Fed-Xi at the Bat

December 2, 2018

 

It looked extremely rocky, for the Gallant 5 this week,

The month was almost over, and performance was quite bleak, With Housing in the dumpster and PMIs all down,

It did not appear, from far to near, that smiles would replace frowns,

 

A host of stalwart traders, done in by last month’s gloom, Having not much left to do, packed up and left the room,

Those that remained were hoping “if we could only catch a break, “Then the risks that we are holding, are ones we’d gladly take”

 

They thought if only Fed and Xi would play their game and fair, Performance would recover, and this would clear the air,

But Xi, as was remembered, is one tough old cat,

And what on earth could the Fed bring forth with yields so low and flat?

 

With the meeting three weeks away, what was a fund to do? And the dinner at G20, might be just a chew and screw,

But then Powell sung a docile tune at the NY Econ Club, Said hikes are nearly over; let’s meet up at a pub,

 

And oh that lovely dinner, where Trump and Xi broke bread,

Or whatever fare the Argy’s served; what matters was what was said, The tariff hike is now postponed; the two sides soon will barter, Which might’ve pleased Ol’ Poppy Bush, and even Jimmy Carter,

 

So November ended strongly, best week in seven years,

And for one brief shining moment, the markets calmed their fears, There’s still another month to go, in this worst year of the ‘10s, But as of now, I’m not the guy to foretell how it ends,

 

… with apologies to Earnest Lawrence (Casey at the Bat) Thayer

 

Yes, my friends, I do indeed apologize to Mr. Thayer for bitching up his masterpiece, but why stop there? Indeed, my regrets extend to all of you; perhaps to all of mankind.

 

Because, you see, I have transgressed, in last week’s note, serving up the worst market call that I can remember publishing in these typically clairvoyant pages. I hope you can forgive me, and, for what it’s worth (take this as you will), I have forgiven myself. After all, even a stopped clock is wrong 23 hours, 59 minutes and 58 seconds of the day.

 

For those who may have forgotten this sorry episode, allow me to refresh your memory. Buried among the digressions of last week’s Gravy Boat essay was an unambiguous warning that the market was flashing material, immediate incremental downside risk. As long as I am unburdening myself, I may as well inform you that I was actually even more worried than those who managed to wade through the introductory schtick might have reasonably inferred. I was convinced that investors would persist in their demonstrations of displeasure with both trade and monetary policies, by continuing to trim their sails, risk-wise, and increasing their sales, market-wise.

 

And you should also be made aware that when equity indices rallied on Monday, I viewed it as nothing more than corroboration of my selloff fears. Indeed, when I woke up Tuesday morning, I actually considered the heretofore shocking breach of protocol of issuing a midweek warning that stocks were about to crash.

 

But thank God I held my fire, because the stalwarts kept buying. And buying. And buying. And, when the frolicking was over, our mighty indices had registered their strongest weakly gain since 2011.

 

Yeah, well, like I said, I was wrong. But I’m really glad I was, because: a) the professional investors for whom I toil desperately needed and uptick in performance, and b) thanks to last week’s moonshot, most of them (though to varying degrees) caught the move. As we’ll cover further down the page, this here rally may continue to demonstrate legs, but in the meantime, hedge funds in particular will not now be obliged to report dismal numbers again -- until well after the last cork on the last New Year’s Eve champagne bottle has popped, and its contents emptied, across this fair land.

 

There’s something to be said, in and of itself, about the merits of a respite from what has been the sad lot of the industry for most of this year: reporting losses to investors. And who knows? Maybe they’ll nail the December encore. It is my fervent hope that they do.

 

But in the meantime, I will try my best to un-see the frightful images that were dancing around my brain had my bleaker prognostications been proved correct. And, of course, we have Fed-Xi to thank for this. Let’s start with the Fed. I will admit to being a tad surprised when Chair Powell took to the podium on Wednesday to share his weariness with this whole rate hiking cycle. I had feared less constructive rhetoric, but by God he crushed it. Given the subsequent success of the G20 summit, I now fully expect him and his crew to follow through with their threatened quarter point hike on 12/19. But now, unless his goal was to set himself up to be made a monkey out of next year, he can’t really raise anymore unless and/or until there is sufficient economic traction to do so. And I gotta say – this is a big relief to yours truly. As I mentioned in last week’s post, I simply don’t see the rush to hike as being a particularly prudent policy.

 

But within the obtuse world of monetary governance, there were a couple of other odd doings that I believe bear mention. First, it’s pretty clear to me that somebody knew something in advance of his latest address. Both stocks and bonds were bid up all week – not just in this jurisdiction, but indeed across the globe. Wednesday’s moonshot was already underway before the release of his remarks, and their publication, in retrospect, appears to be nothing more than those last retro rockets igniting and empowering that final thrust.

 

And the thrust lasted all week, as, by Friday’s close, equities were bid up to multi-week highs, and our 10-year note enjoyed sufficient demand to migrate associated yields to levels below the psychologically important 3% threshold. Powell will get another at-bat this Wednesday, by virtue of his semi-annual address to Congress. Here’s hoping he stays on message, because I don’t even want to think about what may happen if he reverses course yet again. From there, we can turn to anticipation of Friday’s Jobs Report, with yet another set of robust employment numbers expected. By that time, and depending on what transpires in the interim, we may well find ourselves in one of those perverse paradigms where strong numbers may be viewed as dilutive, and vice versa.

 

However, as the affairs of humankind tend to go, Chair Pow’s testimony will coincide with the funeral of Poppy Bush. According to longstanding protocol, the markets will be closed that day. Moreover, presumably, there’ll be some empty seats on Capitol Hill, as some subset of our elected national legislators might see fit to honor the memory of our 41st President with their presence at the ceremony. I’ve always been a big fan of Poppy’s, for reasons that are now splattered across the pages of every relevant publication under the sun. He wasn’t treated all that well when he was still among the quick, though, and that, as always, is a helluva shame.

 

But Poppy has now gathered to the dust of his forebears, and, while the flags will remain at half-staff in his honor for a couple of weeks, we already have no alternative other than to our full attentions to the struggles of the living. This all began, of course, with the wind-down of the G20 meeting, culminating in the much anticipated culinary summit between President Trump and Chairman Xi. Going into this, I agreed with the consensus view that the best outcome that could realistically emerge from these doings was rhetorical goodwill, a promise to sit down and hammer something substantial/sustainable out in the near future, and (perhaps most importantly), an extension of the menacing Jan 1 deadline for incremental tariffs.

 

Well, wonder of wonders, all of that took place. And more. The locals on this here Continent used the opportunity to sign a new North American trade agreement, and, flawed though it might be, the need for it to pass through 3 legislatures all notwithstanding, from where I am positioned, all of this is better than the three countries spending the next several months attacking each other’s economies. Further, the entire G20 came out with a statement wishing nothing but Peace on Earth and Goodwill to Men. And Christmas is still three weeks away!

 

Nobody should delude themselves: this whole throw down with China is a major hassle, and the mood could deteriorate to new lows before anything of substance is resolved. The Fed could again get all in our grill. NAFTA-cum-USMCA could fall apart.

 

But the only real takeaway that matters, after an improbably productive week, is that the elevated risk premium that has plagued the markets for so many weeks should experience substantial gravitational pull – and this should improve both performance prospects and associated investor dispositions through at least the end of the year.

 

Fed-Xi has indeed come to bat, and, unlike the Mighty Casey (from whose example he was born onto these pages) he did not strike out.

 

One could even argue that he managed to clear the bases, but the outcome of this game remains still in doubt. For this week, at any rate, I’ve sworn off making explicit market calls, but I will state that we’ve got a lot of wood to chop before it’s all over, and that having chopped it, the time has come to lay some of it on the financial equivalent of spherical horsehide.

 

Here’s hoping that all of you will see some fat pitches come your way in what remains of the difficult, often bitter and rapidly ending contest of 2018.

 

…TIMSHEL

 

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