The darkness drops again but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
William Butler Yeats
I thought I was back. But now I’m not so sure. So, let’s forget about my Second Act braggadocio from last week. Because the truth is that September got away from me. Almost entirely. As such, and in honor of my favorite poem, written darkly in 1919 – the aftermath of WWI and the tail end of the polio epidemic.
Call it thus, not a Second Act, but rather a Second Coming.
It seems, or so I’m told, that a number of significant proceedings may have passed me by this past month. So, I’ll rely upon all of y’all to tell me if the following events did, or did not, occur:
• Did somebody murder the country’s most well-branded young conservative, with a WWII rifle, from 200 meters away?
• Did the Justice Department really lay indictments down on the perfidious James Comey?
• Does it really now cost one hundred large to apply for an H1B visa?
• Did the entire British Empire recognize the Palestinian State?
• Did Trump tell the N. General Assembly that the whole organization is worthless (he has a point) sham?
• Did he actually appoint his Chief of the Council of Economic Advisors to a voting position on the Federal Open Market Committee (FOMC)?
• Did this clown really vote for an >150 bp cut at the last meeting?
• Did the Fed, nonetheless, make me look stupid by only cutting 25 bp?
• Are we really now only a couple of days away from another one of those annoying government shutdown psychodramas? YAWN.
And all the above notwithstanding, did our equity indices, entering the final two sessions of the month, put up respectable positive returns?
This, at any rate is what I find, as my beastly, ursine body awakens from an extended slumber. And, on balance, it is no more, and no less, confusing than my last images from these dominions ere I nodded off.
However, one might argue that the stakes are higher now than then. Summer is over. We are entering the fourth quarter. Otherwise known as the “money quarter”. The one which will determine (at least for some of us) whether or not we get paid.
Thus far, and from a market perspective, it’s been an interesting year – perhaps one of the more interesting ones of my overlong career. We entered the proceedings, whatever our political predispositions, in a nigh-giddy state at the prospect of the return of our heroic, capitalist-businessman- turned-television personality-turned politician’s return to the White House. Now, at last, or so we told ourselves, we can do some business. But something went wonky along the way. Oh sure, we came out of the gate strong, but a few weeks into the proceedings, our peerless leader not only co-opted trade policy but began managing it like some cross between Finnegan’s Wake and a Pink Panther movie.
Investors didn’t like this, and, by the early stages of Q2, the Gallant 500 was down an ignominious high single digit amount.
But as I wake, the G5 is showing a ~13% gain on the year – quite a turnaround from those early days of Spring, and what has caused this remarkable reversal is difficult to pinpoint. Trump scored some optically pleasing trade wins – as well as some victories in the realms of domestic and geopolitics. One could therefore fairly deduce that market participants were imbibing some orange kool aid.
Earnings were about as strong as any rational investor might’ve hoped. GDP clocked in pleasingly. The Jobs market showed some signs of fraying, but giving hope to one and all that the Fed might, at long last, cut rates. However, Trump wasn’t living on hope in this regard – preferring, instead, to exert his by now well-honed muscles — on the Central Bank. He threatened Powell within an inch of the latter’s life. More hawkish members of the Federal Open Market Committee began to either change their disposition or resign. He tried to remove one of these on legal grounds, and, while at present still thwarted, I wouldn’t take the over on her extended tenure.
He also installed his Chief Economist into the FOMC, dropping even the flimsiest pretext that he believes in Fed Independence. And I believe that before long, he will have taken over the whole organization. The first step of which will likely be the completion of his long-pined-for dispatching of Chair Pow. And if you doubt this, take a look at this clever little tidbit, posted yesterday by the Leader of the Free World, to a for-profit media outlet of which he is the majority owner:
I’m not sure that he drew this picture; mad props to him if he did.
Washington’s Farewell Address to the Troops it is not. Neither is it Lincoln’s Second Inaugural (“with malice towards none, with charity towards all”). As a eulogy, it falls well short of Marc Antony’s tribute to Caesar — as re-imagined by Shakespeare.
But you gotta give the big guy points for clarity. He’s drawn a bead on the Federal Reserve Bank of the United States and intends to take it down.
His immediate objective will be to dramatically lower interest rates. This is an entirely political calculation, based on the premise that lower rates will boost the economy, generating immediate bennies to the electorate, and that if Inflation surges, it will do so over a longer period of time – ideally to a point beyond the ’26 Midterms. After which, if his party retains both chambers of Congress, he’ll have a hall pass to do whatever he wants.
And if they don’t, he’s in for a passel of aggravation.
Either way, a bet on being long Treasuries across the entire curve looks to me like a solid one. And the market will like this. It already does.
Between these dynamics and the excess funding liquidity which has plagued us since 2008, it looks to me to still be game on. Valuations may not go into afterburner velocity here, but, absent the immediate appearance of the rough beast slouching towards Bethlehem, any material selloff will be arrested by those seeking to accumulate all available securities in a world where, relative to the demand catalyzed by all that QE, they are in increasingly short supply.
What worries me most at the moment, however, is the looming government shutdown. Oh sure, we’ve been through this sort of thing before – maybe a million times. But this round, somehow, seems different. The battle of the wills between opposing sides in the political debate seems nastier, more personal and less conducive to the type of give and take that the Founders intended. There are no good guys here. The Dems appear to wish to make a stand – primarily on the topic of health care spending. But there is little pretense that this is anything but an exercise in making the other guy look bad.
To quote W.B. Yeats – the centre cannot hold.
It will be difficult for either side to back down from their current positioning, and it appears to me that the Dems are taking the bigger political risk – willing to move forward with the shutdown unless huge medical subsidies are immediately reinstated. They already rejected a bid to extend the discussion a mere 7 weeks, and it looks to me like this indeed might be the hill upon which they are prepared to die.
On the other side, we can take it as a near-certainty that Trump is spoiling for this fight – if for no other reason than that he has demonstrated his preference to spoil for any fight. If armistice terms are not soon reached, he’ll start firing Federal workers by the truckload, and the other side may dig in – because they have few other alternatives.
I could see that getting quite messy – and in such a way as to displease the investor class. Ultimately, these things tend to resolve themselves, but if you’re looking for a near-term “sell” catalyst. This may very well be your ticket.
Absent that, I believe we’ll end this crazy year on an uptick. But just like Yeats’ bird, turning and turning in the widening gyre, if the falconer is out there, we can’t see him.
I reckon this is grim fodder for my own Second Coming. But I will strive to reclaim my ceremony of drowned innocence.
I can only do this with you. And no one else.
Turning our lack of all conviction into a passionate intensity will be quite a challenge. But we have no other alternative. It’s our hour. Or that of the rough beast.
So, let’s be reborn, shall we?
TIMSHEL