God Oh Mighty; they’s droppin’ like flies.
Adhering to the reality that my essays are often little more than a running obituary, this one goes out to four of the recently and dearly departed. Two from entertainment and culture; two from academia.
Let’s begin with the diverting stuff first – saying goodbye to Jim Brown and Tina Turner. Brown was arguably the most dominant player in NFL History, establishing himself as the league’s all-time leader in rushing, TDs, and all-purpose yards – all in a scant 9 seasons. These records were meant to be broken. And were. Mostly by Emmitt Smith, who played about twice as long.
Brown retired at the top of his game, ostensibly for a career in the movies. His one significant contribution in these realms – his role as Private Robert T. Johnson in the fabulous 1967 film “The Dirty Dozen” is particularly noteworthy insofar as it proves the exception to the rule which stipulates that in action films, the black dude always dies first. (SPOILER ALERT: Brownie indeed gets it, but is the last, rather than the first, to go).
After that, and for fifty years till his death, not much.
Then there’s Tina. Irreplaceable. Kind of like the female soul singer version of Led Zeppelin – scores of imitators and no one came close.
Think of it: does anyone even enter her galaxy? No. There. Is. No. Alternative.
Brown died in L.A.; Tina in Zurich. Neither metropolis had as bad a week as did Chicago and its eponymous University, which lost two giants– Nobel Laureate Robert Lucas and President Emeritus Robert Zimmer (the latter not to be confused with similarly named Robert Zimmerman — aka Bob Dylan — who is not only still kicking, but who celebrated his 83rd birthday last week and who is about to launch the ’23 version of his never-ending tour in Lisbon, Portugal).
Lucas is most widely known for the somewhat oxymoronic concept of Rational Economic Expectations, hypothesizing that economic agents will make rational (i.e. self-interested) choices based upon available information. Commercial enterprises will, for instance, produce up until the point where marginal revenue drops to the level of marginal cost; consumers will, well, consume — to the point where marginal cost meets marginal utility. One always hoped that this would be the case, and often it is. But it took a Lucas to codify it into a useful economic model.
It also fostered a corollary called the Efficient Market Hypothesis – suggesting that the price of financial instruments at all points converges to appropriateness – again based upon available information. One can argue that economic expectations often diverge from the rational, and that markets are anything but efficient – particularly nowadays. I studied this sh!t across my two tours of duty in Grad School (one at the U of C), and this journey may have ruined for me what might otherwise have been a fabulously lucrative career in Money Management. Because, you see, I bought into the whole Efficient Markets thing with fulsome abandon. I figured that neither I nor anybody else could spot market mis-pricings on a consistent basis, so, what would be the point of trying to make a living attempting to do so?
Now I know better. The market is full of inefficiencies, often manifesting for rational reasons. To cite one example, when investors seek to buy or sell outsize quantities of a security that features finite liquidity or other constraints, it can often cause valuation shifts that are not in the moment reflective of all pertinent inputs. Consider, for instance, the intraday interval in the Spring of 2020 – in the early days of the lockdowns, when Crude Oil traded at negative prices. That’s right; rather than paying for the stuff that powers the world, sellers were willing, for a few hours at any rate, to compensate for taking it off their hands. This was an exclusively technical problem. There was no room at the inn of approved storage facilities, including, most notably, the official warehouses in Cushing, OK. The Cush Okies were unable to accept any more of the black, sticky stuff, and, as a result, unless one had a fleet of tankers at the ready, one had to ditch crude under whatever terms were available.
So, no, and though this is Chi-U blasphemy, I can confidently assert that markets are quite often inefficient. Still and all, I think both theories are useful as benchmark assumptions. It pays, I find, to begin with both above-described hypotheses. Then seek to figure out where this is not the case – thereby creating an actionable as an investment hypothesis. You could do a lot worse.
Zimmer was a mathematician and a gifted one at that. He chaired the Maroon Math Department as well as such legit institutes as Argonne National Laboratories and the Fermi-Lab. But for my money, his signal contribution was as the former’s Chancellor – particularly his 2014 publication of what is known as The Chicago Statement – a document solidifying the University’s commitment to Freedom of Expression — and going so far as to admonish any souls too sensitive to embrace diverse thought to park their snowflake asses at some other academic institution.
Rational Expectations and Efficient Markets. In an ideal world, There Is No Alternative. But then there’s the one which we inhabit, where these tenets manifest in quantities short of the optimal.
Two topics dominate market proceedings at present. First, there’s the never-ending debt ceiling drama, which appears to be migrating towards resolution. Some of this is consistent with Rational Expectations; some not so much. It certainly would be irrational to upend the entire political and capital economy by failing to expand an entirely arbitrary borrowing limit. However, the current political climate suggests that the two sides which must agree — in order to avoid this outcome — are aligned in such a manner as to disincentivize them from any form of compromise.
I reckon what wins in the end is the Rational Political Expectation that if policy makers manage to bitch this up, there will be hell to pay. For all of them. The deal’s not done yet, and the blood-thirsty backbenchers must be satisfied to complete the process. There may be more pearl clutching moments here — ere the ability to add incrementally to our gargantuan indebtedness becomes the law of the land. But I haven’t been too worried about this and am less worried now. Nobody wants to own a Treasury default, and ALL will share in the shame and disgrace if it goes down. So, sooner or later, they’ll save themselves.
There. Is. No. Alternative.
Investors have been passing pleased with the latest developments in these realms, and even more so at the veritable explosion driven by the emergence of Blockchain Artificial Intelligence onto the telecommunications horizon. AI has been discussed – ad nauseum – since before I entered grad school at University of Chicago. Back in 1985. Under the administration of the fabulous Hanna Holborn Gray. But for the ensuing 40 years, it was just that – nothing but talk. Then, of a sudden, in 2023, it’s everywhere. In practical use. It’s writing poems. Love letters. Term papers. Sales pitches. It will accurately prognosticate the exacta at Pimlico. I’d go so far as to suggest that if the folks in Washington do indeed resolve the debt ceiling stalemate, it may be owing to both sides having agreed to simply submit the problem for arbitration to the auspices of ChatGTP.
I don’t want to devote too much real estate to the subject – the focus of so much recent yakety yak – some of it, I suspect, AI-generated. But after NVDA’s historical, blowout quarter, duty compels me to mention it. It is knocking on the door of the vaunted, 5-member, Trillion Dollar Club. It sports an astonishing P/E of 189 (4 of the other 5 top out in the 30s). It is worth more than JP Morgan, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup combined. Its post-earnings rise on Thursday, which added $186B to its valuation – third largest single day gain in market history – is greater than the value of all but ~50 names in the global market matrix.
Its Jordan-like/Brady-like performance had investors positively swooning, catapulting Colonel Naz to its highest thresholds in nearly two years and projecting an annualized ’23 gain – even as of this Memorial Day Weekend — of nearly 100%.
Nice Job, NVDA; good work, Colonel, but I’d take this opportunity to warn that the scope of the market rally is at historic lows, with spiffy index gains driven by a handful of favored names. One way of measuring this is in the spread between the Capital-Weighted and Equal-Weighted Naz:
Thus, for investors, it’s AAPL, MSFT, NVDA and few others.
There. Is. No. Alternative.
It all rather strikes me as thin gruel, and I’d urge caution up here.
It’s a long race, and a good start doesn’t ensure a successful finish. Among the images burned into my brain is Jim Brown’s final desperate sprint to the escaping jeep containing Lee Marvin and Charles Bronson. Every time I see it, I’m praying for him to make it. And he never does. Perhaps you’ll do better. Just keep running, OK?
Once again, and for the last time: There. Is. No. Alternative.
TIMSHEL