Nasty, Brutish, and Not so Short

First published March 20, 2020, at TalkMarkets.com

Once I built a railroad, I made it run
Made it race against time
Once I built a railroad, now it's done
Brother, can you spare a dime?…

(lyricist E. Y. "Yip" Harburg,and composer Jay Gorney, 1930 )

Get ready, gentle reader, for numbers “like you’ve never seen them before,” in the favored phraseology of our supreme idiot, er, leader. 

Something tells us we are about to enter the 1930s in the 2020s. We used to wonder how our parents, grandparents and great-grandparents survived the Great Depression. You know who we’re talking about, the greatest generation. Walter Cronkite (look him up), our nation turns its lonely eyes to you.

Goo goo g’joob.

No more “OK, Boomer,” all right?  We’re all gonna get a dose of it.

Nine-eleven left your correspondent with memories of neckties and skirts flapping in the wind, trying to escape from an attack by members of their own species descended from the same Abrahamic source of God’s revelation. We don’t mean to be flip, but we’re inclined to agree with the Episcopal bishop in “Caddyshack” who exclaimed to Judge Smails the day after what would have been his record-setting putt popped out, “There is no God!”

Of course, there is. (We can discuss this later; His ways are mysterious).  In the meantime, prepare for that mysterious thing called uncertainty, which what all the market pundits (we among them) say plague investment decisions from cash to snake oil.

The equity and credit markets decide how to toggle between assets on real numbers from a central government that they assume is competent.  Can we trust a government that won’t nationalize the continent’s resources to whip it now? (apologies to Devo - look it up, generations x,y,z, et al.).

As we discussed in “Two Ex-Wives and Several Bartenders”, stocks are only for insiders at this point.  Either you sold like Sen. Richard Burr, (R-NC) did, or, like most of us, you scampered along as if all would all go according to plan. Talk about rigged. Oh, Doctor Evil, why didn’t you listen to Scott!

No one should be in stocks unless he/she knows something the world doesn’t. The lows are not in. Welcome to the Hobbesian world of buying the dips: nasty, brutish and short.

We Irishmen know life is not fair, but at some point, our brave forbearer stopped digging rotten potatoes and got to the USA.  Level the playing field while you can.  Await the $1,200-whatever check that won’t pay a month’s rent in Brooklyn, and tip your bartender if you can still see her again face to face.

Welcome to the Hobbesian world of buying the dips: nasty, brutish and short. 

Two Ex-Wives and Several Bartenders

(Originally published at Talkmarkets.com on March 18, 2020)

As we compose this, gentle reader, we are coughing and achy, but no fever or foreign travel, so the public authorities here in Dixie waved us on and didn’t swab our bodily fluids because, we suspect, they don’t have enough tests to waste on, let’s say, senior sorta guys who look like they can limp along for a little while longer. Or, more depressing, they harbor the unspoken thought that guys like us – and we have to glumly agree – are no big loss. No worries.  Still taking in plenty of oxygen between Marlboros.

In any event, as we warned in “The Great Fires of 2020”, “the world is due for something to blow up.” And so it has. Much has been made of the overused “black swan” to explain the equity market meltdown, which is true as far as it goes.

A worldwide recession, if not depression, is certainly baked in the COVID-19 cake.  Indeed, this is one of the easiest episodes for the financial reporter to tell her readers why the market soufflé has collapsed.  But there’s another ingredient in this not-so-secret recipe: stocks were just too damn rich.  Getting into our way-back machine, the ratio of market capitalization to gross domestic product was about 152% at the end of 2019.  At the close March 16, the ratio was 110%, suggesting stocks are near fair value.  Of course, the denominator in this fraction will be getting smaller as well; thus, stocks may still not be a bargain measured by the resized economic pie.

So don’t be satisfied it’s safe to buy stocks. Get out now: We’re doomed. As we heard some expert or another characterize the pandemic’s ultimate outcome, we’ll either get immunity or die. So we have that going for us. After all, the 10-year Treasury note yield at this writing is at 1.038%. It began the day at 0.78%. What a world! Still, one would have netted about 190% in price gain if she had followed our advice to buy at 3%, not to mention the raise she could get by refinancing that big old mortgage.

We anticipate your riposte: A stopped clock is right twice a day. And that’s a fair criticism of equity perma bears like us. Yet we still insist stocks are only for those willing to believe they are smarter than Mother Nature. (And, to be fair again, there are those among us who can see what we cannot see. The rich are different than you and us).

But if you are not one of the one-percent, we are reminded of Cary Grant’s character in “North by Northwest” telling government agents: “I've got a job, a secretary, a mother, two ex-wives and several bartenders that depend upon me, and I don't intend to disappoint them all by getting myself ‘slightly’ killed.”  We don’t either, gentle reader.

What to expect? 

• The Federal Reserve Board’s ability to keep financial markets liquid remains formidable. At the first sign credit markets were seizing up, as fixed-income and equity sectors fell in tandem, the Fed stepped in and righted the bond-stock relationship. It can succeed in this respect, but cannot defeat the lack of ventilators or the coronavirus grapes of wrath.
• The unemployment rate will reach double digits in next month’s employment report in March.
• The United States will not shut down like Italy. Americans are too restless, too diverse.
• If you must buy stocks, we recommend Amazon, which will rule the world once the dust settles. And pick an airline. The industry will be bailed out.
• Budget a $1,000 or more check in the mail in the next 30 days. Don’t spend it all in one place.

Data Briefing: How 'Real' Are Retail Sales?

Merrily, we roll along.

Data released this morning support the sense that the U.S. economy remains buoyant.  We wonder though.

Let’s get to the headline: the U.S. Census Bureau reported that retail sales rose 0.3% in December and up 5.8% from December 2018. 

It is curious to us, though, that the headline figure from the Census Bureau is adjusted for seasonal variation but not inflation.  Using the consumer price index as a deflator, the St. Louis Fed figures show just a 0.1% increase in retail sales in December from the previous month and up just 3.5% year over year.

Some details from the retail sales data worthy of note:

• Nonstore retailers (read on-line) garnered the highest sales figure of all categories excluding autos, posting $66.765 billion in seasonally adjusted sales, compared with $66.635 billion in November, an increase of about 2%.  For the year, nonstore retailers had sales of $778.374 billion, up 13.1%.
• Department stores continued to lag, with seasonally adjusted sales of  $10.936 billion vs. $11.019 billion in November, down about 0.8%.  For the year, department stores saw a 5.5% decline in sales.

Meanwhile, the Department of Labor said initial claims for jobless benefits fell 10,000 to 204,000, the fifth straight week of declines and reinforcing the sense that if you want a job you can get one.

The Great Fires of 2020

First published at TalkMarkets.com Jan. 15, 2020

We know, gentle reader, you have been mystified and concerned that our voice had been stilled by the deep state or that Ukrainian interlopers had taken control of our server.  Fear not, friends.  We are in fine trim and back to prognosticating as the teens of the 21st century give way to what we hope (we’re always ready for a good time) will be the roaring ’20s.

Without the benefit of Big Data (we consider it cheating), here’s what’s coming up, in no particular order because all are of importance.

• We “called” Donald John Trump’s election four years ago (see https://seekingalpha.com/article/3782936-happy-of-2016) but see all sorts of reasons why he should lose this time around.  Yet, as excruciatingly painful as it may be, we find it hard to believe a man — even an out-of-his-depth, Philistine man-child — enjoying the longest expansion in U.S. history with unemployment below 4% could possibly lose.  This depends, of course, on the likely outcome the president is not removed from office.  Despite what they say, Democrats must root for financial panic.

• Infamously, we have been perma bears on the stock market and extollers of the virtues of bonds.  It wasn’t a horrible call.  We advised buying the 10-year note at a 3% yield, and debt has done nicely since.  But we whiffed on the stock market, which appreciated 25% or so in 2019, depending on your index of choice.  Calling a top is futile, but we note that total market capitalization over gross domestic product is well over 150%, a level that historically signals significant overvaluation.  Either it’s different this time (for instance, the idea that the supranational nature of enterprise requires a more global perspective than U.S. GDP), or equity returns are destined to be negative this year.  Sell bonds (see inflation discussion below). Pare equity positions, but own Amazon (AMZN), the only retailer we see benefiting from either higher or lower consumer prices.

• Here’s a no-brainer: We’re doomed!  The most underreported story of 2019 was a continent on fire.  If charred koala corpses don’t do it, nothing will.  Climate change-fueled disasters will increase in frequency and intensity, but nothing will be done.  A wise confidante of ours says that any problem that calls for collective action will be opposed immediately by the Trumpist know-nothings who, like Huck Finn’s pap, blame “guvment” for any and all miseries.  Or, as another Huck Finn character, the Dauphin, says: H’aint we got all the fools in town on our side? And ain’t that a big enough majority in any town? Oh, the humanity!

• The Federal Reserve System’s Open Market Committee won’t raise rates in 2020.  When they do, it’ll be too late.  It will only do so if bond market vigilantism comes back in vogue. We know monetarism is out of fashion, last employed by the late Paul Volcker to conquer inflation in the 1980s.  The linkage between money supply and inflation appears to be severed, but only because the velocity of money has been on a downward trend since the great recession and has kept sliding during this long recovery.  Data from the Federal Reserve Bank of St. Louis show the M2 money stock increasing about 85% in the decade ending Dec. 31, while velocity has decreased 25%.  This is puzzling, but suggests to us inflation could return if velocity returns to a more “normal” level and lazy people like us don’t boost our productivity growth.  In any event, the Fed won’t risk the political fallout of raising rates, especially in Trump’s re-election year, unless the consumer price index itself turns decisively higher. 

• Unless we return to “a world lit only by fire” (William Manchester’s term for the middle ages), gold will become more of a barbaric relic, owned only by scolds who, like the puritans, are worried somebody, somewhere is having a good time.  Then again, the world may very well be on fire by the end of the decade.

• Some bubble will burst in 2020.  We can’t tell you if it will be housing again or corporate debt or student debt, but the world is due for something to blow up.  Take the corporate sector.  According to MacroMavens’ Stephanie Pomboy, the top three companies in the S&P 500 have more cash than the bottom 450 combined, leaving one to wonder how the nearly $10 trillion in corporate debt can be serviced if the world gets wobbly.

• On the sporting front, which, after all, is where the real money is, the rich get richer.  The New York Yankees with the signing of starting pitcher Gerrit Cole will be world champions this year, and the Dallas Cowboys, under new coach Mike McCarthy, will win the Super Bowl next year.  Matthew Wolff, the young golfer with the unorthodox baseball swing, will win two major tournaments this year.

Which reminds us that if we remember to keep our head down, turn not sway, and keep the left arm pinned to our chest, breaking 90 in the sporting life ahead is within our grasp.  If not, there’s always next year.  So we have that going for us.

Suffering with Sontag

(First published Dec. 26, 201, on TalkMarkets.com)

At the end of the year, we were thinking of Susan Sontag for some reason. We took “Against Interpretation and Other Essays” (1966) down from the shelf and turned to “The Artist as Exemplary Sufferer.” Speaking of ancient Hebrew, Greek, and Oriental literature, she wrote: “Suffering was not the hallmark of seriousness; rather, seriousness was measured by one’s ability to evade or transcend the penalty of suffering, by one’s ability to achieve tranquility and equilibrium.”

Replace “Artist” with “Equity Investor” and which might be the real exemplary sufferer is clear. Like Sontag’s ancients, we prefer to be serious about sidestepping the penalty of investing in what we believe to still be an overvalued stock market.

Back in March, we wrote in these pages:

“In any event, gentle reader, we think equities, even Facebook, are dead money or worse for a while. The likeliest bull market to come, despite Fed tightening, is bonds, we believe. We know that some heavy-hitting interest rate gurus believe bond prices are headed downward. But we think an inverted yield curve looms as the Fed squeezes and investors flee to safer assets. If the 10-year note yield hits 3% (it’s currently about 2.85%), it’s a screaming buy, we think.” (see What Rough Beast?).

And in June, we again expressed our preference for bonds over stocks (see Is Your Daddy Rich And Your Momma Good Lookin'?)

Alas, the bottom in equities has not yet been plumbed, in our view. Here’s why:

How much is that doggie in the window? Valuation has been excessive for some time and remains so despite the December sell-off. For reasons that only the gods know, this pendulum tends to swing way out of whack in both ways, perhaps because human beings expect either the best of all possible worlds or the end of time. In any event, at the end of the Christmas Eve bloodbath, the broad stock market was capitalized at about 123% of gross domestic product, still way too rich, in our view, given signs of a global slowdown, starkly evident in crude oil prices.

Ye olde yield curve. Inversion is in the eye of the beholder. The two-year to10-year spread was still positive at 19 basis points at the close of trade Dec. 24, according to U.S. Treasury data. That spread has narrowed from 58 basis points at the beginning of the year. However, the TIPs, or inflation-protected bonds, showed an inversion between the five-year and 10-year yields. We find this ominous in that it foresees a policy mistake of tightening too zealously by the Fed, the traditional trigger for economic downturns.

Donald Trump is in over his head. Forget the girls, Russia, emoluments, etc. No matter what echo chamber you frequent – be it “Fox & Friends” or “Morning Joe” – it is clear by now that President Trump could be non compos mentis with no strategy but the seat of his pants.

• Though he hailed his meeting with China’s Xi Jinping earlier this month as a deal of some sorts, what exactly was struck other than a delay in tariff impositions remains ambiguous.
• Insulting the intelligence of the Fed (though, strangely, he might be right that it is too worried about inflation) can only have the opposite effect he wants.
• Partial government shutdown over the wall fetish and fear that Mattis’ departure from Defense removes adult supervision portend escalating distraction and confusion.
• Public airing of Trump-related stuff by the Democratically controlled House could make the President mad enough to do something daffy.

In the face of all the uncertainty, we think it vain to make a case for value in equities.

Is Your Daddy Rich and Your Momma Good Lookin'?

This article first appeared on TalkMarkets.com (http://www.talkmarkets.com/content/economics--politics/is-your-daddy-rich-and-your-momma-good-lookin?post=179062)

Sometimes, gentle reader, we think things will be all right, especially when summer rolls in and fish are jumpin’ and the cotton is high.  Why, just the other day we were tooling down the highway in our 18-year-old Saturn station wagon (she and her V-6 can now vote.  Hurray!) and, miracle of miracles, our i-phone music library played beautifully through the cassette deck thingamajig from what had once been a problematic stereo.

Not so fast, you say; OK, we hear you.  Yes, the “check engine” light was still on. But we had Petula Clark telling us that she knew a place where we could go where the lights are low, and Peter and Gordon were assuring us that nobody they knew loved us more than her.  All with no bass rattle!  What’s more, the potholes we had dodged for several months had been filled by conscientious government pothole fillers. As we always say when each day confounds us with good luck: so we’ve got that going for us.

Which means that one of our pillars for equity underperformance – a trade war (see http://www.talkmarkets.com/content/us-markets/what-rough-beast?post=170281) – has been masterfully parried by that stable genius Donald Trump.  He may not know the American lyrics to “God Save the Queen,” or that red coats, not Canadians, who served under that anthem burned the White House down in 1814, but he’s a shameless son of a gun and Wall Street doesn’t care as long as profits keep growing. Yes, the cotton is high indeed.

What we hadn’t counted on was the co-dependency of the United States of America and the People’s Republic of China.  For all the blustering about trade deficits, the USA loves buying cheap Chinese stuff at Wal-Mart so that Beijing gets the dough to buy USA bonds. Duh!

The S&P 500 is up 3.62% this year and up 13.83% year over year.  We find it interesting, though, that the consumer staples sector -- the manufacturers and distributors of Eggo waffles, Marlboros, diet Coke and the like -- is down 12.5% year over year, while information technology is up 28% year over year.  This tells us that investors believe that we wage slaves will never dig ourselves out, while Facebook, etc., will soldier on and raise rents wherever they invade.

The bull in the China shop is the Federal Open Market Committee. Once it starts choking credit as prices rise (try booking a flight from Dixie to NYC this summer!), the proverbial punch bowl will be snatched away before working stiffs like you and us get a raise.

We love the late sunshine; our tan is progressing nicely.  But in two weeks the star that nourishes us will begin its lazy slide into the horizon and so will stock prices, in our view.  The United States 10-year note is at 2.93%, close enough to our buy target of 3%.  Sell stocks, buy bonds.

Forgive us, dear reader, but we must resort to the New Testament for our outlook:

“No trial has come to you but what is human.  God is faithful and will not let you be tried beyond your strength; but with the trial he will also provide a way out, so that you may be able to bear it.” (1 Corinthians, 10:13).

We can bear it if you can, gentle reader.  We’re pouring another diet Coke, opening another pack of Marlboros and plan on toasting an Eggo waffle in the morning.

What Rough Beast?

This article first appeared on Talk Markets.com (&uid=28607)

One of the more athletic of the school’s security guards bounded into the cafeteria one January day, yelling “pow, pow,” hands holding a phantom firearm.  The remedial class of reluctant readers we were overseeing as a substitute teacher scrambled back to our room as instructed by our principal, himself an overseer of the active shooter drill.

We trailed, necktie flapping, Weejuns slipping on the polished linoleum, claudication stabbing us in the lower left leg.  We made it limping through the door, mercifully held open by our charges, literate in empathy if not the printed word.  Maybe they couldn’t, and didn’t want to, read, but the high school sophomores and juniors were nice enough guys and gals not to lock the door until their not so beloved Mr. Chips scooted inside.

Our faux escape accomplished, we returned to the lost cause of cultivating a taste for odes evoking beauty and truth versus Instagram and wondered “what rough beast, its hour come at last,” had been born among us.

Indulgent readers will forgive us for mixing our Keats and Yeats, but we wonder if they’ll forgive lawmakers who refuse to take the common-sense measure of outlawing firearms that discharge a whole lot of bullets real fast (buy Dick’s Sporting Goods). It was done once from 1994-2004 and the Republic survived.  This is so truly a no-brainer that it strains one’s sufferance of the gun-centric crowd that worries its “rahts” (as non-Southerners mock our accent) will be compromised.

Enough preaching.  In the meantime, the “four ‘easter” battering the Eastern Seaboard this spring is an apt metaphor for the four things that spell doom for equity investors in 2018.

• Withdrawal of monetary stimulus.  This is the biggest.  The Federal Open Market Committee, under the new regime of Fed Chairman Jerome Powell, hiked, as expected, the Fed Funds rate 25 basis points at its meeting yesterday.  If inflation is the result of too much money chasing too few goods, the bull market has been fueled by too much money chasing too few assets.  It’s ending.
• Overvaluation.  The market is priced at 143% of gross domestic product.  Experience says returns will be subpar until this ratio reverts to the mean.
• Trade wars.  President Donald Trump appears bound and determined to impose tariffs in an effort to erase the U.S. trade deficit.  As a wiser head than us (wish we could recall who it was) has said something to the effect: A trade deficit is not a bad thing or a good thing, it’s just a thing.
• Trump himself.  Whether it’s Mueller or Stormy who rocks his world, unpretty things await.  In a way, though, Republicans might be glad to be rid of him and work with reliable conservative VP Pence, we think.

In any event, gentle reader, we think equities are dead money or worse for a while.  The likeliest bull market to come, despite Fed tightening, is bonds, we believe.  We know that some heavy-hitting interest rate gurus believe bond prices are headed downward.  But we think an inverted yield curve looms as the Fed squeezes and investors flee to safer assets.  If the 10-year note yield hits 3% (it’s currently about 2.85%), it’s a screaming buy, we think.