November 26, 2018
To AMG: Thinking of you, with love, as always, on what would’ve been your 27th birthday.
OK; y’all, so last night I dreamed of gravy boats – big, scary, monstrous, ungainly, non-seaworthy gravy boats. I thought you’d like to know, not only as a matter of general information, but also because as perhaps (along with my well-documented scaffolding phobia) the worst kept secret on Wall Street, I have a fear of gravy boats. Specifically, empty gravy boats. Now, don’t get me wrong; I recognize the sublime utility of these vessels, particularly at this seasonal time of the year. Moreover, I since birth, have been known to be one who has always joyfully punched above his considerable bulk in terms of content consumption. But once they’re empty, they present a considerable problem for yours truly.
Because what do you do with them after you pull them out of the dishwasher? Trust someone who knows: they don’t stack well with the plates/bowls, nor do they as a rule hang comfortably with the teacups on those cute little hooks. The silverware drawer does not even rise to the dignity of being a viable option.
I’m sometimes tempted to put them in the cereal box cabinet, but that, alas, is at best a transient solution
My wife knows where to put the gravy boats, but she won’t tell me.
Other than that, though (i.e. the nocturnal hauntings of the sauce urns), it was a pleasant Thanksgiving, as I hope it was for my readers. I dug the parade as I always do (even if the balloons were hovering at fearfully low elevations) and the Bears won their 5th straight. But now it’s time to focus on bringing a constructive end to what has thus far been a real turkey of a November. We’re all stuffed to the gills, the gravy boats are empty, and now, we’re faced with the daunting task of clean up/storage.
And indeed, about the best thing I can say about November is that it isn’t October – yet.
But it’s getting close, and, with the looming turn of the calendar, I can offer not much in the way of hope that those infernal screens are likely to flash from red to green.
As matters now stand (slightly beyond the sad intersection between prospect and retrospect), it occurs to me that from the outset, this particular month set up very badly for the mouse-clicking wretches of the trading and investment game. We have covered at length the reality that the interval from January to September featured the worst year-to-date fund performance of the decade. Then came October, which brought about the worst performance month over the same interval. Professional investors were certainly reeling, but the advent of All Saints Day offered little in the way of relief. At that point, all eyes turned naturally towards the election, and let’s face it: how constructive could the outcome possibly have been for the investor class?
Well, it wasn’t. Constructive for the investor class that is. The headline results were by and large in line with expectations, but nobody was satisfied, and from where I was positioned, it appeared that the newly re-ascendant progressive class was beginning to prepare that (gravy boat bereft) dish that is always best served cold: revenge.
So my hopes for a post-midterm interval of calm quickly evaporated, as did the punishing 45-day hedge fund redemption window. All of which brings us to the back half of November, and the truly ghastly return prospects it portended. It all began this past week, which, holiday shortened though it was, featured high volume de-risking. It was, I think, Wednesday when we were treated to a quintuple whammy: a rare day where stocks, bonds, commodities, credit instruments and (improbably) the USD all sold off in unison.
As predicted confidently in these pages, all U.S.-based risk factors were flat on Thursday, but that’s about as thin a gruel as ever dared fill a gravy boat. Friday, as was widely reported, evidenced the worst post Turkey Day pricing patterns in many years.
All of which brings us to the upcoming week: where we can focus on two less-than-ethereal market catalysts. This Wednesday (ironically the one-year anniversary of his confirmation hearing before the Senate) Fed Chair Jerome Powell, will offer his penultimate address – to the Economic Club of New York – prior to a rather important FOMC meeting on 18/19 December. The smart money suggests that: a) he’ll telegraph very little; and b) the Fed is still overwhelmingly likely to raise rates – for the 4th time this year – at its December session.
But I’m not so sure about b), and partly this is because I believe that the pathetic showing for everything from equity valuations to crude oil prices to credit spreads, etc. is in part a message to Chair Pow to cool his rate hiking jets. Though the financial press rains on this parade, I think the strategy may be working. The equity markets are a hot mess, credit spreads are widening like America’s post-holiday waste lines, and the housing market is dying like it’s 2007. To the extent that there were data flows this past week, they were pretty wretched, with Durable Goods Orders and Consumer Sentiment leading the flop parade. Midweek this week, in fact a couple of hours before Powell’s noon enlightenment session, the Bureau of Economic Analysis will release its revised Q3 GDP estimates, and then those friendly folks at the Census Bureau will announce September New Home Sales.
All I know is that if I were on the FOMC, I might just be asking: “what’s the hurry?” I mean, after all, it’s not as if a Fed Funds increase is likely to do anything at the moment other than flatten a yield curve that is already at pancake viscosity, if not invert it altogether.
But all of that is beside the point; more pertinent to our purposes is the likelihood that to whatever extent investors are using their capital in an effort to impede the timelines toward rate normalization, this behavior is likely to continue – not just through that cozy lunch on Wednesday but all the way through until the pre- Christmas FOMC party.
One way or another, we’ll then move on to even more pressing matters, most notably the upcoming G20 meeting and the much-anticipated coffee clatch between Trump and Xi. Le Grand Orange could really do the Wall Street crowd (whom he routinely stiffed during his private sector days) a major solid by coming away with some rhetorically tangible good news from this meeting. But is this likely? I think not. Trump has his heart set on teaching the world’s largest nation a lesson he must’ve learned at Wharton -- about whose boss on this here planet. And, if this requires taking actions that work against the short-term interests of the global capital economy, then so be it. After all, he can always point the blame at Mnuchin. Or Powell. Or Roberts. Or Kelly. Or Tillerson. Or Pelosi. Or Sessions. Or even my old buddy the Mooch. In fact, he already has.
Still and all, I will hold out some hope that interests are sufficiently aligned across the Pacific to evoke the possibility that the world’s two most powerful politic leaders can emerge from the Buenos Aires summit with some glad, pre-holiday tidings -- to constituencies that could really use some holiday cheer. If this happens, then risk assets should recover in gratifying fashion. It’s more likely, though, that the tete-a-tete will offer no further clarity as to how this whole trade war will play out, that it won’t impede the Jan 1 timetable for the next round of tariffs, and that, on the whole it will render the quest for returns in the final month of a difficult year a somewhat quixotic enterprise.
Though it pains me to suggest it, there is a third possibility that we hadn’t even counted upon and that is that the two parties depart their sit-down with daggers pointing at each other. If this comes to pass: a) you can up the odds that the Fed will stand pat; and b) well I don’t even want to think about b).
It’s all, on balance, an awful shame, I think. Because absent the infantile shenanigans of politicians around the world, there is ample reason for optimism – particularly for us beneficiaries of lands stolen from native tribes all those years ago. Early returns are mixed, but clearly, millions of intrepids braved record cold on Friday to stomp over one another in quest of discounted clothing and consumer electronics devices. Cyber Monday ought to be a real barn-burner. The pace of technological innovation is, if anything, accelerating. America is producing so much oil that we don’t even know what to do with it.
So, on this holiday weekend, I can offer some hope that somewhere, someday the agita will decrease, and at that point, there may very well be some bargains to cop in the world of investment. I’m still looking at Alphabet/Google (an enterprise that may carry more economic power than any organization this side of the East India Tea Company) trading at 25% off its highs. Apple is down more like 30% and no one as yet has been able to convince me that its current valuation reflects the fast-approaching migration to 5G, and the near-certainty that each and every one of us will be compelled, like it or not, to suck it up and buy new phones to avail ourselves of its wonders.
Global credit, on the other hand, is indeed a problem, and one that is likely to get worse before it corrects itself. But anyone who tries to compare the current threats of insolvency to those episodes of the last decade is just playing you, and, most likely, themselves. Financial leverage is a fraction of what it was in the intervals leading up to the crash, and if all else fails, don’t doubt for a second that if forced to do so, governments will again buy up any unpleasant excess of bad paper that will cover their widening posteriors. It’s either that or the politicians will get thrown out on their collective ears, and that, as we know, is unthinkable.
Let Chair Pow and his minions do their worst: interest rates, across a slowing global economy, are not likely to rise above levels that imply essentially cost-free financing for capitalists in the coming quarters. It says here that corporations will continue to use this bounty to make acquisitions and/or buy back their own stocks – in the process removing scarce inventory of private securities in a world that does not, even as I write this, feature sufficient supply to meet the needs of the global investor base.
It is the last of these observations that convinces me that these difficult times will run their course. Unfortunately, I do see incremental downside in the short term for investment assets, and again, I don’t think they stand much hope of putting in a V-bottom. Nope, prices will have to reach a capitulation level (probably not too far from prevailing thresholds) and flat-line for a bit. All of this could take weeks and maybe even bleed into next year, but when this moment arrives, there’ll be plenty of room for smart shoppers to take action.
And, if history is any guide, they won’t have to suffer the indignities of climbing over one another to claim their objects of desire at favorable prices. I think, instead, they’ll be alone in the aisles. Indeed, there’s already some indication that the buyers are becoming lonelier by the hour:
I threw in the SPX graph over the same time period to demonstrate the uncanny correlation between equity de-risking and market lows. Indeed, the last time that net exposure hit the ~20% level was that horrible start to 2016. Then, the Gallant 500 hit its cyclical bottom of 1865, but over the subsequent 2 ½ years, it rose to a Summer of ’18 high that was an astonishing 57% above those putrid depths, and of course, investors got longer across the course of the rally.
Needless to say, this ain’t the winter of 2016, but pattern recognition abides. Whether on Cyber Monday or some of these days hence, investors may very well take a shine to some bargains and begin shopping again. When this happens, I’m gonna screw my courage and get me a new gravy boat, because, daunting as the task may be, I actually need one. I won’t, however, share what happened to its predecessor.
After all, some matters are better left, on a holiday weekend, within the bosom of one’s own family. So my final advice as the game commences in earnest again is to stick that gravy boat wherever it suits, gird your loins, and, as always….