For the second consecutive week, I find myself positively impelled to weigh in on a tangential topic that has gone both global and viral. In our previous installment, I attempted, with only partial success, to unpack Gresham’s Law, in the process putting my imprimatur on Goodie’s Law, a construct which no one (as yet) has had the temerity to dispute.
I was hoping to leave it at that, but then, unbeknownst to me, another web-exploding debate emerged, resurrecting a long-established but by-and-large dormant concept called the Ebert Principle. For the uninitiated, the Principle, named after its Discoverer: the late Chicago Sun Times film critic (and possessor of the two of the four most feared thumbs in Hollywood) Roger Ebert, reads as follows:
An anthropomorphic cartoon character suspended in mid-air will remain in said state until being made aware of same.
Let’s use the obvious example to illustrate. When Wile E. Coyote chases the Roadrunner toward a cliff, and then the latter (with trademark sh*t-eating grin) side-steps the former and allows him to barrel off the precipice, Mr. Coyote does not immediately fall earthbound. Instead, he remains at his peak elevation expressive incredulity affixed on his face, until he looks down. At that point, recognizing the realities of his situation, the inexorable force of gravity over overcomes his state of confusion, and down he goes.
For those among you that remain confused, the following illustration should remove any lingering doubts:
I hadn’t thought about this phenomenon in many years, but that respite was about to end abruptly. Just as we were past this Gresham’s Law throw-down; just as we were drying off from Harvey and Irma, the blogosphere exploded on the subject.
So many wise souls opined on this that I can’t catalogue them all, but a small sample of the Ebert Principal response is provided below:
The Mooch issued a formal statement accusing the Roadrunner of cuckolding him, and filed a paternity suit in Federal Court. The Roadrunner’s legal team responded with a motion to dismiss, denying any liaison with Mrs. Mooch, and pointing out that given he and Mrs. M are two different species, the paternity claims were, at best, frivolous. The Judge sided with the Roadrunner in Summary Judgment, and ordered Team Mooch to pay court costs. Team Roadrunner threatened Mooch with a Defamation Suit, but indicated that it would drop the matter if the latter made a formal apology.
Mooch tweeted out a tepid apology, to which The Roadrunner responded in kind: “@Mooch: Beep Beep You”.
Hillary Clinton took general responsibility for the incident, and then proceeded to assign blame to Comey, Sanders, Obama, Putin, Biden, the DNC, the RNC, the Mainstream Media and others.
Former Vice President Albert S. Gore blamed global warming.
LeBron sent out a formal $50M Hang Time Challenge to the Coyote, stating that if victorious, he would donate the proceeds to (Flightless) Bird Lives Matter.
Black Sabbath Bassist Terrence Michael Joseph (Geezer) Butler thought it was all pretty cool, and former British Prime Minister Benjamin Disraeli could not be reached for comment.
Actually, that’s about all the flow generated by the Ebert Principle, but isn’t it enough? Couldn’t I just leave well enough alone? Well, maybe, but it did strike me that I had an obligation to investigate and report upon whether or not there was an investment universe analogue to this construct, and, on first glance, the positive case is fairly compelling. Pretty much every time the market has reached an unsustainably elevated threshold, it did not come careening down until everyone realized that there was nothing but air beneath it. Of course, the most glaring example of this is the ’08 crash. Yes, Casandra Chorus admonished us about a housing bubble and a looming credit crisis. But until borrowers started defaulting in droves and the FDIC began closing banks, nobody was paying much attention to these warnings. Similarly, prior to the bursting of the dot.com bubble, investors were buying up worthless web companies like they were 16th Century Dutch tulips. I could go further back in history, but I think you’ve caught my drift.
But perhaps the more important issue is whether the market has currently run off the cliff, and resides in a Coyote-eqsue state of suspended denial. Again, there is anecdotal evidence supporting this assertion. To wit: equity valuations, by many standard metrics, offer some back up:
Then there’s this handy little graph which I unearthed, suggesting that every market, with the ironic exception of Housing, is in bubble configuration:
Don’t ask me to explain this psychedelic spaghetti bowl, which I don’t understand at all. Suffice to say that it’s as scary a piece of Microsoft Excel Charting Function handiwork as one would care to see. Further, we can impute that if this guy is on to something, then we’re truly in Coyote Configuration, so whatever else you do, I’d advise you, from a risk management perspective, not to look down.
All of this resides against an economic backdrop that features multiple crosswinds. The macro picture is mixed. On the positive side of the equation, for the first time in history, all 46 countries in what is defined as the developed world are sporting ISM scores above 50. But Retail Sales and Industrial Production came in weak. The former metric does not feature a geographic breakdown, but the latter figure does, and was clearly diluted by all that nasty weather down south. As a result of nature’s wrath, both the NY and Atlanta Fed’s GDP Estimates took a turn for the worse:
No doubt here the economy will be issued a Mulligan after the double storm wallop. But we’ll all probably feel the GDP gap nonetheless.
In addition, like it or not, this coming week, we will be forced to endure yet another FOMC meeting, the expectations for which involve the Fed holding rates steady, but announcing some concrete plans for the divestiture of portions of their >$4T Balance Sheet.
I suspect that the dynamics around this may at least partially answer our questions, based upon the following theory that has crystalized for me in recent days: QE has reached a state where it has created a chronic supply/demand imbalance for marketable securities. There simply aren’t enough of them out there to satisfy investor needs, because Central Banks have Hoovered them all up. As long as this persists, then as a matter of pure market technicals, downside volatility – particularly in Stocks and Bonds — has been dramatically suppressed. Perhaps if the Fed really puts some of its inventory on sale, it will break the logjam, but I’m not counting on it – just yet.
So, to answer our key question, I do think we’ve got some of investment version of the Ebert Principle at play here. The Market Coyote is indeed over a cliff, but on the other hand, he shows no signs of looking down. Someday in this fair land he will cast his eyes towards terra firma, and at that point all of us will feel some gravitational pull. I don’t think he’s up nearly as high as he was, say, in late ’07, but neither, for the moment, do his feet appear to be touching any solid surface. Moreover, there’s every chance he’ll climb to more dangerous elevations before the “Aha Moment” reaches his cranium.
On a happier, closing note, while the good folks at the Looney Toons Division of Warner Brothers, producers of The Roadrunner Show (and therefore indirect creators of the Ebert Principle) have only done partial violence to Newton’s Laws of Motion, they have absolutely obliterated core tenets of Biological Science. No matter how far Mr. C. falls, no matter how much it hurts, he gathers himself and begins the struggle anew. For this, he deserves, if not our praise, then at least our sympathy. Moreover, I suspect this is true for us all, so take heart, and, as always…
TIMSHEL