Submitted by Nick Colas of ConvergEx
The “Funky Drummer” Market
If you are getting a strong sense of déjà vu from current news flow, well, join the club. Everything feels so… familiar. And not necessarily in a good way. When we hear phrases like “Bubble markets”, “M&A cycle”, “historically low yields”, and “retail investor buying”, our minds automatically flash back to prior periods of history when those phrases last dominated the headlines. It isn’t hard to come up with a “Top 10” list of phrases with strong historical - and emotional - antecedents. So, today we did just that. Fair warning, however: just because a tune sounds familiar doesn’t mean you actually know the song. It could just be what the kids today call a “Sample” – a snippet of a song put in another song. Yep, what we’ve got here is something out of hip hop, not rock. Don’t especially like rap? Too bad, homey.
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Even though he died in 2006, James Brown is still with us, and not just because of a newly released movie about his life and times. No, the “Godfather of soul” lives on in both his own music and in countless songs from artists he likely never even met. Hip hop music – rapping and DJing – is famous for “Sampling” brief snippets of songs to construct entirely new arrangements. Of the “Top 10 most sampled” songs in hip hop, James Brown holds two of the top 5 spots. His “Funky President” and “Funky Drummer” appear in close to 1,000 other songs. In case neither rings a bell, I have included a Youtube link to the former at the end of this note. You’ll know it when you hear it.
Fans of classic rock tend to disparage the extent to which hip hop relies on sampling to craft songs, but that’s somewhat unfair. Let’s not forget that The Rolling Stones were a blues cover band until “Satisfaction” came along. Is it all that different for Keith Richards to learn guitar by copying African American bluesmen, or for the Stones to cover Robert Johnson’s “Love in Vain” on Let it Bleed? Eric Clapton references the song in “Layla” as well. Johnson lived in the Depression era Deep South, was murdered in 1938, dying a painful death from poisoning, and never achieved commercial success. That’s a long, long way from swinging 1960s London.
Mark Ronson, famous for producing Amy Winehouse and being a top DJ in his own right, recently did a TED talk on sampling. He explained that musicians everywhere have used bits and pieces of other people’s songs because “They heard something in that music that spoke to them that they instantly wanted to inject themselves into the narrative of that music.” The difference between a modern rapper and a teenage Keith Richards listening to old Chess albums is essentially the technology available to each. One has a digital sampling machine, one has a beaten up guitar. Different outcome, same basic storyline.
It occurs to me that the news headlines that can move markets have some elements of this narrative as well. When you hear phrases like “Oil Shock”, you don’t just abstractly consider what higher oil prices might do to the global economy. No – you have a series of either first or second hand memories of what higher gasoline prices mean to you. That phrase might take you back to playing gin rummy with your Dad in the car in 1979, waiting online at a gas station. When you use it describe what would happen if Iraq were to fall to ISIS rebels, or Libya were to descend into even further anarchy, you are touching back to story from a different time and place and dragging into the present. It is your personal “Sample” in a new song about the present.
Catch phrases turn into personal stories, and those stories have power beyond abstract economic analysis. Sometimes that power is positive – say with the words “Upside earnings surprise”. Chances are you will think back to other times you’ve heard that phrase and experienced a nice investment gain. And others, well, they remind you of why you keep as few personal items on your desk as possible.
Beyond “Oil shock”, it wasn’t hard to come up with 9 other common Wall Street phrases that elicit specific historical antecedents. Some are good, some not so much. But when you hear them, just remember that you have entered a rabbit hole of memory which may limit your ability to think creatively –and accurately - about their impact.
- Rising Fed Funds rates. Say this to anyone who was in the capital markets in April 1994, and you will see a visible shudder. After a solid start to the year, the S&P 500 rolled over from 480 to 443 in June and posted a small loss on the year. Yes, the Fed moved much more aggressively in 1994 – 50 basis point moves for several meetings – than anyone expects today. But deep in the reptilian bits of every old trader’s brain sits the memory of 1994, along with the observation that Fed rate increases are like roaches – there’s never just one.
- “Bubbles”. If you are old enough to drink, you are old enough to remember (in varying degrees, of course), the dot com bubble, the housing bubble, and the bubble in badly structured financial products. Very few people investing today managed to walk away unscathed from those experiences. The only thing that limits the power of the word “Bubble” is that there is a bubble in its common usage.
- “Gold Prices”. The yellow metal has had two great runs in my lifetime – the late 70s and the mid 2000s. Both moves were the result of the same driver – a lack of confidence in the financial system. And to this day, when you see gold rally for a few days, it feels like a loud noise in the middle of a quiet night. It makes you sit up and wonder just how bad things might get. Even if it is just Indians buying ahead of wedding season.
- Ebola/Pandemics. While it might be at the fringes of modern history, the 1918 flu pandemic killed 50-100 million people, or 3-5% of the world’s population. That was less than 100 years ago, not several hundred as was the case with Bubonic Plague. So no wonder that the topic still captures the public’s imagination. And fear.
- M&A Cycle. Mergers and acquisitions tend to indicate CEO confidence, and like all humans they tend to overestimate both their own abilities and the sustainability of economic expansion. History shows that outsized and low quality deals tend to come towards the peak of an economic/capital markets cycle. Just think back to AOL-Time Warner deal, announced in January 2000. Or Daimler-Benz and Chrysler in 1998. That’s why everyone is looking out for the signature lousy deal of this cycle – nothing really in the running yet. But just give it time.
- Leveraged Buyout Cycle. Similar to the M&A cycle, the LBO cycle peaks when cheap money meets overly confident private equity shops and hilarity ensues. Think RJR Nabisco in 1988 (still the biggest LBO inflation adjusted of all time), or TXU in 2007 (in the #2 spot). When you see a mega-buyout, it is time to ring the bell at the top of the cycle. Or so history would seem to say.
- Historically Low Bond Yields. Ever since the all-time high on the Nikkei in late 1980s, Japan has been mired in a protracted period of low economic growth and all-too often recessions. This has pushed long term Japanese sovereign debt to a current yield of 0.51%, implying that the chance for any real growth (and the resultant inflation) is still essentially zero. No one wants to be Japan, so when European sovereigns sport yields in the 1.1-1.5% range the natural reaction is to worry about a similar lost decade – or two, or three – of economic growth in the Eurozone. And as U.S. Treasuries continue to rally, you’ll hear the same thing here soon enough.
- Political Strongmen with large standing armies. The hardest aspect of predicting the outcome of the current Ukrainian/Russian standoff is trying to handicap what Vladimir Putin might do next. That’s an uncomfortable position for markets, since it harkens back to a range of other solitary political leaders from history that created varying levels of political and economic mayhem. Saddam Hussein, the Ayatollah Khomeini, Chairman Mao, and the long line of Soviet rulers before the end of the cold war – just to name a few.
- Retail investor buying. This one goes way back in the market’s memory banks - all the way to the Roaring 1920s. Shoe shine boys were supposed to have great tips, courtesy of their wealthy customers. Fast forward to the 1990s, and black car/taxi drivers seemed especially in the know. Now, they all seem to want to talk about Uber. But rest assured, “Mom and pop” are back in the market is/will be a consistent bearish talking point in 2014. Whether or not it means anything.
In short, the point here is to draw the connection between seemingly innocuous words we hear every day and the actual power they have to move us. Remember that the lessons learned through emotion and experience will always last the longest. And that’s fine – just don’t let history and learned behavior be your only guides to the future. That’s what the crowd does, after all.