The Fed Is Not Going To Raise Rates In September….

Why no rate rise in September?  Because there is a US Election in November.  An unwritten Fed commandment is “Thou shalt not appear to overtly meddle in politics.“**  Without a gun-to-the-head turn of events, they will put it off until December.

What I am still trying to figure out why we keep getting these saber-rattling hints from various Fed governors trying to keep the idea of a September rate rise in play?  They mostly serve to diminish the Fed’s already-battered credibility.  So what is driving them?

  • The internal debate played out on a public stage?
  • An effort to keep the markets on edge?  To what end?
  • Some sort of “talk-tough before we raise the inflation target to 3% whilst raising rates” strategy?

My hope is that the more consequential Fed news was the SF Fed governor’s recent piece questioning today’s (totally arbitrary) 2% inflation “target.  2% has become a de facto ceiling – as “targets” are wont to become.  Which has condemned us to 1%-2% inflation.  Which is pretty obviously too low.  Why?  See “negative interest rates, general malaise, and Donald Trump…”  I’d have though that was all obvious enough, although clearly a lot of people haven’t grokked it yet.

The SF Fed’s paper is short and worth a read.  Excerpts and a link below.  My takes are…

  • It is hopefully a sign of a shift as much as a plea for it.  Does the Fed shift to a 3% inflation target post election?  He certainly suggests they should.  Because the target has become a ceiling (as predicted by many), 3% really means about 2%-3% inflation vs todays 1%-2%.  2%-3% would be in line with the original idea of 2% as the mid-point target of the inflation range, not the cap.
  • This is about as close to a Fed Governor begging for fiscal stimulus.  Message to Congress etc… “stop diddling around with the politics already!.  We’re out of bullets and this is deadly serious!
  • The other sub-text is “We all know nothing will happen until after the election but we need to get teed up on this messaging shift now!
  • He is right IMHO.  Especially about fiscal policy and the Fed being out of bullets.
  • The market’s recent pep might be a sign we resolve this intelligently and positively.  Which would be a pleasant change…

** Note that its OK for the Fed to meddle in politics by NOT doing anything.  See Greenspan’s quiet contribution to Bush II’s re-election by leaving rates too low for too long.  Remember that the Fed leans Republican (see “regulatory capture“).  That was pretty obvious “action,” but in a passive aggressive way that didn’t risk blame.  Just a subsequent housing bubble and financial crisis…

Monetary Policy in a Low R-star World Excerpts Below

The critical implication of a lower natural rate of interest is that conventional monetary policy has less room to stimulate the economy during an economic downturn, owing to a lower bound on how low interest rates can go. This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates.

In this new normal, recessions will tend to be longer and deeper, recoveries slower, and the risks of unacceptably low inflation and the ultimate loss of the nominal anchor will be higher (Reifschneider and Williams 2000). We have already gotten a first taste of the effects of a low r-star, with uncomfortably low inflation and growth despite very low interest rates.

Unfortunately, if the status quo endures, the future is likely to hold more of the same—with the possibility of even more severe challenges to maintaining price and economic stability.

To avoid this fate, central banks and governments should critically reassess the efficacy of their current approaches and carefully consider redesigning economic policy strategies to better cope with a low r-star environment. This includes considering fiscal and other policies aimed at raising the natural interest rate, as well as alternative monetary and fiscal policies that are more likely to succeed in the face of a low natural rate.

Taking each of those in turn, I’ll start with policies aimed at raising r-star by affecting its underlying determinants.

  • One potential avenue is to increase longer-run growth an d prosperity through greater longterm investments in education, public and private capital, and research and development. Despite growing skepticism and endless column inches questioning whether college is worth the cost, the return on investment in post-secondary education is as high as ever (Autor 2014, Daly and Cao 2015). Likewise, returns on infrastructure and research and development investment are very high on average (Jones and Williams 1998, 2000, Fernald 1999).
  • Turning to policies that can help stabilize the economy during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to re cessions, working hand-in-hand with monetary policy. Instead, it has too often been stuck in a stop-and-go cycle, at times complementing monetary policy, at times working against it. This is not unique to the United States; Japan, and Europe have also fallen victim to fiscal consolidation in the midst of an economic downturn or incomplete recovery.

One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries (Williams 2009, Elmendorf 2011, 2016). These already exist in the form of programs such as unemployment insurance but are limited in size and scope. Some possible ideas for the United States include Social Security and income tax rates that move up or down in relation to the national unemployment rate, or federal grants to states that operate in the same way. Such approaches could be designed to be revenue-neutral over the business cycle; they also could avoid past debates over fiscal stimulus by separating decisions on countercyclical policy from longer-run decisions about the appropriate role of the government and tax system. Indeed, economists across the political spectrum have championed these ideas (Elmendorf and Furman 2008, Taylor 2000, 2009).

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What Did I Get Wrong On Trump?

I didn’t think Trump would win the nomination.  What did I get wrong?

What did I expect?  A wall of Money to coalesce around a single alternative.  Probably Rubio.  Like one of those ugly goal line football plays.  Standing him up and pushing him across the line on mass alone.  Probably at the cost of deep voter dis-enthusiasm.  The result would have been a similar “battle of the unpopular” we’re seeing now, but with a better chance of success for the Republicans as a whole.

What did I get wrong?  I misjudged…

  • …The cohesion of the “money wing” of the party.  Enlightened self-interest should have led to the scenario above.  But they couldn’t coalesce.  Which is the clearest sign of the party’s deep fractures and likely fragmentation.  I under-estimated how fractured things are.
  • …The relative impotence of traditional media.  We all know about traditional media’s declining legitimacy and authenticity, but wow!  Although I should have figured this out.  I can barely stand to track the race except via comedy outlets myself….  Others have made this point better/deeper elsewhere so not going to belabor it.
  • …The Boaty McBoatFace phenomena (the joke name a flash-mob “voted” for a British research ship).  Part of the general “de-legitimization of the elites” problem.  Dis-empowered mobs doing what mobs do when they feel dis-empowered.   This is the clearest (and probably only) useful connection between the Brexit vote and the US election.  This problem is going to be with us for as long as the Internet is.  Its going to be interesting to see how “serious people society” adjust and(eventually, hopefully) cope with this.
  • …When Trump would implode.  I was pretty sure he would.  And his (eventual) disastrous reception by Suburban Republican women was pretty darn obvious.  But the narrative shift happened AFTER the nomination, not before.  I should have called this given media dynamics etc.  But I didn’t.

With that I am going to turn my attention more to other exciting things like Productivity, Fiscal Policy, the Senate Races, what happens after the election, and etc….  The presidential race is pretty done and dusted.  The main risk is that consensus leads to lower turnout by the anti-Trump vote.  But I think the “no Trump at all costs” voters will still turn up in greater numbers than the “I hate Hillary and maybe Trump isn’t really a racist sociopath” voters…  Sigh.

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Trump Has Peaked…

Trump has peaked.  Why?  Because he’s not making any new friends; just new enemies.  We’re at that moment of weightlessness at the peak.  Before the slide really begins…  I think it ends in a crushing defeat.  Trump is like a “story” stock.  They run up big.  Whoosh!  They fall big.  Splat!

Remember that Registered Republicans are only 26% of the electorate.  The “crowd” that voted Trump in the Primaries are only a sub-set of that 26%.  The other 74% of the country – undecided/uncomfortable/unsettled – aren’t going to break Trump’s way.

Sure, “Republican leaning” is at 42%.   But how many will pull the lever for Trump?  In particular, watch suburban, college educated Republican women fade away.  They might not vote Hillary, but they just won’t vote.

The election is becoming a referendum on Trump (sorry Hillary).  More on that later.  And the answer isn’t likely to be “Yes.”

The real campaign hasn’t really started.  Most Americans are still tuned out.  Wait for the ad campaigns after the Olympics.  A barrage of ads – “greatest hits of Trump insulting every voting group except white under-educated males.”  Trump has furnished an insult or snide remark for nearly every demographic out there.

The “likely voter” problem will skew polling toward Trump, which will help feed a landslide loss.  An effective ad barrage will drive new registration AND new turnout among the @60%-70% of the American electorate that Trump has alienated.  Republican no-shows will likely spike too.  NEITHER will show up in “likely voters” polls and predictions.  They will show up at the ballot box.  The Democrats’s will be working to make it seem like a close race…   They need the turnout.

The real game is the Senate races.  If Trump skews turnout enough, the Dems win the Senate.  3 Supreme Court Justices and a string of “uncomfortable” Warren/Sanders Senate hearings later, we’re living in a very different country.

We’re even seeing hints of the Democratic “stretch goal” to take the House.  Less likely, but Democratic gains will mostly unseat Republican moderates.  So the House, the only “national” face of the Republican party, will have a higher concentration of the wackiest wackos.  That is a road to ruin…

FYI, I drafted this on Sunday (before recent polls showed Trump tanking).  Really!  🙂

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Trump Will Lose Big. He’s Peaked.

Barring some major “Black Swan” event, Trump will lose and lose big.  That’s a Strong View Not-So-Lightly Held (grin).  What convinced me?  Among other things, see this photo I took Tuesday (after both conventions).

Not a single TRUMP sign...

Not a single TRUMP sign…

Note what isn’t in the window – no TRUMP signs.  In a Michigan county that put the “jerk” in “knee-jerk” Republican.  Prime Trump country.  Plenty of White, no-college voters and a fading manufacturing economy.  If the Republican party here can’t get behind him…

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Why I Don’t Think Warren Would Take the VP Job…

Lot of speculation that Clinton might pick Elizabeth Warren for VP.  It doesn’t seem likely…

  • Warren’s dream job is head of the Senate Finance Committee.  A platform for her message and brand.  Hearing after hearing with her patented pointed questions.  All the dirty laundry…  Plus personal payback for all the nasty things they said about her.  Hmmm… maybe the smart money on Wall Street should be begging Hillary to make her VP to avoid that?  Instead they’ll probably pour money into the Senate races to try and prevent a Democratic takeover.  And risk going down swinging….
  • Warren doesn’t need Hillary’s spotlight.  She is already powerful and influential as an independent force.  Becoming VP would diminish her stature not increase it.  Note how she withheld her endorsement until AFTER Hillary won enough delegates.  That’s the act of an independent power broker.
  • The real fight now is for Democratic control of the Senate.  Hillary’s better off with Warren out there fighting for Senate control.  And Warren is more effective doing that as an independent.
  • Senate control argues against Hillary picking ANY sitting senator.
  • Warren doesn’t seem to particularly trust or like Hillary.  Although that could be said for @55.7% of the country if you believe the polls.  🙂
  • The first “gotcha” VP debate question would link Hillary’s now infamous Goldman Sachs speeches to Warren’s position on the ticket.  Warren doesn’t (and can’t) have a good answer to that one…

My guess is Hillary goes for a Latino.  Why? Latinos now are energized and pissed off by Trump.  Hillary will want to start digging a Democratic-leaning groove into that nascent voting habit.  And voting habits tend to stick for generations….

Latinos have been the jump ball of US politics for a while now – low voting rates but increasing population numbers.  Socially conservative, but friendly to government.  And deeply wary of present-day Republicanism (NASCAR fans,  “dog whistle” bigotry of anti-immigration talk, and the general bad taste of the “Southern Strategy”).

If that Democratic voting rhythm is established, Texas and Arizona go purple and then blue over the next few election cycles.  And losing Texas alone is a mathematical death-blow to Republican presidential hopes.

Unless the Republicans drastically renovate the party.  Lets hope they do.  Dysfunctional wacko-ism does no-one any good.

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Whither the House? A Legislative Golden Age? Possibly. Even Greater Wacko-ism? Definitely.

I just read a Bloomberg column by “conservative” writer Ramesh Ponnuru (AEI, National Review) all but awarding Democrats the Presidency AND the Senate?!?  “Republicans accept the conventional wisdom that Hillary Clinton is favored to win the presidency, and they know that her election would probably end their majority in the Senate. But in a year that has upended political expectations, they have clung to one comforting assumption: Their hold on the House is secure.”  He goes on to question the hold on the House.

I’ve been musing around the same, but when did this become “the conventional wisdom?”  It seems a bit premature to award the Senate this early.  Maybe this is best read as a gauge of the despair?  Rational conservatives finally acknowledging “their” party’s take-over by the NASCAR fan base.  I’m guessing a guy named Ramesh Ponnuru doesn’t feel so welcome in the thick of of a NASCAR crowd (or at a Trump rally)…

But he’s right.  The House is definitely the most interesting question out there now.  There are two scenarios.

  1. The Democrats win the House outright.  That seems unlikely.
  2. The Democrats remain in minority, but take a bite out of the Republican majority.  This seems likely and a LOT more interesting…  Oddly enough, it might also usher in productive era for American politics…

Why?  Democrats will ONLY pick off Republican moderates.  The wacko wing of the House comes from districts that will never flip.  That’s why their elected Representatives are wackos – QED.  So any Democratic gains will come in “swing” districts voting out less-than-totally-wacko Republicans.

The end result is (probably) a smaller Republican majority with a larger percentage share of wackos.  As we have all learned in the last few years, that wacko wing is allergic to the actual business of government.  Cue a nihilistic procession of government shutdowns, tilting at windmills (voting down Obamacare) and general grandstanding.  Anything to avoid the actual messy, compromise-laden (ew! ech!)  duties of governing a diverse country with its cross-currents of interests.

So why is a larger wacko wing a good thing?  Because the beleaguered, non-wacko rump of the Republican could start doing deals across the aisle vs dealing (and failing) within “their” own party.  That has arguably already happened.  Very little real governing gets done in the House without Democratic votes these days…  De facto coalition government with Paul Ryan as the pivot point…  

And why could that be a productive era for American politics?  Paul Ryan is a twerp, but he is inclined to actual governance.  He will do deals.  A legislative balance between a resurgently Liberal Senate and a Right-of-Center-But-Not-Wacko coalition in the House.

Whatever passes muster through both Paul Ryan’s and Elizabeth Warren’s meatgrinders is probably going to be finely ground,well seasoned, and reasonably tasty political sausage.  Appetizing to political centrists at least.  A fix to the corporate tax code?  Some obvious tweaks to Social Security?  Real infrastructure investment?  The possibilities seem endless after so many years of obstructionism…

Or the House wackos just take over the asylum.  Then the legislative engine simply grinds to a halt.  Almost today’s status quo, but increasingly damaging if it goes on.  Those roads and bridges will still keep on rotting away….

  • The Democrats could pick off so many Republican moderates that there is no rump wing left to do those deals….
  • The wacko wing could de-throne Ryan & Co in the leadership.  They will most certainly try.  But that could result in a House “Majority” leader elected with votes from the House Minority party.  That event would take today’s de facto coalition government out of the shadows.
  • Ryan’s gets “primaried” and his constituents vote him out a la Eric Cantor.  Also a very real risk….

All interesting, but perhaps overly hopeful.  What is certain that November will yield a MORE extreme, ideological, nihilistic, “Ultra” Republican House.  More wackos, fewer moderates…  The wackos will go deeper into an impotent, foam-flecked rearguard battle against an increasingly diverse, tolerant, and urbanized America.  A battle they are already losing.  NASCAR peaked years ago…

The wackos will also be “the” national face of the Republican party.  Compounding the damage Trump will do to the Party’s standing.  All bad news for thoughtful conservatives out there.  For they will truly lack a home.  They have my sympathy.  But there is no deliverance from a deal with the devil.  The bill for Nixon’s “Southern Strategy” has come due.

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I (Still) Think Stocks Go Higher… A Wall of Money vs a Wall Of Skepticism. The Money Wins…

The last few days of selling notwithstanding, I think the market is more likely to  “melt up.”  Past its prior highs and up to Lord knows where.

As that last phrase implies, I don’t think “valuation” per se is the main driver.  Or even a useful way to think about it.  Per prior pieces, its pretty hard to figure out a “fair” value for anything in a world of negative interest rates (getting paid to borrow).  The only certainty is that past analogues, patterns, and rules of thumb are useless.  They depend on a positive rates dynamic that doesn’t currently exist.

So we are left stumbling along in a foggy world where North has shifted  to someplace unknown on the compass rose.  That dead reckoning and inference are deeply discomforting.  But its smarter than seeking comfort from a map that is guaranteed to yield garbage coordinates.

So why do we go higher?  Because the money has to go someplace.

Fighting that wall of money is a wall of skepticism.  It is dressed up in a lot of reasonable sounding arguments about valuation and ya ya ya.  But much of that “analysis” is just recycling the past to avoid facing a discomforting future.  They are navigating off maps where North is still where it “should” be.  And/or shouting loudly for the gods (ie the Fed) to move North back to its normal place.  Anything to avoid facing the reality of uncharted waters.

I think the wall of money will win.  And Lord knows where we end up.  There is probably a very ugly reckoning ahead somewhere.  But only after the skeptics become enthusiasts…

Anyway.  Going camping in the Sierras this weekend.  At least the maps still orient to North out there…. 🙂

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Silly Season Starts, But Hillary Still Wins…

We are into silly season for the election.  We “could” be having a substantive national conversation about the Senate races.  But that’s a more-than-two-horse race and requires explanation.  Besides, when was the last time we actually had a “substantive national conversation?”  So its time for weird polls and wild theories.  The story of the moment? Hillary might actually lose!  Stay tuned!  Keep watching!  Please we need the ad dollars!

Hillary is still going to win.

Why?  Look at how today’s disaffected will line up come Nov. 6.

  • Disaffected Democrats will still show up.  Lefties shifting to the center.  They are energized, angry, and (rightfully) suspicious of Hillary’s bona fides. It is telling that the Koch brother prefer Hillary to Trump…  But they will still show up to vote for her.  They have a sense of civic engagement.  They fear Trump.  And Bernie and Elizabeth Warren will have camped out in those Senate swing states getting out the vote.  With the powerful message that a Democratic Senate is the best way to keep Hillary’s crony capitalist Davos buddies in line.  A powerful message because it is largely true….
  • Disaffected Republicans will stay home.   Centrists who’d rather lose than endorse the extreme.  Remember the Sarah Palin effect?  A LOT of Republicans just couldn’t bear that vote on their conscience.  The courageous, civic-minded ones voted for Obama.  The other 95% (grin) just found something else to do on election day…  Trump will have the same effect.  Suburban, college educated, non-partisan Republicans (especially women) will abdicate and let their districts tip Democratic.  The Republican establishment will be begging them to turn out in those same Senate swing states.  But who’s the Bernie or Liz of the Right?  Who rallies the troops….  Paul Ryan?  Hah!  He can’t even rally the House….

Actually, the Republican elite’s pivot to a defensive stand for the Senate validates the above in three ways.

  1. The smart money has already given up on the Presidency.
  2. Senate control is the real key to control of the national agenda…
  3. The elites preference for Hillary + a Republican Senate validates the Bernie supporters’ mistrust of her.  And the argument for a Senate overthrow.

Point 3 is a subtle one, but I’d expect it to be made over and over again by Bernie and Elizabeth.  Make sure we’re there to keep her and her cronies’ feet to the fire.  Sander’s base is educated and activated enough to grok that.

The opposite argument – vote Republican to save the crony capitalist oligarchies! – doesn’t have quite the same ring to it.  Vote to keep those lefties out! would work better.  But it risks energizing/validating the left’s turnout efforts.  And vote for gridlock! probably doesn’t play well after the last 8 years of increasingly churlish obstructionism.

As a final factor, there are Trump’s lumpenproletariat supporters.¹  One thing that probably does come out of the next few months’ news cycle is something truly despicable , ignorant, and viral that slumps “thinking Republican’s” even deeper into despair.  Although arguably Trump’s been delivering that for some months now….  But it can always get worse.

So take a break for the next few months.  Watch the Olympics!  Amateur sports!  Clean, noble, un-corrupted by elites and rivers of hidden cash…  Hmmm.  Scratch that…

¹ “Lumpenproletariat is a term that was originally coined by Karl Marx to describe the layer of the working class that is unlikely ever to achieve class consciousness and is therefore lost to socially useful production, of no use to the revolutionary struggle, and perhaps even an impediment to the realization of a classless society.


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Why the Market Might Go Up? Even with Vegans Starving in a Butcher Shop.

The operative term here is “MIGHT.”  This is about exploring a scenario, not making a prediction.  The S&P500 has been wandering around between 2000 and 2100 for the last year.  With notable breakdowns in August 2015 (ChinaMacroOil blurk!!!) and January/February 2016 (“The Davos crowd talkin themselves into a tizzy until reality (via 4Q earnings) re-asserted itself!”  AIEEEE!!!!).  Now we’re back to wallowing around under 2,100.   Where to from here?

The consensus remains resolutely glum.  It is still a mostly unloved bull market – 7 years in.  That alone is a good reason to ask whether the next move is actually up.  Some reasons.

  • The “pain trade” is UP.   People seem to be positioned somewhere between “cautious” and “bearish.”  So a sharp shock move upwards is most likely to maximize collective investor pain. And the pain trade has been the most reliable market mover for the last few years.  Why?  A stew of Davossian group-think, too many algorithmic robo-traders, and probably a few too many right-leaning “investors” confusing crackpot ideology with macro-economic insight (especially around monetary policy)…
  • Negative interest rates outside the US = a rising swell of money headed to our shores.  Negative rates mean lenders are PAYING borrowers to take their money.  If that sounds insane it should.  Today’s market environment is (literally) unprecedented.  Negative interest rates were a hypothetical, academic thought exercise not the stated policy of TWO major central banks (Japan and the ECB).  No-one quite knows how to think about a world where you get paid to borrow.  Certainly I don’t.  But my guess is people will eventually
    1. wrap their heads around it,
    2. get clever,
    3. find a way to pump a ridiculous amount of money into assets that still pay a positive interest rate.   Like the S&P500 with a 2.12% cash dividend yield.  Or Microsoft at 2.79%.  Because if Microsoft is cutting its dividend in the next 5-10 years the world economy has broken down to the point that you’re better off investing in canned food and shotguns…
  • Negative rates negate past historical patterns.  I see a lot of bloviating about “unprecedented” valuation levels.  Or “x years since a recession”  This is inevitably accompanied by charts referencing the past 5, 10, 15, or even 100 years of data.  All of which are totally useless.  We live in unprecedented times.  Because negative interest rates are also “unprecedented.”  As is a whole lot else going on right now.   The one thing we know about the past is that it is useless as a guide to the future.  Because the present is totally FUBAR.
  • Dry Brush Piled Up.  Normal wildfires should happen on a regular, cyclical basis.  But sometimes they don’t happen.  So the dry brush piles up.  Until you get a massive, uncontrollable conflagration.  Central banks worldwide have piled up a whole lot of dry brush (see “negative rates”).  But monetary velocity remains sluggish.  None of that “money printing” is actually finding its way into the economy.  Maybe we’ll have to take the next step to “helicopter money.”    This is getting surprisingly serious consideration (because anything is better than – gasp!- fiscal stimulus).  It fits the fire metaphor well, with a helicopter dropping big loads of gasoline instead of fire-suppressant….  But maybe those animal forces struggle to life all on their own and a spark catches somewhere somehow.  It’d be a big burn if it does….
  • Fiscal Stimulus 1:  Hah!  Just joking.  The Davossians ideological blinders keep the idea of serious government spending well off the table, beyond the pale, and unmentionable in polite company.  Because the idea of getting paid to borrow and invest in productive repair/renewal of long-lived assets like roads, bridges, rail, telecoms, and sewers is somehow wrong.  We should have to sweat hard and suffer for these things because…  Ummm… Well.  Because I said so!  Because I am afraid and uncertain!  Because I can never admit a government role for anything!  Go away I’m not listening Nyah Nyah Nyah!  Its like a bunch of vegans starving to death in a butcher shop (with a grill handy nearby).  Not tragic.  Just pathetic.
  • Fiscal Stimulus 2:  It is just possible that the tide turns this year.  Germany could come to its senses and start spending some money in response to another European crisis (Brexit?).    The US political calculus might shift enough this election.  It won’t come from the White House (Hillary et al pretty much wrote the Davossian credo).  But it could come from a newly Democratic Senate.  Something faux-free-market-y enough to get a “coalition”vote in the House.  But maybe something.  Which is better than nothing.
  • Unloved Bull Market:  Anyone who’s been an adult for the last 20 years knows what a bubble feels like.    Admittedly, this rules out a lot of millenial hedge fund analysts, but I digress.  There is absolutely nothing euphoric about the present day.  So maybe we have a bear market without a euphoria?  Maybe…. Or maybe we have euphoria before the next big crash.  This is one place where past historical patterns might have predictive value…. I’ll wait until I get a stock tip from my taxi Uber driver before I’ll call euphoria.

The biggest problem with the optimistic scenario is the elite’s ongoing crisis of confidence.  The January/February “Davos downturn” was a big wake-up call to me on this score.  I went to two Institutional Investor conferences those months.  The density, urgency, and self-referential certainty of that group-think really stunned me.  And I had thought I was pretty cynical going in.  I still made a decent chunk of money betting against it (grin), but that bet took more gumption than usual.  Fast forward to now.  The “elites” are facing the awkward reality that Hillary is their new, best defense against a howling mob they under-fed for too long.  The great swing leftward is starting to gather momentum and it ain’t feeling all that good.

A final thought to the inevitable “valuation” counter-arguments.

  1. On a mathematical basis, negative-to-low rates break any “past history” referential model.  I’d be VERY interested in any “valuation” argument referencing the actual present and future.  But any model based on past history is worse than useless as a guide.  Holding a map you KNOW is bad, its better to just use your own judgement…
  2. Since when has valuation ever mattered?  (over the short run).  This is the first lesson of successful tech investing.  The market is a huge, messy, volatile thing that goes all over the place.  You need to keep an eye on the compass, but the monster waves swinging the ship around are a lot more important in the short term.  Note that the most of the arguments above aren’t based on valuation.  Because that’s probably not what drives the next big move.  That bothers a lot of people.  But they probably have very tidy sock drawers….

To repeat, this is not (yet) a prediction.  I am positioned for upside more than down in my own portfolio, but I’ve still got some shorts in there…  This is also not about whether the market stays up on some high-holy valuation basis.  I am just trying to figure out the next lurch of the ship.

I will admit the upside move is also a lot more interesting to consider.  The downside scenario is just so depressing.  The monetary pedal is down to the metal (negative rates).  The government spending tap is so firmly shut (by willful, fact-denying, purblind, ideological stupidity).  It’d probably take another crisis on par with 2008 (or worse) to get the “fiscal” stimulus tap really opened up.  And I really don’t want to go back there.  A blind spot I freely concede.  Lets hope for the pain trade instead…

S&P 500 from BigCharts


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Hard Costs Hardly Understood. Financialization’s Costs Pile Up on the Soft Side. Until They Spill Over.

Goldman Sach’s unofficial motto used to be “Long-Term Greedy.”  There’s a lot to commend that as a business philosophy.  It implies some immediate restraint in service of longer-term gains.  But like most artful things, that nuance got lost as “financialization” crept into the US economy.  It got shortened to “Greedy.”

Financialization describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible or intangible, future or present promises, etc.) into a financial instrument. 

Concerns about financialization abound, but the damage all seems a little vague and hard to quantify.  Which allows the (financialized) commentator crowd to dismiss the concerns as a bunch of liberal hand-wringing.

The problem?  The damage is done in the “soft side” of the business equation, which the financialists ignore until it bites them in the ass.  The guys making the mess (and it is mostly guys) then blame some “market” force instead of their own clumsiness/ignorance/gracelessness/general bro-ish-ness.  Lets mine the Wall Street Journal’s Monday May 2 Edition for some examples.

  • Sports Authority files for liquidation after failing to even go bankrupt.  This follows on from another bankruptcy filing at Sports Chalet.  Reporting talks about how tough the sports equipment retail category is, and because Amazon and e-commerce (waving of hands here).  No-one thinks to mention that both were owned by private equity shops that probably made them spectacularly dull, un-informative, un-delightful places to shop.  Because Financialization means limited SKU’s, ignorant store staff, and (eventually) run-down stores and stock-outs.  Shopping becomes drudgery.  This cancer of the soft tissues runs across most of the retail big box, “category killer” stores.  Just visit a Bed Bath & Beyond, Home Depot, Best Buy and ask “is this fun?”  That’s as much why people are going to Amazon.
  • Valeant Pharma admits they were “too aggressive” about drug price increases.  This is at a Senate hearing after a spectacular stock crash, the CEO’s firing, and a general scandal.  Maybe Valeant would still be making piles of money if they had only doubled the price of an acquired cardiac drug instead of tripling it?  And maybe even had the sense to raise the prices over a year instead of a one-off the day the deal closed?  But the long term cost of those “soft” considerations got lost in a room full of financialization…  Lets not even get into Martin Shkreli‘s awesome missing the nuance of “long term greedy.”
  • CNN’s revenues up BIG after they boosted ad rates by up to 40x following the first Republican debate in August 2015.  Whooeee we got a live one here lets make some money!!!  And so the Republican race morphed into a reality TV show.  A (financialized) TV executive’s dream.  A newsperson’s nightmare. The immediate cost is obvious (in retrospect);  A reality TV veteran about to clinch the Republican nomination.  The long term costs range from a crack-up of the Republican party to President Trump starting a nuclear war with someone (maybe France’s Force de Frappe lobbed in with “Freedom Fries for you American Jerks” scrawled on the first missile?).  But hey!  CNN’ll make big bucks on that road to perdition.

So how do we get out of this hole?  It won’t be via self-help.  The “bro” culture of financialization centers on NOT getting the point of all of the above.  Consider that aggressively, almost defensively ignorant guy with the backwards ball cap dragging down conversation to some lowest common denominator (usually sports – sigh…).  He will do anything to stomp out even the idea of nuance.  And, per the WSJ, there is always some convenient “free markety-y-dumb-it-down” explanation that deflects consideration of those long-term (obvious-but nuanced) costs of being a limited, low-horizon, un-interesting jerk.  Or running the business equivalent.  Especially if enough of your options vest before the sh*t piling up under the bed starts to really stink…

PS:  I really don’t think France would nuke us, but it was just a great excuse to use the wonderful term “Force de Frappe.”  Hard to know if its a threat or a dessert.  Really a great phrase either way.

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