By: K(en(neth Louis) G(rant)
I begin with an apology for any offense given through the paragraphs that follow. None is intended. This week’s introductory parable (which sets up, in time-honored fashion, the subsequent, probing, market risk analysis) is intended in the spirit of fun. Which, one must admit (whatever their views on current affairs) is in depressingly short supply at the moment.
So, imagine a man, an Ordinary Joe. So ordinary, in fact, that his actual name is Joe. It had to be Joe; his parents had no other alternative. Because he is so ordinary. A Joe Six Pack, a Joe Bag of Doughnuts, he is largely bereft of outsize talents – save one. He is affable. Superhuman affable; an affability for the ages. Episodically too affable? Well, that’s not for me to decide.
But it is an affability that enabled him to rise very high in his (wisely) chosen field of politics. Higher, in fact, than all but a couple dozen folks (all men) had reached during his lifetime. An affability that took him to the penultimate rung of this ladder, and, for more than thirty years, he sought to climb that last step. Then, just when this last, aspirational objective appeared to be out of reach for him, 2020 happened, with all of its signifying sound and fury. This, among other matters, unearthed another redeeming and heretofore undiscovered (or, at any rate, underappreciated) feature in Joe – one that now holds great promise to carry him all the way to the White House:
Joe is not the Other Guy.
And just so we’re clear, there were actually two other guys, coming in “one-two punch” sequence. The first was a crazy old codger who somehow developed mad vibe with the young bloods. He was always yelling about something, and mostly at us. Honeymooned in the Soviet Union. Sidled up to Castro for f$kcs sake. Wanted to give away a bunch of sh!t. Never said how he was gonna pay for it.
He kicked up quite a fuss, and, for a time, in the early Spring, it looked like he was poised to take his party’s nomination. And this justifiably freaked out the Party Elders. Joe was their last hope to avoid him leading them, lemming-like, over the proverbial political cliff, and, together, they avoided this catastrophe. Within a matter of about three subsequent weeks, they rolled over the outlandish old dude with the wild hair and the Bolshevik sensibilities, and stuck Joe in the top spot.
The Party Elders rejoiced, because they knew Joe would do as he was told, but, as everyone was aware, the victory was a mere stop at the weigh station. There was another Other Guy. The meanest, nastiest, ugliest Other Guy around. More about him in a moment, but the mission was clear: take him down.
But the Party Elders were worried, because all the while, Joe was shrinking. By the minute. Some of this was planned in advance, by the Party Elders themselves, who didn’t want to draw overt attention to his impossible-to-miss ordinariness. But the feared that maybe they shrunk him too much, as, when Spring turned to Summer, there was nothing left of him at all. They still dressed him up in his fancy suits, and trotted him out from time to time. But for the most part they wouldn’t let him leave his house. Sent him to bed, sometimes at 9 A.M. It didn’t matter. Because he was not there. The bag of doughnuts disappeared, leaving only the holes. The six-pack remained in the fridge, un-imbibed.
And meantime, the final challenge remained. Absent though he was, he had to beat the other Other Guy. Who was one bad hombre. Uncouth, intemperate, petulant, etc., but whatever other pejoratives one may wish to apply, this much is also true:
He is not an Empty Suit.
It in fact would be more accurate to describe him as a Stuffed Suit. And I mean any suit. Insiders tell me that they keep letting out his trousers and coat, but he fills them up anyway. And then he goes about sucking the oxygen out of any room he occupies – even when he is outside.
So, there you have it: the looming, Beyond Thunderdome “two-men-enter-one-man-leaves” Death Match between the Empty Suit and the Stuffed Suit. If polls and the volume of the din can be believed, Empty holds a big lead.
All of which begs our rhetorical, titular question: How long are the coat tails of an Empty Suit?
If you’re like me, you’d like to think that they are neither longer, nor shorter, than they are when occupied by actual human flesh. I mean, given all we are currently forced to endure, I would rather not be compelled to allocate bandwidth to unpacking the concept of tailoring that shifts in length along with the dimensions of its occupant. But no dice. Gotta consider this, because if Joe wins and the Senate flies with him on his coat tails, well, then, in terms of market risks, all bets are off.
Loyal readers are perhaps well-acquainted with what I think rides on the left (coat) tail of the political/economic distribution. Higher taxes, more regulation, an all-out assault on three market sectors (Energy, Health Care, Financials) which account for nearly 30% of the capitalization of the equity complex. For this week at any rate, I’ll spare you my Casandra-like admonitions, but how the Senate breaks out will go a long way towards determining whether or not our (or at least my) worst fears are likely to materialize. It thus follows that if current trends hold, the length of Ordinary Joe’s coat tails are indeed a matter of great urgency.
In the meanwhile, investors don’t seem to be terribly troubled by rising coat tail risk. The soldiers that comprise the Gallant 500 host are indeed proximate to all-time highs but appear to be too weary to obtain higher elevation. There’s a pant-load of information coming at us (covid trends, earnings, coat tail prospects) and my own theory is that nobody is particularly eager to be the putz that top ticked the Spoos in advance of its unfolding.
With respect to concerns of contested outcomes on the first Tuesday (after the first Monday) in November, the hubbub appears to have died down. But I predict that even if Empty, clearly and unambiguously, knocks the stuffing out of Stuffed, there will be dozens of disputed results — across both houses of Congress, and even more at the state and local levels.
So, coat tails are important, and I’d ask everyone to consider the potential implications of them extending out like those of Rufus T. Firefly in “Duck Soup”.
Because this ain’t Duck Soup. We have pandemics, recession and other nasties with which to contend, and I just don’t think that now is a particularly opportune moment to change the world/atone for our sins through such initiatives as higher taxation, re-regulation and redistribution.
It wearies me to beat on this threadbare drum, but the problem (setting aside the hifalutin moralizing) is that we’re just too much in hock to even consider such actions (even if we are indeed considering them).
The truth, my dearest loves, is that the entire capital economy is burdened by breathtaking debt and only being held up by the strong (but perhaps not infinitely so) shoulders of the Fed.
And the burden is growing. There are too many grotesque ways to visualize in this family publication but one that happened to cross my desk just Friday caught my eye. It tracks the inventory of what are known as “Fallen Angels” – companies that issued debt with an Investment Grade Credit Rating which has since been downgraded by the all-knowing ratings agencies, to “junk”.
TRIGGER Warning: This picture ain’t pretty:
Anybody think that this chart has topped out for 2020? Didn’t think so. Unfortunately, a lot of folks with whom I reason be like “that’s their problem”. But The hard fact is that nearly everyone who lent to these new-fangled FAs lost money. And (news flash) when lenders lose money, they become less inclined to lend more.
Thus, it’s our problem. We’re already at about 150% of the debt we carried in 2009. When companies like Lehman went t!ts up, when AIG, Fannie and Freddie needed massive Fed bailouts. In case you didn’t know or can’t remember, the financial system almost collapsed, would have collapsed if not for some big hacks by our Central Bank.
Superimpose the current global pandemic, a worldwide recession, mad social unrest — upon all of this and consider the potential outcomes. Do we really want our financial system to collapse here?
Just let a few of these Fallen Angels default and see what happens. The Pavlovian reaction of banks — to call in all boats (loans), while otherwise hiding under their desks, structured securities unravelling like the thread of a badly made suit, will be breathtaking in its unfolding. No mortgages available for your dream house. No buyers for the one you need to unload in order to buy it. No hope for your favorite restaurant that cannot obtain the extended financing that it needs to survive.
So, now, anyone for a roll-back of the 2017 corporate tax cuts? A reinstating of the payroll tax (which hits both workers and their employers) at comp thresholds above $400K? How about pushing Capital Gains levies up to ordinary income levels? Forgive me, but I can’t see any outcome, particularly for the untold number of companies carrying crippling debt loads, other than their inability to source capital, retain top tier employees, or to invest in research, development, new plant/equipment and employee training. And they’re gonna cut jobs by the boatload. Many such companies won’t survive at all. This will be a problem. Of course, we can always just expand those weekly stipends to the unemployed, with funds we don’t have and must ask the Fed to create out of thin air. Under any 11/3 outcomes, we will probably do this anyway. It’s just a matter of timing and magnitude, baby.
But if Joe’s six pack contains enough tall boys to carry the Senate, we’ll be looking at immediate tax hikes. In the middle of a wicked recession. Markets may stay giddy for a bit, under the dubious hypothesis that an even bigger Washingtonian giveaway (which will be the first order of business) will: a) not come at enormous cost; and b) will actually be accretive in a sustained fashion to capital markets valuations.
But then will come the tax increases. And the regulation. Energy Companies, Health Services Enterprise and Wall Street will come under immediate attack. Many borrowers will default. All during a cold, cold winter, which may bring with it a resurgence in the Public Health crisis. And every bit of this sets up the next Thunderdome Death Match – between the Progressives and our monopolistic Tech Titans, who have made a Germany/Soviet Union-like bargain of expediency. They have achieved détente, but ultimately their respective agendas are on a collision course with one another, and the point of impact will not be pleasant to observe or endure.
Much, but not all, of this is unavoidable, but what we can avoid of this nature, we should seek to eliminate.
So, my mind remains fixated on coat tails. It’s true that I, like Joe, take up less space than before, and am told that it has upped my appearance game. But my wardrobe remains a weak point. Whatever I have accomplished I owe to you, and we have miles to go before we sleep in these realms.
After November 3rd, we may be able to lay the coat tail quagmire aside for a time and focus more directly on our joyful journey.
But in the meantime, when you stop at Brooks Brothers to examine the fare, please take a look at the lower, back portion of the jackets, and bear in mind that, as is often the case in this crazy world, and, with respect to both me and Ordinary Joe, less may indeed prove to be more.
TIMSHEL