You Only Live Once, right? At least that’s what they tell us. And if it’s true, well, maybe a submarine is as good a place as any to reside. It may not be for everyone. But in the town… Where I was born…
I reckon you know the rest.
Besides, I’m on a roll with this Beatles stuff. I don’t mind telling you that last week’s The Egg Man piece was a cash cow for me, and one whose udders have yet to run dry. They will run its course eventually, and probably soon. But you don’t mess with a winning formula, as anyone who has accumulated enough years to remember New Coke will gladly tell you.
Beyond this, I got to pondering about the relationship between life’s transience and undersea dwellings as I scanned the lightly reported tidings that on Wednesday, the Russians (yes, them!) launched the world’s largest submarine. Stem to stern, it measures 600 feet, and displaces more water than a WWI battleship. The Ruskies named the vessel Belgorod, which translates into English as White City. It is designed to carry up to four Intercontinental Ballistic Missiles, each of them capable, at minimum, of generating a tsunami of sufficient size to take out an entire coastal region (say the New York, San Francisco of Los Angeles metropolitan regions).
Published reports suggest that Putin watched the launch remotely, from his cozy, above-ground enclave in the Kremlin. And even now, rumors are afloat that that “you know who” was patched into the same feed from his palatial residence in Bedminster NJ (in keeping with his trademark good taste, he is said to have felt the White House to be an inappropriate setting for the viewing of this ceremony).
So if the Belgorod is our YOLO Submarine, it’s not yellow, but white. The sky is still blue and the sea remains green (sort of), but the vibe is certainly less uplifting. The villains of the original Yellow Submarine were the relatively harmless and entirely hapless Blue Meanies, who only wanted to remove music and color from Pepperland. Color schemes notwithstanding, it’s pretty clear to me that the Belgorod has more nefarious latent intent, and, if called into action, its objectives are not likely to be much impeded by four Liverpudlian hippies, no matter how musically gifted they may otherwise be.
With all of this in mind, I am forced to conclude that the jury is still out in terms of the advisability of making one’s home in a submarine (whether Yellow or YOLO), but for the time being, I reckon most of us are still stuck on dry land, with our eyes pointed to the skies. For market types, while there have been gratifying pushes to celestial elevations, it cannot unilaterally be stated that ALL markets are on an upward trajectory. For the most part, it would be well to assume that we’re all still rooted on the soil.
It is true, of course that global equity indices continue their improbably climb towards the heavens. I perhaps need not waste much space on reporting that, as prophesied in these pages, our Gallant 500 has now planted its flag on the new high ground of ~2940. It is flanked, of course, by its comrade: Captain NAZ, which, despite the huge force of the unleashing of its afterburners, remains 10 skinny index points (~0.13%) below its point of zenith – mostly because it took a bigger beat down in Q4 ’18, and had further to travel to eclipse its previous highs. However, in terms of one particular metric – annualized return — NAZ is blowing the 500 away. As of Friday’s close, the Good Captain is projecting out a 97% full-year gain for 2019, which embarrassingly blows away the beggarly-by-comparison SPX trajectory of 68.3%. Both, however, are wiping the floor with General Dow, which: a) is registering a laughably small ytd gain of < 15%, and b) is throwing off an embarrassingly infinitesimal annualized rate of approximately 50%.
On the other hand, we can perhaps cut the Old General some slack, seeing as how its main component (Boeing) is only barely emerging from dual incidents in which it inadvertently converted its signature flying machines into submarines.
And elsewhere across the global capital economy, there remains some palpable gravitational pull. German Bund yields, after a valiant attempt to traverse sea level, are again in modest negative territory. Rates last week were indeed under pressure across the globe, as were virtually all major currencies not painted in green and graced with the image of dead presidents. The Euro in particular is feeling the pinch, closing Friday at its lowest level against the USD in two years. This notwithstanding, published reports indicate that speculative interests are lining up against the EUR, and playing for further carnage.
Commodities are also at subterranean levels, particularly on a relative basis. The week ended badly in the Energy Complex, and if you haven’t looked at the Grains lately, well, trust me, you might not want to. But what is really pushing the buttons of the smart guys I know, is the shocking underperformance of commodities (again, the stuff we actually eat, wear, burn and build with) versus the stock market:
Now, admittedly, I’m running a risk here by presenting a graph that eerily resembles last week’s colorful-but-obtuse egg chart. For purposes of clarity, I’d draw your attentions to the “sea of green” lower half, which measures the spread between the SPX and the Bloomberg Commodity Index. It implies the following reality: as of now, a single unit of the SPX will purchase about twice the amount of foodstuffs, fossil fuels and metals as it did a mere five years ago. And one can only point to a single explanation here: again on a relative basis, we appear to be blessed with an abundance of resources that have designated purpose in the economy, and a shortage of assets the ownership of which is designated by and large to generate returns of the filthy lucre variety.
Investors don’t seem to want to want to own Commodities at any price, particularly on a speculative basis, and all I can do is wonder if, at that point when we decide — once and for all — to migrate to our YOLO Submarine, we might not want to load up on some wheat, corn, and maybe even cotton.
Specs are also lining up against the VIX, which is testing multi-quarter lows, even as short positions continue to amass at record levels:
One wonders what possibly go wrong here? Equity indices are flying high in miraculous recovery from a dismal end to 2018. Valuations are at record levels and volatility is deeply suppressed.
So what’s the easiest trade out there? Well, obviously it involves going short the most impaired risk factor across the entire capital markets. If the VIX goes to zero, these short players will certainly have reason to celebrate. Of course, the VIX may not actually go to zero, but why dwell on that unpleasant contingency?
Meanwhile, I think all of us land dwellers have cause to give thanks for the bounty of good news that has come our way across the first trimester of 2019 (which, by the way, was a very timely point for happy tidings to arrive). We’re now about half way through Q1 earnings, and, while they’ve not exactly been gangbusters, they have arguably given the lie to those who were projecting Armageddon in these realms. It’s another big week for reporting – in many ways the last big sequence of the cycle, with names such as Apple, Alphabet and McDonalds stepping up to the podium. Now, normally, I wouldn’t care about McD’s; I haven’t choked down a Big Mac in about two decades. But after Coca Cola’s surprising upside blowout, I’m not so sure. Anyway, in general, the massive downward profits boot has not yet materialized, and the longer that we can stave off this inevitable, the better we will feel about ourselves.
And then there’s the macro stuff. Everyone should be pleased about the better than expected New Home Sales number (‘tis the selling season after all), and then, of course, Q1 GDP was at least superficially a blowout. To be sure, there was some fluff in the 3.2% print. The American Yankees got a rare and perhaps unsustainable win against the world on trade, and there was a justifiably concerning buildup of inventories, which must be depleted lest they are kept gathering dust in warehouses, and threatening to vex us all. But again, any fair analysis must also contemplate the performance against some headwinds we encountered, particularly the partial government shutdown, which was supposed by many to foretell recession. In general, as compared to the dire prognostications that were all the rage around the holidays, I think we can all be understandably pleased with the continued vitality of the domestic economy.
So we end the trimester of ’19 with equities at or beyond previous record valuations, a docile financing environment that in future cycles will most certainly cause us to look back with wonder, commodities on deep offer, and the USD sustaining remarkable vigor. My friends, old as I am, I feel comfortable in conveying that I’ve seen worse conditions for risk-taking in my time. MUCH worse.
And I reckon that the party will continue for a bit longer – mostly because I don’t find anything on the visible horizon to stop it. By purely Newtonian logic, we could be poised for another material leg up. Moreover, if, absent some paradigm-shifting dynamic entering the equation, the market happened to sell off here, I am convinced that many investors would view it as a buying opportunity.
From my perspective, this here market looks like one of those environments where everyone is praying for a 4%-5% pullback so they can buy more. When this form of sentiment prevails, said 4%-5% pullback almost never transpires. Instead, valuations climb higher, until the inevitable happens, and the correction is 2x to 3x (or worse) what everyone wants. This is a pattern that repeats itself (or, to paraphrase Churchill, “rhymes” itself) over and over again. In fact, it kind of reminds me of the late summer of 2018, and I don’t need to remind you what happened after that.
Over a slightly longer time horizon, I suspect that we need look no further than the Fed to identify the source of the next round of carnage. They will meet this week, and announce nothing of import, but if the equity markets continue to soar like they have, at some point they’re gonna reverse course, among other reasons because they’re sneaky sumb!tches that none of us should trust. But I don’t reckon their treachery is imminent. And, given that we only live once, I suggest we enjoy the good times while they prevail.
But I’d do my celebrating on dry land if I were you. The Yellow Submarine is still out there, 50 years after its maiden voyage. But so too is the Belgorod, with friends soon to be living next door.
If I’m right about this, it might be fair to conclude that the concept of a YOLO Submarine, is, at least for the time being, little better than an oxymoron. Let’s thus try to make the best of our landlocked condition.
TIMSHEL