Runaway train, never coming back,
Wrong way on a one-way track,
Seems like I should be getting somewhere,
Somehow I’m neither here nor there
— David Primer (Soul Asylum)
Let’s begin with a brief as possible sojourn into passably edgy Early ‘Nineties Alt Rock, which, I tell you fairly, is not my particular jam. So let’s get this over with. Our title track comes to you by way of the Minny-based outfit Soul Asylum, amounting perhaps their only recognizable song and certainly their only hit. I’ve kind of cottoned to the riff on my guitar and think the boys did a good job here; that’s about it.
But that ethereal, eternal theme of a runaway train seemed like as good a place to begin as any, so let’s do it. Begin, that is.
I am delighted to report that after one ripper of a week, into which we entered through the dark tunnel of my published fears that our equity indices might be losing momentum and not even produce the low end of triple digit returns this year, we’re back on track. The Gallant 500 has re-fired its engines — up to an annualized rate of >124%, Captain Naz is revved up to 136%, and that often-overlooked super steamer powered by Ensign Russ churning at a rippling 224% rate.
On balance, we can therefore perhaps state that it was a good week for bullet trains, but not unilaterally so. Shortly after my CA high speed rail project screed, newly minted Governor Gavin Newsome announced a decision to scrap the effort – at least insofar as it aspired to connect by hyper-locomotion those quaint little villages of Los Angeles and San Francisco. All, however, is not lost. The initiative will shoulder on with its plans to build a bullet between the thriving metropolises of Merced and Bakersfield. As the Governor pointed out, this will be a major boon to the misanthropic residents of that corridor. Now, I’ve never had occasion to visit Merced, but I was born not too far from the field of bakers, and have kicked it more than once with my crew there. My biggest memories are of two dominating forces: auto racing and churches, big-a$$ churches. I take great comfort in the fact that sometime next decade, the residents of these two urban colossuses (and those of points in between) can speed their way to a NASCAR event or an old school revival rally. I think, once some track is laid and the engines mounted, ambitious Merceders may even be able to wake up on a Sunday morning, take in some old time religion, catch a race, and make it back home for family dinner.
The other signal event of the week, of course, was the decision by the Almighty Amazon Corporation to abandon plans to establish an HQ2 (or HQ2a) in the Long Island City Section of Queens County, NY. This, of course, was viewed as a great victory by the same political forces that envision a Shangri-La of high-speed electronically powered trains across this great land of amber grain waves — so effective, comprehensive and efficient that it will remove the blight of airplanes infecting our spacious skies. That some of this track may force its way through majestic purple mountains and dissect/disrupt fruited plains is a subject that has yet to be addressed, but I’m sure they’ll get to it sometime or another.
Now, I will cop to sharing prog-like squickiness about the whole AMZN HQ2 thing, which featured a lot of promises from Team Bezos, and caused at least a hundred cities to come begging with treasures to play host to the one-time bookselling concern — only to be forsaken in favor of the two municipalities where they were best positioned to expand their considerable power (NY and DC). As such, a certain feeling of sangfroid is nothing about which any of us should be ashamed. In fact, the whole thing reminds me of the wholesale heists pulled off by innumerable sports teams who have forced their towns to gift them glittering new stadiums and/or arenas, lest their capitalistic extorters, with crocodile tears in their eyes, follow through with their threats to pack up their squads and move them to the embracing arms of another jurisdiction. The worst of these offenders, at least to my knowledge, is the New York Yankees, owned of course by the billionaire shipbuilding Steinbrenner family. They demanded a cool $1B from us Empire State taxpayers, which of course turned in to more like $2B. Bear in mind that this was 2008, when NYC was awash in fear. I haven’t been to the New Yankee Stadium, and even resisted the temptation to turn up there when my Wisconsin Badgers put their 2nd straight beat-down on the Miami Hurricanes in the Pinstripe Bowl. I had already been hating on the Yankees anyway, and had been hating on them for quite some time but every time I drive by that stadium, the dubious gift to these fat cats (to which I contributed material amounts) reminds me why this is the case.
Still and all, I can’t completely fault Amazon for grabbing with both hands what was theirs for the taking. And New York would’ve in all likelihood seen a speedy return its $3B investment. But as I mentioned last week, we must render unto Bezos what belongs to Bezos, and it was a pretty easy and slick move on his part to convey the message that, deal notwithstanding, if you don’t Amazon to come, it will stay away. Some businesses and consumers in that forlorn section of Queens are of course left holding the bag, but hey, they’ve got the promises of the dream girl that represents a contiguous district in the Boro to carry them through.
Perhaps at greater issue is the potential joining of a battle whose time for action is, if anything, overdue. We have all watched with great discomfort the dubious alliance between America’s most powerful corporate concerns and the increasingly self-righteously empowered progressive left, and wondered about the elephant in the room. In an arrangement that, writ small, resembles the 1939 treaty of non-Aggression between Nazi Germany and the Soviet Union, both sides know that they must at some point do deadly battle, but both realize they’ll be better to defer hostilities to future points of their own choosing. So, as long as major TMT companies parrot the appropriate progressive orthodoxy, hire Chief Diversity Officers and the like, and underwrite progressive causes with their seemingly unlimited supply of capital, as long as prog groups (and I’m not referencing Emerson, Lake and Palmer) are recipients of these financings and can use the forums to advance their messages, the uneasy alliance sustains itself. But to my way of thinking, it only sets up for a bigger showdown between these forces down the road. Those Big Tech companies are capitalists with capitalistic agendas, capitalistic modes of operation, and as much power to advance their schemes as anyone this side of John D. Rockefeller, Sr. They are headed on a collision course with the redistributionist dreamers in green fairyland, and it will be quite a spectacle to observe.
So the CA bullet train goes from nowhere to nowhere, and Amazon, while clearly going somewhere, will not point its runaway train towards NYC, so no high speed train from Seattle to Long Island City is at the moment urgently required.
And meanwhile, the economic signs at the switching stations of the landscape are flashing not green, but yellow. Recent macro data (albeit likely skewed downward by that tragic, five-week partial shutdown that heartbreakingly imposed 5-week paid vacation on about 800,000 bureaucrats) has shaded toward the dismal. The delayed December Retail Sales number of -1.2% was so bad that it has many economists smelling some sort of fix. Of course, by now we should be already processing the January report, but that number is delayed till 2/25, placing those interested in the odd position of being compelled to review two monthly reporting cycles in the space of two weeks. And this time, there’s not even a survey (at least yet) by which to benchmark consensus. On the other hand, if the December bomb was indeed an empty payload, we’ll know by virtue of the contents of the January print.
Meanwhile, the Inflation numbers came in like zombies, and it looks like the GDP juggernaut is feeling some significant gravitational pull:
Maybe it’s a Super Bowl hangover, spurred on by embedded cranial images of Adam Levine’s ink, but the Atlanta Fed’s Q1 projection has dropped by some 40% in less than a week.
I intend to pay attention to these trends and believe it would do you no harm to do the same.
Investors, however, and as is their prerogative, are cheerfully ignoring these tidings. The Q4 earning season is entering its last innings, and, as indicated below, it’s been many a quarter since capital allocators have taken in bad news in such forgiving fashion:
The implied message from investors is this: don’t worry if you bitched up the quarter. We know you did your best and let’s go get ‘em for the rest of 2019 and beyond.
I must admit: this attitude of charity is a bit unique in my experience, and I have an uneasy feeling that it won’t last forever. My read is that there’s a good deal of pressure on CEOs to deliver over the reporting cycles that confront them in the near term.
And, much as we’ve enjoyed contemplating a set of equity benchmarks projecting a more than doubling over the full course of 2019, it may behoove us to look at the hard facts of the current rally. The best annual return ever recorded by the Gallant 500 was 46.6%. And that was in 1933, which few of you likely remember, but (trust me here) was not a particularly wise time to be fully invested. It has only exceeded returns of 30% a handful of times since then. The newer Naz clocked in at 85.6% in 1999. But whatever one can say about current conditions in the global capital economy, I think we can agree on one thing: this ain’t 1999. The party may not be over but it’s well past the point of its introductory surge.
So, best case, the near-certainty is that the equity complex bullet train will slow, stop, or even reverse across the next 10.5 months. It could still be a very good year for investors, but even now, I suggest y’all ask yourselves the following question: back on January 2nd, if you could have locked in a full-year 2019 return of 10.72% on the SPX, 12.62% on the NDX and 16.36% on the Russell 2000, would you have taken it? Thought so. Well, that’s where we are right now. And I ask you to take this into consideration in your determination of risk profiles on a going-forward basis.
But on this wintry weekend, let’s hail the bright side. The Fed is on ice, the Chinese appear willing to deal, and, wonder of wonders, the Federal Government is even funded. I recall that a couple of weeks back Pux Phil failed to see his shadow, foretelling of a short winter. And, from a market perspective, he may be right; the green shoots of February are indeed a welcome sight to these decaying eyes of mine.
And then of course we’ve got those trains coming. Big, beautiful trains, all painted in emerald hues. So let’s forget Soul Asylum, shall we? How could we possibly be going the wrong way on a one-way track? Yes, we should be getting somewhere, and if Team Bezos is any example, we may indeed be neither here nor there. But we’ve been there before, and will be again. It falls upon our lot to deal with all of it.
TIMSHEL