A Walk on the Wild Side
“Never play cards with a man called Doc. Never eat at a place called Mom’s. Never sleep with a woman whose troubles are worse than your own.”
– Nelson Algren, A Walk on the Wild Side
Fresh Fruit or Rotting Vegetables?
A subtle gas seems to always be vented into the atmosphere at the sunset of an extended bull market. As the light fades, an odor that’s indiscernible from that of fresh fruit or rotting vegetables wafts down Wall Street. You can almost smell it. But what it is you smell is too faint to accurately characterize.
DJIA, daily; quo vadis Industrial Average, and what’s that odd smell? At the peak in late January the weekly chart of the average sported an RSI of 92 – an all-time record “overbought” condition. A few other indexes (particularly the Nasdaq and small cap indexes) have reached new highs in the meantime, but broad-based and large cap indexes have failed to confirm these moves. [PT]
The Dow Jones Industrial Average (DJIA) closed at a record high of 26,616 on January 26 – nearly five months ago. Since then it has swooned and spiked with uncertain direction. Buying the dip at this juncture may not work out in anyone’s favor.
When the stock market peaked out in mid-2007, in the early days leading up to the 2008-09 crash, some of Wall Street’s best and brightest mistook the smell of the moderate initial decline for that of fresh fruit. They bought the dip. At the time, however, it was still unclear what the source of the subtle odor was. Was it really fresh fruit? Or was it actually rotting vegetables?
The answer remained unknown until mid-2008. That’s when the bear market delivered the rancid and punishing stench of rotting vegetables. If you recall, the DJIA crashed by over 50 percent.
There are dips to buy. There are dips not to buy. The stock market dip that occurred between mid-2007 and mid-2008 was a dip not to buy. What about the current dip?
Billionaire hedge fund manager Paul Tudor Jones has a long track record for successfully sniffing out the direction of the market. This week, the man with three names shared what his olfactory senses are detecting at present.
Paul Tudor-Jones explains the hazy imagery conveyed by his nasal radar in the most general terms possible. He is conversing with God’s worker, whose bald pate decorates the foreground. Insert: a younger version of Tudor-Jones back from when orders still had to be phoned in and he was making his first gazillion. The off-screen contraption he is looking at is a Quotron, which provided real time quotes in a design reminiscent of MS-DOS. Here is an unauthorized documentary from the time when the photo was taken. PTJ prepared for the 1987 crash – he was essentially betting on the idea that the market was mimicking the 1920s boom and that a crash pattern similar to the 1929 crash would end the rally – this turned out to be spectacularly correct. As an aside: it is quite funny that the first thing mentioned by the narrator in this 32-year old video are “recent Wall Street scandals” – when are there no “recent Wall Street scandals”? [PT]
The special occasion was a conversation with Goldman Sachs CEO Lloyd Blankfein, as part of the bank’s “Talks at GS” series. Through a strange mixture of grins and grimaces Jones offered the following general assessment:
“You have to be thinking this is a highly dubious sustainable price… You look at prices of stocks, real estate, anything. We’re going to have to mean revert to a normal real rate of interest with a normal term premium that’s existed for 250 years. We’re going to have to get back to that. We’re going to have to get back to a sustainable fiscal policy and that probably means the price of assets goes down in the very long run.”
Mean reversion of real interest rates and the decline of asset prices over the long run are gloomy prospects, as far as we can tell. Jones, regrettably, didn’t elaborate on what exactly happens when there is a significant long run asset price decline. Obviously, a stock market index chart – like the S&P 500 – would exhibit a wave pattern that generally trends down and to the right for, perhaps, a decade or more. But what else happens?
In just a moment, and with a little help from the departed, we will attempt to clarify the matter. Yet, first, we must make an important distinction: The 2008-09 financial crisis was not a significant long run asset price decline; it was merely a blip. A long run asset price decline is something much more severe. It is associated with a depression.
America hasn’t experienced a real lengthy and desolate economic depression since the 1930s. In fact, it has been so long, there is hardly a living soul left who experienced the nation’s last real depression. Hence, we must visit the crypt to find a proper first-hand account.
The events related below are by now thoroughly mummified and live witnesses are becoming increasingly scarce. Consultation of the Crypt library is therefore required. [PT]
A Walk on the Wild Side
What follows for your consideration are the portentous words of the late Nelson Algren, a long forgotten novelist. The quote is from his equally long forgotten novel, titled A Walk on the Wild Side:
“The Ladder of Success had been inverted [in 1931], the top was the bottom, and the bottom was the top. Leaders of men still sporting gold watches were lugging baby photographs door to door with their soles flapping. Physicians were out selling skin lighteners and ship captains queued in hope of a cabin boy’s mop and pail.
“Offices of great fire insurance companies went up in smoke, which seemed no more than just. When the fire department – long unpaid – cleared off, little remained but scorched files, swivel-chairs on which no one would ever swivel again, lovely heaps of frosted glass, and all that mahogany.
“All that mahogany that hadn’t helped anybody but brokers after all. Then the brokers began jumping off rooftops with no greater consideration for those passing below than they’d had when their luck was running. Emperors of industry snatched all the loose cash on which they could lay hand and made one fast last run. Lawyers sued one another just to keep in practice.
“And every bug-house had one little usurer hidden away in a cell all his own where he did nothing but figure percent with his fingernail on the wall, day after day after day.
“In less time than it takes to say God with your mouth open, the go-getting door-to-door canvasser became the backbone of the American economy. He went to work for Realsilk Hose or Hoover Vacuum long enough to go-get himself a dozen pair of Realsilk hose or a second-hand sweeper by stealing it part by part.
“There was also small change, milk money and such, left lying about on shelves and sills while housewives studied one proposition or another. Change snatching too came under the head of go-getting, for hundreds subsisted upon it week in and week out.
“However, the secretary of the Federation of Labor pointed out, Business was resisting further decline. Self-reliance for the penniless and government aid to those who already had more than they could use was the plan.”
Is this what Jones meant by “the price of assets goes down in the very long run?” We suspect the answer will be revealed soon enough.
A collection of depression era cartoons in chronological order, from late 1929 to mid 1932. We have copied the cartoon captions in a larger font to make them easier to read. Our own comments are in square brackets and/or italicized. [PT]
A photograph of Nelson Algren (1909 – 1981) taken in 1956, the same year in which A Walk on the Wild Side was published. He is actually not quite as unknown as Matt indicates above…:). A Walk on the Wild Side was Algren’s last commercial success, but his work experienced a noteworthy posthumous renaissance in the mid to late 1980s. Algren primarily wrote about assorted losers and outcasts and reportedly entertained far-left political leanings. Similar to many other Western intellectuals he seems to have fallen for Soviet propaganda, which was highly effective from around 1930 until the late 1960s (the invasion of Czechoslovakia in 1968 in order to suppress the “Prague spring” reform movement of Alexander Dubček was an eye-opener for many). To his credit, Algren appears to have had a healthy disdain for members of the US Communist Party on account of “negative experiences” he had with them (we imagine that the authoritarianism of party apparatchiks and their complete submission to the Dear Leader in Moscow were rather obvious, which he may have found off-putting – of course this is just a wild guess). Nevertheless, the FBI suspected him of harboring communist sympathies and as a result his passport applications in the 1950s were denied. This kept him from visiting his girlfriend Simone de Beauvoir in Paris (who was quite a prominent leftist/ existentialist/ feminist author at the time). When he was finally able to obtain a passport in 1960, their relationship had cooled to mere friendship status – or as Algren himself put it, it was “too late”, because their relationship had changed “subtly, but decisively”. This was sad for Algren, but the world was spared their potentially far-left offspring…:) [PT]