Though I dealing with non-work-related issues, thousands of miles from my post, the week’s noteworthy events were not entirely lost upon me. And I’d be remiss in failing to begin with the recognition our high-flying equity indices experienced some gravitational drag. In fact, not only did their annualized rates drop below the minimally acceptable level of 100%, they did so in menacing fashion: the Gallant 500 is now on a pace for a pitiful 67% gain this year, Captain Naz is sucking wind at a projected 77%, and even the Icarus-like Ensign Russ is currently extrapolating to a beggarly 95%.
Oh well, it was a good run – while it lasted.
I’d urge everyone to stay calm. And eat their Wheaties. I encourage the latter in particular because perhaps the most shocking lack of energy associated with any financial instrument that that I track is that of the good old Wheat market:
Let’s try not to panic, OK? Published reports suggest that the Ag Bears are coming out of hibernation a bit early, and shorting commodities at their angriest magnitudes in about three years. The crops look strong, and the warehouses are full.
Plus, there’s the whole trade war thing, which, whatever form its ultimate resolution assumes, is not currently helping the holders of this most stalwart of amber wave grain crops. Nor, for that matter, is it offering much solace to the other charter members of the Grain Complex: Soy Beans and Corn.
So there’s some perverse good news here: if the eating of Wheaties does indeed procure the benefits that were featured in those adverts of old, there should be no shortage of affordable supply about which to complain.
Besides, other markets are showing signs of vigor, and none more so than the global bond complex. Yields on virtually every benchmark government security dropped by unmistakably large amounts this past week, as the 30-year bull run in fixed income securities displayed no indication of running out of steam in the foreseeable future.
The signal event of the week – and one that I strongly believe merits our sustained attention, was the comments of ECB Chairman (Super) Mario Draghi, who, in ending what I believe has been a creditable run (he retires from the post in October), looks, by all indications intent on going out in a blaze of glory. Specifically, on Thursday morning, he took to the podium to inform his constituents and well-wishers that: a) the Bank is lowering its 2019 GDP forecasts for the Eurozone from 1.7% to 1.1% (a fairly alarming downward boot); b) is committing to hold rates steady for at least the rest of the year (and beyond the point of his retiring); and c) is reinstituting a menacing sounding program called Tactical Long-Term Refinancing Operations – designed to grease the rusty engines of European bank lending.
His renewed, or, if you will, reinvigorated pessimism is summarized in the chart provided below.
By way of context, it’s important to bear in mind that the more dismally positioned dark blue line is the new, March projection, and, in this chart is compared with the forecasts of December – when everyone (including yours truly) was justifiably concerned that the wheels were coming of the global economic bus – this time perhaps in earnest.
Perhaps most notable about Mario’s aggressively dovish turn is that it comes on the heels of a similar 180 executed by our own Fed Chieftain: Jerome (Jay) Powell.
As might be expected, global equities sold off in the wake of these sentiments, while the world’s bonds rallied like banshees. And, for me, there are only a couple of related inferences to draw from these tidings. First, Central Banks (and we can certainly throw in both the Bank of Japan and the Peoples’ Republic Bank of China) are terrified about a deceleration of global economic activity.
And second, they’re not going to stand idly by and watch it unfold. What I myself am seeing in all of the above is the likelihood that within a finite period of time, the big Central Banks will be revving up their printing presses and creating new money. Stated another way, not only will they encourage economic agents to eat there Wheaties, they’ll be tearing open the boxes, pouring them into bowls, adding milk and shoving them across the table at us.
Further corroboration of this scenario came to our shores on Friday, with the February Jobs Report informing us of the creation of a pitiful 20K new private engagements. Now, as you’ve probably read, the release was not unilaterally negative. Average Hourly Earnings exceeded expectations, the separately calculated base unemployment rate hit a new secular low of 3.8%, and the broader, underemployment metric (including those searching for full-time jobs but only able to find episodic gigs) also breached a decade-long minimal threshold at 7.3%.
But there is a decided lethargy in view across the great economic expanse, and those that ignore these tidings do so at their own peril.
As we have covered in great detail over our time together, much of the manner in which these trends should be interpreted is through a political lens. I believe that a visible slowdown is simply an unacceptable outcome for elected and appointed officials across the globe. It. Just. Can’t. Happen. Not in the United States, where the children are so bored that they decided to start the 2020 election cycle about nine months early, where the economic policy debate focuses most intently on whether we should institute a wealth tax, break up our great technology companies, eliminate, full-stop, our usage of fossil fuels, and provide free education, health care and a guaranteed income for everyone who manages to plant a toe on our shores. Not in Europe, where they have never recovered from the Crash, and where, among other problems that plague them, they must contend with this whole Brexit mess before the end of the month. And not in the Peoples’ Republic, where the slowdown that they do their best to hide menaces the absolute dictatorial control which the ruling party voted for itself just last year.
So I don’t believe that there will be any clearing of the markets. Rather, we will deal with our global hangovers of excessive debt using the same remedy as that of our forebears – with a dose of the hair of the dog that bit us. If you doubt this, just take a look at the proposals for the repair of the fiscs of American states including New York, Connecticut, New Jersey, California, and, of course, Illinois. All feature not only Democratic governors (white males – natch – including billionaire scions, ex Goldman partners, former hedge fund managers and other such world-class statesmen) but majorities in both legislatures, and all propose to energize their flagging economic fortunes and looming insolvencies by a combination of more borrowing, increased taxes, and, of course, bigger budgets.
What could possible go wrong?
But I’m inclined to take a somewhat more optimistic view of these dynamics (except perhaps the issues at the state level). What is most clear to me is that again for political reasons, interest rates CANNOT rise – anywhere in the world, and, with any signs of an accelerating economic downturn, they will in fact have to fall.
So, in a world where financial assets other than perhaps Wheat are evidencing patterns of increased shortage, where borrowing costs are at laughably low levels and may submerge from here, how much risk is there in holding onto, or even increasing one’s inventory of these assets?
Over the medium term, I think the answer is not much. But I do expect that the current downturn carries forward for a spell. I fact, I kind of hope that it does. A few percentage points down from here, with the world awash in fiat currency, with politicians and Central Bankers (pseudo-politicians that they are) telegraphing their absolute terror at any kind of December-like selloff, equities in particular will start to look like a bargain.
And, on balance, I’d include Wheat in this equation. After all, it’s trading at a three-year low, and if, as expected, we do strike some sort of deal with China, the silos across the Great Midwest should begin the emptying process.
And yes, you can help, and, if you’re so minded, you know exactly what to do. So, boys and girls, I close this note by encouraging you to eat your Wheaties, for the good of the nation, its farmers, and the global economy.
I hardly need to add that the extra fiber may also come in handy as you prepare yourselves for what is likely to be an eventful rest of the year.
TIMSHEL