December 16, 2018
So? How’s everybody feeling out there? With two weeks left in this wretched year, how many of you are ready to channel former Salomon Brothers Chairman John Gutfreund’s marching orders, and wake up ready to eat the a$$ out of the proverbial bear? If you are, you have, at least from some perspectives (but not from others), my full admiration.
In the current paradigm, The Gutfreund Principal is more widely, in fact ubiquitously, referred to as Animal Spirits, a phrase first coined by iconic economist John Maynard Keynes, in his seminal 1936 treatise: “The General Theory of Employment, Interest and Money”. Since the Crash, the term has been serially abused, in the written and spoken word, by commentators too numerous and outrageous too inventory in this family publication. Over this period, other cringe-worthy terms have come and (mercifully) gone (“green shoots” for instance), but Animal Spirits, for better or worse, abides.
However, in these troubled times, the term has been applied most commonly through its obverse: with the wizened among us lamenting the lack of Animal Spirits across this fair investment land as the primary case for our ills. Well, OK; fair enough, but you will never hear this term uttered from my lips. In fact, though I may fail within the realms of this very piece, from this point on, I will strive mightily not to even type the letters into any electronic device within my current or future disposal.
The wizened ones are correct, though, at least insofar as that the absence of the never-to-be-mentioned-in- this-space phrase is, today, among the market’s most prominent characteristics. This got me to thinking that what we really are looking at, more than anything else, is a case of Vegetable Spirits – a condition I will define as one where risk-taking agents lack perception of their surroundings, and thus the ability to adapt to them, and must simply accept the caprices of natural forces. The financial peaches, tomatoes and yams of the investment universe may win prizes at county fairs, or they may be unceremoniously chucked into boiling pots along with the turnips and cabbages, as part of an undignified, unsavory, unsatisfying Mulligan Stew. We just don’t know, and anyway, there ain’t a great deal we can do about it.
So yes, I’d say that the markets as a whole, and not in a good way, are currently wallowing in Vegetable Spirits, but perhaps the condition is more broadly applicable to the full range of human activity. A couple of examples should serve illustrate my point. This past week, I met up with one of my oldest and dearest professional chums, at the social gathering locus of his alma mater: The Manhattan Yale Club of Yale University. The place was buzzing, and upon greeting my friend, I mentioned that it appeared that business was good at The Club. Not so, he responded; in fact, times are so tough that the custodians of this sacred meeting place, where stone cold Eli ballers have been gathering for more than 5 generations, has now become a shared dominion with (wait for it) Dartmouth College (it’s not even a University!).
I’m not sure when this happened, but I will say this: it shocked me. By everything that is holy in this world, Yale needs its own, exclusive NYC clubhouse. And, though the oil paintings of famous Eli’s ranging from William Howard Taft to the Bushes – Junior and Senior – still stare down at those imbibing in the Great Room, they have now, at least for me, lost some of their luster. I never had the juice to make it to Yale myself, but, other than some sympathy for the recently banished Andrew Jackson Vice President John C. Calhoun (dispatched due to his stance on slavery, while the University’s Founder: slave trader Elihu “Eli” Yale’s name remains on the door), I have heretofore had no particular quibble with the place. But letting the modestly down-market Dartmouth Big Green into the previously exclusive Bulldog House kind of brought me down. And I blame Vegetable Spirits, which apparently have now seeped into the Ivory Towers of the Ivy League.
More closely aligned to our immediate concerns, I’d be remiss if I didn’t take note of Friday’s 16% drop in the price of Johnny John, as the maker of virtually every consumer product under the sun felt the wrath of investors -- for covering up an apparently liberal use of asbestos in the production of their talcum and baby powders. However, it bears mention – pursuant to our theme – that the key ingredient in these marvelous items is corn starch. And corn, according to my own protocols for determining these matters (my phrase; my rules) is unambiguously a vegetable, and therefore by its very nature guided by Vegetable Spirits. So it could do nothing useful to impede the assault on its corporate paymaster.
And so it goes for the markets as a whole this past week, which, after a couple of sessions that gave rise to hopes that perhaps the menacing volatility cycle was winding down, sold off hard on Thursday and Friday. The Gallant 500 is now not only to its lowest level since March, but also -- albeit by the merest titch -- sporting an undignified 25 handle (2599.95). In addition to the JNJ talcum bomb, Friday’s selloff was catalyzed by weak numbers out of China. But I’m not in a position, particularly with respect to the latter, to find fault with those who turned tail on this intelligence. Everybody knows that China gooses their numbers with all of its considerable might, so when it reports bad figures, one can rest reasonably assured that the numbers are indeed bad. Perhaps really bad.
But as we cast a leery eye towards 2019, I think there is something more menacing creeping into valuations, and that is the likelihood, nay, near-certainty of a once-in-a-lifetime (at least let’s hope) battle taking shape across the political parties in Washington. In mentioning this as a risk factor, please know that I’d rather cover any other topic (how ‘bout them Bears?). But duty calls. My best guess is that before they’ve even cleaned up the mess in Times Square from New Year’s Rockin’ Eve ‘19, the proceedings will devolve to levels that will make 2018 political escapades look like Woodstock.
On January 3rd, the 116th Congress will be sworn in, and it says here that the new (same as the old) bosses will waste no time before laying an all-out legal assault on the Trump Administration. I anticipate hundreds of subpoenas, dozens of Grand Jury formations, and a galaxy’s worth of innuendo and worse, to materialize before January turns to February. Pelosi, Schiff, Nadler and the rest will be out for blood, and will begin their efforts to extract it immediately. Yes, they will pink their swords multiple times, but it’s also clear to me that Trump and his allies have little intention of simply rolling over and getting stiffed.
The prevailing level of abject cross-party hatred is beyond anything any of us ever have experienced, and I challenge anyone to refute this point. I also am comfortable in suggesting that Trump has received more vitriol than any president since Lincoln, who had to sneak into Washington for his 1861 inaugural, and who immediately faced the reality that a dozen states had left the Union. The outgoing Vice President at the time (John C. Breckenridge), actually became a Confederate General.
There have been periods of strife since those historic days, but nothing that comes close to what is emerging at the moment. Many dozens of congressmen, millions of citizens, and untold billions of dollars are bent on the destruction of the current administration, and they stand a fair chance of achieving their goals. They now control the enforcement arm of the legislature, and they will use it with abandon.
Please forgive the political diatribe here, but look at what the Democrats have wrought even while in the minority. I won’t inventory everything, but anyone who isn’t shocked and dismayed by what has been revealed about the Michael Flynn episode should take another look. They set the poor b@stard up, big- time, and he is a decorated war hero for f#cks sake! This shocking exercise in entrapment, one of many such episodes, should chill the bones of even the most tree hugging snow flake who’s paying attention.
A judge may throw the plea deal right back in the prosecutor’s face, but that’s beside the point. Clearly some nasty stuff from the Mueller probe (so far completely removed from anything remotely related to Trump/Russia collusion) is about to drop, as will the subpoenas, etc. Most of the next several months will feature an obsessive focus on whether Trump resigns or is impeached. Many members of his family may be indicted.
I find this all beyond sickening, and will just remind my many prog friends that you reap what you sew. Some of you would do well to review the history of the French Revolution, which began in righteous effort to bring due process and civil justice to the masses, but ended up with its sponsors taking turns sending one another to the guillotine. Every. Single. One. Of. Them.
But enough of this, right? More pertinent to our purpose is that if I’m right, then it would be foolhardy to commit any more risk capital into the markets, or, or for that matter, into the real economy than is absolutely necessary for survival. In terms of the former, with nothing but a Battle Royale raging in Washington, it will be extremely difficult to commit capital to real-world projects. And this, my friends, renders the generation of investment returns over the next couple/few quarters a very quixotic exercise.
At the same time, though, other forces strike me as serving to significantly diminish any framework for an outright crash. Again, for the bajillionth time, there’s is a shortage of stocks available for investment on a global basis, and this deficiency is almost certain to increase. As pointed out in earlier editions, there are now less than half the number of names to trade in the US equity complex as there were 20 years ago. The 3,000-odd survivors are the beneficiaries of buybacks, mergers, acquisitions and the like, which further reduces the inventory of securities available to own. Over the last decade somewhere in the neighborhood of $40 Trillion of new currency has been created, and, while the money printing machines have slowed and in some cases shut down, all that new money needs a permanent home. As a result, and in true Twilight Zone fashion, there aren’t even enough bonds out there in which to invest. And if you doubt this, just take a look at current yields across the globe. Even here in America, where debt prices are arguably more rational than in other jurisdictions, the 2s/5s spread remains inverted.
I reckon, on a related note, and seeing as how this is Fed week and all, I should mention something about the FOMC announcement on Wednesday. I really have very little insight here, but suspect that the equity markets will not like any decision to follow through with their planned rate hike. But get this: they may like an announcement that instead the Fed has chosen to pause even less. One way or another, I don’t see much in the way short-term prospects for higher yields at the longer end of the curve (i.e. the maturities where real economic agents actually lend and borrow) – at minimum until 2019 is well under way.
So, with interest rates frozen or at least capped, and dysfunctional government dampening enthusiasm for private sector risk taking, I believe that corporations will continue to hoover up both other companies and their own available stock. This won’t socialize much of a rally, but at points not much lower than this, absent an unforeseeable catastrophe, investors will be compelled to buy stock, because there is simply no alternative.
I thus am projecting a highly volatile, range-bound tape for at least the first half of 2019, and we’ll just have to hope for the best. Perhaps the Good Lord will provide ample sunshine and precipitation for us, if not to thrive, then at least survive, in our own rich soil. These are the fruits of Vegetable Spirits, my friends, and I suggest you order your activities accordingly.
It could, though, be worse. At least at present we’re not looking at a Mineral Spirits construct, under which investors are dumb as rocks and equally immobile. I don’t think this is likely, and the holidays are of course right around the corner, so let’s keep our spirits up – whatever materials of which they be comprised.
This post is brought to you by General Risk Advisors, a full-service risk solutions group. For more information, visit or contact .