 25 handle (2599.95). In addition to the JNJ talcum bomb, Friday’s selloff was catalyzed by weak numbers out of China. But I’m not in a position, particularly with respect to the latter, to find fault with those who turned tail on this intelligence. Everybody knows that China gooses their numbers with all of its considerable might, so when it reports bad figures, one can rest reasonably assured that the numbers are indeed bad. Perhaps really bad.

But as we cast a leery eye towards 2019, I think there is something more menacing creeping into valuations, and that is the likelihood, nay, near-certainty of a once-in-a-lifetime (at least let’s hope) battle taking shape across the political parties in Washington. In mentioning this as a risk factor, please know that I’d rather cover any other topic (how ‘bout them Bears?). But duty calls. My best guess is that before they’ve even cleaned up the mess in Times Square from New Year’s Rockin’ Eve ‘19, the proceedings will devolve to levels that will make 2018 political escapades look like Woodstock.

On January 3rd, the 116th Congress will be sworn in, and it says here that the new (same as the old) bosses will waste no time before laying an all-out legal assault on the Trump Administration. I anticipate hundreds of subpoenas, dozens of Grand Jury formations, and a galaxy’s worth of innuendo and worse, to materialize before January turns to February. Pelosi, Schiff, Nadler and the rest will be out for blood, and will begin their efforts to extract it immediately. Yes, they will pink their swords multiple times, but it’s also clear to me that Trump and his allies have little intention of simply rolling over and getting stiffed.

The prevailing level of abject cross-party hatred is beyond anything any of us ever have experienced, and I challenge anyone to refute this point. I also am comfortable in suggesting that Trump has received more vitriol than any president since Lincoln, who had to sneak into Washington for his 1861 inaugural, and who immediately faced the reality that a dozen states had left the Union. The outgoing Vice President at the time (John C. Breckenridge), actually became a Confederate General.

There have been periods of strife since those historic days, but nothing that comes close to what is emerging at the moment. Many dozens of congressmen, millions of citizens, and untold billions of dollars are bent on the destruction of the current administration, and they stand a fair chance of achieving their goals. They now control the enforcement arm of the legislature, and they will use it with abandon.

Please forgive the political diatribe here, but look at what the Democrats have wrought even while in the minority. I won’t inventory everything, but anyone who isn’t shocked and dismayed by what has been revealed about the Michael Flynn episode should take another look. They set the poor b@stard up, bigtime, and he is a decorated war hero for f#cks sake! This shocking exercise in entrapment, one of many such episodes, should chill the bones of even the most tree hugging snow flake who’s paying attention.

A judge may throw the plea deal right back in the prosecutor’s face, but that’s beside the point. Clearly some nasty stuff from the Mueller probe (so far completely removed from anything remotely related to Trump/Russia collusion) is about to drop, as will the subpoenas, etc. Most of the next several months will feature an obsessive focus on whether Trump resigns or is impeached. Many members of his family may be indicted.

I find this all beyond sickening, and will just remind my many prog friends that you reap what you sew. Some of you would do well to review the history of the French Revolution, which began in righteous effort to bring due process and civil justice to the masses, but ended up with its sponsors taking turns sending one another to the guillotine. Every. Single. One. Of. Them.

But enough of this, right? More pertinent to our purpose is that if I’m right, then it would be foolhardy to commit any more risk capital into the markets, or, or for that matter, into the real economy than is absolutely necessary for survival. In terms of the former, with nothing but a Battle Royale raging in Washington, it will be extremely difficult to commit capital to real-world projects. And this, my friends, renders the generation of investment returns over the next couple/few quarters a very quixotic exercise.

At the same time, though, other forces strike me as serving to significantly diminish any framework for an outright. Again, for the bajillionth time, there’s is a shortage of stocks available for investment on a global basis, and this deficiency is almost certain to increase. As pointed out in earlier editions, there are now less than half the number of names to trade in the US equity complex as there were 20 years ago. The 3,000-odd survivors are the beneficiaries of buybacks, mergers, acquisitions and the like, which further reduces the inventory of securities available to own. Over the last decade somewhere in the neighborhood of $40 Trillion of new currency has been created, and, while the money printing machines have slowed and in some cases shut down, all that new money needs a permanent home. As a result, and in true Twilight Zone fashion, there aren’t even enough bonds out there in which to invest. And if you doubt this, just take a look at current yields across the globe. Even here in America, where debt prices are arguably more rational than in other jurisdictions, the 2s/5s spread remains inverted.

I reckon, on a related note, and seeing as how this is Fed week and all, I should mention something about the FOMC announcement on Wednesday. I really have very little insight here, but suspect that the equity markets will not like any decision to follow through with their planned rate hike. But get this: they may like an announcement that instead the Fed has chosen to pause even less. One way or another, I don’t see much in the way short-term prospects for higher yields at the longer end of the curve (i.e. the maturities where real economic agents actually lend and borrow) – at minimum until 2019 is well under way.

So, with interest rates frozen or at least capped, and dysfunctional government dampening enthusiasm for private sector risk taking, I believe that corporations will continue to hoover up both other companies and their own available stock. This won’t socialize much of a rally, but at points not much lower than this, absent an unforeseeable catastrophe, investors will be compelled to buy stock, because there is simply no alternative.

I thus am projecting a highly volatile, range-bound tape for at least the first half of 2019, and we’ll just have to hope for the best. Perhaps the Good Lord will provide ample sunshine and precipitation for us, if not to thrive, then at least survive, in our own rich soil. These are the fruits of Vegetable Spirits, my friends, and I suggest you order your activities accordingly.

It could, though, be worse. At least at present we’re not looking at a Mineral Spirits construct, under which investors are dumb as rocks and equally immobile. I don’t think this is likely, and the holidays are of course right around the corner, so let’s keep our spirits up – whatever materials of which they be comprised.


The Al Gore Rhythm

It was a busy, on-the-whole-gut-wrenching week for most of us, but we’ll get to all of that shortly. First, and perhaps for the (let’s at any rate hope) final time, I will take this opportunity to pay tribute to a Great American. Scion of an elite political family, Ivy League-educated, accomplished college athlete, legislator, two-term Vice President and top vote getter in a presidential election.

We could, of course, be referring to Poppy Bush, who was laid, amid much pomp and circumstance, to rest this past week. Except we’re not. Instead we pay our respects to the irrepressible, still-able-to-fog-a mirror Albert S. Gore. Unlike Bush 41, he never fought in a war, failed to win his presidential bid, and ultimately divorced his long-suffering, rock and roll hating wife Tipper. Yet he still, somehow, manages to permeate the ionosphere. As everyone knows, he invented the internet, and managed to put himself front and center in the Climate Change debates – while cashing in, among other projects, on his sale of a flailing Cable TV enterprise to the Petro-oligarch-controlled, America-hating Al Jazeera.

Also, if you add the word “rhythm” to his name, you arrive at a homonym for the ubiquitous for model-driven methodologies. The Al Gore Rhythm has a nice ring to it, the double entendre so compelling that (on my immortal soul) without prompting, I suggested to my son that he name his band The Al Gore Rhythm. He rejected the idea, and, in retrospect, I can hardly blame him.

Among other reasons because I was not the only one who came up with this clever mash up of nomenclature. Al Gore Rhythm has even been enshrined in the Urban Dictionary, which defines it as an individual or object with annoyingly stiff, robotic motions. Y’all can decide for yourselves, but as for me, I think the Urban Dictionary nailed it.

I reckon that’s about it with respect to A.G. – except for one thing: his mash up homonym pair – algorithm — is starting, in my judgment to do real damage to the markets. Now, please understand me, I hate to do so, but see no alternative other than to opine that market algorithms are starting to wreak real havoc on investment portfolios. In fact, it may be more than coincidence that these programs, with their heavy reliance on connectivity, actually bear the name of the internet’s self-anointed founder.

I have resisted blaming the algos for market causing carnage for many years now, and this for a number of reasons. The excuse of their presence is just too convenient. Algos are entirely too available as a justification for losses. No one really knows how they operate (including, presumably in many cases, the operators themselves). Most importantly, no one can prove empirically that their presence is problematic.

All of these issues persist, my friends; indeed, they do, but my mind is changing about them. I’m not sure that risk factors would be configured much differently if algos didn’t dominate market proceedings, but I think that a lot of investment pools would be better off if they weren’t around.

But let’s first take a look at the markets as a whole, and acknowledge, yet again that my own particular compass has been way off since before Thanksgiving. After reaching the time-honored state of being unable to choke down even one additional morsel of turkey, I welcomed in the following week with a real concern that equities were going to blow out to the downside. And I was wrong. Dead wrong. As everyone knows, they rocketed up across the entire sequence.

The improbable, insulting assault on my prognostications was due and owing to a couple of heaven-sent catalysts that came our way during the last week of November – ones that ran in direct refutation of my most pressing market concerns. For context: 1) Fed Chair Powell assertively calmed our interest rate fears by stating that his rate hiking work was nearly done; and 2) the Trump-Xi summit concluded with the only positively-shaded outcomes that were feasible – the postponement of the next round of tariffs and a promise to sit down in earnest and begin to hammer out a deal.

Number 2 was, of course, mostly pure political posturing; I have long believed that our trade issues with China are too complex and obtuse for accurate information to be delivered to the public. But there was every chance that the sit-down could’ve produced widely socialized incrementally negative outcomes, and when it didn’t, I felt that a significant short-term risk had been removed from the markets.

The news for the Fed, I felt and still feel, was more impactful. I have believed for some time that we’re in the wrong time and wrong place for rate normalization. Though he’s annoyingly self-serving, Gundlach is dead on when he suggests that contemporaneous central bank balance sheet reduction and policy rate increases is a counterproductive, counterintuitive exercise. Throw unmistakably slowing global growth into the mix, and you really have to wonder about those Fed hawks.

While it was only one speech, I think Powell painted himself into a corner in which unless the economy shows renewed, sustained vigor, he cannot move his policy rate upwards more than a small fraction without looking as unstable as the guy who appointed him. And that, mis amigos, was cause for celebration – the fact that – true to script – Powell and all his minions began immediately walking back his comments notwithstanding.

So by all accounts, we entered last week with two visible, short-term risks having removed themselves from the equation, but what did the market do? It sold off. Hard. All week. When the dust settled on Friday, the SPX closed with in a microscopic ½ index point from where it landed on Thanksgiving Friday – a punishing two-week round trip as ever I can remember. Govies rallied across the globe, with the U.S. 2’s/5’s spread actually negative, and those hard-nosed Swiss now again charging investors 20 basis points per year for the privilege of lending to them until 2028. Given what is transpiring in these economies (and indeed) worldwide, I fail to see how long-term rates anywhere can achieve much uplift.

Private debt was an entirely different story, with High Yield securities selling off in sympathy with their equity brethren to beat the band:

Yes, below investment grade paper is now as cheap as it’s been in two years. But anybody who wants to dive in here is on their own; I’ll not sanction the trade from a risk management perspective.

The dumping of less than impeccably credit-worthy debt obligations is a clear sign of a rising risk premium, and, connecting the dots, it must be acknowledged that over the last couple of weeks, said premium fell when I expected it to rise, and rose when I expected it to fall. I reckon that’s what makes this the great game it is.

Now, clearly, it didn’t help matters that while the world’s two most powerful leaders were breaking bread and drinking toasts to a bright collaborative future, our Canadian friends, at our request, were busy arresting, a nepotistic senior executive of a Chinese technology company long suspected of purloining our technology and using it for various nefarious purposes. But though the long arm of international law reached out on Saturday, the news didn’t break until late Monday, by which time the markets had already begun its week-long descent. Published news reports suggest that Trump didn’t even know this was going to take place, but: a) this is laughable; and b) we should all hope and pray it’s a lie. I shudder to contemplate a domestic governance structure under which while a president was in the midst of perhaps the most important meeting in many years with his Chinese opposite number, he was uninformed that his own G-men were arresting a Chinese executive.

Either way, it’s not the best footing upon which to commence critical trade negotiations. Moreover, while I won’t venture too far into this undesirable territory, I will also suggest that the market may be justifiably spooked by a scene in Washington that appears to be near breakdown. Mueller is starting to drop his bombs, and it’s not pleasing anyone. The adult in the West Wing, Chief of Staff John Kelly, was (as was inevitable) given his walking papers. Meanwhile, the President was busy taking shots at his once-highly lauded/now former Secretary of State. It unfortunately appears, my loves, that the Russia debacle is coming to a head. One thing is certain: Trump is about to receive that punishing sequence of body blows that was always in the offing with this here mess. As a matter of pure substance, it looks to me to be a survivable event – both legally and politically. But it will require careful, disciplined management: a) which was never his strong suit; and b) which whatever meager gifts of this nature the Good Lord bestowed upon him appear to have dwindled to insignificance. I won’t lie: this makes me very nervous.

On a more encouraging note, arrest notwithstanding, the U.S. China negotiators are making encouraging noises, interest rates are trending downward and I don’t see this trend reversing itself anytime soon. While the domestic economy may be feeling some gravitational pull, from what we know, it’s still humming along. Meanwhile, equity valuations are approximately 12% below where they were 2 ½ months ago.

And at least in part, I blame the algos. Sell programs were in full force all week, but that’s just one factor. Open interest in important risk benchmarks like crude oil is bouncing around like they are immersed in a particle collider. Individual, macro-neutral equity names are down 30%, 40% or more – all on no news.

Using deductive reasoning, I think that the quant programs are at their misbehaving worst, and here’s the thing: they’re not even benefitting from the damage they’re causing. My anecdotal information indicates that quant funds are having both their worst quarter and worst year in several. I won’t lie: this frustrates me, because hard experience has taught me that when individuals and entities are doing harm to others, they should at least benefit from their transgressions – at least in the short term. Otherwise, why bother?

Overall, my sense is that equities are pretty oversold here, and I expect them to bounce – perhaps significantly, perhaps as soon as tomorrow. The “sell everything” elements of the algos will certainly take more shots at the market, but I think they’re running out of gas. Moreover, with all of the insanity going on everywhere one cast one’s eye, I believe there’s limited upside to the equity tape over the next several quarters, and if I’m right, then these look like pretty good entry points to me.

Of course, the algorithms may disagree and probably will, but Al Gore and the Al Gore Rhythm abides. According to published reports, the former is now a billionaire, and has reasons to be glad, on balance, for those hanging chads that took him down in ’00. My son’s band picked the name of The Jays (in tribute to the first initials of 75% of their favorite ensemble: Led Zeppelin). But cruel fate intervened and The Jays are no more.

Their surviving members carry on, though, as do Al Gore, the Al Gore Rhythm, and, of course, market algorithms. There’s really not much else to do, now, is there? So hang in there my friends; when good stocks in your portfolios get crushed, when you lose Florida by 500 votes, when problems arise as they always do, if you hang in there, perhaps there’s an Al Jazeera out there for you as well, just aching to take your troubles away. Stranger things, in fact, have happened you know….


Fed-Xi at the Bat

It looked extremely rocky, for the Gallant 5 this week,

The month was almost over, and performance was quite bleak,

With Housing in the dumpster and PMIs all down,

It did not appear, from far to near, that smiles would replace frowns,

A host of stalwart traders, done in by last month’s gloom,

Having not much left to do, packed up and left the room,

Those that remained were hoping “if we could only catch a break,

“Then the risks that we are holding, are ones we’d gladly take”

They thought if only Fed and Xi would play their game and fair,

Performance would recover, and this would clear the air,

But Xi, as was remembered, is one tough old cat,

And what on earth could the Fed bring forth with yields so low and flat?

With the meeting three weeks away, what was a fund to do?

And the dinner at G20, might be just a chew and screw,

But then Powell sung a docile tune at the NY Econ Club,

Said hikes are nearly over; let’s meet up at a pub,

And oh that lovely dinner, where Trump and Xi broke bread,

Or whatever fare the Argy’s served; what matters was what was said,

The tariff hike is now postponed; the two sides soon will barter,

Which might’ve pleased Ol’ Poppy Bush, and even Jimmy Carter,

So November ended strongly, best week in seven years,

And for one brief shining moment, the markets calmed their fears,

There’s still another month to go, in this worst year of the ‘10s,

But as of now, I’m not the guy to foretell how it ends,

… with apologies to Earnest Lawrence (Casey at the Bat) Thayer

Yes, my friends, I do indeed apologize to Mr. Thayer for bitching up his masterpiece, but why stop there? Indeed, my regrets extend to all of you; perhaps to all of mankind.

Because, you see, I have transgressed, in last week’s note, serving up the worst market call that I can remember publishing in these typically clairvoyant pages. I hope you can forgive me, and, for what it’s worth (take this as you will), I have forgiven myself. After all, even a stopped clock is wrong 23 hours, 59 minutes and 58 seconds of the day.

For those who may have forgotten this sorry episode, allow me to refresh your memory. Buried among the digressions of last week’s Gravy Boat essay was an unambiguous warning that the market was flashing material, immediate incremental downside risk. As long as I am unburdening myself, I may as well inform you that I was actually even more worried than those who managed to wade through the introductory schtick might have reasonably inferred. I was convinced that investors would persist in their demonstrations of displeasure with both trade and monetary policies, by continuing to trim their sails, risk-wise, and increasing their sales, market-wise.

And you should also be made aware that when equity indices rallied on Monday, I viewed it as nothing more than corroboration of my selloff fears. Indeed, when I woke up Tuesday morning, I actually considered the heretofore shocking breach of protocol of issuing a midweek warning that stocks were about to crash.

But thank God I held my fire, because the stalwarts kept buying. And buying. And buying. And, when the frolicking was over, our mighty indices had registered their strongest weakly gain since 2011.

Yeah, well, like I said, I was wrong. But I’m really glad I was, because: a) the professional investors for whom I toil desperately needed and uptick in performance, and b) thanks to last week’s moonshot, most of them (though to varying degrees) caught the move. As we’ll cover further down the page, this here rally may continue to demonstrate legs, but in the meantime, hedge funds in particular will not now be obliged to report dismal numbers again — until well after the last cork on the last New Year’s Eve champagne bottle has popped, and its contents emptied, across this fair land.

There’s something to be said, in and of itself, about the merits of a respite from what has been the sad lot of the industry for most of this year: reporting losses to investors. And who knows? Maybe they’ll nail the December encore. It is my fervent hope that they do.

But in the meantime, I will try my best to un-see the frightful images that were dancing around my brain had my bleaker prognostications been proved correct. And, of course, we have Fed-Xi to thank for this. Let’s start with the Fed. I will admit to being a tad surprised when Chair Powell took to the podium on Wednesday to share his weariness with this whole rate hiking cycle. I had feared less constructive rhetoric, but by God he crushed it. Given the subsequent success of the G20 summit, I now fully expect him and his crew to follow through with their threatened quarter point hike on 12/19. But now, unless his goal was to set himself up to be made a monkey out of next year, he can’t really raise anymore unless and/or until there is sufficient economic traction to do so. And I gotta say – this is a big relief to yours truly. As I mentioned in last week’s post, I simply don’t see the rush to hike as being a particularly prudent policy.

But within the obtuse world of monetary governance, there were a couple of other odd doings that I believe bear mention. First, it’s pretty clear to me that somebody knew something in advance of his latest address. Both stocks and bonds were bid up all week – not just in this jurisdiction, but indeed across the globe. Wednesday’s moonshot was already underway before the release of his remarks, and their publication, in retrospect, appears to be nothing more than those last retro rockets igniting and empowering that final thrust.

And the thrust lasted all week, as, by Friday’s close, equities were bid up to multi-week highs, and our 10-year note enjoyed sufficient demand to migrate associated yields to levels below the psychologically important 3% threshold. Powell will get another at-bat this Wednesday, by virtue of his semi-annual address to Congress. Here’s hoping he stays on message, because I don’t even want to think about what may happen if he reverses course yet again. From there, we can turn to anticipation of Friday’s Jobs Report, with yet another set of robust employment numbers expected. By that time, and depending on what transpires in the interim, we may well find ourselves in one of those perverse paradigms where strong numbers may be viewed as dilutive, and vice versa.

However, as the affairs of humankind tend to go, Chair Pow’s testimony will coincide with the funeral of Poppy Bush. According to longstanding protocol, the markets will be closed that day. Moreover, presumably, there’ll be some empty seats on Capitol Hill, as some subset of our elected national legislators might see fit to honor the memory of our 41st President with their presence at the ceremony. I’ve always been a big fan of Poppy’s, for reasons that are now splattered across the pages of every relevant publication under the sun. He wasn’t treated all that well when he was still among the quick, though, and that, as always, is a helluva shame.

But Poppy has now gathered to the dust of his forebears, and, while the flags will remain at half-staff in his honor for a couple of weeks, we already have no alternative other than to our full attentions to the struggles of the living. This all began, of course, with the wind-down of the G20 meeting, culminating in the much anticipated culinary summit between President Trump and Chairman Xi. Going into this, I agreed with the consensus view that the best outcome that could realistically emerge from these doings was rhetorical goodwill, a promise to sit down and hammer something substantial/sustainable out in the near future, and (perhaps most importantly), an extension of the menacing Jan 1 deadline for incremental tariffs.

Well, wonder of wonders, all of that took place. And more. The locals on this here Continent used the opportunity to sign a new North American trade agreement, and, flawed though it might be, the need for it to pass through 3 legislatures all notwithstanding, from where I am positioned, all of this is better than the three countries spending the next several months attacking each other’s economies. Further, the entire G20 came out with a statement wishing nothing but Peace on Earth and Goodwill to Men. And Christmas is still three weeks away!

Nobody should delude themselves: this whole throw down with China is a major hassle, and the mood could deteriorate to new lows before anything of substance is resolved. The Fed could again get all in our grill. NAFTA-cum-USMCA could fall apart.

But the only real takeaway that matters, after an improbably productive week, is that the elevated risk premium that has plagued the markets for so many weeks should experience substantial gravitational pull – and this should improve both performance prospects and associated investor dispositions through at least the end of the year.

Fed-Xi has indeed come to bat, and, unlike the Mighty Casey (from whose example he was born onto these pages) he did not strike out.

One could even argue that he managed to clear the bases, but the outcome of this game remains still in doubt. For this week, at any rate, I’ve sworn off making explicit market calls, but I will state that we’ve got a lot of wood to chop before it’s all over, and that having chopped it, the time has come to lay some of it on the financial equivalent of spherical horsehide.

Here’s hoping that all of you will see some fat pitches come your way in what remains of the difficult, often bitter and rapidly ending contest of 2018.


Of Gravy Boats and Other Risks

To AMG: Thinking of you, with love, as always, on what would’ve been your 27th birthday.

OK; y’all, so last night I dreamed of gravy boats – big, scary, monstrous, ungainly, non-seaworthy gravy boats. I thought you’d like to know, not only as a matter of general information, but also because as perhaps (along with my well-documented scaffolding phobia) the worst kept secret on Wall Street, I have a fear of gravy boats. Specifically, empty gravy boats. Now, don’t get me wrong; I recognize the sublime utility of these vessels, particularly at this seasonal time of the year. Moreover, I since birth, have been known to be one who has always joyfully punched above his considerable bulk in terms of content consumption. But once they’re empty, they present a considerable problem for yours truly.

Because what do you do with them after you pull them out of the dishwasher? Trust someone who knows: they don’t stack well with the plates/bowls, nor do they as a rule hang comfortably with the teacups on those cute little hooks. The silverware drawer does not even rise to the dignity of being a viable option. I’m sometimes tempted to put them in the cereal box cabinet, but that, alas, is at best a transient solution.

My wife knows where to put the gravy boats, but she won’t tell me.

Other than that, though (i.e. the nocturnal hauntings of the sauce urns), it was a pleasant Thanksgiving, as I hope it was for my readers. I dug the parade as I always do (even if the balloons were hovering at fearfully low elevations) and the Bears won their 5th straight. But now it’s time to focus on bringing a constructive end to what has thus far been a real turkey of a November. We’re all stuffed to the gills, the gravy boats are empty, and now, we’re faced with the daunting task of clean up/storage.

And indeed, about the best thing I can say about November is that it isn’t October – yet.

But it’s getting close, and, with the looming turn of the calendar, I can offer not much in the way of hope that those infernal screens are likely to flash from red to green.

As matters now stand (slightly beyond the sad intersection between prospect and retrospect), it occurs to me that from the outset, this particular month set up very badly for the mouse-clicking wretches of the trading and investment game. We have covered at length the reality that the interval from January to September featured the worst year-to-date fund performance of the decade. Then came October, which brought about the worst performance month over the same interval. Professional investors were certainly reeling, but the advent of All Saints Day offered little in the way of relief. At that point, all eyes turned naturally towards the election, and let’s face it: how constructive could the outcome possibly have been for the investor class?

Well, it wasn’t. Constructive for the investor class that is. The headline results were by and large in line with expectations, but nobody was satisfied, and from where I was positioned, it appeared that the newly re-ascendant progressive class was beginning to prepare that (gravy boat bereft) dish that is always best served cold: revenge.

So my hopes for a post-midterm interval of calm quickly evaporated, as did the punishing 45-day hedge fund redemption window. All of which brings us to the back half of November, and the truly ghastly return prospects it portended. It all began this past week, which, holiday shortened though it was, featured high volume de-risking. It was, I think, Wednesday when we were treated to a quintuple whammy: a rare day where stocks, bonds, commodities, credit instruments and (improbably) the USD all sold off in unison.

As predicted confidently in these pages, all U.S.-based risk factors were flat on Thursday, but that’s about as thin a gruel as ever dared fill a gravy boat. Friday, as was widely reported, evidenced the worst post Turkey Day pricing patterns in many years.

All of which brings us to the upcoming week: where we can focus on two less-than-ethereal market catalysts. This Wednesday (ironically the one-year anniversary of his confirmation hearing before the Senate) Fed Chair Jerome Powell, will offer his penultimate address – to the Economic Club of New York – prior to a rather important FOMC meeting on 18/19 December. The smart money suggests that: a) he’ll telegraph very little; and b) the Fed is still overwhelmingly likely to raise rates – for the 4th time this year – at its December session.

But I’m not so sure about b), and partly this is because I believe that the pathetic showing for everything from equity valuations to crude oil prices to credit spreads, etc. is in part a message to Chair Pow to cool his rate hiking jets. Though the financial press rains on this parade, I think the strategy may be working. The equity markets are a hot mess, credit spreads are widening like America’s post-holiday waste lines, and the housing market is dying like it’s 2007. To the extent that there were data flows this past week, they were pretty wretched, with Durable Goods Orders and Consumer Sentiment leading the flop parade. Midweek this week, in fact a couple of hours before Powell’s noon enlightenment session, the Bureau of Economic Analysis will release its revised Q3 GDP estimates, and then those friendly folks at the Census Bureau will announce September New Home Sales.

All I know is that if I were on the FOMC, I might just be asking: “what’s the hurry?” I mean, after all, it’s not as if a Fed Funds increase is likely to do anything at the moment other than flatten a yield curve that is already at pancake viscosity, if not invert it altogether.

But all of that is beside the point; more pertinent to our purposes is the likelihood that to whatever extent investors are using their capital in an effort to impede the timelines toward rate normalization, this behavior is likely to continue – not just through that cozy lunch on Wednesday but all the way through until the pre-Christmas FOMC party.

One way or another, we’ll then move on to even more pressing matters, most notably the upcoming G20 meeting and the much-anticipated coffee clatch between Trump and Xi. Le Grand Orange could really do the Wall Street crowd (whom he routinely stiffed during his private sector days) a major solid by coming away with some rhetorically tangible good news from this meeting. But is this likely? I think not. Trump has his heart set on teaching the world’s largest nation a lesson he must’ve learned at Wharton — about whose boss on this here planet. And, if this requires taking actions that work against the short-term interests of the global capital economy, then so be it. After all, he can always point the blame at Mnuchin. Or Powell. Or Roberts. Or Kelly. Or Tillerson. Or Pelosi. Or Sessions. Or even my old buddy the Mooch. In fact, he already has.

Still and all, I will hold out some hope that interests are sufficiently aligned across the Pacific to evoke the possibility that the world’s two most powerful politic leaders can emerge from the Buenos Aires summit with some glad, pre-holiday tidings — to constituencies that could really use some holiday cheer. If this happens, then risk assets should recover in gratifying fashion. It’s more likely, though, that the tete-a-tete will offer no further clarity as to how this whole trade war will play out, that it won’t impede the Jan 1 timetable for the next round of tariffs, and that, on the whole it will render the quest for returns in the final month of a difficult year a somewhat quixotic enterprise.

Though it pains me to suggest it, there is a third possibility that we hadn’t even counted upon (Obligatory Thanksgiving reference to Arlo Guthrie’s “Alice’s Restaurant”)  and that is that the two parties depart their sit-down with daggers pointing at each other. If this comes to pass: a) you can up the odds that the Fed will stand pat; and b) well I don’t even want to think about b).

It’s all, on balance, an awful shame, I think. Because absent the infantile shenanigans of politicians around the world, there is ample reason for optimism – particularly for us beneficiaries of lands stolen from native tribes all those years ago. Early returns are mixed, but clearly, millions of intrepids braved record cold on Friday to stomp over one another in quest of discounted clothing and consumer electronics devices. Cyber Monday ought to be a real barn-burner. The pace of technological innovation is, if anything, accelerating. America is producing so much oil that we don’t even know what to do with it.

So, on this holiday weekend, I can offer some hope that somewhere, someday the agita will decrease, and at that point, there may very well be some bargains to cop in the world of investment. I’m still looking at Alphabet/Google (an enterprise that may carry more economic power than any organization this side of the East India Tea Company) trading at 25% off its highs. Apple is down more like 30% and no one as yet has been able to convince me that its current valuation reflects the fast-approaching migration to 5G, and the near-certainty that each and every one of us will be compelled, like it or not, to suck it up and buy new phones to avail ourselves of its wonders.

Global credit, on the other hand, is indeed a problem, and one that is likely to get worse before it corrects itself. But anyone who tries to compare the current threats of insolvency to those episodes of the last decade is just playing you, and, most likely, themselves. Financial leverage is a fraction of what it was in the intervals leading up to the crash, and if all else fails, don’t doubt for a second that if forced to do so, governments will again buy up any unpleasant excess of bad paper that will cover their widening posteriors. It’s either that or the politicians will get thrown out on their collective ears, and that, as we know, is unthinkable.

Let Chair Pow and his minions do their worst: interest rates, across a slowing global economy, are not likely to rise above levels that imply essentially cost-free financing for capitalists in the coming quarters. It says here that corporations will continue to use this bounty to make acquisitions and/or buy back their own stocks – in the process removing scarce inventory of private securities in a world that does not, even as I write this, feature sufficient supply to meet the needs of the global investor base.

It is the last of these observations that convinces me that these difficult times will run their course. Unfortunately, I do see incremental downside in the short term for investment assets, and again, I don’t think they stand much hope of putting in a V-bottom. Nope, prices will have to reach a capitulation level (probably not too far from prevailing thresholds) and flat-line for a bit. All of this could take weeks and maybe even bleed into next year, but when this moment arrives, there’ll be plenty of room for smart shoppers to take action.

And, if history is any guide, they won’t have to suffer the indignities of climbing over one another to claim their objects of desire at favorable prices. I think, instead, they’ll be alone in the aisles. Indeed, there’s already some indication that the buyers are becoming lonelier by the hour:

I threw in the SPX graph over the same time period to demonstrate the uncanny correlation between equity de-risking and market lows. Indeed, the last time that net exposure hit the ~20% level was that horrible start to 2016. Then, the Gallant 500 hit its cyclical bottom of 1865, but over the subsequent 2 ½ years, it rose to a Summer of ’18 high that was an astonishing 57% above those putrid depths, and of course, investors got longer across the course of the rally.

Needless to say, this ain’t the winter of 2016, but pattern recognition abides. Whether on Cyber Monday or some of these days hence, investors may very well take a shine to some bargains and begin shopping again. When this happens, I’m gonna screw my courage and get me a new gravy boat, because, daunting as the task may be, I actually need one. I won’t, however, share what happened to its predecessor.

After all, some matters are better left, on a holiday weekend, within the bosom of one’s own family. So my final advice as the game commences in earnest again is to stick that gravy boat wherever it suits, gird your loins, and, as always….


Confessions of a Three-Handed Economist

Harry S. Truman, 32nd President of the United States, is said to have spent much of his ~6-year tenure in the White House in a futile search for a two-handed economist. Presumably, he never found one, but hey, he was busy. When he was forced had to take over, with little preparation and somewhat unexpectedly, for a guy who still holds the record for tenure in the office, he’d been Vice President for all of three months. The transition transpired just as our boys and our allies were mopping up matters in Berlin, and beginning the process of splitting up Germany between the Yanks and the Russians. He then turned his attention to the Japanese, still menacing our troops in the Pacific, but made short work of them, as everyone knows, by dropping “Little Boy” on Hiroshima and “Fat Man” on Nagasaki.

Shortly thereafter, he set up NATO and established the Marshall Plan to rebuild Europe. On May 14, 1948, 11 minutes after Israel declared itself a sovereign nation, Truman officially recognized its status and independence. This of course, was an election year, and though he was widely expected to go down, he pulled off the most surprising victory this side of, well, this side of that interesting contest in 2016.

Less than two years later, he’d entered us into the Korean War, a conflict that: a) has not to this day officially ended; and b) bears consequences with which we are still contending – nearly 70 years later.

So let’s just agree that Harry was not in a position to focus his full attentions on his ultimately futile search for a bi-manus (This is the only technical term, albeit a tortured one, for a creature with two hands) practitioner of The Dismal Science. But I’m not sure that even absent myriad distractions, he would’ve ever found what he was looking for.

Because, in economics, there is always a second hand. Those of us who have studied the discipline will tell you that this is because the whole thing is based upon tradeoffs. An economic agent must choose, in almost all instances, between two sub-optimal set of outcomes. You can have one from Column A or one from Column B, but not both. It’s either paper or plastic. Chicken or egg. You can’t eat your cake and still have it (unless of course you are the lady Bob Dylan is trying to lay in “Lay Lady Lay”). One cannot wash one hand without the other, and as for washing the face without both? Fuggedaboudit.

Examples of these trade-offs also abound across the current human comedy. There, is, on the one hand, fire on the West Coast, and, on the other, ice on the East (the latter condition to which I bore personal witness when a one-hour commute home on Thursday stretched to seven).

These disparate conditions on each coast would suggest to any economist worth his or her salt that on average, conditions are pretty comfortable. However, unless you have the bad taste to live in flyover country, you must pick one or the other (though neither of them are to be what they claim).

Such dichotomies are the conceit of the econ game, but it all got me to thinking that while a one-handed economist might be harder to find than a penguin in a clover field, and while they grind out two-handed economists out of the world’s leading universities like link sausages, a three-handed economist, readily available, might come in pretty handy in these troubled times. So that’s what I’m going to designate myself. (With a nod to Gilbert and Sullivan) a three-handed economist I, a thing of dubious forecasts, thinking the future will look like the past… And no one can stop me, because in a world where selfdefinition of gender, race and even age identity (y’all probably saw the news item of the 69 year old Dutch guy who has petitioned for the legal right to identify as being 49) has become an inalienable right, I hereby proclaim myself to be a tri-manu evaluator of all matters of supply and demand.

But know, my loves, that all of this changes nothing. I’m going to keep doing what I’ve always done, which includes laying my unique form of madness on anyone who cares to observe it, each week. And this time ‘round, there’s no shortage of madness to share.

I’d say that on the whole, and after as difficult a month and a half as my dimming memory can recall, the markets and their participants have earned themselves a holiday. It was, of course, another tough week in equity-land, which ended with a modest two-day recovery that offered little respite in terms of portfolio performance. On the other hand, we did manage to turn the calendar from the 45-day hedge fund redemption window, in the process removing one glaring uncertainty from a roster of issues that have plagued investors pretty much all year. However, on the third hand, the early returns of the cycle suggest that it is going to be a pretty lean Christmas in Hedge Fund Village, and that many funds might not make past New Year’s Day.

We’re now 92% of the way through Q3 earnings and overall, they show the strongest quarterly performance since 2011. On the other hand, the return-essential tech sector laid a big fat egg, with lessfollowed but vital chip makers NVIDIA and Applied Materials both missing and missing badly on Thursday. Finally, On the third hand, it may very well be that the worst of the tech news is already built into valuations, and that any incremental strength in the holiday cycle and capital spending paradigm would catalyze some justifiable upside in the coming months.

On undeniably plausible cause for concern is burgeoning issues in the credit markets. Though it is now a number of years back, and though memory inexorably fades, I do remember a credit crunch last decade causing some pretty serious and widespread mischief for the global capital economy. This week’s headlines – from the FT to Drudge — proclaim that household debt has reached a new aggregate record — $13.5T according to the New York Fed. On the other hand, the same study shows an encouraging downward trajectory/magnitude of associated delinquencies:

On the third hand, I strongly suspect that while household debt – when taken to excess – is most certainly a problem, it is corporate debt issues that are most likely to vex investors — first and most deeply.

The attention-grabbing news in credit markets this week is the spiraling decline in the price of obligations for the once-iconic General Electric Corporation, which owes approximately $120 Billion in total, 1/3rd of which takes the form of revolving credit lines with pretty much the entire bulge bracket. The rating agencies, even as I pen this, are issuing menacing threats to lower GE’s credit rating to junk, and no one should wish this outcome – not even short sellers.

Because a significant portion of this paper is held by institutions, which, as a matter of fiduciary constraint, cannot retain securities below investment grade in their portfolios. So, if Moody’s, S&P, Fitch or other ratings wannabes do lay that next downgrade on GE, tens of billions of high yield bonds and notes will be immediately offered on the tape – at a time, when, as illustrated below, the lower grade credit markets are already suffering their worst interval since in a couple of years:

I’m not gonna lie: all of this has me wringing all three of my hands – particularly because when high-yield investors hit the sell-button in contemporaneous fashion, it can be about as ugly as any spectacle you might ever care to witness in the markets.

Unless entire economies unravel, buyers do eventually emerge, but only at prices that are unthinkable even under impaired market conditions. I don’t think that politicians can withstand the rout, so I do hold out hope that even if the worst happens, somebody (read: taxpayers) will come in to stem the bleeding.

Meantime, with the midterms over, and with some clarity as to who rules the roost in Washington, perhaps we are now in a position to dial down the agita on that score. As indicated last week, the prognosis for a split government is one that is typically constructive for market securities. In fact, dating back to my undergrad days of 1906, the average return over the 3 quarter interval that includes the election itself, combined with the subsequent two, is 14%. Speaking for myself, I’d be pretty happy if the equity markets followed script here, and were trading around, say, 3100 at the end of next June. And I suspect I wouldn’t be alone in these sentiments.

However, brothers and sisters, we have a good deal of wood to chop between now and next summer, and just getting through the end of November is likely to be a high-drama exercise. I do suspect that the upcoming week will be a quiet one, with a combination of holiday disengagement and – let’s face it – volatility fatigue — putting something of a speed bump on the action. But then all eyes turn to the G20 meeting, and, more specifically, to the big November 30th summit between Trump and Xi. By all accounts, both sides appear to have something to gain if the meeting goes well, and a great deal to lose if it doesn’t. I truly think that Trump, more than any time in his, er, glorious tenure as president, can use a win here, and I suspect that he aims to get one. On the other hand, if he doesn’t, and both sides come out of the conference at long daggers, then I would anticipate something of a “risk off” rout in the markets – for year end and perhaps beyond. On the third hand, the latter scenario is so unthinkable that I’m going to assume that interests are sufficiently aligned here to evoke the strong probability that the principals will gather themselves and throw a bone to their good-news-starved constituents.

So, in summary, one hand says it’s very risky out there and not a good time to load the boat, while the second hand thinks that some good bargains abound in the investment universe. The third hand doesn’t know what to think about risks in these crazy markets.

And this is the worst confession I have to make as a three-handed economist: that I’m just not sure. So, one way or another, I couldn’t have offered much in the way of help to Harry. But Harry was a no nonsense type of cat, and his own common sense would suggest the following: if you’re not sure, then don’t act assertively. So don’t. Act assertively here, that is. Let’s just wait and see what happens.

That’s about all I’ve got for now. I’m on my way to a long anticipated, hard-earned mani/pedi. And, with trademark holiday spirit, my manicurist is offering me a five for the price of four special. So I’ll take my leave, wishing everyone a Happy Thanksgiving, and, as ever, a heartfelt…


Chalk One Up for the Chalk (Sort of)

“When I was a boy, all of the people of all of the nations which had fought in the First World War were silent during the eleventh minute of the eleventh hour of Armistice Day, which was the eleventh day of the eleventh month. It was during that minute in nineteen hundred eighteen that millions upon millions of human beings stopped butchering one another. I have talked to old men who were on the battlefields during that minute. They have told me in one way or another that the sudden silence was the Voice of God. So we still have among us some men who can remember when God clearly spoke to mankind.

“Armistice Day has become Veterans’ Day. Armistice Day was sacred. Veterans’ Day is not. So I will throw Veterans’ Day over my shoulder. Armistice Day I will keep. I don’t want to throw away any sacred things. What else is sacred? Oh, Romeo and Juliet, for instance. And all music is.”

— Kurt Vonnegut: “Breakfast of Champions”

Happy Veterans’ Day y’all. Or Armistice Day if you prefer. Know that I am not necessarily endorsing Mr. Vonnegut’s above supplied sentiments, nor do I expect my readers to glom onto them en masse. But there’s a point in there somewhere, and it bears mention that the conversion of AD to VD came after, and arguably as the result of, WWII. KV was not only a veteran of the latter, but a prisoner of war to boot, so I reckon his sentiments ought to count for something. But KV is dead, as are all the men who heard the soundless Voice of God on that autumn day in France, a century ago. This leaves us, as always, forced to decide for ourselves.

Today indeed is the Centennial of the cessation of hostilities in the War to End All Wars. It was an odd, hollow ending to a horrible, horrific contest. Russia had left early to deal with its own revolution. The German army, not quite defeated (and in fact still well armed and ensconced in France), got tired and went home. Maybe they felt that America’s late entry into the hostilities rendered their efforts futile, but the Americans were green, under-trained and ill-equipped. At the end of the day, everybody just walked away. But ensuing events were not particularly pleasant. The tragic over-reach of the Versailles Treaty is well-known: it turned Germany into an economic and political dumpster fire. Angry, perhaps justifiably so, at the reparations imposed by their erstwhile foes, the Reich paid their debts by printing worthless paper. At least in part because of this, the world soon fell into the Great Depression. Deutschland remilitarized and became rabid nationalists. We had to take to the battlefield again to resolve matters in a more gruesome, more permanent fashion. More than 100 Million perished in the effort.

I have long felt that the first half of the 20th Century was simply a two-generation-long exercise in reorienting the world order, taking multiple forms, and featuring some interruptions that would not, could not, last. But this much is certain: since the end of WWII, Americans in particular but the Western World in general have enjoyed an interval of peace and prosperity that is virtually unprecedented in terms of its scope and longevity. In contrast to the previous hundred centuries, wars, famines and plagues have been the exception rather than the rule. This is the lifetime experience of almost every adult on the planet.

How much longer can this magnificent run last? This is the question that keeps me up at night.

But let’s lay the wreath for our patriotic dead and move on to more pertinent matters. With respect to the Mid-Terms, you can indeed chalk one up for The Chalk, which, for the uninitiated, refers to The Favorite in a sports betting context. It originated in horse racing but is most typically associated with the NCAA Men’s Basketball Championship, also known as the Big Dance and/or March Madness.

But The Chalk to which I made reference in last week’s edition reflected the likely outcomes of the United States 2018 Mid-Term elections — specifically the probability that that the Dems would win the House while the GOP would retain the Senate. And so it went, sort of.

At the moment, though, it all seems rather unsettling/unsettled, and, though I do not search, I nonetheless find eerie parallels – writ small, to what life must’ve been like for the developed world in the times leading up to WWI. Everybody’s on edge. Allied nations are very distrustful of one another. Technological breakthroughs (back in those days taking the form of assembly lines and the horseless carriage, vs. the current miracles of the 5G, The Cloud, Artificial Intelligence, etc.) evoke images of untold human discovery. The economy is strong, but shows unmistakable signs of gravitational pull.

A century ago, it took nothing more than the murder of a back bencher politician to unleash a series of treaty obligations that took us down the paths described above. These days, embedded ire rests on a similarly wound hair-trigger. My own personal wish is that everyone would just dial it back.

But in the meantime, we’ve got a very troublesome market on our hands. Yes, The Chalk got it right in terms of the headline outcomes of the Mid-Terms, but, after (as prophesied in these pages), the run-up caused so much agita, said Chalk dictated that matters would calm down a bit.

But they haven’t. Calmed down a bit that is. And now, I don’t think they necessarily will – for the next few sessions and perhaps beyond. Following the script down to the last punctuation mark, equities rallied hard on Wednesday, and one could be forgiven for taking this as a signal that the menacing cycle of volatility had run its course. But a closer look at that short-lived melt-up gave rise to further concerns. Stocks don’t typically shoot up in that fashion without being abetted (if not driven) by short squeezes, and the mid-week rally appears to be no exception.

Further, it does not appear that the political psychodrama in the lead-up to the voting cycle has run its course; quite to the contrary, one could argue that political fevers are running even higher than before. Broward County, FL is up to its old shenanigans, and, abetted by the stone cold baller partisan lawyers that have descended on the state, we may be looking at a minor redux of the hanging chads of 2000. The House Leadership for the 116th Congress is taking shape, with its policy contours coming into view. We can expect amped up investigations, hostility across the board, and brinksmanship, to rule the day.

On the other side of the aisle, all (well, most) of the checkmarks on the election map had barely been filled when (as I believe was inevitable) Attorney General Jeff Sessions was abruptly shown the door. The post-results presidential news conference nearly descended into violence.

And, outside of the world of Beltway plebiscite battles, other risks begin to emerge. The FOMC met last week and indicated its intent to stay the course with respect to interest rate normalization. A gargantuan Treasury auction cycle yielded mixed results. As illustrated below, demand for our 30-year bond was dismal, with yields hitting 5-year highs and the bid-to-cover being the worst recorded in a decade:

Now, I have a confession to make: I find this whole “bid-to-cover” thing a bit confusing. Press me and I think that I could summon up a plausible definition. But my heart would not be in it. Mostly, though, I like to discuss “bid-to-cover” because: a) it trips off the tongue so elegantly; and b) I think it makes me sound smart.

Let’s just agree, though, that if we extrapolate the demand trends for our long-dated paper, it could mean that much higher rates loom on the horizon. On the other hand, The Chalk suggests that these would need to be accompanied by higher inflationary expectations, a concept to which the following little bit I pulled down from Bloomberg gives the lie:

And as for me, I’m rather inclined to go with The Chalk here and suggest that ginning up inflationary expectations sufficient to catalyze a material, sustained rate rise will be a heavy lift for the markets. I am particularly biased in this direction because: a) global growth appears to be trending downward; and b) I could really use those higher rates, and I have found that the markets, seldom, if ever have acted in a manner that supports my personal agenda.

It is, though, clear that our Treasury will have to issue a passel of paper for a long time into the future if we’re to fund the obligations we’ve assumed, and about the only blessing I can find here is that we won’t have to deal with another debt ceiling episode until next March. I have no doubts that this will add a nasty elements to March Madness ’19, but hey, it’s 5 months away.

And now we’re in looking at the back half of a 4th Quarter that has been a nightmare for investors across most every strategy. Earnings are functionally over, and our attentions now likely turn to the big G-20 meeting in Buenos Aires on November 30th. Trump and Xi are expected to meet, greet and exit with happy tidings for the rest of us. Let’s hope for the best.

The stock market has a magnificent record of rallying into year-end after mid-term election cycles, and perhaps this time will be no exception:

All the same, though, I expect that this cycle it will be a bumpy ride. For professional investors, it again has been the worst year of the decade, and, with nine short weeks until it (mercifully) ends, I continue to warn that there are a lot of desperate operators out there.

And it is my considered experience that desperate operators cannot be relied upon to make rational investment decisions. This is a problem.

Because desperate operators can wreak havoc on even the most rationally oriented of portfolios. But the Chalk says we’re likely to rally, and I will admit to hoping, in this case, that The Chalk is right. Lord knows, the investment community has suffered enough across this long, grueling year. But one way or another, I continue to urge caution.

Because just when you’ve let your guard down, some obscure Archduke can get taken out, Whitey Bulger style, and the world can, as a result, suffer two generations of unimaginable carnage. It all began with WWI, but the Armistice didn’t resolve matters, and soon the world decided that a minute of silence on 11/11 at 11:11 was no longer required. Maybe they knew what they were doing; maybe not. But as for me, with 11:11 on 11/11 fast-approaching, I think I’ll keep my yap shut – for a single minute anyway.