First, I am delighted to report that I passed the week without suffering any new forms of vandalism, assaults on my sensibilities, or moral outrages. So, there’s that.
Now, please get your mind out of the gutter. I know what you’re thinking about our title, but you’re only partially right.
It’s true that over the last several weeks, as the Public Health situation has brightened a bit, I’ve been kicking around the notion that — whenever this here thing runs its course, the country owes itself a full immersion into “L’Affaires de Coeur”. In all of their delicious manifestations.
Some of us need this more than others, but ALL of us would benefit from the exercise. So, let’s say we get the “all clear” by, say, Memorial Day. Perhaps our leaders should designate the three (oh heck, let’s make it four) day weekend exclusively to the sweet, ancient art of love making.
And then, when it’s over, I say we do it again. Because, after all we’ve been through, we are most certainly entitled to some sloppy seconds.
As always, we can take our cues from the markets, which have jumped the gun and (I believe) entered, head-first into a Disheveled Subsequent Helping configuration.
Risk assets (as I have anticipated and further predict will continue) are pricing in a very sloppy manner at the moment. Lord knows they’ve come to this behavior honestly, because, what to make of the distinctly unkempt condition of the capital economy?
So, sloppy seconds abound across the economic and investment landscape, brought to you in large part by our Public Servants in Washington (and those of many other glittering capitals in the Western World). Depending upon your orientation, the original orgy of asset monetization began either 12 years or 11 months ago. During those cherry-popping innings, the sweet nothings issuing from the magic money machines created a near-perfect cycle of valuation bliss.
Of course, we wanted, want, need more, and god bless those D.C. Lotharios; they’re doing they’re level best to deliver it to us. But it takes a unique amount of vigor to match the passion of the first go-round, and there’s often less surety as to success of the enterprise.
Everyone is thus down for sloppy market seconds, but a little iffy as to: a) whether we can pull them off; and b) how closely we can soar to those original, ecstatic fires. At the nexus of it all is the crowd at the Fed and Treasury, who are plunging yet again — in unambiguously scruffy fashion, into the flames of asset inflationary passion. It will be a costly undertaking, funded by money we don’t have — as, based upon what we currently know (and including the soon-to-be-enacted $2T relief package) it looks like the Fed must paper in a $4T 2021 deficit.
This will take our National Debt well past $30T – approaching the value of two years of GDP,
And, for the first time in nearly three decades, the market is showing a slowness to pick up what Treasury is laying down.
Signs of trouble accelerated last week, during a $62B auction of 7-Year notes, which should have been a “wham-bam-thank-you-ma’am”/missionary position affair, but instead registered the limpest demand in recent history:
You have my apologies for what is an indisputable passel of fruit salad in the accompanying graph. It tells of an auction that failed, causing both 10-Year notes and equities to sell off pretty hard. Maybe you noticed this action on Thursday; if not, you weren’t paying attention.
And all of this took place in the direct aftermath of some rather melodious enticing by Chairman Powell in his recent remarks to Congress. “Let’s do it again” warbled Chair Pow, but the markets were not cooing in response to his wooing.
And now, rates across the world are soaring.
One cannot blame investors for their failure to swoon over the auction. They know an enormous amount of new supply is on its way, presumably at lower prices, so what’s the hurry?
But the flowers and candy keep coming. Another $1.9T in fiscal stimulus, and this after December’s $900B rendezvous. Hundreds of Billions from the CARES Act remain undistributed; hundreds more sit unspent. According to my main man Casey Mulligan (latest in a long line of baller U. of C. economists), across this great land, beneficiaries of the program can and will receive the tax-adjusted equivalent of a six-figure salary – doing whatever it is that strikes their fancy that doesn’t involve punching the clock.
Sloppy seconds anyone? Just sign right here.
A goodly portion of this amorous action has migrated to the Special Purpose Acquisition Company (SPAC) market, a previously obscure corner of the investment bordello which is now generating lines around the block. If you want sloppy portfolio seconds, this is as good a place as any to point your feet.
For the uninitiated, the SPAC process involves forming a public company to purchase a majority share of another company, and then getting out of Dodge. Once the SPAC is funded, its organizers pay themselves back whatever they shelled out to create the enterprise (the rest is pure profit) and work their little tails off to find some company, any company, to acquire within the time window specified in the offering memoranda.
There was a time, not long ago, when this tool was used primarily by industry experts to bring financial efficiency to a portion of that sector, and, by doing so, achieve the holy objective of improved capital deployment.
But those days appear to be gone. Now, the name of the game is SPACing for SPACing’s sake. It is the formation of the deal where all the returns are created. We’ve been through this before, and my view is that whenever the financial markets focus with tunnel vision on financial engineering as a means of creating value, it tends to end badly. The mortgage crisis of 2008? Samesies, and bad outcomes ensued.
And, if forming a company to buy another company (and getting paid a king’s ransom for doing so) isn’t sloppy seconds, then I have missed my mark indeed. I personally feel that many of these SPACers deserve to be spanked. But it won’t be by me, as my tastes run in a different direction.
Meantime, let’s SPAC away, shall we?
Pretty good ’21 showing, right? Particularly since it’s still only February? But I save the best for last. In perhaps the sloppiest of recent sloppy seconds episodes, the manipulators of Game Stop (GME) were at it again this past week, ginning up a three-and-a-half bagger – from ~50 to ~180 between Wednesday and Thursday, before the tizzy wore off and the name closed the week at (the still-absurd level) around 100/share. I think it’s a settled fact that this is pure price manipulation, but you’d think that at least with respect to GME, it’s long past time to withdraw for that blessed interval of cigarette and pillow talk.
But it all sort of indicates to me that investors have adapted to sloppy seconds. And thirds. And fourths.
And this is probably a good thing, because I believe that the sloppiness has just begun. I still think the rally has some juice left (what with those Washingtonian medicine cabinets so full of fiscal and monetary Viagra), but the aesthetics of the next cycles of investment erotica are likely to leave a good deal to be desired.
So, what to do about all of the above? Well, as your risk manager, it is my duty to advise you to use protection. If it’s raining, yes, you should wear a raincoat.
Moreover, from my vantage-point, the heavens appear to be clouding up pretty discernably.
Of course, just because it is sloppy seconds season doesn’t mean that we have to get all sloppy ourselves, right? After all, you and I, we’ve been through that, and this is not our fate. So, let’s not talk falsely now; the hour is getting late.
And all I can urge you to do is to remember we are in this for the long haul, and to act accordingly. There’s too much at stake for us not to bear this in mind.
Thus, while others may joyfully embrace the filthy fun, we should comport ourselves with greater dignity. In the end, this will suit both us and our dreams much better.
And now if you’ll excuse me, I’ll take my leave.
But know this: I intend to soon re-emerge, riding — both neat and clean, to wherever I may find you.
TIMSHEL