Well, my loves, we survived – even if 2021 didn’t. The latter departed, on schedule, in rolling hourly units across the globe this past weekend. Few in my field of vision are terribly busted up about this, and, FWIW, neither am I.
With seasonal consistency, we’ve just completed the annual “______ of the Year” cycle, and a couple of days ago, I came across an authentic looking Time Magazine mockup, which named Charlie Watts as its Person of the Year. Charlie, of course, died this past summer, after having begged out of his band’s bajillionth Geritol tour, Moreover, he hadn’t recorded a particularly memorable percussion lick in several decades (maybe since that Honkey Tonk Women cowbell). But I’m thinking to myself: does this even matter? His biggest feat in ‘’21 was managing to die. Which was something; bought him a lot of press. More so, than, for instance, Keith Moon. Who bounced in 1978.
But one way or another, Charlie is now indisputably a corpse, begging the question as to whether he would even cop “corpse of the year” honors. He’d certainly be in the running but would have had to fend off late surges by the recently departed John Madden and Betty White, as well as challenges by such notables as Mike Nesmith, Colin Powell and (a personal favorite of mine) the late, great New York Dolls’ guitarist Sylvain Sylvain.
More than this though, it would seem appropriate from some perspectives if Time had chosen to honor a corpse rather than a living being, because it was that kind of year. It would have been outside of its publishing comfort zone to do so, and their its would probably have objected. But anyway, as has been widely reported, they gave their annual award (with no complaints from me) to Elon Musk.
But that’s all so last year. It’s on to the new one, where, presumably, we can rely upon one near certainty:
Deuces are wild.
My (then-future) wife told me this on her 22nd birthday. And she was right. It was a crazy year. So, too, does this new one portend to be.
2022 certainly sets up in “deuces wild” configuration, ending, as it does, with two of them (which is to say nothing of the identical numeric marking the millennium). And, since we can put it off no longer (even if we would), it behooves us to review the singular set of conditions that await us as we commence annual proceedings.
There is an abundance of visible risks, almost an embarrassment of them. They include, in no particular order, inflation, public health disruptions, the gearing down of the Fed’s money printing machine (at least on a temporary basis; my guess is that they’ll keep it on idle – just, you know, in case), and great, associated uncertainty about interest rates and credit spreads.
Government, that heretofore omnipotent market Sugar Daddy, finds itself in a somewhat neutered position. The ruling elites, with their widely divergent interests and lack of requisite Sugar Daddy discipline, cannot seem to agree on anything. Their titular head is (predictably) showing himself to be increasingly a straw figure; whatever he’s doing, it bears no resemblance to leadership.
As such, among other issues, one can forgive our transcontinental, foreign frenemies (who have problems of their own), for thinking that they can do pretty much anything they choose without evoking a potent response from us, thereby enabling us to add Foreign Policy to our list of matters upon which to fret.
This isn’t exactly the best environment to look the the guy in the hat across the table and tell him that you’ll see him and raise him a buck.
And I think it would be wise for the investor class to give the gov its props, as it has had the market’s back for well-nigh a generation. Early last decade, it goosed the mortgage market, and everyone had a good time/made oodles of bank — until the consequences of that policy became apparent.
In the aftermath of the subsequent financial collapse, what did Washington do? Printed trillions of dollars of electronically rendered cash and used it to by its own securities. These are the preferred form of investor collateral, and, in result, for virtually the entire decade of the teens, it was game on.
The back half of the decade also brought tax cuts and deregulation – particularly in the Energy Patch, which, of course the market loved.
Then came ’20, with its wretched quarantines, which (and this I missed) were offset (at least from an investor sentiment perspective) by a huge doubling down on Fed money printing/securities buying. But what followed was (as was, in retrospect, inevitable) a nasty dose of inflation – one that if not checked at this pass, could cause all sorts of unpleasantness in the capital economy.
But tapering has barely begun. Real rates are still negative. The re-regulation — Committee for Public Safety Rendition, has not emerged in full force. For these reasons and others, the markets closed out ’21 just a titch below all-time highs. Fed funds are still barely above zero. Madame X/10- year yields are at a docile 1.5% — smack dab in the middle of the 1.2% — 1.7% range registered all year.
In addition (and though, for years I’ve ignored the short end of the curve), rising near-term rates may pose a problem for the markets – particularly for levered pools of investment capital that rely upon broker financing to build their portfolios. Heck, I am acquainted with several such platforms that utilize > 10x leverage in their books. A 1% increase in overnight rates implies a double-digit performance haircut for these cats. Some of them have crafty ways to evade this problem – most of which I can’t or won’t divulge — due to that endless inventory of Non-Disclosure Agreements I’ve been compelled to sign. But others, lacking these tools, will suffer, and won’t have the opportunity to cast their eyes towards Washington for any succor or assistance.
Are there any tricks left in the collective sombreros of the federales? It doesn’t seem to me to be so.
Crazy, no? Crazy deuces abound in every hand. Except the ones that we hold.
Thus, when the markets open today, it will be at peak valuations, against a hardscrabble backdrop where the myriad, government-sponsored bounties that have enriched us all these years appear, to be, at best, in short supply.
If I had even a basic understanding of the present-day capital economy, I’d say that risk assets are ripe to get slammed. But I don’t think this will happen, principally because (as has been the case for several years, and is even more evident as we begin our latest trip around the sun) there’s simply too much cash, chasing too few securities, to create the framework for a god-fearing selloff:
If I’m reading this chart correctly, the global inventory of fiat currency is now fixed at a tidy $100,000,000,000,000 – up from a more modest $65,000,000,000,000 just a few years ago. That’s a ~50% increase – over which period the global equity market capitalization is up by a similar amount (meantime, the Gallant 500 is nearly a double and Captain Naz is > a three bagger).
Could be just coincidence, but I’d not rush to that particular conclusion. Logic would dictate that a cessation of money printing projects out to a headwind for stocks, bonds and even commodities. But even if they don’t print another penny of newly minted cash, there’s still that $100T of currency and demand deposits sloshing around the globe, and therefore in my judgment, plenty of juice to absorb wayward risk assets that take a notion on themselves to go underground.
Of course, that’s not the whole story. Because plenty of solid equity names took the worst pasting in more than a decade last year – one where the equity road forked into two distinct paths. One was a gilded stairway to heaven, but only a small handful of names that retain investor favor were able to access this track. These are the stock group once called FANG, then unwieldy re-christened FAAMG. But now, by virtue of a recent name change by Facebook (now Meta), they at least sport a legit acronym: GAMMA (Google, Apple, Microsoft, Meta and Amazon).
But that’s about all we have to thank those fortunate few for. And it ain’t much. My hunch is that they will continue to draw investor inflows, while the valuation of other quality equity names languish with vexing persistency.
So, there you have it – a huge macro quagmire offset by an impossibly large liquidity base. Strong index performance disguising a great deal of carnage beneath its glossy surface.
However, that was the story of ’21, now toe tagged and preferably forgotten as soon as is possible. It is now nothing but a corpse, and, for my money, is its own Corpse of the Year. Not Betty. Not Madden.
The Corpse of the Year is the year itself: 2021.
But now it’s on to ’22, where deuces are bound to be wild.
Guard them, if you will, with care.
TIMSHEL