“We’re all Keynesians now”
— Milton Friedman, quoted out of context, in a line incorrectly attributed to Richard M. Nixon.
I recognize that the entire world has worked itself up into a frenzy of debate over the whole Keynesian Liquidity Trap kerfuffle, but before we get to that, I have something on my mind that I wish to share.
Isn’t it time that water beds made a comeback?
I mean, water beds were pretty cool. At one point, Joe Namath-in-the-Hollywood Hills-circa-1974 cool. But not long after Joe ended his always-celebrated-but-eternally stylish career (and before he creepily tried to kiss that on-air reporter on the lips), they disappeared off the face of the earth. Water beds that is.
And I’m guessing that some of you don’t even know where they are.
I’m not going to waste much time schooling that younger, less erudite portion of my readership on the topic. Think of a water bed as a somnolent onomatopoeia: a thing that sounds like it is. A bed made of water, or more, specifically a mattress made of water. But the truth is that I never had enough bling to own one. Or even sleep in one. My brother had a water bed when we lived together in the ‘80s, and for the briefest interval, this was a sign that he was spitting madder game than me. But all of that changed. He ditched his liquid lounger, and now, I’ll match my game against his any day of the week.
Being the diligent, game-rich guy that I am, I did some research here, and have found in addition to the fact that they fell out of fashion around the same time as did big hair and acid-washed jeans, the contraptions were something of a headache to deal with. As one can only imagine, they are heavy as sh!t, require constant maintenance, and suck up a lot of resources — the utilization of which the woke world of 2019 won’t tolerate. No, the gaseous issuances from bovine backsides do not enter into the equation, nor, as far as I am aware, is much fossil fuel consumption required.
But these virtues notwithstanding (and though I have no direct knowledge one way or another), I think it’s a fair bet that neither Bernie nor AOC owns one in any of their multiple dwellings.
Biden, on the other hand, may have an H20 recliner stashed in his one of secret Delaware batch pads, and Bill Clinton must still own at least a half-dozen of these bad boys. And as for 45, well who’s to say? Probably not, because if a single water bed existed in the Trump portfolio, it’s a near-certainty that evidence of same would’ve made its way into the Steele Dossier, leaked to the media, and perhaps even merited a third section of the Mueller Report.
But one way or another, I think that the time for une couch de l’eau renassiance has arrived. The good news is that there are indications that this dynamic is indeed emerging. Nowhere is this more evident than in the recent surge in the valuations of utility companies, which just this week hit all-time highs.
I won’t lie: I didn’t see this coming. In a capital markets universe dominated by technology, biotech, cannabis and crypto, who knew that the sleepy likes of Consolidated Edison and New Jersey Power could surge to the heavens, valuation-wise? But I’m here to show you that the unthinkable has indeed become the actual:
Thus, and particularly adhering to the lower portion of the graphic, it seems to be the case that investors would have fared better these last three years by owning Grandma’s favorite preferred stock names than they would have holding (Insert favorite social media darling).
And I can only deduce one possible explanation here: the markets are anticipating one whale of a redux of the whole water bed thing. Bear in mind, here, that unless you are plan is to either freeze or sleep on the under-frame, the use of a water bed is going to require a significant amount of electric heat, and, well, water. And these, my loves, are the stock and trade of our new darlings in the Utility Complex.
It’s all starting to come together, right? Investors know that the water bed craze is on the verge of re-emergence, and, given the reality that (to the best of my knowledge at any rate) there are no publicly traded water bed concerns, they (investors) are reverting to the part of the playbook that involves owning companies that produce input components.
So we’re clear on the whole water bed thing now, right? At least I hope so. And my transient obsession with the topic has caused me to focus on a more germane element of fluidity: market liquidity. As was widely reported, the Repo market, the lion’s share of which involves overnight, interbank loans of cash, as collateralized by Treasury Securities, seized up earlier this week. Their associated yields jumped five-fold, and might’ve stayed there had not our Fabulous Fed stepped in with divine normalization relief. It’s still a bit wobbly, and the Fed has not yet exited the scene. The technical cause was a drain on reserves held at the Central Bank, which elicited a cash funding shortage in the overnight markets. But no one (I’ve talked to some really smart folks about it) can tell me why this drain occurred. Or what caused it.
But I’m not going to let a technical glitch knock me off my pillar of obsession with water beds, because if I did, you’d be disappointed in me, and rightfully so. However, with all of these fluids flowing through my cranium, it was perhaps inevitable that my focus would turn to liquidity traps. Most specifically Keynesian Liquidity traps. And here the mind races.
Like the weather (as attributed to Twain collaborator Charles Dudley Warner), everyone is talking about Keynesian Liquidity Traps, but no one is doing anything about them. Maybe this is owing to the reality that the entire premise has been inverted in grotesque fashion. As even my two-year-old grandson knows, the classic KLT features a conundrum under which a Central Bank is unable to lower longer term rates, no matter how much liquidity (i.e. funding) it injects into the system. This was a sound concern for most of the history of the global capital economy, but the problem has now turned itself right on its head.
Because for the time being, albeit with the same inputs, a similarly vexing monetary quagmire emerges. Specifically, now, no matter how much liquidity the CBs create, it seems that there’s nothing they can do to lift rates at the long end of the curve. And as a result, the U.S. yield curve remains depressingly inverted. As everyone is aware, Powell did come through with yet another short-end rate cut this past week, and, if we hold all other points constant, the logical outcome of this would be that the current, unpleasant pattern of inversion would disappear.
But It is my sad duty to report scant progress in this respect. The US Treasury Curve remains inverted out to points beyond 15 year maturities:
All of this is as unsettling to us economists as those first images of Joe Namath in panty hose back in the mid-70s. But there’s not much we can do about it. I am on aggressive record as being a perpetual bond bull, and the enticement of all the water beds in the world isn’t going to change my viewpoint.
We’ve been over this before, but the hard facts are as follows. The weakening global capital economy simply cannot abide higher longer-term rates. These securities are the beneficiaries of a perpetual, galactic bid, and the quantitative easing engines of major economies are just now revving up.
Even the estimable Chairman Powell blandly suggested that his outfit might yet again be expanding its still-gargantuan balance sheet again ere long, and we know what his peers at least in Europe have teed up.
I can’t help but wonder what good old JMK, who presumably never slept in a water bed (the reality that they first emerged about a thousand years BC notwithstanding), would make of all of this. It seems that instead of, as he prophesied, conditions where no amount of liquidity could lower longer term rates, it now seems that nothing of that nature can serve to raise them.
All of this speaks in my mind to a duality I’ve written about before. The value of financial assets, due to scarcity, is immense and rising, while the relative price of real economy components continues to fall. Anyone who doubts the veracity of the latter condition should consult with my friends in commodity land, or review a few of the charts over which they obsess. Heck, last week, when some Iranian drones took out major portions of the Saudi Oil Fields, Crude spiked, but couldn’t even hold its lordly position for more than a handful of sessions. West Texas Intermediate, after soaring to the heights of over $63/bbl, now resides at a docile 58 and change.
So the signals are clear. On balance, the 21st Century analogue to the Keynesian Liquidity Trap will continue to increase financial security scarcity, and calls for investors to hoover up financial securities at every strategic opportunity to do so. And this remains the case even if the signs of pending recession begin to emerge in sharper contours. If GDP continues to slip, if the mighty consumer begins to amp up despair and close its wallets, it will only serve to push financing costs lower, induce more buying of financial assets, and the rendering the scarcity of the latter that much more acute.
But I don’t think the consumer is ready to roll. Yet. And if I’m right about the water bed resurgence, that right there would be a welcome boost to this most critical component of the domestic economy. Consider, in closing, the multiplier effects. The future purchasers of acquatic sleeping devices must also treat themselves to new bedding. And please, whatever you do, don’t skimp here. Because the bedding is critical. For your water bed to be all you wish it to be, you must accessorize it with the best sheets, blankies, pillows and pillow cases you can find. Don’t go all tacky here (nothing made of silk), but pure cotton sheets, for instance, are a must. Otherwise, you ruin the whole experience.
In the interest of full disclosure, I myself won’t be buying a water bed. I feel I own too many beds as it is, and, having survived nearly six decades of less soggy, I think I can muddle through my remaining allotment of days without one. I am told that for the right price, though, the Pierre Hotel on 5th Avenue will set you up with a sweet one. And that, my friends, is a temptation I’ll be hard-pressed to resist.
TIMSHEL