November 11, 2018
“When I was a boy, all of the people of all of the nations which had fought in the First World War were silent during the eleventh minute of the eleventh hour of Armistice Day, which was the eleventh day of the eleventh month. It was during that minute in nineteen hundred eighteen that millions upon millions of human beings stopped butchering one another. I have talked to old men who were on the battlefields during that minute. They have told me in one way or another that the sudden silence was the Voice of God. So we still have among us some men who can remember when God clearly spoke to mankind.
“Armistice Day has become Veterans’ Day. Armistice Day was sacred. Veterans’ Day is not. So I will throw Veterans’ Day over my shoulder. Armistice Day I will keep. I don’t want to throw away any sacred things. What else is sacred? Oh, Romeo and Juliet, for instance. And all music is.”
-- Kurt Vonnegut: “Breakfast of Champions”
Happy Veterans’ Day y’all. Or Armistice Day if you prefer. Know that I am not necessarily endorsing Mr. Vonnegut’s above supplied sentiments, nor do I expect my readers to glom onto them en masse. But there’s a point in there somewhere, and it bears mention that the conversion of AD to VD came after, and arguably as the result of, WWII. KV was not only a veteran of the latter, but a prisoner of war to boot, so I reckon his sentiments ought to count for something. But KV is dead, as are all the men who heard the soundless Voice of God on that autumn day in France, a century ago. This leaves us, as always, forced to decide for ourselves.
Today indeed is the Centennial of the cessation of hostilities in the War to End All Wars. It was an odd, hollow ending to a horrible, horrific contest. Russia had left early to deal with its own revolution. The German army, not quite defeated (and in fact still well armed and ensconced in France), got tired and went home. Maybe they felt that America’s late entry into the hostilities rendered their efforts futile, but the Americans were green, under-trained and ill-equipped. At the end of the day, everybody just walked away. But ensuing events were not particularly pleasant. The tragic over-reach of the Versailles Treaty is well-known: it turned Germany into an economic and political dumpster fire. Angry, perhaps justifiably so, at the reparations imposed by their erstwhile foes, the Reich paid their debts by printing worthless paper. At least in part because of this, the world soon fell into the Great Depression. Deutschland remilitarized and became rabid nationalists. We had to take to the battlefield again to resolve matters in a more gruesome, more permanent fashion. More than 100 Million perished in the effort.
I have long felt that the first half of the 20th Century was simply a two-generation-long exercise in reorienting the world order, taking multiple forms, and featuring some interruptions that would not, could not, last. But this much is certain: since the end of WWII, Americans in particular but the Western World in general have enjoyed an interval of peace and prosperity that is virtually unprecedented in terms of its scope and longevity. In contrast to the previous hundred centuries, wars, famines and plagues have been the exception rather than the rule. This is the lifetime experience of almost every adult on the planet.
How much longer can this magnificent run last? This is the question that keeps me up at night.
But let’s lay the wreath for our patriotic dead and move on to more pertinent matters. With respect to the Mid-Terms, you can indeed chalk one up for The Chalk, which, for the uninitiated, refers to The Favorite in a sports betting context. It originated in horse racing but is most typically associated with the NCAA Men’s Basketball Championship, also known as the Big Dance and/or March Madness.
But The Chalk to which I made reference in last week’s edition reflected the likely outcomes of the United States 2018 Mid-Term elections -- specifically the probability that that the Dems would win the House while the GOP would retain the Senate. And so it went, sort of.
At the moment, though, it all seems rather unsettling/unsettled, and, though I do not search, I nonetheless find eerie parallels – writ small, to what life must’ve been like for the developed world in the times leading up to WWI. Everybody’s on edge. Allied nations are very distrustful of one another.
Technological breakthroughs (back in those days taking the form of assembly lines and the horseless carriage, vs. the current miracles of the 5G, The Cloud, Artificial Intelligence, etc.) evoke images of untold human discovery. The economy is strong, but shows unmistakable signs of gravitational pull.
A century ago, it took nothing more than the murder of a back bencher politician to unleash a series of treaty obligations that took us down the paths described above. These days, embedded ire rests on a similarly wound hair-trigger. My own personal wish is that everyone would just dial it back.
But in the meantime, we’ve got a very troublesome market on our hands. Yes, The Chalk got it right in terms of the headline outcomes of the Mid-Terms, but, after (as prophesied in these pages), the run-up caused so much agita, said Chalk dictated that matters would calm down a bit.
But they haven’t. Calmed down a bit that is. And now, I don’t think they necessarily will – for the next few sessions and perhaps beyond. Following the script down to the last punctuation mark, equities rallied hard on Wednesday, and one could be forgiven for taking this as a signal that the menacing cycle of volatility had run its course. But a closer look at that short-lived melt-up gave rise to further concerns.
Stocks don’t typically shoot up in that fashion without being abetted (if not driven) by short squeezes, and the mid-week rally appears to be no exception.
Further, it does not appear that the political psychodrama in the lead-up to the voting cycle has run its course; quite to the contrary, one could argue that political fevers are running even higher than before. Broward County, FL is up to its old shenanigans, and, abetted by the stone cold baller partisan lawyers that have descended on the state, we may be looking at a minor redux of the hanging chads of 2000. The House Leadership for the 116th Congress is taking shape, with its policy contours coming into view. We can expect amped up investigations, hostility across the board, and brinksmanship, to rule the day.
On the other side of the aisle, all (well, most) of the checkmarks on the election map had barely been filled when (as I believe was inevitable) Attorney General Jeff Sessions was abruptly shown the door. The post-results presidential news conference nearly descended into violence.
And, outside of the world of Beltway plebiscite battles, other risks begin to emerge. The FOMC met last week and indicated its intent to stay the course with respect to interest rate normalization. A gargantuan Treasury auction cycle yielded mixed results. As illustrated below, demand for our 30-year bond was dismal, with yields hitting 5-year highs and the bid-to-cover being the worst recorded in a decade:
Now, I have a confession to make: I find this whole “bid-to-cover” thing a bit confusing. Press me and I think that I could summon up a plausible definition. But my heart would not be in it. Mostly, though, I like to discuss “bid-to-cover” because: a) it trips off the tongue so elegantly; and
b) I think it makes me sound smart.
Let’s just agree, though, that if we extrapolate the demand trends for our long-dated paper, it could mean that much higher rates loom on the horizon. On the other hand, The Chalk suggests that these would need to be accompanied by higher inflationary expectations, a concept to which the following little bit I pulled down from Bloomberg gives the lie:
And as for me, I’m rather inclined to go with The Chalk here and suggest that ginning up inflationary expectations sufficient to catalyze a material, sustained rate rise will be a heavy lift for the markets. I am particularly biased in this direction because: a) global growth appears to be trending downward; and
b) I could really use those higher rates, and I have found that the markets, seldom, if ever have acted in a manner that supports my personal agenda.
It is, though, clear that our Treasury will have to issue a passel of paper for a long time into the future if we’re to fund the obligations we’ve assumed, and about the only blessing I can find here is that we won’t have to deal with another debt ceiling episode until next March. I have no doubts that this will add a nasty elements to March Madness ’19, but hey, it’s 5 months away.
And now we’re in looking at the back half of a 4th Quarter that has been a nightmare for investors across most every strategy. Earnings are functionally over, and our attentions now likely turn to the big G-20 meeting in Buenos Aires on November 30th. Trump and Xi are expected to meet, greet and exit with happy tidings for the rest of us. Let’s hope for the best.
The stock market has a magnificent record of rallying into year-end after mid-term election cycles, and perhaps this time will be no exception:
All the same, though, I expect that this cycle it will be a bumpy ride. For professional investors, it again has been the worst year of the decade, and, with nine short weeks until it (mercifully) ends, I continue to warn that there are a lot of desperate operators out there.
And it is my considered experience that desperate operators cannot be relied upon to make rational investment decisions. This is a problem.
Because desperate operators can wreak havoc on even the most rationally oriented of portfolios. But the Chalk says we’re likely to rally, and I will admit to hoping, in this case, that The Chalk is right. Lord knows, the investment community has suffered enough across this long, grueling year. But one way or another, I continue to urge caution.
Because just when you’ve let your guard down, some obscure Archduke can get taken out, Whitey Bulger style, and the world can, as a result, suffer two generations of unimaginable carnage. It all began with WWI, but the Armistice didn’t resolve matters, and soon the world decided that a minute of silence on 11/11 at 11:11 was no longer required. Maybe they knew what they were doing; maybe not. But as for me, with 11:11 on 11/11 fast-approaching, I think I’ll keep my yap shut – for a single minute anyway.
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