February 10, 2018
Come on, come on down, Sweet Virginia, Come on, come on down, I beg of you,
Come on come on down, you got it in ya, uh huh, Got to scrape the sh!t right of your shoes…
-- Mick and Keith
Exile on Sane Street? Brain Street? Blame Street? Wall Street? It matters not. This week, we pay tribute to what is widely acknowledged to be one of the greatest records ever produced for public consumption: The Rolling Stones’ “Exile on Main Street”. Some, including yours truly, believe that this album marked the high point of “the world’s greatest rock and roll band”. Mick and Keith were at the height of their artistic powers, Charlie was in the pocket as always, and Mick Taylor had found a magnificent (if temporary) niche in the ensemble, as a replacement for the luminous but misanthropic Brian Jones. They had their moments after that. The follow-up: “Goat’s Head Soup” was almost as good. But from there, with the passage of time, with each new album release more banal than the last, their increasingly diminished edginess became more difficult to overlook. While I love the lads, I think it’s mostly fair to say that they’ve been mailing it in for the better part of 35 years.
We feature Exile for two reasons. First, the title derives in part from the reality that is it was recorded in the South of France, as band members, tired of paying 95% tax rates to Her Majesty’s government, and justifiably concerned about associated wealth seizure, decamped to more that more favorable financial jurisdiction. In other words, the Stones had become tax exiles, and, given the general tone of the fiscal debate in this country, I felt that a featuring of the topic was, shall we say, timely. As this note goes to press, the 116th Congress and other sub-legislative bodies are busy outflanking themselves as to who can catalyze the biggest cycle of tax exodus achievable. There are proposals to set the top income levies at 70%, only to be outdone by nostalgic souls who would like to revert back to the post-WWII top bracket of 90% (which no one paid due to myriad loopholes that no longer exist today). As referenced in recent posts, one truly energetic (though identity challenged) senator/presidential candidate has floated the idea of a wealth tax – one that is not likely to gladden the hearts of the paymasters that are needed to fund her desired move to 1600 PA Ave.
And there are lots of ideas as to how to use this gusher of new money that would presumably roll in -- unimpeded from eager high earners/fat cats who never really cared about themselves (only wanted to help the less fortunate), and as managed, of course, by selfless public servant who have no private agendas and who would no doubt spend it with flawless efficiency. We can rebuild every structure in America! We can offer a nice little stipend to those unwilling to work! Best of all, we can replace fossil fuel- hoovering cars and airplanes with a network of high speed trains that will get anyone anywhere they want to go in a jiffy, at lower personal expenditure, and at great benefit to society and its component parts (i.e. humans).
What could possibly go wrong? Well, to begin with, the high-speed rail crew may want to take a look at the Cali bullet train project. 10 years into the effort, the Cali bulleters have burned through $10B, but here’s the good news: the first leg – that uber-dense, car-choked stretch of land between the thriving hubs of Madera and Bakersfield – may be ready to actually transport some passengers by 2025, some 17 years after the launch of the initiative. Yes, it may be ready, but here’s a risk management tip: I wouldn’t bet the ranch on it. If one cares to look even further back into history, to the construction of the Interstate Highway System in the 1950s, one sees many thousands, tens of thousands of homes and businesses being uprooted. Can you imagine what it would take to build a train system from any Point A to any Point B on the map today? In these troubled times, when a stray word, a questionable look, and any minor inconvenience spawns a pant-load of lawsuits, the only job creation I can envision associated in bullet train fairyland is an infinite amount of billable hours for the future attorneys of this great nation.
Oh, even now I can feel the flames.
All of which brings us to our second motivation for our Exile theme. Across the great divide, the rhetorical flames perhaps burn hottest in the Commonwealth of Virginia, Sweet Virginia, for whom the best song on the Stones’ best album was named. I won’t extrapolate overmuch here, other than to say that yes, you got it in ya, and that you GOT To scrape the sh!t right off your shoes.
But if investors are feeling the fires in terms of any of this, they’re not doing much to show it. Equity markets did indeed cool down a bit over the past few sessions. It was by and large a flat week for U.S. indices, and it saddens me to report that this stasis leaves the annualized return for the Gallant 500 at a beggarly 105%. On the whole, however, I find the price action encouraging, as, particularly late in the week, dark forces were clearly attacking it, with little to show for their efforts.
One asset class that remains en fuego, however, is the global bond market. It would seem that there is no amount of paper that sovereign jurisdictions are able to issue that is not immediately consumed by the fires of global demand. Just this past week, our own Treasury brought to auction an impressive $150B of debentures – across the curve – and it did nothing but socialize a rally at every maturity. The godforsaken Italians put out Ï30B and the issue was overbid by about 50%. Contemporaneously, JGB yields are again negative – this time out almost 30 years, German Bunds command an annualized return of 0.085%, while their neighbors: the always accommodating Swiss, now charge nearly 40 basis points for the privilege of lending to them. True, French rates are at a near-usurious half of a percent, but then again they do have that whole yellow vest thing to finance.
And the corporate buying binge continues apace. The week brought tidings of (regulatory approval, of course, pending) nuptials between two large southern banks: BBT and Suntrust. This would be the biggest bank merger since the crash, but across all sectors, more are likely to be forthcoming. In particular, I’d be keeping an eye on Big Tech and Big Pharma for revelations of items on their shopping lists.
And what’s all of this telling us? Well, like I been saying, there’s just too much cash sloshing around chasing too few securities. It’s probably true that the global economy is slowing, and, by way of corroboration, one need to look no further than the performance of the Baltic Dry Shipping Index, plunging like a mofo since the summer:
Now, tempting as it is, I won’t try to hold myself out as an expert on the Baltic Dry. Suffice to say that it is a measure of shipping activity and associated costs, and as such, is viewed by many smart folks as a leading indicator of the well-being of the global capital economy.
And right now, as of the end of the first full week of February, it is annualizing at -99%+, which I reckon ain’t so good.
So, with rates on a one way ride on the “down” escalator, and amid indications of an economic slowdown other than acquire market share and/or retire stock, what’s a CEO to do?
We’re most of the way through Q4 earnings and pretty much done with anything about which anyone should care. The projections for the full year of 2019 did drop below the socialized Mendoza Line of $170/share on the SPX this week, and the trend-lines aren’t pretty. But hey, it’s early in the year, and if nothing else, there’s always the above-mentioned acquisitions and buybacks upon which to fall back, now isn’t there?
In terms of the upcoming week, there are two important deadlines to consider, both of which happen to fall on Friday. First, the historic 3-week budget deal struck in January expires on that day. And, while the legislatures are at it, they may want to fold in something that also expands the debt ceiling – perhaps permanently – as our ever-voracious Treasury is expected to reach yet another limit of its statutory borrowing powers – the 10th such milestone this century – on or about March 2nd. The latest headlines indicate that the two sides are yet again at an impasse, but I’m not overly concerned. Because if there’s any topics upon which politicians can overcome otherwise intractable differences, it’s their pressing need to spend borrowed money.
Feb 15th also marks the 45-day hedge fund redemption window, and, like the market rally itself, it looks like perhaps my clients and their peers may dodge a 100-year flood. Absent the post-Christmas equity melt-up (in which most funds at least nominally participated), the deluge did appear to be in the offing. However, I suspect that the numbers now will be more benign, and, from a personal perspective, I will thank God for that.
There’s not much else on the immediate horizon that appears likely to either enchant us or vex us, so I’ll close with a couple of risk management warnings. First, Thursday is Saint Valentine’s Day, and I suggest that those who do not wish to be flamed by their flames take the trouble to adhere to prevailing protocols.
Because, with extreme negligence, they risk complete Exile from Flame Street. And as for the Stones, they remain tax exiles from their native United Kingdom. Mick Taylor is long gone, replaced by the accessible but uninspiring Ronnie Wood. Bassist Bill Wyman, now an octogenarian, also split the scene, replaced by Daryl Jones, who contributes much, but somehow has not been granted band membership status. My advice to them is that the clock is ticking, and that they should amend this oversight before it’s too late.
The band is now said to be working on a new album – their first containing original compositions since 2005, and will take the material out on their 1,223,407th World Tour. But in terms of the locus of the studio, you can bet your boots it will be outside of the reach of Inland Revenue. Mick spends a great deal of time in New York these days, and if he’s following the news, he may be aware that state tax revenues are sinking like, well, sinking like a stone, and that even Governor Cuomo has warned the masses that they can only tax the local fat cats so much before they pull their own en masse Exile from the Empire State.
For this reason and others, it may behoove us to watch them, and pick up some pointers to deal with what may be the menacing reach of our own revenuers – which may be coming to a venue near you, and sooner than you think.
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