Mad World
Ante Up • one trait common to great investors is their ability to make sense of circumstances, quickly, with limited information —it’s almost a ‘sixth sense’ that comes from them having a supercharged intuition processor. The other, is the ability to totally suspend logic when the mob takes over and destroys the rules (e.g. you were just supposed to buy flimsy tech stocks during the ‘dot-com’ bubble even though they’re flimsy). I have neither of those special traits, which is why I’m here writing this rather than spending Saturday outside or enjoying being retired. But as a spectator, I’ve noticed that so much has changed in markets recently that it has blurred the line between human rationality and animal spirits. Fantasy has become reality, and vice versa. The acceleration of modernity has made even recent history obsolete immediately. The difference between our lives now and ten years ago, is about the same as a thirty year difference from twenty years ago. Holding a position for two weeks is long-term investment in an environment like that. Every trend is replaced by a new one before it goes anywhere, or is reversed by a drive-by from the news tape (e.g. the on-again-off-again trade war with China). And yet, the biggest surprise of all is that assets have remained in narrow ranges amid all this uncertainty. The ‘Fed Put’ has no doubt helped support assets, but even that is a modern construct. Over the last two years, the S&P 500 has remained within +/- 4% of a gradually-upsloping trendline (with one exception)… that’s very well-behaved for a timeframe in which the economy rolled over.
Cold World • my guess is that the idiosyncrasy of markets reflects how much everything has changed in the ‘real world.’ Consider the last decade: QE has replaced conventional monetary policy; Twitter, Bitcoin, Snapchat, Seamless, Venmo, PayPal, Instagram, LinkedIn, Tinder, and WhatsApp have all come about; Netflix has replaced HBO, Showtime and Cinemax; vape has replaced cigarettes (and then some); Uber has replaced the yellow cab; entrepreneurs have replaced CEOs; Silicon Valley has replaced Wall Street; and freelancing has replaced employment. I should know — I am freelancer. It’s my best option, and it’s a thoroughly rewarding adventure (read: “it’s highly stressful”)… and like many people, it’s also my only option.
I never use a laptop anymore other than when I’m writing this. I don’t even own a desktop. My smartphone is my office, and it has replaced at least 1,000 things (camera, calculator, Walkman, wallet, newspaper, TV, pager) that I used to carry around. Apple and Google have increased my productivity tremendously for a very reasonable price… the only cost, really, is that big-data now aggregates, records and analyzes my every thought, move and purchase in a way that even George Orwell couldn’t have imagined (and facial recognition is coming next). Finally within the last decade, a handful of small companies have metamorphosed into juggernauts that dominate almost all aspects of commerce (FANG). And, with their rise, a second generation of robber barons has emerged who give Carnegie and Vanderbilt a run for their money.
According to The Economist, Rockefeller once controlled 80% of the world’s supply of oil… and today Google has 90% of the search market in Europe and 67% in the United States. In the last decade, WeWork was founded; became the biggest occupant of Manhattan office space; and then fell on its face. It’s winner take all out there; kill or be killed; fake it until you make it; become a billionaire or become a freelancer.
Changes • considering how much the world around us has changed, it should be expected that markets would defy historical patterns; and defy common sense. Plus, markets have been also been influenced by all kinds of additional new factors: machine trading; persistent central bank intervention; the wealth gap; the emergence of communist economies into powerhouses; and an unusual level of political incivility within democracy. Another example of the exponential pace of change: the global population has more than doubled within my lifetime (from 4bn people in 1977 to 8bn now). If it is 75° in NYC at this time of year, then of course markets might be just as unpredictable.
Oddities are just as evident in the real-world: there is a homelessness crisis when the economy is above full employment (3.9%); consumers (and economist) have lost any ability to asses actual inflation because deflation is evident in many areas (most noticeably technology) and yet inflation is also evident in other necessities (urban housing, education, insurance, and health care)… inflation matters because the population of the developed countries (US, Europe and Japan) are getting old as the Baby Boom (or lack thereof) ages. And the underclass are angry in the West too, and doing unexpected things (Brexit & Trump). Meanwhile, the emerging economies (BRICs) are growing because their improved economic status is allowing for a higher birth rate. While the West is experimenting with QE, the emerging economies are experimenting too — by mixing open markets with political repression, which has got Hong Kong tilting at Tiananmen Square currently. Yet, through it all, somehow world peace has mostly prevailed since 1945… and volatility is low, all things considered (albeit, rising a little bit lately).
Here is a tongue-twisting summary of everything for you: Trump is facing impeachment, and is transparently guilty, but he won’t get forced out nonetheless, and the stock market (this time) remains at about all-time highs unlike during Watergate.
Sympathy For The Devil • if you think markets are confusing, consider this: unemployment in the financial services sector is accelerating rapidly despite an impressive bull-market tailwind for the banks… and, suffocating from the experiment with negative yields, European banks are all juggling layoffs while racing toward failure… and, of course, hedge funds have had a difficult run the last 3 years too, at least the discretionary ones manned by humans that operate in liquid markets; the ones with just machines have done better; as have the ones in private equity and venture capital, except for the ones that invested in Uber, Lyft, and WeWork.
That’s a lot of words to say: despite so much going on, nothing has really happened in markets and it’s very difficult to make sense of why that is.
UFO • this should all be very stressful to the average person — i.e. one who is not a billionaire —but it is not, because everyone is under too much pressure to make ends meet to be worried about any of this anyway. And if you’re at the other side of the wealth gap — i.e. a billionaire — then you’re probably less fixated on figuring out why everything is so confused — who cares why the sun is rising in the West and setting in the East — because you’re worrying about how to stay a billionaire… considering the mammoth state, local and federal fiscal imbalances, it’s almost inevitable that a socialistic wealth grab will be needed to pay the bills. New York cannot afford to run itself, and there is valid fear that an exit tax could be imposed to prevent any more flight to Florida. Here is another riddle: the wealth gap is untenable but the solutions are even worse… and that’s before Elizabeth Warren wins in 2020.
I know what you’re thinking: “that’s crazy, there is a better chance of being abducted by aliens than her getting elected.” Well then, the Navy confirmed a few weeks ago that three leaked cockpit videos, taken by different fighter pilots on different occasions, are in fact authentic recordings of “flying phenomena that can’t be identified” (i.e. UFOs). This interview with Navy Lt. Graves is unreal; and this dude is not some crackpot in Superman pajamas trying to jump the fence at Area 51, he’s a deadpan, straight-laced Super Hornet fighter pilot, and aerospace engineer. Beam me up.
