I hear some people, tryin’ to talk me down, bring up my name, pass it ‘round,
They don’t mention, the happy times, they do their thing, I do mine…
Oooh baby that’s hard to change, I can’t tell them how to feel,
Some get strong, some get strange, Sooner or later it all gets real,
Walk on……
— Neil
This week’s note is not, per se, about Neil. And not at all about Bob.
But I got so much love from the teeming millions that comprise my readership for last week’s tribute, we’re on such a Neil roll, that I figure we may as well pick up where we left off.
The lyrics supplied above are from a song that served as Neil’s salvo — in a gentlemanly, rock and roll throwdown between him and that flaming, gone-but-not-forgotten ensemble: Lynyrd Skynyrd.
Neil started it, albeit in a very non-ad hominem way, by throwing shade at denizens of the South. He did so, twice, in fact, via “Southern Man” on “After the Goldrush” and “Alabama” on “Harvest”. In each case, he did not, could not have, intended any offense to Skynyrd itself, because, at the time, the band had yet to be formed. But Skynyrd came back at him bigly, with their first massive hit: “Sweet Home Alabama”, which admonishes Mr. Young to remember that southern man don’t need him around anyhow.
So, Neil responded, in a pseudo-apologetic manner, with “Walk On”. And it all seems to me like nothing more than good fun. From a simpler, civiler time.
But this note isn’t about that. Instead, it references the soul-crushing announcement, released earlier this week, that on July 15th, Chinese manufacturer Ninebot will discontinue the production of that ubiquitous, essential, iconic mode of transport: the Segway. Our cold war with China just went nuclear.
If you’re like me, it’s hard to remember what life was like before that two wheeled-locution machine arrived on the scene, and equally difficult to imagine how our existences will be transformed once the last of them bad boys rolls of the Assembly Line, on Bastille Day +1. How did we, how will we manage to get from Point A to Point B? I reckon we will be compelled to rely upon our ever-fallible memories, and, if mine serves, it seemed as though most of us traversed short distances by pushing off one leg after the other, in unidirectional sequence – a concept which is referred to by us rustic rubes as walking.
Well, America, what goes ‘round comes ‘round; what’s old is what’s new. And yes, it’s time to walk on.
And, using, perhaps for the last time, my Segway as a segue, markets will also need to get their walk on.
Only lately, they’ve been walking backwards. And not just some, but in fact most, of them. Last week, the Gallant 500 yielded an ignominious 3% of territory in the wrong direction, as did its comrade indices. The Fed Balance Sheet contracted — to the real-money tune of nearly $100B. 10-Year yields plunged across the globe. The Slovakians and the Swedes (yes, the Swedes) are again paying their governments for the privilege of funding fiscal operations (i.e. negative yields). And as for rates in the U.S.?
They are in fact at three-month lows, down an astonishing 27 bp from where they traded during those more hopeful times earlier this month; positioned a skinny 0.08% above where the depths to which they plunged during those terrifying days around the Ides of March.
I myself had in recent days walked back my call for negative rates here, mostly because I had been wrong. Right at this moment, though, I’m thinking it may be time to walk back my walk back.
Live Hogs? Well, you didn’t ask, but as I have shown the poor taste to bring them up, I regret to state that even after last week’s loving tribute, the commodity dropped another 10%.
Now, as everyone knows from the two decades that we spent rolling our Segways, if one wanted to retreat, all that was required was to lean backwards. Walking backwards, it strikes me, will requires some serious retraining.
But one might legitimately inquire: why should the markets be doing it at all? Walking backward, that is. Published reports point to a resurgence of the covid buggers, and, likely, this is indeed among the causes. But: 1) the spikes were always inevitable as attendant to more testing and re-openings; 2) the loci of the surges feature relatively low denominators; and 3) there is undoubtedly a great deal of political manipulation of the trends (Cuomo quarantining visitors from Texas and Arizona is a particularly rich example; all Cuomo-quarantine target states combined have lower case/death rates than NY).
So, I think other factors may be at play, and perhaps as good a place as any to begin is in the earnings dynamic. It’s all quiet on that front, but shortly after the 4th, when >320M patriots set off legal fireworks to celebrate the true greatness of this country, the silence will move to crescendo. And the trends, from a guidance perspective, are far from encouraging. A record number of companies have begged off on these projections, and those with the stones to actually offer their thoughts overwhelmingly shade negative:
However, this information is not incremental from, say a week ago, at which point valuation trends suggested that investors were in a generous, mulligan-granting mood with respect to Q2 earnings, and, perhaps, for those of the entirety of 2020.
Thus, while I hate to set foot in these realms, my gut tells me that investors may well be starting to prepare for the possibility of an election outcome, which, whatever one’s views may be, and whatever righteous benefits it may bring, will be devastating for the capital economy.
Again, I truly hate to do this, but my pledge to you, my readers, is to call ‘em like I read ‘em. And I think these fears are more than justified.
Because under certain voting outcomes, we’re looking at an all-out market rout.
The “reasonably reliable” betting markets now project out not only a Biden victory, but also a recapture of the Senate majority by a Democratic Party that is increasingly co-opted by a progressive movement bent on reshaping affairs in a manner that is not likely to be accretive to most portfolios. Some of what they wish to do will be highly unpopular (more about this below). They know this, and therefore will act very quickly – putting in irreversible measures at a frenzied pace, to ensure that the (under normal protocols, likely) rout they will face in 2022 cannot undo the changes they contemplate.
Their first move will be to kill the Senate filibuster, bestowing upon themselves a super-majority by virtue of as little as a one-vote margin in the Upper Chamber. Anyone who doubts that this is on their minds should read recent comments from (historically) moderate Senator Chris Coons (D, DE), who now seems eager to lead this assault on this 240-year construct of checks and balances.
Once this action is complete, it’s pretty much open season for the progs, and already there are strong foreshadows of the contours of their strategic plans. Just this past week, Democrats in Congress passed a bill granting statehood (and two new Senate seats) to the District of Columbia. The Bill, of course, is DOA in the current Senate, but if the Dems sweep and eliminate the filibuster, it will be a turkey shoot.
There are few jurisdictions anywhere in the galaxy whose constituents are more over-represented than D.C. They pretty much get anything they want from the Federal Government, much of which is denied to the rest of us. The two Senate seats are not, per se, for their benefit, but rather intended to buttress a permanent majority that their (politically aligned) paymasters are targeting. Puerto Rico may be next.
Imagine, then, next spring, a political environment where the Presidency, the House, and the Senate (as enhanced by 4 newly created seats controlled entirely by one party and the removal of the filibuster) are all in the hands of the Dems, who then can enact any and all elements of their P/L-dilutive agenda.
Their next move may very well be to pack the Supreme Court. Add, say, six seats, which will eliminate that most important check and balance: Separation of Powers. Grant immediate citizenship and franchise to millions of beholden immigrants. Expand entitlements, so millions more voters are incrementally reliant and obliged to their (taxpayer-funded) largesse. Enact a wealth tax? Sure. Reparations? Slam dunk. Wall Street Transaction Tax? Oh boy, when do we start and how much can we ding them for? Expand regulations broadly? Natch. Kill the Energy Sector? Socialize Health Care? Done and done.
If this plan (which may or may not work but is certainly out there) goes into effect, then the U.S. will be no more of a two-party country than California is as a state. Or New York is as a city. And, if all goes according to script, there’s nothing – in 2022, or 2024, that the rest of us will be able to do about it.
And markets will crash – perhaps permanently – in the wake of this. I’m not gonna lie: these contingencies worry the stuffing out of me. Yes, I’m paid to fret, and to make sure that everyone else (at least occasionally) does the same. I’m just asking my readers to consider my view that that this scenario is both realistic and concerning.
Because trust me on this: if anything along these lines transpires, you’re not going to want to own stocks. Or bonds. Or Real Estate. Not with the country and the world in a massive debt bubble, contending with a cryptic and stubborn pandemic that has shown few signs of having run its course, and which has already taken a huge bite out of the global capital economy. Overlay higher taxes, redistribution, punitive regulation, etc. and you should get the picture.
To top it off, we won’t have our Segways to motor us away from the mess.
And I suspect that some of this agita may be working its way into the markets, in the form of elevated risk premiums. Moreover, if I’m right on that score, then market conditions will surely get riskier ere they becalm themselves.
But I reckon all of that is in the hands of the Good Lord, who acts in mysterious ways. Skynyrd never did respond back to Neil, but perhaps that’s because half of the band died in a plane crash not long after “Walk On” was released. I don’t think that there were many hard feelings anyway. If you google images of Ronnie Van Zandt, you will often see him wearing a Neil Young “Tonight’s the Night” T-Shirt.
When that plane went down, it was on its way to a show in Baton Rouge that I had reservations to attend (no lie). Everyone said to save the unused ticket, as it would be worth a lot of money someday, but I didn’t, and I was wrong not to. Because in 2008, the surviving members of the band held a show on the LSU campus — to commemorate the 30th anniversary of the crash, and in doing so, chose to honor those original 1978 billets. I otherwise occupied at the time, anyway, attending to (among other matters) the fallout from the last market crash.
The original owner/designer of the Segway, Jimi Heselden, drove one of his machines off a cliff and to his own death, nearly ten years ago.
But all may not be lost. At least not yet. On a brighter note, while the Fed has indeed contracted its balance sheet, what shrinks can certainly grow back, in even larger proportions, as needed. There’s a boatload of cash on the sidelines, a growing shortage of investible securities, and (who knows?) come November, the election outcomes might at minimum yield a measure of balance.
And balance is what we’re gonna need, because sometime later this summer/fall, we will all be compelled to learn to walk again. And I’m gonna insist on walking with you. Maybe we can start with a stroll on Greenwich Avenue. But we won’t stop there. Someday, we’ll learn how to walk together – and for life.
But in recapturing our stride, we must learn to step carefully. There are an uncountable number of potholes and other nasties to avoid, and they are ever-increasing in magnitude and severity. We will need to focus our attentions on navigating this terrain. But come what may, we will, we must, walk on.
Ooh baby, that’s hard to change. I can’t tell them how to feel. Some get strong; some get strange. Sooner or later it all gets real.
Which is nothing more than stating, in a different language, our time-tested blessing of farewell:
TIMSHEL