Perhaps for lack of other “forum-suitable” alternatives, I am dedicating this column to recently passed Professor Stephen Hawking. Please understand, it’s not as though I don’t admire Hawking; it’s just that I’m ambivalent. Among his other accomplishments, he was a miracle of modern biology for having lived out 3x lifetimes under the heartbreaking burdens of ALS. He should’ve died at 25 – at least according to his (presumably highly qualified) doctors, but made it to 76. During the 3 penultimate decades of his life, he held the Lucasian Chair of Mathematics at his Alma Mater: Cambridge University, and was only the 15th so-honored academic — dating back to Sir Isaac Newton, for whom the post was created in what I remember to be the somewhat raucous year of 1669. In a stunt you can file under “stranger than fiction”, the University forced him to step down 10 years ago, because he had reached the mandatory retirement age of 65. He carried on though, albeit as a somewhat controversial figure, and to my mind detracted from his legacy in his final years by spewing out a fairly unhinged leftist socioeconomic philosophy. I prefer that practitioners in other fields – from Charlton Heston to Roger Waters to Colin Kap – refrain from laying their righteous cross-discipline political thoughts on the masses. However, on this St. Patrick’s Day weekend, I’m willing to give Ulster Steve a Mulligan. Let’s just agree that in the Brief Time of His History, he had an improbably magnificent run.
To be sure, Professor Hawking had a flair for mathematics, but when all is said and done, Physics was his game. Here, he went both big and small, adding significantly to the world’s understanding of the ordering of the Universe (the behavior of Black Holes, the dynamics of the Big Bang, etc.), but also studying the equally fascinating world of atoms and sub-atomic particles. Alas, he never found his Holy Grail: the above-referenced Theory of Everything, which seeks to reconcile Einstein’s Theory of Relativity with the attendant misbehavior of both sub-atomic particles, and celestial objects travelling at velocities beyond the Speed of Light. The latter set of miscreants operate under a concept called Quantum Mechanics, and, thus far, no matter how much intellectual capital we allocate it, humanity has failed in its quest to harmonize General Relativity and Quantum Theories.
Beyond his heroic endeavors to overcome a disability that proved to be too many for the likes of even Lou Gehrig, he is perhaps best known for dumbing down his work for consumption by the masses, as embodied in his 1988 book “A Brief History of Time”. It was an international sensation, but was ironically panned by some critics for being too pointy-headed, and by others for not being sufficiently so.
I read it many years ago, and enjoyed it. And my main takeaway was the remarkable similarities between the behavior of the Universe as we observe it, and those of every single cell that exists therein. I may have misinterpreted something somewhere (nobody would ever accuse me of being a physicist), but when I completed the reading exercise, I took its main message as being that every cell that exists in the cosmos is its own universe, and that the Universe itself can be thought of as behaving like an individual cell.
To me, a such a sublimely symmetrical concept, if not precisely accurate, ought to be so.
And it got me to thinking (natch) about analogues to the markets. And here I will posit a corollary: the entire global capital market can be viewed from certain perspectives as behaving like a single security, and each such security has strong behavioral similarities to the global capital market itself.
As is the case with Hawking’s “Time” theme, I feel that if this isn’t the so, then it ought to be.
But let’s not dismiss thing out of hand, OK? I believe I’m on to something here. Think, if you will, of the world’s markets as being a single financial instrument. Like many existing securities, it has a lot of moving parts. But then again, so does (or did) General Electric. And so does Berkshire Hathaway. Its Balance Sheet contains an impossibly complex mix of privately held assets, collectively held assets, receivables, payables, commodities, real estate, foreign exchange holdings, embedded derivative structures, and even, perhaps, a smidge of Goodwill. This complexity, however, in no way precludes investors from asking the fundamental question: is the market something that I’d want to own at prevailing price levels, or is it not? Across the span of time and conditions, when they have answered in the affirmative, markets go up, and vice versa.
Similarly, one can view every single instrument as an entire macro economy. Whether it be a stock, bond, commodity, physical asset or unit of account (Foreign Exchange) it bears elements of all human endeavor within it. Just as (according to Chaos Theory) a single butterfly flapping its wings in Brazil can cause a tornado in Texas, so too can a default of a Small Cap widgets manufacture in Singapore cause a collapse of the entire American Cotton market.
Across our quixotic journey through the heavens and inside the mystic universe of particles, Newton’s (old school) Second Law of Thermodynamics, which holds that an object at rest or in motion will remain in said state until it is acted on by a material force, seems, by and large, still good to go. The Law still applies pretty well to Quarks, Higgs Bosons, Black Holes, Super Novas and the like.
In addition, it appears to retain its validity in terms of market pricing behavior.
Over the past couple of installments, I have suggested that as Q1 winds down, not a great deal of price movement would be observed in any asset class. So far so good, but why? Well, if we analogize economic information to the “material force” component of Newton’s 2nd Law, then it may very well be that, as I assumed, the information calendar slowing to a seasonal crawl has frozen the majority of current prices in an “at rest” state. After a little bit of two-way movement early in the week, the Wed-Fri range on the SPX was all of 20 handles. The yield on the U.S. 10-Year note hug snugly within 5 basis points. Ditto in terms of for the FX complex price ranges. On a relative basis, there just wasn’t much going on, and this is reflected in the flat-lining of a whole bunch of price graphs.
Yes, there were a few data nuggets to digest. Industrial Production was a blowout – highest in seven years. But Retail Sales and Housing Starts were absolute duds. Let’s call it even.
Elsewhere, our Washingtonian version of “Being for the Benefit of Mr. Kite” (“full of men and horses, hoops and garters; lastly through a hogshead of real fire”) carried on in full swing, and continues, if not to the delight, then, at least not to disappointment, of observers everywhere. A soon to be eliminated Pennsylvania Congressional District slipped, improbably, into the hands of the Democrats. Tillerson was fired on a tweet; Kudlow brings his pin-striped cable TV personna to the West Wing office most recently held by the less telegenic Gary Cohn. McCabe got his butt canned, ostensibly to deny him his estimated $1.8M pension package. Here’s hoping (and expecting) that some private sector coastal fat cat will scoop him up, stash him into a cushy spot, and make him whole. Meanwhile, the rest of us will continue to suffer through cross-fire emanating from both the Left and the Right.
The trade war of words continues unabated and is likely to further devolve before any subsequent igration towards the Heavens.
Some of the above is sending signals that threaten to disturb our temporary state of blissful economic equilibrium. Q1 GDP estimates have come careening downward in a rather alarming fashion:
I’m not entirely sure that anyone saw this coming. And about the only root cause I can identify is the already unfolding consequences of the tariff policy, along with general uneasiness regarding international relations.
If one wishes to look for signs that any of this matters, one should point one’s attention to Fixed Income markets. But here, as is so often the case with respect to the cosmos in general, one may be left with more questions than answers.
Consider, for instance, that the Treasury’s latest extended frenzy of issuance has simultaneously acted to flatten the yield curve, while causing some immediate mark-to-market losses for patriotic purchasers:
But that’s the type of tape we’re in. Perhaps next week’s FOMC Policy Statement – the first ever to be issued by Chair Pow, might bring some clarity; but more likely not. I just don’t see him doing anything but raising rates by 25 bp, while uttering some ambiguously pleasing and platitudinous words about the upward trajectory of our economic fortunes.
However, as is the case with everything in this here universe, current conditions won’t last forever. Once the calendar turns to April, the magnetic flow of data should be sufficient to cause investor types to rethink their hypotheses, and to effect attendant material price movement.
But for now, very little is discernable to reconcile the General Relativity of the markets with its befuddling tendency to engage in quantum-like calisthenics. If ever this riddle is solved it will, enable us, as Hawking wrote in “Time”, to “know the mind of God”.
By all accounts, though, Hawking was a wandering agnostic, sometimes placing his faith in divine purpose; at other moments rejecting it on conceptual grounds. Maybe, at the time of his demise, he leaned towards the path of righteousness. I mean, after all, he was born on the 300th anniversary of Galileo Galilei’s death, and died on Einstein’s birthday.
The latter calendar date: 3/14, is known among the egg-headed as Pi Day: as it corresponds with the constant that will give the area and circumference of every circle for which a radius can be supplied.
If there’s an over-riding message here, it’s that markets, as the universe itself, travel a circuitous path, and we’d be well-advised to remember this truism in our risk-taking endeavors. This is not a Theory of Everything, but neither is it a Theory of Nothing.
TIMSHEL