I am happy to report a couple of small steps towards the narrowing of the chasm that separates right from left in this increasingly divided nation; one which, if taken to extremes, threatens to destroy what has been one hell of a ride since WWII at any rate.
First, it would appear that contrary to widely, er, socialized perception, Senator Elizabeth Warren (D-MA) does not wish to destroy capitalism as we find it. In fact, she wants to help, and, seeing as how she’s a Senator and all, she has actually introduced a bill to strengthen its foundation. Specifically, the blood-chillingly named Accountable Capitalism Act (what are the chances that she did NOT choose the acronym to match that of Obamacare? Answer: slim) would require domestic companies with $1B in revenues to apply for a national charter, presumably controlled by enlightened Washingtonian political insiders. Under the proposed regulatory regime, companies would be impelled to operate in such a way as to maximize benefits to ALL stakeholders – including (one can assume) employees, regulators, customers, community, creditors, and maybe even competitors (I mean, after all, don’t your competitors have a significant stake in your fortunes?).
Presumably, shareholders are not to be excluded from this warm embrace (because seriously, don’t shareholders need love like everybody else?), but not under prevailing terms of monogamy. In fact, if I properly understand the provisions of The Act, being overly attentive to the actual owners of your enterprise can land you in hot water with Sen. Liz: a place where (trust me) you do not want to be. The bill also proscribes that at least 40% of Board Seats of chartered companies must be assigned to employees, and prohibits top executives from selling shares, whether purchased on the open market or acquired as part of a compensation package, until, well, until forever.
What, in heavens name, could possibly go wrong?
Well, for one thing, investors in enterprises who must, as a price of doing business, de-emphasize shareholder interests might not be willing to pay as much for the privilege of ownership – particularly when one considers that there’s a whole wide world – full of companies that are willing to place their objectives at the highest level of the priority chain. In addition, Corporate Research and Development efforts that might’ve otherwise driven whole new innovation/monetization cycles might not do enough for employees or the community to meet the newly engineered underwriting standards. Management teams, confused and disincentivized by the Act, might make suboptimal decisions.
Yup, on the whole, I’m forced to conclude that the passage of The Act would be a market short. Securities of every stripe would probably decline in value, and face a twisted path to valuation recapture. My guess is that there would also be fewer Googles, Ubers, Sovaldis, etc. emerging, because the risk/reward calculus associated with devoting your life to one big idea would’ve taken a severe downward turn. So there’d be a lot of buzzkill for investors. However, before you plunge into a cycle of despondency, please consider my other piece of good news. In a rare show of cross-party back watching, President Donald J. Trump came to Liz’s rescue by floating the notion of reducing the frequency of earnings reporting from quarterly to semi-annually.
Thus, while the stocks you own are likely to decline in value, at least you won’t have to hear about it as often.
These initiatives, ladies and gentlemen are the flower of your tax dollars at work.
I strongly suspect that the markets wouldn’t cotton to even the Trumpster’s portion of this elegant solution. Being creatures of obsessive habit, I’m guessing they’d be frustrated if their sequences of noodling over every line item on an income statement, dissecting every word and even the body language of Corporate Chieftains, were to be cut in half. The markets would be rendered riskier; more prone to discrete price jumps in both directions, and therefore less compelling to own at any given price.
But in the final piece of happy tidings I am able to share on this mid-August day, the markets appear to have ignored both initiatives. All of our indices rallied, and the Gallant 500 now rests a skinny 80 basis points below its January all-time highs (remember those)? That little beyotch of a VIX got beaten back to a 12 handle. And even the perpetually beleaguered Bloomberg Commodity Index was able to register a pulse this past week.
Potentially alarming, though, is the unprecedented build-up in speculative short interest in longer-dated United States Treasury Securities:
This chart, my friends, is a pretty scary one, and not necessarily for the reasons you might believe. Close inspection suggests that shorts piled up with record speed, aggregating to amounts that are approximately double those of the previous record, posted earlier this year.
Now I know that the bond crew is a smart bunch (and if you doubt this, just ask them) but this kind of speculative factor concentration: a) is unsustainable; and b) is not likely to end well, at least for some, when it unwinds.
Let’s just hope that the losers here aren’t us.
I am also concerned that this flow pattern emerges immediately before the Kansas City Fed’s Jackson Hole Conference (Wed thru Fri). I don’t mind stating that I hate Jackson Hole. I don’t ski, and it is, after all, the summer, but I’d rather be pushed down a ditch dry Double Black Diamond run than attend a conference that either produces nothing, or generates outcomes that always seem to leave my clients sideways.
Elsewhere, there were some encouraging developments on the trade front with both China and Mexico, which didn’t capture much attention in equity-land. But I don’t blame the equity crowd for discounting these reports in their valuation calculus. From what I’m told, we’re pretty close on terms with the Mexicans, which would certainly be a step in the right direction. The Chinese, however, are another kettle of fish. I suppose it’s encouraging that our trade reps will soon be sitting down at the table with theirs, but it will probably take more than polite discussions to bridge the gap between the two bull goose economies in the world.
Market participants were, on the other hand, justifiably giddy at the results presented by the late reporting Walmart Corporation. And it was indeed a thing of beauty. Particularly encouraging were the positive trends in both Grocery and On-Line: elements of their vast enterprise where the Arkansas colossus faces direct, arguably dire threats from the Kings of the Columbia Gorge: Amazon.com.
But on the whole, I feel that the next migration in security valuations will be driven by and large by developments in the dodgy world of international trade. As I’ve suggested before, there’s more riding on this than whether Premier Xi buys his Soy Beans from Butler County (IA) or Brasilia. For one thing, I believe that the ebbs and flows of these discussions will impact the outcome of midterms, now a mere 9 ½ weeks away. If we make progress (which can only happen if 45 is able to spin it with trademark bluster), the markets will rally, the economy will surge, and I suspect the President and his minions will experience much better outcomes in November. Conversely, if talks break down (as well they might), it will continue to drive up the risk premium – both in the markets and in the actual economy. Everyone will be nervous/agitated, and I feel that these vibes will manifest in the post midterm electoral map.
Even that wouldn’t be so bad for us market types if the party currently on the outside looking in weren’t, by all accounts, out for blood. There are a lot of grey areas here, and if the result is some sort of Congressional balance in both chambers, I reckon we’ll survive. However, if the Dems run the table, I fear that they will use their newfound powers in ways that (let’s just say) won’t be overly accretive to the fortunes of wide ranges of risk capital allocators.
Importantly, I don’t believe the markets will wait to know the actual outcomes of our great exercise in democracy to adjust risk appetite and investment configuration. More likely, the rising and falling political fortunes of each side will have a material impact upon valuation trends – as soon as Labor Day if not sooner.
All of which sets up for a rather overwrought last trimester of 2018. But hey, let’s not get ahead of ourselves, shall we?
Just remember, if worse comes to worst, we can perhaps take comfort in the prospect of world-class market economists Donald J. Trump and Elizabeth Warren working together to fix a market structure that for the most part doesn’t need fixing.