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.