August 4, 2019
Lord knows I hate bringing mathematics into our little weekend rendezvous, but sometimes duty calls. I don’t want to be overly blunt here, but some (though certainly not all) of you, lack what is called mathematical maturity, a characteristic that can only be obtained through either DNA or a gargantuan amount of sweat equity. For me it was a bit of both, but that’s another story.
So we’ll go math light, OK? Instead I draw your attention to one of the greatest comedy routines of all time: the Mel Brooks/Carl Reiner “2000 Year Old Man” sketch, which first emerged in Village clubs around 1960. Therein, perpetual straight man Reiner interviews Brooks, playing a 2000-year-old man with a decidedly Borscht Belt sensibility. He describes dating Joan of Arc, and his parents forbidding him to marry her because she was a gentile. He tells Reiner he has 4,096 children, none of whom ever come to visit him.
But most importantly for our purposes, when asked about history’s greatest inventor, he immediately names someone named Onin: a guy who fell from a tree, “discovered” himself and then fell in love with himself. This, according to Brooks’ account, was highly controversial at the time, because our forebears of the time considered the discovery a great sin. “The Lord told us to be Fruitful and Multiply” Brooks’ character points out, while Onin’s breakthrough falls under the heading of “Fruitless and Subtracting”.
And in so many ways, Onin’s sin plagues us through modern times. And we’re starting to feel the, er, unintended consequences. As this is a family publication, we will focus exclusively on recent Fruitless and Subtracting activity that has a bearing on the markets. Because that’s what we’re here for, right? To cover pertinent market trends?
This past week was particularly fruit-bereft and aggregation reducing. In rough chronological order, the first F/S episode occurred at the FOMC presser on Wednesday, where the Fed, as expected, announced a 25 bp cut to the overnight rate it charges banks, thereby unambiguously covering the subtracting element of the Onin ballet. It was viewed as a disappointment, as publicly proclaimed, among other forums, by the Leader of the Free World, who, had been using his inestimable tweeting powers to angle for a 50 bp subtraction. To add to the agita, Chair Powell disabused the masses of the notion that this was merely the first step towards a reversion to those carefree days in the first half of the decade, when the overnight rate was tethered to zero. Oh for a return to 2011 (NOT)!
Market participants expressed their disappointment in time-honored fashion: by selling stocks and buying bonds, the latter action (due in part to other Fruitless and Subtracting episodes described below) undertaken with gratifying rigor:
Now, even the mathematically immature among us are perhaps able to recognize that U.S. 10- year government yields reside at the lowest levels since early 2016. The yield curve, if anything, has become more inverted, which presumably was the opposite of what the policy move was designed to accomplish. In fact, rates across the entire global government bond complex plunged to levels not seen since, well, since back before the birth of the 2000- year-old man. Onin would indeed be proud of us.
And of course, equities dropped in sympathy with government yields; all of which was pre-ordained by the gods. However, as prophesied in this space, the selloff soon abated – temporarily. By mid-morning on Thursday, the Gallant 500 had recovered virtually all of the territory it had yielded in the wake of Powell’s latest trip to the podium. All of this strictly adhered to the script; equities were not likely to suffer much because the Fed had only cut 25 bp -- against a backdrop of a gratifyingly robust economic landscape, and record valuations for financial instruments.
But then came an inevitable Fruitless and Subtracting episode, delivered courtesy of 45 himself, via his magic tweet machine. As everyone knows, on Thursday, the big guy announced that gosh all mighty, it looks like he is going to be forced to lay that next round of tariffs on the Chinese after all, perhaps with more to come after that. This fruitless statement subtracted another percent or so off of equity valuations.
I’ve long since given up trying to read the big guy’s mind, particularly with respect to topics such as China. But this one also seems to have been written into the script long ago. Probably, it is in part due to his self-perceived inability to piss off a sufficient amount of his constituents with his aggressive comments about the city of Baltimore. The story was beginning to wane, and his tweeter trigger was justifiably itchy. Further, this prolonged dance with Chairman Xi was always going to involve some stepping on toes before the banns are set and the betrothal takes place in earnest. I’m guessing that Trump now wants to wait a bit before inking a deal with the Chinese. Perhaps all the way to a point contemporaneous with the Democratic National Convention, scheduled to transpire, in a year minus a fortnight, in the great city of Milwaukee.
Now wouldn’t that be a kick in the head.
In the meantime, why not have some fun and stir up some sh!t?
But clearly, from a capital markets perspective, the market viewed the prospect of renewed trade hostilities as a fruitless action, which not only took a bite out of equities, but also subtracted critical price magnitudes from the Commodity Complex. As a case and point, I offer a glimpse at the glide path of both the Bloomberg Commodity Index and its most important component: Crude Oil:
My relatives in the great heartland tell me that the crops are looking weak, and that the harvest may indeed be in jeopardy, while my Energy crew assures me that there is an oversupply of the much-derided raw ingredient to gasoline and other products. But these commodity guys and gals have been suffering for so many years, that one wonders whether the subtraction of their pricing power can bear any fruit for them at all. And I don’t want to beat a dead horse here, but I promise you that a reversion to anything that looks like kind of crude oil selloff experienced in the second half off 2018 would be disastrous for a credit bubble -- already at galactic levels, and growing in alarming fashion.
But in terms of F/S, I must draw our final attention to the Democratic presidential debates, held over two consecutive nights last week in Detroit. I do so partly in honor of Phil, who gets very disappointed if I don’t through some political monkey shine into this publication. So here’s to you, Phil. And please don’t worry. These pages will be rich with political content in the coming weeks and months, among other reasons because with each passing day, market action will be drawn increasingly into a political vortex.
As for the debates themselves, they also followed the script. As expected, it was a monkey circus of (at least partially deserved) ad-hominem attacks on the President. OK; fair enough. The rest of the sessions were spent with aspirants seeking to outflank on another in the hysteria of punitive redistribution, social warfare, and other ethereal objectives which, if manifested, will of course lead us directly to the Promised Land.
I found the whole thing entirely Fruitless, I must state. So much so that I didn’t watch even one single minute of it. Didn’t need to.
But in all likelihood, the exercise will lead to the Subtraction of a few back benchers dreaming of somehow breaking through. So let’s remove a few names right now, shall we? Bye Bye Beto. Kiss goodnight, Kirsten. Disappear, Di Blasio, (with some regret) Good to know you, Gabbard… …I could go on but I reckon you catch my drift.
In the meantime, I encourage investors to keep a stiff upper lip. The selloff over the last three days was, on balance, a pretty weak showing. Had the news flow that catalyzed it transpired at any point other than where we are now, it would’ve been much uglier, and more painful. But with bonds rallying to astonishing-even-by-modern standards thresholds, I just don’t see how equities can suffer much. In fact, tariffs or otherwise, either at current levels or much below, this looks to me like the buying opportunity we’ve all been seeking for many months now.
So hang in there everybody. Mel Brooks and Carl Reiner are still alive and kicking up a storm well into their ‘90s. The 2000-year-old-man even makes an appearance now and then, and will be, if my math is correct, celebrating his 2059th birthday this coming October.
And as for Onin, nobody has spotted him in quite some time. But I wouldn’t let my soul be troubled by this over much. My sources tell me that: a) he prefers his own company these days (has for a long time); and b) he’s only now getting a full, er, grip on enhancements that modern technology brings to his magnificent invention.
One way or another, his spirit lives on.
And one last word to the wise for market participants. While I have no objection to your channeling Onin in a measured fashion, please don’t get carried away.
Otherwise, you’re likely to miss some heavy action in the coming days, weeks and months.