I know. It’s foolish, it’s consensus, it’s foolish consensus. It’s trite. It’s glib. It’s glibly trite.
But I’m going with it.
Truly, I don’t see any alternative (other, of course, than unspeakable doom).
I’ll use this week’s space to defend this neo annum hypothesis, but we’ve a few matters with which to attend first, so bear with me.
Sharp-eyed readers (of which there is at least one) will recognize that I slipped our title into the body of last week’s musings. There’s even one soul out there with enough game to have recognized that the line is lifted from the early strains of “Tommy” by The Who. The specific setup is one that involves a WWI soldier, missing and declared dead, who comes home to find his (blameless – she thought he was gone for good) wife in another man’s arms, and then blows the dude away – Gail Collins style.
The penultimate words of the misanthropic lover boy are captured in our heading.
But all of this is mere prelude to the main storyline of Townshend’s wandering libretto. The title character/son of the original couple witnesses the whole episode, and is rendered psychologically blind, deaf and dumb by the experience. His sole obsessions are staring in the mirror and “playing the silver ball” — the latter at which he excels to such a degree that a pinball wizard cult forms around him.
The narrative devolves from there.
But god oh mighty, what a great record it is. The same can be said about the musically magnificent Quadrophenia, the storyline of which cannot, even in mixed company, be cogently unpacked. I had the bizarre experience of seeing “Tommy” on Broadway in the mid-nineties (imagine horrible Brit accents singing “come ooon the amoizing juuuhney….”), and reckon I came out no worse for the wear. On a happier note, a couple of years later, I was able to see The Who perform Quadrophenia live, at Madison Square Garden, no less. So, at least there’s that.
One way or another, I find myself grappling with eerie verisimilitude to the Tommy vibe — a century later. As 1921 dawned, the world was still contending with the after-effects of not one, but two, global pandemics. Polio was on the wane by then, but not completely eradicated (case IN point: FDR contracted the disease in ’21). And then there was that whole Spanish Flu thing, which faded to oblivion in the diminishing days of 1920.
Of those plagues, I cannot bring myself to write more.
There are, of course, differences between now and then. 1921 ushered in something of a depression on these shores, with record deflation of 18%, and a GDP that contracted to the tune of nearly 7%. We entered the year with General Dow (the Gallant 500 would not muster in for another four decades) having suffered a rather ignominious retreat — on the order of 6.7% (dropped in 1920 from ~92 to ~86; compare this to the 2020 ride from 28,538 to 30,606) — a cycle which perhaps may be forgiven in the wake of the above-mentioned pandemics and prolonged WWI battle fatigue.
The Presidential Election of 1920 was a rather dull affair, rendered particularly so by the involuntary withdrawal of two previous winners: Woodrow Wilson (whose vainglorious desire for a third term was nipped in the bud by his sponsors) and Theodore Roosevelt (who wanted to run but died instead).
So, we were left with two obscure persons from Ohio: Warren G. Harding and James M. Cox. I’m not even sure who won, and (I ask you), one hundred years later, does it even matter?
On the whole though, I find more similarities with, than differences from, the vibe of a century ago. We are dealing with what (hopefully) is the back end of a worldwide health crisis. The global economy is in recession, most certainly suffering from myriad ills, and being propped up by the artifices of politically driven policy manipulation. We’re not experiencing the major after-effects of a world war, but (like then) everyone is weary, on edge, and very troubled as to what happens next.
Somewhere, some poor heat-packing schlub is walking in on his wife in a compromising position with her lover, with his son looking on. Don’t ask me for further details on this, because: a) I don’t know much; and b) what I do know, I’m not at liberty to divulge.
The markets, from my vantage point, are an easier read. Everybody is all in and can’t fold now. Normally, the mad bull sentiment would be the surest sign available that we are at or near a retrospective top (that we are at contemporaneous time record highs is indisputable), but I just don’t see how this frenzy of incremental asset/financial instrument ownership demand possibly abates in the near term.
The Gallant 500 closed out the year at an historic, frothy 3756, and, as I am describing it to my clients, I can’t envision a pullback to, say 3000, 3200 or even 3400.
1200? Yes; piece of cake.
Because unless the investment universe continues to generate massive incremental demand, everything crashes, and I mean crashes. In the middle of a pandemic. With an amount of indebtedness heretofore unimaginable during our lifetimes. Policy makers are aware of this and acting accordingly. I think they’re terrified of a collapse and taking desperate measures to avoid one.
And they have some tail winds, because another similarity between now and a hundred years ago is the presence of deflationary forces. The CPI may not read -18% but in real (inflation adjusted terms), goods and services are actually cheaper now. The purchasing power of the dollar was about 13x its current level a century in the past. A gallon of milk in 1920 cost 35 cents or ~$4.50 inflation adjusted.
Today? $3.60. Gas? 30 cents in 1920 or $3.90 in current cash. Average price per gallon right now? $2.60. Rents are higher today, but who, at the current moment, rationally pays rent? Wages are about flat (actually down a bit) over the last hundred years, but, objectively, purchasing power has increased dramatically.
I could go on, but the point here is that all of the above has miraculously enabled our care givers to expand the money supply, with impunity, like drunken sailors.
I’ve written a great deal about this, but the manner in which this is continues to unfold absolutely blows my mind. Earlier this past week, I stumbled upon the following graph — of something that us economist types refer to as M1 – defined as the combination of aggregate currency in circulation plus demand deposits, and widely viewed to be the most visible measure of money supply:
Now, I’d like to be able to report that I don’t know who this FRED person is, but I do. It’s the St. Louis Fed crew, who (perhaps needing a sense of purpose) are tasked with keeping track of such things.
And, as the graph clearly shows, FRED has had his hands full counting all that new money. So be it. But what gets me is the big spike that has apparently transpired over the last six or so weeks. Tell me that M1 surged this past spring and I’m like, whatever, of course it did. But what gives with this retro-rocket boost in Q4?
Well, it’s not new currency, and I am unaware of any recent, frantic, nationwide push to beef up checking account totals. Yes, the Fed and Treasury balances are creeping up, but at a measured pace. PPP subsidies were actually disrupted during this interval, so it wasn’t that.
I think it was the Fed stuffing the channel surreptitiously — saving for an anticipated rainy day (kind of like the biblical, clairvoyant Joseph with that Egyptian grain). But it almost doesn’t matter. One way or another, the money supply nearly doubled in 2020, with much of the increase at year end.
And where is this money gonna go? Into investable assets is where. Here, the market is acting with rationality, because, as the monetary base expands, its value against everything else should be going down. Hate to be a broken record, but one way to look at the big surge in stocks, bonds, real estate, crypto, etc. is that it is an adjustment to the oversupply of USD. Heck, even commodities, until recently on a thirty-year slide to oblivion, seem to have gotten the memo.
The Great Commodity Rally of 2020:
And the thing of it is, all of this is taking place before the big monetary-expanding giveaways that are certain to take place in the first half of ’21.
So, you wanna hold dollars here, or anything that is not a dollar instead?
Risk, of course, abides. Don’t really wanna talk about Georgia, but it is on my mind. Can the Dems really take both seats? And, if so, would they dare spoil the party with buzz killing stunts like tax increases? The first is possible; the second, in my judgment, unlikely. I just think that even if they win, they’ll have their hands too full to mess much with the tax code.
But if I’m wrong here, if: a) the Dems win both seats; b) eliminate the filibuster (layup); and c) jack up taxes with the new VP casting the deciding vote, then, yes, it could be “lookout below”. For a time. But I believe that even if this “unthinkable” happens, it’s simply adds to the fuel that fires the engines of the Magic Money Machine. Ultimately, stocks resume their surge. Lots of folks will lose their jobs (collateral damage) and likely suffer other unspeakable indignities, but investors (bless their hearts) will find a way to turn this to their advantage.
There’s also every chance that the pandemic worsens and our mitigants are found wanting. If so, what will they do in Washington? (Say it with me) Print more money. And give it away. Nobody will be able to spend much, but they can and will invest.
One way or another, a big fiscal cash drop is a near sure thing. And there is (in my judgment) an even more plausible scenario under which the public health situation, at minimum, renormalizes come spring, and that economic agents (commercial and consumer), flush with funds, go on a major spending bender that could push stocks and bonds much higher into the stratosphere than even now. Corporations, stuffed with liquidity and the bloated currency of their valuations, will further the goosing with acquisitions.
Could all of this actually catalyze the re-animation of inflation? Of course it could. It already should’ve. Based upon everything we’ve done in these realms since the ’08 crash, we should already be the (hyperinflation plagued) Weimar Republic (which, by the way, was just getting off the ground in 1921, when Warren G. Harding replaced Woodrow Wilson in the White House). But I just don’t see it taking off any time soon – particularly on the (in my view, essential) wage side. Too big a supply of labor is why, and it’s global. And commoditized. And, every day, a bunch of poor souls’ jobs are being replaced by technology.
All of which means that the Fed (including FRED) has a free hand to keep interest rates at microscopic levels, and to take them negative if something goes wrong. All these stock bulls are expecting a spike in yields, but I’m just not there. Too much riding on keeping them submerged at all costs. Over longer intervals, inflation (and attendant higher interest rates) may indeed be found to be the foreign object floating in the proverbial punch bowl. But for now, I think we can fill our cups and chugalug.
And if the unexpected happens and assets start to sell off, well, that’s when the real money machine kicks into high gear (and rates execute a Pavlovian Plunge). I do expect some vol in the coming weeks, but I can’t get past my belief that we’ll gather ourselves after not too much damage and push ahead from there. We have to honey; there’s simply no alternative (other than, of course, unspeakable doom).
“I have no reason to be over-optimistic. But somehow when you smile, I can brave bad weather”. These are the last words spoken by Tommy’s mom’s paramour. And this is true – applies to me and you. Lots of twists and turns await us in the coming months and beyond, baby.
But I got a feeling ’21 is gonna be a good year.
Like I said a while back, I’m going with it. Will you?
TIMSHEL