Somehow, we’re through the first trimester of the great campaign of ’22. From a grading perspective, it’s one that most of us are not particularly fired up to sprint home to show our parents.
What passes for good news here is that we still have 2/3rds of the year to go, that our calendarbased cups runneth under — to the tune of 67%.
Is that a measure of our capacity to drink deep? Or is it an indication that we are unlikely to slake our thirst to the point where we’ve had our fill? I reckon we’ll find out.
A current read is, of course, anything but encouraging. And, unfortunately, it devolves to me to inventory the carnage – a bleak exercise through which I will seek to pass as quickly as I am able.
On the economic side, the tidings are grim. The economy contracted by >1% in Q1 – an outcome that came as a surprise to everyone – including me. Notably, this is a measure of nominal, er, growth. Thus, when one overlays the associated measure of inflation, which, within the same release, clocked in at 8.0%, we’re looking, in real terms, at a significant contraction. I read some of the gibberish about how this ain’t so bad because it is driven by inventory adjustments, trade balance changes, and so on and so forth. But I know this:
It ain’t good.
Meantime, critical prices continue to surge. Heroic efforts notwithstanding, nothing – short of the (morally unthinkable) prospect of removing the shackles from our own production capacity – appears to beat back rising energy costs.
Other than perhaps filling our tanks with Corn. Which we are doing through E15 Ethanol, but which might not even work, as the latter is now at its highest price level in more than two generations:
Corn Prices: Higher than an Elephant’s Eye
In Europe, the divorce proceedings, by mutual consent and owing to irreconcilable differences, between the Russian Energy Industry and Continental consumers, ensue unimpeded.
China, of course, is in zero-covid lockdown, and feeling significant economic pain in result:
Now, I’ll stop short of busting out the tired cliché that when China sneezes, the rest of the world catches a cold. More accurate would be to state that the rest of the world takes their remedies, through the form of pharmaceutical exports, upon which we deeply rely.
We also import other sh!t from them. Like machinery and technology equipment. If they’re indeed slowing down, no matter how we otherwise may feel about their leadership, it’s something of a problem for us.
Transitioning to the markets, the (1/3rd) good news is that China is allowing its currency to devalue a significant amount relative to the USD, rendering the goods we import from them more than a smidge cheaper. But this also implies that our exports to them are more expensive. Which could be a problem – particularly for those Big Dog/Sell-Everything-to-China Tech companies, who, on balance, broke our hearts with their earnings releases this past week (more about this below).
The same can be said about Japan and the USDJPY exchange rate, which crossed the 130 mark (highest in about a generation) last week. Time was, we would buy virtually everything from the Japanese. But no more. We do purchase their cars and entertainment hardware, which is now cheaper, purely on a currency exchange basis, by more than 10% this year. Yes, their imports from us are pricier, but that doesn’t matter, because they never much liked buying our stuff anyway.
As mentioned above, earnings, while respectable on balance, are a dumpster fire across most of the Park Avenue section of the Equity Complex. Particularly problematic was Amazon. They reported a loss for the quarter – which itself is not much of an issue – owing to the creativity of the folks in the Office of the CFO that produce the numbers. However, FactSet is reporting that their massive whiff took three full percentage points off the earnings growth tally for Q1, which, had they simply reported “flat” (which I believe it was in their power to do), would reach a respectable double-digit threshold.
But we have lived with the earnings of these ruling class corporations since before I can remember, and so, with their earnings, do we die. Except for the now-fully-ensconced-in-an-alternative-universe Meta/Facebook, these names are down ~30% from their highs — registered just a few weeks ago.
And, in result, our beloved Equity Indices are all in free fall. You can read elsewhere about how this was the worst April for the Gallant 500, General Dow, and, most dramatically, Captain Naz (now officially in Bear Market territory), in several decades, about how our stock market is off to its worst start since WWII…
And so on, and so on, and shoobie doobie doo…
I also remain beyond worried about credit markets, who, in tail-wagging-dog fashion, are, for once, following the lead of their less erudite opposite numbers in equity-land. Both Investment Grade and High Yield instruments are approaching lockdown level valuation reboots.
And Credit Spreads are, of course, not the only source of worry in the Fixed Income Complex. I may not need to inform you that interest rates are going up, that the 5s/10s Treasury Curve is inverted, and that all of this comes to us in advance of Thursday’s FOMC wingding, which is setting up to be a rager. The Street is pretty locked in on a 50 bp increase in Fed Funds, and we’ll probably hear more saber rattling about Balance Sheet reduction. And, on a separate but related note, we learn this week how much paper the Treasury Department is fixing to dump on us thus quarter. It’s probably a lot, and just when the long-ravenous Fed is pushing away from the table.
So, our Central Bank is gonna get all in our grill one week after a surprise negative GDP print (here’s an early prediction – a couple of weeks from now, we’re likely to learn that the Commerce Department miscounted, and finds, miraculously, that GDP is revised upward into modest, positive territory), against pretty clear evidence of (at minimum) a slowing domestic and global economy. Contemporaneously, the Treasury Department is likely to announce a series of massive offerings to lay on a Fixed Income market that: a) is showing scant enthusiasm for these investments; and b) will feature the Fed not as buyers, but rather as sellers.
What could possibly go wrong?
Far be it from me to complain, though. We’ve been in a Bull Market for about 90% of my adult life, and Bull Markets don’t function effectively without an occasional culling of the herd. Now in particular would be a good time for a washout: a painful but finite-in-magnitude-and-time reboot down to more rational valuation levels, where a fella could look around and maybe find some good names to buy.
Problem is, I don’t think this will happen. There is (yawn) too much cash sloshing around and looking for a place to go. Big investment capital pools are flush with liquidity. As are corporate treasuries. With respect to the latter, seeing as how now does not appear to be an opportune time to invest in growth: plant, equipment, R&D, etc., what better way to serve their investors than seeking the best entry points for the repurchase/retirement of their own stock?
Those big capital pools are looking for buying opportunities here as well. And if you doubt this, just look online (if you haven’t already done so) at the highlights from Buffet’s just-completed annual “aw shucks” gathering in Omaha. Buffet (while not scolding the rest of us for our patent stupidity) is buying.
So, I reckon, as the second trimester of ’22 gets underway, we’re looking at more of the same, piled, as they say, higher and deeper. Lots of bouncing around at the index/factor level, significant downside pressure that never quite completely manifests, and unspeakable carnage with respect to specific, misanthropic individual names.
It makes for a helluva quagmire for the professional investors who comprise the lion’s share of my readership. I wish I had better advice for them, but I continue to counsel portfolio simplification, sober focus on key themes (based upon Socratic re-underwriting of same) and the intestinal fortitude to endure as difficult a set of investment conditions as ever I canrecall.
If it all makes you want to grab a drink, I’m with you. I’m reaching, in fact, for the one in front of me right now.
Naturally, my glass is only 1/3rd full and thus 2/3rds empty.
But for now, I reckon, I’ll take what I can get.
TIMSHEL