Yossarian: Sweden?
Arfy: Orr
Yossarian: Orr?
Arfy: Sweden
OK so I lied. Not only are we back to this Catch 22 riff, but we’re with Orr. In Sweden.
Stockholm to be precise.
But don’t you fret now, because there are worse places to be than Sweden. Like, for instance, Central Greenland – a locale that has always terrified the living daylights out of me. Don’t ever wanna go there; don’t even like flying over it on the way back from London.
So, let’s revert to Sweden, shall we? First, if you weren’t aware of this, it’s a Kingdom (just checked Wikipedia). It has a King. Moreover, in addition to its status as the host country for the Nobel Prize, it is itself the birthplace of seven Nobel Laureates of Literature that aren’t, unfortunately, named Bob Dylan.
It is also the home of Abba, but please don’t make me write about Abba. I don’t actually dislike them (love, for instance, “Take a Chance on Me”). But. I. Just. Can’t.
And I reckon that’s all I have to say about Sweden.
Except for this. Sweden also features its own Syndrome, and how many countries can make that claim (China and maybe a few others)? It’s an important Syndrome, but The Kingdom is so fly that its Syndrome is named not even for the entire country, but only for its Capital City of Stockholm.
And that is where this week’s theme comes in: Stockholm Syndrome, or, as I have rebranded it (with rhetorical flourish, natch), Stock Holm Syndrome.
For the uninitiated, Stockholm Syndrome is defined as a condition where imprisoned individuals come to sympathize with, empathize with, and ultimately passionately embrace, their captors.
And where is such a dynamic more at play than in today’s stock market? Let’s face it: when it comes to stocks, we’ve all got a case of Stockholm Syndrome. It captivates us; we cannot escape it. We sometimes hate it. But in the end, we are sympathetic/empathetic to it, and, ultimately, passionately embracing of it.
I believe that this form of the Syndrome plagues no one more than Chairman Jerome Powell and his crew on the Federal Open Market Committee. Some of y’all may have been too distracted to notice, but the FOMC held its regular meeting/presser this past week, and the market reaction was, in my judgment, wild, wooly and arguably Stockholmian.
Powell was not, per se, the bearer of glad tidings. He used terms like “not out of the woods yet”, and “considerable risks over the immediate future”. But on a happier note, he came bearing gifts. Set a floor on Fed asset purchases — to the dainty tune of $120B/month. Announced his expectation that overnight rates, currently fixed at 0.00%, would remain there, or lower, for the next several quarters.
Now, believe it or not, $120B is a lot of paper to cop every month, using newly born fiat currency. By way of perspective, consider that the record shattering QE3, announced at the 2012 Jackson Hole yukfest (to the astonishment of monetary theorists across the globe) topped out at $85B for each lunar cycle.
But since those little Covid buggers arrived on the scene, the Fed has managed to up its game a lot, pumping out $3T in the space of little more than a quarter. The chart is a thing of beauty to behold:
Stock Holm Jerome Buys $3T of Govies:
This translates into a QE pace of approximately $1T/month, so one could argue that Powell is not now pumping, but rather jamming pretty hard on the brakes. But on the other hand, the action in April was sold to us as Electroshock Therapy.
So, it took everyone a bit by surprise when Chair Pow took to the podium to announce his intention to top off his work – at an annualized rate of at least $2.5T.
The markets did not like it; not even a little bit. From the point of the presser (around 2pm EDT Wed) through Thursday’s close, our gallant indices dropped about 8%. I myself was less than pleased with this development, as it added to the dismal score of my 2020 market clairvoyance – particularly insofar as it transpired after my having finally (like Kubric’s “Strangelove”) stopped worrying and embraced the rally.
But now I’m doubling down on my prediction that the rally is not over – first and foremost because of Powell’s acute case of Stock Holm Syndrome (as well as my own). Ride with me here for a bit and I’ll explain. Consider, first, the glide path of the Gallant 500 over the past 6 or so quarters:
Recall, if you will (or can), that brutal selloff that culminated in the ~2370 low on Christmas Eve, 2018. At the time, it was pretty clear that a significant amount of the agita was owing to some tough talk on Powell’s part in the weeks leading up to the holiday. It was time to raise rates, or so he informed the New York Economic Club in December ‘18. Thus, as I made ready for Santa’s visit, it was my conviction that: a) the economy was not in a position to accommodate a hawkish assault on interest rates; and b) since Powell was on record as being committed to a), we had not likely seen the worst of the selloff.
It seemed at the time that Powell hated the equity markets, but then the calendar turned, and, remarkably, his Stock Holm Syndrome kicked in. Specifically, on January 4, 2019, Stock Holm Jerome walked back everything he said the preceding fall. Pushed all his chips into the middle of the stock (holm) table. The markets swooned with delight and remained smitten all year – resulting in a fairly astounding >30% gain for that magical interval of 2019.
Gosh oh mighty, I wish it was still 2019. Don’t you? It was all so life changing for me, and in the best of ways. And I made a commitment in 2020 to build upon its miracles.
But as I wrote about across the entire period, Powell had at that time adopted a “you broke it, you bought it” attitude towards stocks, and the market made sure that he was as good as his word. He was by all accounts terrified of a selloff, and investors kept their side of the bargain. He must’ve still sometimes hated stocks, but passionately embraced them anyway. This, my friends, is Stock Holm Syndrome in its most magnificent glory.
And as for Powell, his condition carried over acutely into this (entirely more problematic) year. Not that it showed much — until, that is, those annoying little viral cells traversed the mighty oceans. According to the charts presented above, right at the point that the markets went into Covid Collapse, Powell pumped $3 Trillion of new money into the economy.
At least in a Stock Holmian sense, it worked, so much so that somehow, earlier last week, the NDX actually reached an all-time high. But then came Wednesday’s presser, and it all came tumbling down.
But as a guy who has learned to wear his own case of Stock Holm Syndrome with pride, I still think we’re going up. And here’s a few reasons why.
Wednesday’s FOMC comments were, to my ears, eerily reminiscent of that fabulous moment in January 2019. It’s “you broke it, you bought it” time again. Now, if I’m correct on that score, with any sustained selloff, as a matter of near certainty, the Fed will be compelled to step in with a passel of money printing and securities buying.
There’s already another $3T of this paper sloshing around, and much of it has yet to be deployed.
I further suspect that the next string of important economic data, most notably Jobs and GDP, will follow on in the same motifs of May’s upside employment surprise. The pent-up demand is anecdotally palpable, and I think it will manifest in greater force in June than even in May.
Investors are looking past currently stretched valuations and are likely to continue to do so for at least a spell into the summer. In fact, nearly every element of the investment universe showing signs of chronic Stock Holm Syndrome. One of the most improbable, stranger than fiction, examples of this is as follows. As has widely reported, the Hertz Corporation, which filed for bankruptcy earlier this month, thought it might be a good idea this week to seek to raise capital through the issuance of a tidy $1B of equity securities. Even more improbably, the Bankruptcy Judge approved the request. And finally (as was perhaps inevitable all things considered), Hertz’s stock rallied >30% on the news.
I’m at wits end explaining this, but when a public company files for bankruptcy protection, it’s because it cannot pay its bills. And if it cannot pay its bills, its equity is essentially worthless. How in the name of Benjamin Graham can it then issue stock and actually, by doing so, manifest a gain in its valuation?
If your answer is Stock Holm Syndrome, then, like Crap Game told Fischer in “Kelly’s Heroes”: “you win a cookie.
So, to summarize, we’re looking at a galactic amount of cash yet to be deployed, with potentially more on the way (as needed), in an economy that should at least optically continue to revive, on a very forgiving tape, with the Fed and other Central Banks all in to support the fun and games.
I’d also point out that it is my experience that when the Fed goes “hard dove”, the first reaction in the markets is often to cry out: “holy sh!t, the Fed’s worried, we’d better sell”. Which is usually followed by a moment of “holy sh!t, the Fed is giving away money, we’d better buy”.
We saw some of this on Friday.
But all of this, admittedly, is likely my Stock Holm Syndrome brain taking over.
What could go wrong? Well, as it happens, any number of things. First, if the virus regathers itself and gets its mojo fully on, then all bets are off. I don’t see this yet and think increases in the states that have reported them are to a large extent inevitable. But if the Covid Count turns ugly in jurisdictions such as New York, New Jersey, Florida or California, it’s another story.
And I won’t lie: I’m also worried about domestic politics. A leftward sweep in November, no matter how righteous it may be, will NOT be good for the markets.
I’m not expecting much in the way of a happy ending to any of this, no matter what. And it’s likely to be a bumpy ride come what may. But this, mes amis, is what we signed up for.
And in the meanwhile, I will live the truth of my Stock Holm Syndrome. Just like Powell. Just like Orr.
Though he’s nearly 100 now and no longer flies, I am told that Orr is still living large in Stockholm. Occasionally (or so I am informed), he logs into his Fidelity account and spitballs a few stock trades. He is in fact rumored to be among those who bid up Hertz stock on Friday.
I’m thinking of joining him. But maybe I already have.
Stock Holm Syndrome is, after all, a tough cat to kill.
TIMSHEL