Well I don’t pass buildings with lights on, if I said that I did than I lied,
Because what looks like a Chinese restaurant may have a Chinese New Year inside,
And son all my life I’ve been searching, the bars I’ve been in I forget,
The light outside ever brighter, the light inside? Not yet
And son, this is Rule 1…
— Paul Heaton
I shouldn’t even be having to write this, because y’all should know by now. Don’t take the Jailbait. It’s Rule 1. And if you don’t know what Jailbait is (at least in the vernacular sense of the term), well, I’m not gonna tell you. Because this is 2019, and such triggering terms are not even acceptable among us newly sensitive souls particularly in what is (need I remind you?), first and foremost, a family publication.
Well, OK; I probably should, for framing purposes, offer a bit of contextualization regarding JB. Specifically, it references the dangerous allure of desire, directed at whatever has not reached the full flower of maturity. This has been a conundrum for society since time immemorial, but it has its analogues — in the investment universe that is, after all, the exclusive concern of this forum. Examples abound.
Crypto/Blockchain Finance? A disruptive technology that is certain to disintermediate commercial banks, the financial/legal system and even central banks. It will usher in a new financial Eden, within which economic agents can interact directly, absent the meddling of middle men (and women), in utter secrecy and with full security. I myself believe in this, but the concept, for the moment, is most certainly jailbait. It wants more time and development before we can wallow in its warm embrace. Heck, this past week, even Facebook’s crypto offering (for my money a sure winner on paper) suffered the wholesale bailout of heretofore energetic suitors such as Visa and Master Card. But Libra will continue to bud out, and my guess is that the credit card Lotharios will be back when it does (if not before).
Cannabis? Another beautiful, blossoming monetization opportunity whose interval of full blush appears to be somewhat further down the road. Its main byproduct (trust me, I know) yields a gentle, inoffensive buzz. Other extracts are said to cure every disease under heaven. But with (among other issues) this vaping problem having emerged, well, need I elaborate? Yes, I suppose I must. It’s investment jailbait.
Initial Public Offerings (IPOs)? As one of the oldest dudes in the market, I do indeed remember a time when: they were pursued with Cyrano de Bergerac ardor, evoking images of unspeakably lovely treasures unearthed in little Parisian jewelry shops in the Paris of the 1920s, where Hemmingway, T.S Eliot, Ezra Pond, Dorothy Parker and Gertrude Stein roamed and wrote the words that shaped the modern world.
And investors became accustomed to making money on them. But that was so last century. Paris still has unspeakably lovely treasures to offer, and those who seek them will find them. But Notre Dame is in ashes. And all those writers are not only dead, but almost no one reads them anymore.
And as for IPOs? For the time being, they are clearly not worth chasing after — in life or death fashion. As indicated below in the chart on the right, numbers are down in terms of both deals and proceeds. And, as illustrated on the left, the many of these darlings have done nothing other than broken our hearts:
Yup, they’re investment jailbait in every sense of the term. All are intriguing companies; embracing them may yet pay off for the patient, but in their adolescent IPO stage, they are clearly best kept at arm’s length.
The China trade deal announced on Friday? More jailbait. It does appear promising, but on the other hand, it has only just been announced, and may not even come off. It is described as a first stage of something that will ultimately be yuuuuge, but I reckon only time will tell. The markets failed to resist its youthful charms in Friday’s session, with the Gallant 500 pushing, after several weeks of setbacks, within 1% of that magical 3,000 spot.
But to me, it’s the pricing equivalent of a high school sophomore reaching second base. It’s nice and all, but we’ve been there before, and it won’t by itself, bring about the satisfaction we so desperately seek.
More broadly speaking, I think the entire 4th Quarter remains, at present and from an investment perspective, in jailbait mode. She’s off to a rather ambiguous start. She doesn’t know what she wants to be when she grows up. Which is only natural, because she is a late bloomer. By this point in her life cycle, her forebears had ripened in visible forms, such as the banks having reported, and meaningful economic data having been released. But the bulge bracket earnings don’t come until next week, and the recently released employment and inflation numbers offer, at best, confusing signals as to what will set her heart aflutter in the coming weeks.
Let’s allow her the girlish adolescence to which every woman justifiably feels entitled, shall we? And let’s face it: she’s gonna act according to her whims whether we like it or not. As one illustration, take a look at her fickleness with respect to what she might tell us in a couple of weeks about her predecessor’s (i.e. Q3’s) GDP performance:
She loves us; she loves us not. Truth is, she herself doesn’t know. Because she’s too young to decide. And anything we do to try to force her to become that which she is not ready to become, is likely to end in tears – for her and for us.
It’s my guess that she will continue to waltz capriciously about, but only for a finite period of time. She (i.e. the Q4 capital economy) will reach the full force of maturity soon, and she could turn angelic or diabolical. She likely cannot be both, and we need, for the moment, to be patient as we can be with her.
If we take her bait now, investment return jail awaits.
Yes, I think that Q4 is going to be a wild ride, and, if in these tender, early days, making to fast a move looks like it buys a trip to the slammer, there are other opportunities to capture the hearts of the loveliest of the market gods’ creatures, who have dwelled among us for a bit longer, and who have rarely, if ever, let us down. At times, they can look very much like jailbait, but from my subjective positioning, they are decidedly not. Jailbait, that is. They are mature and lovely. And they need to be treated with the deference and respect that is their due.
Discerning readers will probably have guessed that I’m referring to the US Treasury Complex; and specifically the long-tooth end of the curve. Note that I got jail-baited by these instruments, in rather rude fashion, over the past week. Shortly after boldly predicting negative yields on the 10-year (which from here on out we will call Madame X), she decided to give me a hard smack in the face:
To be sure, I deserved this b!tch slapping, because I was arguably treating the 10-year like jailbait, and whatever else it may be, it is not that. It has been around since the days of Hamilton, and has been giving investors all its love for the last 30 years. But I asked for it all, and in rather rude fashion at that. This was not the way to play it with Madame X, and I am deeply sorry for my trespasses with her dignity.
But I’m gonna press ahead with her anyway, albeit in more respectful fashion. I still think yields are going to come careening down, cross the zero bound, and stay there for quite a spell. Slowing global growth, political incentives, aggressive/global/incremental monetary easing will all help me in my quest here.
As an experienced, stone cold playa, my gut tells me that Madame X wants to go where I have predicted she will travel. But she’s going to do it in her own way. In her own time.
It’s the lord’s will that she does so. Because she’s not jailbait. And as should be clear by now, not taking the jailbait is Rule 1. Let’s deem not to treat Madam X or any other more mature-but-nonetheless-alluring creatures like they themselves are jailbait. They may look and act like young innocents, and they can be won over. But only by treating them with respect and deference. I will designate this as Rule 1a.
There is also a Rule 2, the details of which I’d like nothing better than to describe to you. But it has not yet reached the full flower of its maturity.
Therefore, to debut it prematurely would be a clear violation of Rule 1. So it will have to wait for another day.
TIMSHEL