Kick a buck
Luke
As in Cool Hand Luke – the misanthropic jailbird hero of the eponymous 1967 film. The title of the movie, and this week’s quote — come from Lucas (Luke) Jackson’s exploits at the prison poker table, where, in one particular hand, he keeps raising (“kick a buck”) until the rest of the players are forced to fold. Whereupon it is revealed that he held nothing, nary a pair, and remarks, in offhand fashion “sometimes nothin can be a real cool hand”.
Luke, in other words, was bluffing. And won. Though hardly the norm, this sometimes happens – in games of chance and skill, in the markets, and in life itself.
This past Wednesday, the FOMC, perhaps (though probably not) channeling its inner Luke, raised again – the eighth such hike in less than a year.
They hasten to warn us that more is on the way, and we’d be well advised to heed them.
But the Fed did not “kick a buck” last week, nor yet even half a buck. Their latest increase was a tepid .25, which, according to old timey vernacular, equates to two bits.
Are they bluffing? I reckon only time will tell. But as any player worth their salt will tell you, success impels the bluffer to convince his opposite numbers that he can raise them into insolvency, lest they stand true, last him out, and, thereby, vanquish him.
In time-honored fashion, Chair Pow (played by Luke’s jailer Strother Martin) attempted to explain the Committee’s thinking/articulate just what in blazes is going on out there in the capital economy. I feel that overall, it was a “what we have here is a failure to communicate moment”. He tried his best to talk tough, but investors responded by bidding up stocks, bonds, commodities, crypto, etc. in laudatory fashion.
The Barking Dogs of Tech also yelped last week, and delivered earnings tidings that were, at best, mixed.
The final setup for our plot came Friday morning, with a January Jobs report that verily blew the doors off all rational estimates. Lots of smack talk about shady methodological adjustments, some of it no doubt valid. However, it’s hard to argue that the jobs economy – in optically difficult conditions – is, for now, anything but white-hot.
So, where does this all leave us? Beats the hell out if me.
First blush, I’ll be damned if it doesn’t appear that the economy has drawn the real-world equivalent of an inside straight. It has taken the very bad hand dealt to it over the last few months – slow reanimation from viral shutdown, the nastiest war in nearly a generation, massive inflationary pressures, historic rate hikes and a few other deuces and treys, and turned them into ten-Jack- Queen-King-Ace sequence, perhaps even one of the same suit. With declining inflation, robust GDP growth, and an employment picture which improbably features both record low joblessness and historically high numbers of job openings.
Equity indices seem untethered to these latest data drops – rallying on Fed rate hikes, shrugging off earnings misses, and attempting to sell off in the wake of the astonishingly good jobs numbers.
Instead, market participants are “kicking a buck” – thus far all year. Captain Naz, for example is up over 14% year to date — and this after and this after Friday’s ~1.6% selloff. If he keeps up this torrid pace, he’s looking at an approximate five-bagger by Christmas and will close the year at thresholds exceeding 50,000.
Let’s not get carried away, though.
Because maybe investors are holding a Luke-like hand of pure dreck, and only pushing up risk assets by way of bluff. But that’s the thing about a bluff; you gotta pay to find out.
If you fold here, you’ll never know.
And I don’t think it is/we will – a bluff or a fold, that is. One simply cannot ignore, and instead must marvel, at the strength of an economy that has taken so many lickings and keeps on ticking.
With a big, dramatic data sequence behind us, I don’t see terribly much in the way of short-term downside risk. I was – not gonna lie – a little worried about that whacky balloon. But I’ll be switched if we didn’t shoot that sumbitch down. And I am heartened by the implied geopolitical messaging: Take that, China. You can send your Willy Wonka Flying Machine across the Bering Straits, down through British Columbia and into the Great Plains. Across the Rust Belt and over Tobacco Road. Violate our territorial waters off the Carolina Coast, though, and we will blow your ass up with an F22 missile.
Having dodged these and other bullets, it looks to me like this here economy is torqued. That absent a couple of vexing, nagging problems, would arguably reside at the verge of a new Capital Markets Golden Age. We’ve barely begun to harvest myriad miraculous technological advances (centered in telecommunications and biotech) that emanated from our virus response alone. We’ve got a ridiculously robust consumer contingent, oceans of liquidity, a highly engaged workforce, and untold hosts of hungry, savy entrepreneurs dying to make a little coin.
But several challenges loom. Feel free to disagree as you will, but I feel that we have a monetary and fiscal policy portfolio hell-bent on effecting dilutive action. The Fed is formally in this camp. And anyone willing to look objectively at the action in the elected part of Government finds little but energetic moves towards higher taxation, more restrictive regulation, redistribution, and other righteous objectives that make for effective, pandering soundbites, but will do little to add to, and much to detract from, our collective ability to add economic value to the proceedings.
Oh yeah, and then there’s this. We’re in hock. Deep hock. Consumers have spent down their covid savings and now owe more, on a relative basis, than they have since before those unlovable little viral buggers arrived on the scene:
Higher interest rates won’t help this picture, but if the Fed is serious about slaying the Inflation beast, Powell’s not bluffing. He’ll never get to 2% without doing more gratuitous economic violence that he’s managed since he transmogrified himself from docile monetary dove to harrowing money hawk.
Still and all we can try. We can do that, at any rate. Sometimes, we surprise ourselves with what we are able to accomplish. I would have never expected the type of persistent economic vigor witnessed these last several months. But there it is.
All of which takes us back to Luke. And his iconic boast that he could eat 50 eggs. His cellmates put him to the test, and by God, he met the challenge.
Of course, these days, in addition to the gastronomic hurdles (unchanged over the ensuing two generations), a modern-day Luke would have to consider the cost of the enterprise:
This here graph only goes back to the ‘80s, but nonetheless evidences a near tenfold increase in the material expense. I suspect that if we were to wind the clock back to ’67, it’s more like 20x.
It may very well be that the current cost of 50 eggs might exceed all that was wagered on the contest back in ’67.
No matter, I’m still putting my money on Luke. And if anyone cares to raise me, they will find me prepared to meet all takers.
TIMSHEL