Marley was dead: to begin with. There is no doubt whatever about that. The register of his burial was signed by the clergyman, the clerk, the undertaker, and the chief mourner. Scrooge signed it: and Scrooge’s name was good upon ’Change, for anything he chose to put his hand to. Old Marley was as dead as a door-nail.
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It was the Best of times, it was the Worst of times. It was the age of Wisdom. It was the age of Foolishness. It was the epoch of Belief. It was the epoch of Incredulity. It was the season of Light. It was the season of Darkness. It was the Spring of Hope. It was the Winter of Despair. We had everything before us. We had nothing before us. We were all going direct to Heaven. We were all going direct the other way. In short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
— Charles Dickens
So, first off, London is still calling. This time as channeled through Dickens. As we move inexorably towards the culmination of this holiday season, I take the unilateral accommodation of using a Dickensian mash-up, because: a) it is, after all, Christmas; and b) I just finished rereading “A Tale of Two Cities”, and would go so far as to suggest doing the same will do you no harm.
And yes, Marley is still dead. There is no doubt whatever about that. On the other hand, being nothing more than a creation of the wonderful mind of the most famous British writer this side of William Shakespeare, one could argue that he was never truly alive in the first instance.
And, of course, his namesake, the deified musical genius that brought reggae to the uninformed masses, is dead as well. Been dead for nearly four decades. Got a tumor on his foot that was treatable, but being a Rasta Man and all, forsook medical care, and instead went on an 18-month world tour, By the end of which he weighed about 65 pounds and had nothing left to him other than to meet his maker. We miss this Marley more than it is in our power to express. But other guy did teach us (and Scrooge) a thing or two about the spirit of the Season, and for that we most certainly owe him a debt of gratitude.
Fortunately, and to my great advantage, though, the two above-referenced works of fiction converge to offer what I hope and expect is a tasty little hook for this week’s episode.
Because this, indeed, is a Tale of Two Christmases: the one most recently celebrated, and the other, which is rapidly approaching. For those open to them, they offer important object lessons in terms of what we, who toil for investment returns, should consider, as we point our vision towards the future.
Let’s take them in chronological order, shall we? Last year (call it Christmas Past), as the bells were ringing and the chestnuts were roasting, I was about as nervous about the markets as I can ever recall feeling. Q4 of 2018 was maybe the worst alpha interval I believe I ever experienced. And, considering that the Gallant 500 and other benchmark darlings had corrected to the tune of 20% by Christmas Eve (implying that even modest negative performance was still conducive to positive alpha), this was no mean feat. The Fed, who spent much of the quarter testing the hypothesis that the time had come to end the financing party, was showing no signs of backing off this stance. The trade-based table tennis tournament between the U.S. and China was throwing off of the good vibe of that historic bit of diplomacy arranged by Mao and Tricky Dick – other than the reality that, as they did in ’72, the Chinese might win (Risk Management Tip of the Day: You don’t want mess with the Chinese at the ping pong table).
And the market looked like it was headed to full-on crash. In perhaps the unkindest cut of all, the SPX hit its dead low of 2351 and change at the close of the half-day session on Christmas Eve. I feared the worst for the following day, just as the little darlings in their matching jammies were barreling towards the tree, but then I remembered the wisdom of the custodians of market protocols, and the reality that given there would be no trading on 12/25/18, further price erosion was only a remote possibility.
But proceedings did, as a matter of necessity, resume on Boxing Day, and, in the final sessions of last year, markets, miraculously, register a pulse. Still and all I was worried sick. My thoughts, as committed to writing at the time, were that there was nothing on the visible horizon likely to impede, much less terminate, the downward drift. And this was a great cause for concern for my business, which: 1) (contrary to urban myth) has a positive beta to the performance of my clients, who: 2) almost unilaterally carry a positive beta to equity pricings.
But the holiday passed, and then, somehow, in January, the Fed pulled an unthinkable 180. And other Central Banks followed suit. Rate normalization? C’mon, we’re not even thinking about it! In fact, we’re going to lower rates. And we’re gonna keep them low – maybe forever. And they did. Lower rates, that is. Three separate times. And the markets showed their gratitude in the sublimest way they possibly could, by buying up stocks (and for that matter, government and corporate bonds) to beat the band. Bought all year. Still buying them, even now. And as a result, as we bask in the feel-good awareness of a 2019 SPX year-to-date return of 28.5%, the totality of this move is actually understated – insofar as the accretion from last Christmas Eve (almost precisely a one-year rolling figure) is actually >37%.
I am already on record as stating my belief that the lion’s share, the plurality, maybe even the full-on majority of this heavenward ascent is owing to the largesse of the United States Federal Reserve and its peers in other major jurisdictions. Had they not stepped in, with a resounding thud of their belated Santa boots, well, I don’t know where we would be.
We can now migrate to this Christmas (call it Christmas Present), which arrives with about as much of the financial equivalent of Peace on Earth/Goodwill Towards Men as any I can ever recall. Our equity indices continue to be dissatisfied with the record valuations they repeatedly establish and remain on their quest for higher ground. Interest rates persist, in fact are stuck, at what might be call criminally benign levels, with many jurisdictions still priced to a negative yield (though Denmark and France have careened into positivity, and Japanese Government Bonds rest at a usurious -0.01%) The decade long recovery is showing no signs of meeting either Marley on the other side, any time soon. Inflation estimates, overstated in any event, are tepid and below policy targets. The optics of those menacing trade wars have improved dramatically, and, given the incentives tied to our political calendar, are likely to look even better as 2020 unfolds. The quixotic Impeachment quest has devolved into such a farce that its custodians are delaying it, under the impossibly obtuse argument that it cannot proceed unless the Senate agrees to allow for the calling of witnesses that Congress had the opportunity, but decided against, questioning.
Christmas Past bestowed upon us the further gift of catalyzing such a dreadful earnings season that the comps, heading into 2020, are also impossibly benign. It is perhaps for this reason that the Street consensus is for an approximate double-digit income growth sequence, and this in the wake of an earnings recession that is now three years running.
Ah, what a difference a single yuletide makes! Am I right? So, just as we entered 2019 full of fear, trepidation and loathing, we usher in 2020 in what, on paper, looks like one of the most constructive market backdrops in a generation. If I were writing either a Victorian novel or a Roots, Rock, Reggae anthem, the next chapter/verse, would be slathered in agita and adversity (if for no other reason than to keep the plot going). And I won’t lie, this might ultimately be the best way to look back on what happens next. But we won’t know until it’s over. And it hasn’t even happened yet.
Again, if we’re looking for signs of trouble, they aren’t hard to find. There is a significant problem in the Repo markets, and it’s only getting worse. Overnight funding, at several points over the last few months, has all-but dried up, and might have done so if not for – you guessed it – Fed intervention. By the time ABC busts out that Dick Clark hologram in anticipation of the Big Ball Drop, our CBers are expected to be in — to the tune of $500B (that’s B with a B). And, as a result, the domestic Central Bank balance sheet, nominally reduced to great, self-congratulatory fanfare, is now projected to instead achieve new frontiers of bloatedness – sometime next month:
Now, I can already hear the peanut gallery chorus: “c’mon, KG, must we really interrupt our holiday cheer to put a microscope to the Fed Balance Sheet? I mean, it’s not just Christmas, it’s also Hanukkah FFS!”.
No you do not. Please feel free to ignore the graph on the left. I will be doing so myself – for a number of reasons, including the fact that my eyeballs are already bleeding and I’d just as soon do what I can to avoid a full-on, seasonal, cerebral hemorrhage.
Perhaps more importantly, I don’t think even a further extrapolation of these trends is likely to do much damage over the foreseeable future. As I mission out various scenarios, I believe that we could indeed experience a teapot/tempest funding crisis over the next few months. But then I remind myself that the only (hair of the dog) remedy available will be for Central Banks to further flood the funding markets with liquidity, which, in turn, will set things a-right and keep us on the march to further unthinkable valuation thresholds.
I do expect some pockets of unpleasant volatility in the coming weeks and months, and my hunch is that they come earlier rather than later. But unless something changes, dramatically and for the worse, my guess is that these will be substantial buying opportunities. Support for my DNA-based bovine sensibilities of course features the certainty of further monetary love, combined with my belief (articulated in greater detail last week) that the merger and acquisition calendar will be hot, heavy, and bordering on desperation.
But with that, I must begin to take my leave, my darlings. Unlike Dickens, I am not paid by the word. In fact, I’m not paid at all for this column; it is nothing other than a labor of love. I could be jealous of CD, but on the other hand, I am alive, while he is dead. There is no doubt whatever about that. He’s buried in the most prominent spot in the Poets Corner of Westminster Abbey, and slumbers in close proximity to peers such as Geoffrey Chaucer, Robert Browning and (improbably) Charles Darwin.
Bob Marley reposes in a widely visited crypt in Nine Mile, Saint Ann, Jamaica. His fictional forbear: Jacob lies nowhere, because he never was in the first place. It is indeed the Best and Worst of times for all of us, full of Hope and Despair, Light and Darkness, Belief and Incredulity. And in closing, I want to wish you the happiest of holidays. Please know that the reality we are not spending it together is damned nigh killing me. And also know that I will be thinking of you, every minute, each day.
TIMSHEL