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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Aren’t “Free” Markets Competitive Markets? Might Democrats Seize That Rhetorical High Ground…?

Competition!?! Egads! That’s totally against free market principles!!  [Whiskey spray-sputter from the Monopoly plutocrat in the top hat….]

What does a “free market” really mean?  Lots of competition?  Or lots of consolidation? The freedom to compete?  Or the freedom to gouge?   Its an interesting but often elided question.  Why?   The Republicans have seized the term and avoided that debate. Why? Gouging is good (as even Gordon “greed-is-good” Gekko mightn’t have courage to say).

Obama is muscling into the Republican’s “free market” rhetorical space.  It might amount to nothing, but watch to see if Hillary (and Elizabeth Warren)  follow his lead. From the NY Times – specifically talking about opening the Cable TV set-top-box market but…

[Obama] will sign an executive order calling on every federal agency to send him proposals within 60 days for steps they can take to promote competition in a range of industries and better protect consumers.

Politically, this points to a “pro market, BUT anti-capitalist” message that could resonate for the Democrats.  “We’re for free markets!  For healthy competition!  Low prices!  We’re just against the fat cats divvying up cozy, collusive cartels!  Raising your prices! limiting your choices!

For your average American consumer and (especially) small business man, that is going to be pretty darn appealing.  And it could start to peel off a decent segment of voters.  It also sounds like a particularly useful bit of messaging for Hillary in the general election.  Obama is putting the ball in the air.  Watch to see if she catches it…

In terms of tactics, the NY times article goes on to note those proposals were actually requested a while ago.  Meaning.

  • A raft of “pro-competition” proposals to hit the news right around the run-up to the general election.  Probably controversial from a plutocratic perspective, but appealing from a populist, consumer perspective.
  • If one of them grasps the public imagination (especially FOX News’ indignant ire), Hillary takes that ball and runs with it…
  • Even if nothing goes viral, Obama craftily shifts the rhetorical goalposts for his successor.  Cementing/extending/defining his legacy.

Is Oligopoly a Problem?
As usual, The Onion’s nails it far better than The Economist. “drugstore giant Walgreens confirmed Wednesday it is proud of its origins as a small business that in today’s economy would absolutely never have been able to get off the ground. “Here at Walgreens, we still live by the same commitment to customer service preached by Charles Walgreen when he opened his first store back in 1901,” said company president Alex Gourlay, referring to the miniscule, independent pharmacy that, if opened in the modern era, would quickly be crushed by the present-day Walgreens and other retail chains whose outsized bargaining power allows them to squeeze out would-be competitors at will.

But you know worries about oligopoly in the US economy are mainstream when right-leaning The Economist is writing “Profits have risen in most rich countries over the past ten years but the increase has been biggest for American firms. Coupled with an increasing concentration of ownership, this means the fruits of economic growth are being hoarded.

Backing that up is work by actual Economists.  There’s been increasing murmurs in the econ blogs about how certain otherwise perplexing US data can be best explained by a model that incorporates excessive industry consolidation etc etc.  NB these are “real” economic researchers not political shills.

You can gut check this just by looking around you.  And hearing the howls of aspiring industry concentrators singed by a newly energized DoJ Anti-Trust department.  My own pet peeve is the “distribution” oligopolies in areas like housewares.  You can have any brand of can opener you’d like, as long as its an (overpriced) model from GOOD GRIPS or a nasty piece of crap…. 

On Cable Set Tops:
Cable companies are screaming bloody murder about the FCC’s sudden enthusiasm for a competitive set-top box market.  Unfortunately, the brought this on themselves.

  • Cable used to argue it was too complex to provide set-top data.  The last effort (Cable CArd) was kneecapped by the cable operators complicating the hell out of things precisely to guarantee a still-born market.  But left that battle with a “on paper” commitment to an open set-top market.
  •  They didn’t give that enough thought when designing their own IoS and Android phone apps.  These work just fine.  The FCC is just asking them to provide a similar “raw” data feed to other, 3rd party apps.  Since its obviously not a technical problem…. Oooops #1!
  • They also brought this on themselves by having lousy decorating sense.  The set-top is a hated object among those who actually care what their living room looks like.  Who are not often male hardware engineers…. Oooops #2….

I don’t think Comcast minds this all too much.  They are getting out of the set top business (in favor of home-wide gateways)  anyway.  It is more of a challenge for Charter and TWC.
Note that their deal hasn’t been formally approved yet.  Which is a nice point of leverage for the FCC’s set-top agenda.  Ooooops #3.

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Why Trump Goes 3rd Party. And Might Prefer It. Noble Failure vs Crushing Defeat.

If Trump doesn’t get the Republican nomination, I think he will go 3rd party.  Why?  It solves best for his ego (which is his sole decision function).

Remember, he will lose either way.  The question is which path solves for a more graceful exit (if “graceful” is a word that can be used in a Trumpian context).

Trump will do anything to avoid humiliation.  This is why he might actually prefer a 3rd party route.  He goes out in a blaze of glory.  We fought the good fight.  I did my best against a stacked deck.  Etc. Etc.  If he’s the actual Republican nominee, he’s going to fail spectacularly and embarrassingly.  An epic wave of anti-Trump voters coming out.  And the mass of suburban lumpen-Republicans staying home – that affluent, well-educated, enclaved, un-attached crowd whose political convictions start (and stop) at “I just don’t want to pay taxes. Especially to pay for [pause, quick look around] those people.  Why don’t they just get a job!“*

Trump also loves to be a victim.  If he loses at a contested convention, he can plausibly claim he was “robbed.”  That becomes the justification for a 3rd party run.  Sampson tearing down the temple.

Trump loves the spotlight.  There’s no way he’s going to dutifully line up behind the party nominee.  He’d prefer to be front and center.  Driving the debate.  And participating in the actual debates come to think of it.  Aieeee!  Buy the TV networks!  Ratings will be sky high!

The first point is the key point.  If Trump gets the nomination, he will go down in history as a spectacular failure.  Branded a loser, he also loses any political influence in future years.  Branded a loser” is not a desired Trumpian outcome.  So maybe he plays to lose from here?  Probably not (he is a delusional megalomaniac after all).  But if he loses at the convention, I don’t think he’s going away….

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Warren is the Big Gun Yet to Fire. The Senate is the Prize. Liz/Bernie Double Bill for a More Congenial Workplace…?

The Presidential election is entertaining, but not that interesting.  Hillary will win absent force majeure.   The more interesting contest is for the Senate.  Especially as the math works so whoever wins control in this election likely holds the Senate for a long time to come….

I think the Senate likely flips Democratic and stays that way.  Context:  Republicans are defending 7 “toss up” seats in swing-states – senators elected in the 2010 “shellacking” wave election.  Democrats need to win 5 of them to flip the Senate over.  As always, turnout will decide the Senate races – with women and non-white people being the main swing factors.  Low Republican turnout seems like a given (see below).  On the Democratic side, we could be lining up huge, “wave” scale election turnout.

What drives Democratic wins/turnout (besides fear of Trump)?  Bernie and Elizabeth on the road.  Fighting for those Senate seats.  And (obliquely) for Hillary.  Imagine if the Beatles and Rolling Stones had toured together in @1966.  A Woodstock for the great swing leftward….

Consider all 3 players. Everyone wins in a campaign focused on a Senate takeover.  Bernie doesn’t have to sell out.  Elizabeth has a powerful, personal, actionable message (“Put me in charge of the Financial Services committee and watch those fat-cat’s fur fly!“).  Hillary gets the turnout she needs – especially (rightfully) suspicious left-leaning voters.

  • Bernie Sanders wants a revolution, but he will will settle for a Democratic Senate…  He’s a practical man.  He’d like a more congenial workplace.  And a platform to keep pushing the dialogue leftward.  Most important, Bernie can go out campaigning for a more liberal Senate without shilling for Hillary per se.   He gets a platform for “his” revolution and keeps his young supporters engaged without selling out.  She gets turnout.  Everyone happy.
  • Elizabeth Warren also wants a Democratic Senate.  It means she gets to schedule her own hearings instead of sniping at whoever the Republicans bring into her sights.  Warren is the big artillery in this campaign – yet un-fired but potentially decisive.  She is a great speaker with huge presence.  If she really gets on a roll, I’d guess Bernie ends up her opening act.  But she and Bernie complement each other well.  She speaks to a deep strain of midwestern, anti-bank sentiment going back to William Jennings Bryan’s “Cross of Gold” campaign.  And she will bring in middle aged women in droves.  And she’s a great speaker.
  • Hillary just wants to win.  She’s a bit a tragic figure.  Like Gollum – its unclear whether there’s any humanity left under that thirst for power (more on that metaphor later).  But she will do what needs doing.  And she needs youth and middle aged women to turn out.   Trump et al have already delivered the Latinos and most other minorities (minus the wacko-right Cubans who the Republicans keep confusing for Latinos…).  She’s already OK with African Americans.  Moreover, she’d prefer a Democratic Senate even if it drags her further left than she’d like (remember that policy wise she’s basically a 1980’s Republican moderate).

Of course, those interests fracture is after the election.

  • I’d expect Hillary to spend as much time fighting a newly activist lefty Senate as she does a still-wacko House.
  • But we would also see more of the already-emerging quasi-parliamentary-coalition-style governance dynamic.  Bills pass the still-Republican House with a mix of Republican and Democratic votes, with the Senate pulling them leftward and Hillary acting as a balance.  It all sounds downright European.  Insult to injury for the Republican wacko wing.  Who go even more wacko (and more marginalized).
  • The Supreme Court swings decisively left.  The Republicans (or McConnel) are trying to use Scalia’s seat to hang on to the Senate.  But Bernie and Liz will be using it to take over.  And Republican obstructionism today gives them cover to ram through a couple of very Left, very young Justices…
  • 8 years later, the “centrist” Presidential candidate is probably today’s “socialist.”  Maybe Obama runs again as a Republican? (grin)

The most interesting player in all this is Warren.  Mostly because she has been such a non-presence so far.  Holding her fire.  I’d guess she is waiting for the nomination to wrap up so she can fire with full force.  She gets to support Hillary (1st woman president…) and Bernie (liberal revolution and a Democratic Senate).  At the end, she gets endless Financial Services committee hearings digging into dark corners of Wall Street.  It will be painful, endless, and deeply personal…

Low Republican Turnout:  This is already pretty much guaranteed. but I’ve written it up in the interest of fairness.

  • If Trump is the nominee, anyone outside his boorish base is going to stay home or cast a protest vote.  And if Trump isn’t the nominee, TV ads featuring his greatest hits will still have much the same effect.
  • Slimy scary Ted Cruz?  See this great Onion article “Brutal Anti-Cruz Attack Ad Just 30 Seconds Of Candidate’s Photo Displayed Without Any Text, Voiceover, Music.”  That’s a good thing, because Cruz scares me more than Trump.  If we are doing 1930’s comparisons, Trump is more of a Mussolini and Cruz is more of a Hitler.  One was a bad man, but the other was evil incarnate.  Thankfully, Cruz is probably evil/ugly/scary/slimy enough to fail in the stretch.  Although I do wonder (and fear) where he goes from here…
  • Paul Ryan or some other mangled product of a brokered convention?  That’s be a thing to behold.  Zero legitimacy.  Angry Trump supporters.  Easily painted a plutocratic puppet plaything?  Also notice how rapidly bright-boy VP-candidate Paul Ryan was faded to the background by the Romney team?  My guess is he turned out to be a total dud on the campaign trail.
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Distilled Roadkill, Monetary Velocity, and a (Coming) Bonfire of the Vanities…

The long-promised exploration of monetary velocity!  Starting with a quick shot of “Animal Spirits.”  And no, that does not mean some bearded hipster’s liquor distilled from dead squirrels and other roadkill.  But we desperately need a swig of the stuff…

Animal Spirits” have been THE key missing factor in the economy (and stock market outlook).  The term is often narrowly confined to investor sentiment.  That in itself points to how much investors tend to (wrongly) conflate “the economy” with “the market.”  The original coinage was by John Maynard Keynes.

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.[1]”

That “spontaneous urge to action” is what leads a consumer to take the family out for dinner or a CEO to build that new plant.  And you really don’t need a chart to tell you we are still suffering from global angst…  But a chart does offer a way to track the (hoped for) return of those happy feelings.

Which brings us to the woeful tale told by monetary velocity….Chart: Monetary Velocity 

Monetary velocity is my (imperfect but informational) tracker for “animal spirits.”  Velocity is “the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.”  If velocity is high, money is changing hands quickly and the economy “feels” like it is humming along.  A lot of that activity may be non-productive “taking in each other’s washing” but the pace is a powerful social cue and economic driver.

If velocity is really high?  Look at 1999 and 2007 in that chart and sniff a remembered whiff of the electricity (or crack cocaine/meth) in the air back then.

And if velocity it low?  Per the Fed “A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.

The Fed has been printing money like mad since 2008.  The chart above tells you its just not circulating.  It is possible the world has changed irrevocably (the “secular stagnation” thesis).  It is much more likely that we will eventually revert to our free-spending ways.  Velocity starts to trend back up.  With an eventual mania to follow.

Think of low velocity as potential energy that could/will convert to kinetic energy.  Kinetic energy that feeds animal spirits.  That drive the real economy and (probably) the stock market.  “Dry brush piling up” in the absence of a spark to light that metaphorical forest fire.  The assumption is that a spark comes along eventually – hopefully lower oil prices, rising wages, and higher employment.  Pumping more of that money into parts of the economy where it is likely to circulate faster.

  • Low velocity explains why that M2 supply (all that Fed easing) isn’t translating into more economic activity.  They are printing money like mad, but it is circulating a whole lot slower than in the past.
  • Why the slowdown?  A weak multiplier effect from the sectors where the Fed is pumping that money (multiplier = how much a dollar of spending is “multiplied” by follow-on dollars of economic activity).  Instead of re-spending that money back into circulation, it has just pooled there.  Deeper and more stagnant over time.
  • A lot of that money came to rest in the hands of the top 10% (via wealth effect), banks, and commodity producing countries.   It ended up going to “assets” not “activity.”  They pooled it in squirreled-away “savings-like” activity – bonds, bank balance sheet repair, high end Real Estate, offshore slush funds (see “high end real estate”), and sovereign wealth funds.
  • The historically lousy multiplier effect in those sectors only got worse as the money pooled deeper and stagnated further.  Their response was to squirrel away more money, further slowing velocity.  Cue today’s negative long-term interest rates.  Rates aren’t negative because of central bank “manipulation.”  At least not long-term rates (which are set by markets not central banks).  It is because the stagnation has gotten so bad and deep that people are paying to store money.  A bit like the cost of oil storage keeps going up as oil pumping goes deeper into glut territory.
  • Those stagnant pools represent tremendous potential energy.  Dam’s waiting to burst.  Dry brush piling up waiting for a spark.  Oil stores waiting to hit the market.  (Insert your favorite metaphor here).  Take another look at the chart above.  Velocity is clearly low.  Getting back to 2000’s level of velocity implies a 50% increase.  Getting back to peak is almost a double.  Even 1980’s levels imply a hefty jump.  That’s a nice heady feeling we just don’t have today.  Animal spirits.

My hope (and it is just a hope) is that a shift of that money flow to the pockets of broader-based, lower 90% developed world consumers will lead to faster circulation.  Animal spirits re-awaken.  Velocity turns upward.  Things start to hum again.  Ordinary consumers have a MUCH higher multiplier (higher propensity to spend on an incremental “new” dollar).  And they spend it on higher-multiplier stuff than fancy real estate, art, and tasting menus.

How does that happen?  Fiscal stimulus?  Government borrowing (at negative rates = free money) to fix our rotting infrastructure?  I’d say “insert guffaws here” but it really isn’t funny.  Even our central banker’s can’t summon up the courage to state the obvious need for fiscal stimulus.

But maybe, just maybe we can claw our way there via lower oil prices.  Higher minimum wages.  Higher employment.  Slower and with (much) more lasting damage done than if we’d followed the smart playbook of fiscal stimulus.

And admittedly consumers haven’t being doing much obvious spending so far.  But every week that gas stays cheap is another week the money piles up in the pockets of someone who might actually (gasp) spend it on something useful.  I am hoping last week’s GDP report (stronger consumer spending offsetting weakness elsewhere) is the start of a velocity upswing.   All big moves start small.

If animal spirits do start to revive, that catalyst will convert huge stores of potential energy into kinetic energy.  The stagnant pools drain in a flood.  The dry brush burns.  And the animal spirits course faster and faster.  Velocity returns!

It could get out of hand and drive silly-stupid stock market valuations until it all comes crashing down.  It probably will.  Today’s mis-match between paper wealth and productive potential seems too great.  You need a bubble (and subsequent bust) to destroy paper wealth on the appropriate scale.   We probably end up with a bonfire of the vanities.   So sell that art collection….

Of course, a lot of paid shills for the wealthy “serious observers” argue we are in that bubble now.  My sense is they are confusing that squirreling-away-of-money-activity with the forgotten art of actual-investment-in-productive-assets.  Regardless, low/negative long-term rates and that velocity chart say otherwise.  They’d both be riding high and happy if we were in bubble territory.   And they aren’t.

Admittedly, the stock market might or might not follow along with rising velocity.  It may already be partially discounting in a positive scenario.  But my general rule is that market hasn’t topped out until friends and family stop asking you for stock tips and start giving you stock tips.  That hasn’t happened to me so far, so….


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Obama Has Delivered That “Change” He Promised. Just Look Ahead. Mission Accomplished.

Obama probably isn’t looking back at the last 8 years with much joy.  But he can look forward with a big smile and a happy heart.   He has delivered the change he promised.  And all he had to really “do” was simply exist.  And persevere.  His enemies did the rest.

Obama’s presidency will rank with Reagan’s – the start of an Era.  The Republican Party is imploding.  The political landscape is re-aligning.  The center has NOT held.  It is shifting left… Reagan marked a 30 year shift rightward.  Obama will mark a 30 year shift leftward…

I go to thinking about this while reading a WSJ column blaming Obama for “the tone of today’s politics.”  This is apparently a meme going around in the land-of-the-blind.  It is, of course, a laughable effort to shift blame.  Your classic 6 year old’s deflecting responsibility after acting out.  “But he made me hit him!”  But a grain of truth in there too.

Obama addled the Republican Party into implosion and ruin.  A fairly moderate, cerebral, compromise minded black man in the White House was simply too much to bear.  The Republican Party vomited out a torrent of purblind, vitriolic obstructionism in response.  They are drowning in it now.  

The Republican explicit, stated strategy was to de-legitimize Obama.  The Kenyan, Muslim, Socialist would win no victories.  Governing be damned.  That has boomeranged badly.  The Republicans didn’t just de-legitimize Obama.  They de-legitimized the very idea of rational, responsible government (at least with their base).   They de-legitimized their own governing class…  

That is the implosion we are watching today.  With horror, glee, or a bit of both – depending on where you stand.  And the Republican Establishment is (sort’ve rightly) blaming Obama for deranging them into it.  The wails of the damned – regretting their sins, but not (yet) repenting them.

Taking down a whole party.  Through jiu-jitsu.  That is is a pretty spectacular achievement for Obama.  Albeit painful and frustrating.  Especially as the next President (Hillary) will rack up most of the policy benefits (and the Supreme Court nominations).  But it will still be Obama’s epoch…

PS:  Still working on that riveting Monetary Velocity post.  Its so hot I can’t bear to touch it!

PSS:  Regarding “The Republican Establishment is (sort’ve rightly) blaming Obama for deranging them into self-immolation.”  Lets take these one by one – A fairly moderate, cerebral, compromise minded black man in the White House was simply too much to bear….

  1. Moderate.  Policy-wise, Obama is basically a early 90’s Republican.  Outside of skin-tone, he would have blended just fine into George Bush the 1st’s cabinet.  Heck, his healthcare plan is a straight Republican rip-off.  But the Overton Window has shifted so far right that those same policies are now labeled “socialist.”  The Republicans found themselves with no room to run further right.
  2. Cerebral.  Obama typifies a certain type of arugula-eating, urban-dwelling, knowledge worker.  Demographically, this is where America is going (or already is).  But you don’t want to go there if your personal American archetype is still stuck in the Marlboro Man era.  Cue the Budweiser commercial (and note that Bud sales are slipping while Craft beer is taking off).
  3. Compromise-minded:  Its hard to get past the vitriol, but a lot of Obama’s policy efforts really were actually a reach across the aisle.  Obamacare was (literally) a Republican-originated plan.  More interesting (and symbolic) was his (failed) corporate overseas tax reform proposal.  The (political) problem was that it WAS something a reasonable Republican could have supported.  But it would have given Obama legitimacy.  And the Republicans could not, would not legitimize this Presidency.  Obama could have arguably sent in Romney’s policy papers and still been denied.
  4. Black Man:  As much as the Republican Establishment can’t/won’t face it, this small matter of skin tone is/was something many in their base simply couldn’t/can’t bear.  And it’s hard not to see that as partial cause of their own implacable effort to de-legitimize him.  Remember that North Carolina Congressman’s shout of “You Lie” when Obama addressed Congress in 2009?  That wasn’t about a policy disagreement… That ugliness is also a big reason more thoughtful people are now edging away from the Republican Party…  Enough said on this point by me – others have unpacked it better than I could.
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Are We All On KAL 801 – About to (Very Politely) Hit a Mountain…?

The world’s central bankers are scaring the crap out of me.  Why?  They are being terribly terribly polite in a situation that calls for a little shouting.  Every indicator on the global cockpit is flashing “fiscal stimulus.”  It is right next to the one flashing “FREE MONEY – why the f**k aren’t you spending it?”  But the best the bankers can do is a little throat clearing nod in that direction…?!?

Monetary policy has obviously hit its limits (see negative interest rates, bond buying, etc. etc.) But fiscal policy (government spending) is stuck somewhere between “contractionary” and neutral.  Like a plane where one pilot is pulling the stick back while the other pushes it forward (that actually happened in a recent crash BTW).   Which brings us to Korean plane crashes….

There’s a useful anecdotal vein of “plane crashes because the co-pilot is too polite to tell the captain he’s f**ing up and/or the captain is too macho to admit the mistake.

  • The most infamous (via Malcom Gladwell) is KAL flight 801 flying into a mountain in Guam.  The captain thought he was on course.  The co-pilot and engineer know he isn’t.  Coming from a hierachical, polite culture, they couldn’t summon up anything better than polite hints; “ummm, well, maybe we might consider the idea of a mountain.  One that it wouldn’t be much fun to fly into?  No offence sir.  Just a passing thought.” Then they all died.  But they DID avoid acrimony.  No shouting in the cockpit!  Harmony preserved to the end!
  • The other classic case is a Columbian airlines flight where the crew were too macho to admit they needed help.  Instead, they ran out of fuel.  Then they all died.  But at least they didn’t have to admit a mistake!

Now consider this recent comment by the Fed’s “grey eminence” Stanley Fischer.  Is he a bit too worried about acrimony in the cockpit?  My emphasis added.

There was once a great deal of work on the optimal monetary-fiscal policy mix. The topic was interesting and the analysis persuasive. Nonetheless the subject seems to be disappearing from the public dialogue; perhaps in ascendance is the notion [IE – totally ideological]  that–except in extremis, as in 2009–activist fiscal policy should not be used at all. Certainly, it is easier for a central bank to change its policies than for a Treasury or Finance Ministry to do so, but it remains a pity that the fiscal lever seems to have been disabled.

“It remains a pity?!?”  “Notion”  WTF?  “Ah yes Mr. Scott, it remains a pity you didn’t pack more food, take sled dogs, teach us to ski, and otherwise listen to reasonable advice instead of your “notions.”  I suppose it just remains for us all just freeze to death like gentlemen.  Oh dear…” How about “It is pathetic and cowardly that Congress can’t face reality and authorize a stimulus program!  Replace some of that rotting infrastructure!  That huge backlog we’ll have to eventually borrow to replace anyway.  Why aren’t we doing it while we can borrow for free!  Are you all numbskulls!  Is it just because you can’t bear to give Obama a victory?  Or give up this unfounded “notion” that government might have a useful role during a crisis?  Is that worth penury?  This isn’t a game you fools.”  

How about the ECB’s Constanciao yesterday?  OK he’s not French, but you really need to insert a little gallic shrug at the end

To normalise inflation in the euro area we urgently need higher growth that can reduce negative output and unemployment gaps, using all really available policies. If not monetary policy, then what?”  [gallic shrug]  

That’s the best he can do?  How about “Hey Merkel, can you quit the Protestant morality play, pull your head out of your ass, and help steer us away from a really ugly crack-up?”  Is he worried he might offend her?

OR Draghi himself.

Instead, Draghi sounded resigned when asked about euro-area fiscal policy. That domain spans countries including Spain, France and Italy that are close to or beyond their legal deficit limits, and nations that can afford to spend more — read Germany — that have promised voters they won’t do so.  “The measured driver of the economy and the recovery basically remains our monetary policy,” he said.

Huh!?!  What does “measured driver” even mean?  How about “Well, we’re doing the best we can but what we really need is for the Germans to start spending some of that negative interest money we keep trying to shovel their way.  They need to give up hoping to export their way out of the problem.  Its their banks on the hook anyway, so why don’t they face facts and spend a little. 

The need for stimulus is no longer some fringe, lefty position.  It is consensus.  Even right-wing-y Wall Street economist types are gently trying to make oh-so-polite noises around how it might not be such a bad idea to, err…, spend on infrastructure and stuff.

The problem is that the Captain isn’t listening.  And no-one is willing to shout it.  To force the debate.  They don’t want to face the wrath of the ideologues.  Or admit they were wrong.  Or lose that invite to Davos.  So we fly on oh-so-politely into the night and rain.  Hoping luck will save us…

FWIW, I actually see a pretty good chance luck market forces will save us from this willfully blind/bad/blundering/bumptious policy failure.  To that end, I’ve got a truly riveting post on monetary velocity teed up.  But that seems more like Sunday night reading material.  🙂


KAL flight 801:  A Korean Air plane flying from Korea to Guam was going through bad weather and stormy clouds. The captain had committed the plane to visual landing, which meant that he had to be able to see the airport runway. Here is some of the conversation among the pilots. Pay close attention to a couple of comments from the supporting crew to the captain and to how the captain responds to them, or doesn’t:

First officer: Do you think it rains more in this area?

Captain: (silence)

Flight engineer: Captain, the weather radar has helped us a lot.

Captain: Yes. They are very useful.

What the first officer is trying to do is warn the pilot that it may not be safe to do a visual approach without a backup plan for landing, in case the runway is not visible. Such communication of hinting from first officer to pilot is not uncommon in Korean culture. However, driven by respect to authority and fear of upsetting their superior, the co-pilots ultimately contributed to the plane crash as they allowed the pilot to start a visual landing without an alternative.

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Who is That Man Behind the Curtain? It Certainly Isn’t a Shareholder (or a Voter)…

People love to rail about the evils of shareholder capitalism.  Very few stop to consider the real source of that evil.  It is rarely the shareholder side of the equation.  It is almost invariably management.

The formal name for this particular evil is the principal–agent problem.  It is THE key structural failure point for so much of our modern, spread-out, multi-actor economy and polity.   But it is rarely discussed and poorly understood.  Maybe that is by common, unspoken agreement?  Don’t pay attention to the man behind the curtain!

Whatever the reason the subject brings us naturally to the idea of a wholesale/retail split of telecom companies.  OK, not really.  But stick with me here for a sec.  A friend of mine, Susan Crawford,  has written a (generally excellent) piece about Google Fiber’s potential to catalyze a new model for telecom.  You Didn’t Notice It, But Google Fiber Just Began the Golden Age of High Speed Internet Access.  It is definitely worth a read (quick summary below**).  But one sentence stands out as a particularly glaring non-acknowledgment of the principal-agent problem.

In New York City, for example, it would probably make economic sense for Verizon, which has been struggling to establish its FiOS network in the city, to turn itself into a wholesale dark fiber provider whose pricing is overseen by the city. Benefits to Verizon: no more servicing of individuals or buying overpriced television programming, so overhead goes way down.

She is right.  But… what is the “overhead” of which she speaks?  More importantly, WHO is that “overhead?”  Pretty much every executive, middle manager, and associated hanger-on that encrusts the telco cost structure.  It is the consulting contracts.  It is the FCC and state lobbyists. It is the lawyers.  The thousands of middle managers keeping 20-30 years of legacy billing systems going.  Billions of pixels of Powerpoints.  All the way to the sports sponsorships and charities that know a telco is an easy touch…

So Susan is “right” that Verizon’s shareholders would make a massive amount of money from a wholesale/retail split.  But the shareholders aren’t the decider here.  Management decides.  Asking them to “choose” this model is asking an entire ecosystem of useless-but-remunerative activity to suicide.  They are going to work really hard to make sure shareholders never figure this out.  Per Upton Sinclair “”It is difficult to get a man to understand something, when his salary depends upon his not understanding it”  Shareholder value be damned!  I’ve got kids in private school!

The underlying error is this quaint, but wholly wrong idea that a corporation exists to make money and serve its shareholders.

  • A corporation’s first and primary goal is self-preservation.
  • Its secondary goal is to aggrandize as much wealth to its senior management as it decently can.  Arguably this is primary goal, self-preservation be damned…
  • The needs of the shareholders are best understood as an impediment to goals 1 and 2.

Conjure up some version of Jane Austen’s England and/or Downton Abbey.  Shareholders are the distant landlord with “an income” off in London.  Management is the estate overseer out in Piddling-Upon-Trent or the like…  The estate manager’s incentives are wildly un-aligned with that of his/her nominal boss.

  1. Extract as much as you can from the peasants…
  2. Send on a steady, lowballed rent.
  3. Never ever send any surplus – find ways to hide it and keep it for yourself.
  4. Focus most of your time and energy in vicious in-house politics to divide those spoils.
  5. Ensure the lord/lady never actually visits the fields and farms to judge potential vs actual productivity…

Believing corporations are run for shareholders is like believing that political parties are actually there to express the will of the voters [insert guffaws here].  Like voters, shareholders are a surprisingly powerless bunch.  Even if you are one of the plutocrats who can “buy” a campaign.  Politicians (and managers) just don’t stay bought…

If you don’t force the principal-agent problem into the dialogue, the debate goes nowhere.  You need to acknowledge the underlying problem head on.  In the telecom space, basically EVERY actor is somehow dependent on “not understanding” the value of a wholesale model.   They like the gravy train as it is.  They are not going to “understand” they are worthless overheads.

Most interesting is HOW the evils of shareholder capitalism might over-turn this cozy conspiracy of mediocrity.  And here is where I agree with Susan’s enthusiasm and conclusions.  Google Fiber does potentially open the door to a very different (and better) telecom model.  But it does so through the medium of those evil financiers…

The key event is not Google fiber partnering with Huntsville.  It is (hopefully) Google Fiber (and Huntsville et al) raising debt.  Showing good, steady, stable numbers to a bunch of greedy Wall St. types.  If we can get a documented track record of dull-but-profitable FTTH builds, then we can get the debt markets involved.

  • Debt markets don’t “care” about management’s tuition bills.  They don’t get paid to “not understand.”  They just look at cash flows.  And loan money up to around 70%-90% of their value.  Just like a mortgage.  As long as someone else is willing to take the risk on that last 10%-30% (the equity).  The more stable the cash flows, the more they will lend.  And telecom cash flows are VERY stable.
  • Greedy Wall St. types are a herd like anyone else (see the movie “The Big Short” – it’s pretty accurate on that point).  So the first few deals will be cautious and tentative.  And then the floodgates will open.
  • With all this fat, sexy debt coming out, shareholders will start to make murmuring noises in meetings.  Like a bunch of feudal property owners noticing that other fellow’s properties are throwing off much bigger bucks.  They start asking awkward questions next time their estate manager sends on the annual rent.  Maybe the schedule a trip to actually look at their estates…  And the whole edifice starts to slide downhill into a very dull, very profitable utility business.  Which is what is once was.

I know this is sort’ve what Susan was driving at too, but the dialogue goes nowhere without a sharper point on the motives and effects.  The facts aren’t in question.  It is the willful, self-interested. indifferent blindness of those who shape the narrative.  I’ll leave you to explore the obvious segue to the rise of Bernie Sanders and Donald Trump.  Enough tangents in this post already.   But I’ll leave you with this clip.

** Wholesale/Retail Split:  One company owns the actual fibers – earning a steady rental income like a sewer or water utility.  Another company lights those fibers and offers service over them, earning a (less steady) income as a TV/Internet provider.



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Boardroom Recession? Maybe Just Depression. Angst. Anger….

I’ve been worried about a “boardroom recession.”  The actual numbers show a decent/improving US consumer economy.  If nothing else, billions trillions of consumer stimulus from cheap oil.*  So how to explain the widespread gloom I encountered at a recent institutional investor conference?**  A lot of people seem genuinely convinced another 2008 crisis is around the corner.

Maybe I’m wrong?  Looking at the wrong set of numbers?  Should I be more worried about negative rates (competitive devaluations IMHO), Chinese bad debt (internally contained and eventually sustained by the Chinese government not investors), or tech unicorns tanking (valuations are down, but they still generate real revenues are aren’t going bust…).  But all these worries seemed to be more excuses for the general gloom.  What was I missing?

A good investor is supposed to be dispassionate.  Investing (and politics) isn’t like rooting for a sports team.  You need the mindset of an umpire, not a fan.  Call it like it is and bet accordingly.  A great investor realizes dispassion isn’t humanly possible.  So he/she develops coping strategies to counterbalance their own emotional biases.  Warren Buffet has feelings like everyone else.  He’s just better at managing them.

But there are a lot of not-so-great investors out there.  And lot of them are Republican elite-types…  And it hit me.  Doh!  These guys are mostly self-identified “moderate” Republicans.  No wonder they are depressed!   Investors are paid to look forward.  And they don’t like what they see.  Seen through this lens, “the market” is going through a very understandable emotional meltdown.

Put yourself in the shoes of a typical affluent, urban-dwelling, investor class Republican (or wiggle your toes a bit if you are already wearing those shoes).  The Trump hijacking has forced out a lot of ugly truths.  Highly depressing for an investor-class Republican.  Especially if you had been burrowing into deeper denial as reality got harder to ignore (see “Sarah Palin, Rush Limbaugh, Terrorist “Militia” armed takeover, Tea Party, or any randomly selected 8 hours of Fox News programming“).

It is all pretty depressing.  It just doesn’t solve for an (economic) depression.

  • “Your” party is tearing itself apart.  That’s been going on for years, but its now impossible to ignore.
  • Its not “your” party anymore.  Its a bunch of angry, under-educated, reactionary, pitchfork wielding peasants.   The Sarah Palin crowd.  The people you used to rely on for votes, but who would have ever thought they turn on us…?
  • Actually “your” party is turning on you.  The pitchfork peasants seem most energized by a deep resentment of the elite classes (followed by a dislike of most non-white people, but I digress).  An elite class into which you have somehow been inexplicably lumped.  “Moi?  Don’t you people understand that a family making $200k-$300k in a Whole-Foods zip-code is just barely middle class?  Are we not brothers in arms!?! [ripple of a firing-squad.  A pause… “Bring in the next next lot of class-enemies!”]  
  • Looking across the aisle, things don’t look much better.  The Clintons did a great job of talking liberal-left, but hiring elite-right-center (cue Rob Rubin et al).  OK, the Dems were asking people to, like, actually pay for mroe of what they consumed.  But they weren’t really going to rock the boat.  But isn’t that same peasant crowd is lurking behind Bernie Sanders and Elizabeth Warren too?  The Clintons have done many deals with many devils to win.  Hillary will do another on the backs of Wall Street.  Anything to finally grab that brass ring for herself.

I’m not thrilled about the above trends either.  But I don’t see them adding up to an economic crisis.  This is equating “my team is losing” with “all teams must be losing.”  The tide is going out on the last three decades’ class winners, but that is just re-balancing the distribution of spoils.  I do worry about 10-20 years out.  The great leftward swing will go too far (just like the great rightward swing that started roughly with Reagan).  But today, a little income redistribution would probably lift all boats (minimum wages, fiscal stimulus, etc…).

 * Oil:   Told a year ago that oil would be $30 a barrel, a rational investor would have bet on a consumer boom.  Every week, most every American family is getting an extra $20-$40 to spend somewhere else besides the gas pump.  That boom hasn’t shown up yet.  Those pesky proles are saving it – or something silly like that.  But every week, that same $20-$40 keeps showing up.  Those billions of dollars WILL flow through.  See “stocks vs flows.”  Maybe the problem is your average investor doesn’t see $40 as much money in a world of $4 toast?  Perhaps it isn’t surprising they’re under-estimating the impact.

** A smart Investor Relations guy I talked to complained that EVERY 1-on-1 meeting started with the same question – “How is the (presumably bad) macro affecting you?”  A  thoughtful, qualified, industry-specific answer got dismissed as “well, you just aren’t seeing it yet.”





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