Exit, Pursued by a Bear

December 23, 2018


A sad tale’s best for Winter: I have one of sprites and goblins”. And so begins Shakespeare’s “The Winter’s Tale”. It is not, for my tastes, among his finest efforts. With its convoluted narrative of childhood friendship between kings, accused adultery, uxoricide, banishment and reconciliation, it is part comedy, part tragedy, part romance, and even part history, but perhaps not enough of any of them to rise to the sublime level of Hamlet, the pathos of Othello or the retributive morality of Macbeth. On the other hand, even the dregs of Willie Shake’s pen probably compare favorably to most of the written output produced before or since, so there’s that.


However, as last week ended on the Winter Solstice – the shortest day/longest night of the year: a point in the calendar that we denizens of the Northern Hemisphere deem to be the first day of Winter, it seems like as good a place as any to point our tortured, thematic wanderings. And the exception that proves the rule. If Friday was indeed the shortest day of the year, you could’ve fooled pretty much anyone paying attention to the markets.


“The Winter’s Tale” also features what is almost indisputably the most famous stage direction in dramatic history: our titular “exit, pursued by a bear”. And I’m guessing that in this holiday season, I am hardly taxing the associative powers of my readers by asking them to connect the dots. The singularly wretched year of 2018 is about to take its leave, and nobody in any way connected with the financial markets can doubt that as it prepares its egress, it does so with a big nasty bear in hot pursuit.


In fact, as it applies to certain market realms, The Bear has already arrived. Longstanding convention defines a Bear Market as one that experiences a >20% decline, and, with Captain Naz now moored 22% below its Q3 highs, the NDX already resides within ursine clutches. The same can be said, in this jurisdiction, of Ensign Russell, and, across different oceans, of Herr Dax and Citizen CSI.


Many other indices, including our own beloved Gallant 500 and General Dow as well as their opposite numbers across Eurasia are not there yet – but The Bear is in hot pursuit, and may overtake them before we close the books on this ghastly, bounty-less train wreck of a year.


I hardly need to inform you that the collateral damage has been brutal, removing any doubts that 2018 will be remembered by historians as the worst performance year in a decade. In this respect, is even giving the 2008 crash a run for its money. But at least back then, we had excuses: the global banking system was in full collapse, a housing market waking up to a cold reality after a years-long trip into fantasy land, and an orgy of dubious financial engineering enriched the hundreds while impoverishing the tens of millions.


While one can quibble with current conditions, nothing of a similar nature is appears to be looming on the horizon, at least to me, which begs the question: this time, what’s our excuse?


Plus, it’s not as though periodic 15 – 20% type corrections haven’t been part of the price of admission for risk-takers since time immemorial. But I won’t lie: this time it feels sorta different; sorta worse.


So what gives? Well, for one thing, virtually every major capitalist jurisdiction is in one form of crisis or another. We know, but don’t know, what ails the U.K. Germany is for all intents and purposes leaderless, and in recession. France is in complete turmoil. The sharks are circling around pseudo-capitalist China, and it wasn’t doing that great before those menacing fins appeared on their horizon.


Then there’s the good old U S of A, once and always the head of the dragon. From certain vantage- points, the economics of this country don’t appear to offer much cause for consternation. Q3 GDP was revised down last week, from 3.5% to 3.4%. There is some softness in the Housing Market, but nothing even remotely approaching what transpired last decade. Durable Goods Orders were light, but the Jobs Market remains historically strong, inflation, by any important measures, is under control, the consumer spending parade marches on, and confidence remains high. Yet, as has been widely reported, last week was the worst interval for equities in a decade (dating back to those heady days when Bernie finally came clean and Treasury Secretary Hank Paulsen threw himself at former/future House Speaker Nancy Pelosi’s well-shod feet, to beg her bail out his former employer and pals), and is closing in on the worst December since 1980 (when Nancy Reagan was measuring drapes for the East Wing). So, again, what gives?


Well, I have my theories, and, pending yuletide rituals notwithstanding, duty compels me to lay them on you. To me, the American capital markets are cracking more than anything else, as a direct result of observing, in real-time, the pending disintegration of the governance structure in Washington.


As I have pointed out in past editions, while I could not bring myself to pull the lever for 45, I did consider myself a supporter, and remain terrified by the prospect of the ascent of his most strident political opponents. So when I take shots at the big guy, I do it in sorrow. But facts is facts. By my reckoning, Trump just experienced had the worst week of his turbulent presidency, and I don’t think the contemporaneously-manifest market rout can be viewed, in any way, as being a coincidence.


Three headline-grabbing episodes defined the cycle, and each was worse than the other two. First, without consulting or even informing anybody in the know, Trump announced a withdrawal of our remaining troops in Syria. Now, I won’t presume to lecture on the folly of this policy decision (mostly because I don’t know), but his having done so without seeking the input or even giving a heads up to his military heads, was ill-advised and classless. And his people responded accordingly. Mad-Dog Mattis resigned in a justifiable hissy fit within 36 hours, reinforcing the increasingly undeniable reality that competent, talented and dedicated public servants cannot operate effectively in the Trump White House.


Next of course came the FOMC decision, which I believed would catalyze a further drop in equity valuations no matter what they announced. And of course, we all know what happened after that. The FOMC went through with its hike, and, with barely a pause, asset prices dropped. And kept dropping.


I am on record as standing with my betters such as Jeff Gundlach and Stan Druckenmiller in believing the Fed made a mistake. While reasonable minds can debate, myriad problems in the global capital markets that would not be eased (and might be exacerbated) by higher yields at the short end of the U.S. Treasury curve made it fairly apparent to me that continued accommodation would far outweigh any potential benefits deriving from rate normalization.


But Powell did what he did, but you know what? I believe that any blame from the fallout devolves directly on the shoulders of Donald J. Trump. I had dearly hoped that he would comport himself, at minimum, in such a way as to recognize and respect the Fed’s independence. But here he failed miserably. He’s been in Powell’s grill for months, and that on an increasing basis. Matters have now deteriorated so thoroughly that plausible rumors are afoot that Trump is actually considering firing him.


God help us if he does, because at that point, the consequences are too frightening to contemplate, but as of now, he appears to have thought better of this lunacy. However, he’s done plenty of damage even as matters now stand, and I strongly suggest that if he would’ve minded his big fat business, the carnage extracted by the Fed’s latest action would’ve been significantly mooted. Yes, the Fed probably made a mistake, but it’s one we can live with, I believe, and now I think that they’re boxed in: I don’t see them raising rates – and may in fact be lowering them – unless the economy heats up, at which point it would be the type of high-class problem for which we can only pine in the present moment. The President, however, publicly shoving himself into monetary policy is a potentially more permanent and damaging blow.


If all of this weren’t enough, we ended the week with a straw man government shutdown arising out of a dispute over a funding item that is: a) a mere few basis points of our total outlays; and b) is and can be financed without all of the psychodrama. All parties appear to be spoiling for this stupid battle, and of course no one will feel any impact from the shut-down – except, of course, the already put upon investor class.


And all of this is transpiring in advance of the reign of terror certain to be brought down upon the Administration’s head as soon as the new Congress is sworn in – an event now a mere 10 days away.


So investors can certainly be forgiven for wondering whether >230 years of effective governance on these shores is collapsing, and the decorum of the proceedings is deteriorating before our very eyes. I now think it’s a fair bet that Trump won’t make it out of 2019, and, if he were to vaporize tomorrow, I doubt that there are many remaining among us who would strongly lament his absence. But the uncertain path towards his removal, guaranteed to be accompanied by a great deal of infantile machinations, is a spectacle that cannot be filtered through a risk-taking lens with anything but fear and loathing.


So on the whole, I’m starting to feel that the lower we close a week from Monday, the better the return prospects, meagre though they appear to be in 2019, are likely to present themselves. But even here, the path is wrought with frustration. Given the alarming outperformance of bonds over stocks this year the domestic pension fund complex appears to be compelled to add ~$64B of equity exposure to their portfolios over the next few sessions:


Going into Monday’s truncated Christmas Eve session, this may be about as joyless a stock purchasing cycle as any we’ve experienced in our lifetime. These pension funds will have to sell bonds at the same time, but a look at the continuing juggernaut of a rally in global govies, it says here that the Fixed Income markets can absorb the blow.


Yes, there are cheap stocks to own, and for my money, current valuations may offer as favorable an entry point as one could hope for.


But as Jim Morrison reminds us, the cold grinding grizzly bear is hot on our heels. Yes, he’s out there, he’s hungry, and he’s intent on capturing his dinner. And in closing, all I can think of is the old joke about two campers running for their lives from such beast. One says to the other “you know this is a waste of time: you can’t hope to outrun a bear” to which his partner replies “I don’t have to outrun that bear, I just have to outrun you”.


And this, my friends, all things considered, is about the best risk management lesson I’m able to offer at the moment. So, Merry Christmas, and, as always..





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