The Home Stretch

The ending of the long, languid days of summer and, with their passing, the reluctant return to a focus on the more essential things of life are marked, on either side of the Atlantic, with successive holidays – the somewhat anachronistically named August Bank Holiday in the UK and, a few days later, the even more pivotal Labor Day celebration in the US.

With the nights again palpably lengthening, the vines approaching the annual harvest, and the kids being safely packed back off to school, the financial calendar reaches its final months of the campaign – an intense, last-dash of catch-up consolidate, cash-out, and cover-up when those ahead of the pack seek to protect their gains and those left lagging strive to make it up to the waterline before the year’s closing bell sounds.

Increasingly, such weighty matters as bonuses and  bragging rights occupy the former happy band’s attentions while the prospect of having to craft Mea Culpas and concoct plausible Might-Have-Beens to assuage disgruntled investors keep the latter awake at night.

Knowing that there are perhaps only eight or nine weeks left to crown one’s triumphs or, conversely, to try to limit the damage to both reputation and remuneration wrought by one’s failures, the market itself can become even more than usually self-referential at this point as the players on both sides of the profit-and-loss account seek to jettison losing position and also to jump aboard the bandwagon of whatever it is that emerges as the quarter’s star asset class.

The result is often a marked schism into tops and flops, saints and sinners, sine-qua-nons and sinkers without a trace.

So here, we find ourselves in a period of renewed enthusiasm, but also heightened anxiety – both made more intense in a year which has offered few nasty surprises and many easy rewards to the consensus-chasers and coattail-clutchers. The air is filled with the heady bouquet emanating from the cup of victory: Everyman a hero in an uninterrupted – if also somewhat selective – bull market.

We say selective, because gains have been unusually concentrated in a narrow cluster of Big Name stocks while the median (approximated here by the Value Line Geometric Average) has been effectively rangebound since mid-March – intriguingly, that same index is only around 10% ahead of the levels reached before 2018’s vicious, final quarter sell-off while the S&P500 is up by just over 50% in that same stretch.

Size, too, has mattered with a clear ordering among the Wilshire series of US indices, for example, from Micro-cap’s total return loss of 5.6%, through Small Cap’s 1.8%, Mid Cap’s +10.2%, Large Cap’s +13.4%, and Mega Cap’s +14.1%.

In general, too,  so-called ‘Growth’ – typically a tech-heavy construction, dominated by the market darlings of Apple, Google, Tesla and their ilk – has outpaced ‘Value’ – weighted to financials, health-care, and industrials – and the US has again beaten most of its international peers and so stretched its relative pricing to even further extremes.

Reflecting this selectivity, it may occasion some surprise to learn that US retail investors have committed essentially ZERO new monies to domestic equities via ETFs and mutual funds, taken together, since mid-March and so still have only bought back around a third of the stocks sold in the first twelve months of the COVID Crisis.

Instead, they have regained an enthusiasm for those notionally cheaper foreign counters to the point their purchase has dominated the last few months’ flows, serving to almost completely rebuild pre-epidemic positions.

Chart patterns are now looking decidedly top heavy – creaky, even – it would not take much to erode support to the point position adjustment becomes another “sauve qui peut” scramble for neutrality, though the final denouement might have to await either some clarity regarding Evergrande’s inevitable demise or the verdict of the Solons at the upcoming FOMC meeting.

Conversely, while no-one in their right mind can see bonds as other than a slightly cheaper put option on both the equity market and the economic conditions upon which its performance is in part based, such is the surfeit of money everywhere being created that almost $850 billion net has poured into the equivalent funds, in addition to which US banks have also bought over $1 trillion of their own as partial offsets to their surging deposit balances.

For those who believe the market exists to allocate scarce capital in a reasonably rational manner, it is sobering to note Bonds – despite offering some of the lowest after-inflation yields in the modern record – have actually outperformed seven out of the eleven main S&P sub-indices since the spring.

As for commodities, the balance has shifted to industrial metals and energy – the latter led this time by surging prices of an increasingly decompartmentalized natural gas market which has seen European contracts trade almost four times above their seasonal averages, Asian LNG supply priced 220% higher and even US delivery – a resurgent fracking industry notwithstanding – climb briefly as high as twice those same 5-year norms. Knock-on effects of this mini-energy crisis are already being widely felt AND are occasioning much embarrassment among Tooth Fairy carbon warriors, ahead of the upcoming COP26 jamboree of uncosted -but hardly costless – climate sanctimony.

There are winners and losers here, too. Ironically, in a time of growing inflation fears, gold and silver are numbered among the latter – a fact which occasions some observers a deceptive measure of relief. Yet there are few signs of supply chains being untangled soon, or of shipping costs suddenly falling. The fetish for Net Zero and its associated ESG indulgence-selling means both regulatory accommodation and capital inflow to those providing us with our most basic material needs are not exactly guaranteed to rectify the situation either.

Worse, some governments are already responding to the growing individual and company anger at soaring energy prices by throwing MORE near costless, central bank supplied money at the problem in the form of subsidies for consumers (who will therefore be spared the pain of economising somewhere else in their straitened budgets) or producers (who can therefore merrily bid up their own inputs without worrying as much about destroying end demand).

Central Banks in general still do not want to admit that once again they have misread the tea-leaves, so all talk of tapering and adjustments to interest rates have either been half-hearted (not to say insincere), deliberately nebulous or ludicrously timid – the Bank of England is talking of raising its official rate by 10 BASIS POINTS A YEAR over the next four years, for example!

In part this is because they have invested too much intellectual capital into the ‘transitory’ myth: in part because they have spent so long pining for the attainment of that cabbalistic 2% per annum rise in the CPI index which they have come hermeneutically to regard as being essential to long-term economic recovery.

Complicating this are two other influences under which their labour: one short-term, the other more secular.

First among these is how they can find the moral courage to close the spigot when governments are still playing Lockdown Leapfrog, COVID Hokey-Cokey, and Pin the Jab on the Donkeys and so continuing to impede any resumption of normal economic life.

Furthermore, the more astute among them must be painfully aware that financial markets have passed beyond so many traditional markers of reasonable value only because of the yield-crushing, curve-flattening deluge of money which they have poured into the bond markets.

A return to more traditional pricing would therefore be highly unpleasant, if ultimately salutary, but, as we know from bitter experience, such a long, one-way bull-market as ours doesn’t get to its present extremes without involving a whole concatenation of often-hidden leverage, short convexity, and contingent vulnerability.

From the Wall St. Bets crowd, via the other online options gamblers, to private equity sharks, SPAC punters, and UHN individuals minimizing taxes by borrowing against their equity holdings, to pension funds and insurance companies making up income shortfalls with steamroller penny derivative overlays, there are an awful lot of overripe apples trembling in the autumn gales

Once you have the Tiger by the tail, you need to make sure someone is standing by with a powerful rifle and a steady aim if ever you plan on letting the appendage go again.

Beyond such immediate matters stretches the much more pernicious one of the extreme central banking hubris inculcated since Lehman failed, thirteen long years ago.

Ever since they were called upon to summon up the “Courage to Act” and then seized the moment to do “Whatever it Takes”, their mission creep has become a pell-mell, headlong Charge of the Light Brigade to the assumption of greater powers and wider pseudo-mandates.

Now they will not just be “promoting the good of the people… by maintaining monetary and financial stability” – as the Bank of England motto has it – but they intend to furnish the means for the Davocracy to completely re-engineer society as we know it – from financing vaccine campaigns to ‘fighting climate change’ to promoting the whole insidious canon of freshman virtue-signaller aspirations which so permeates all current public discourse and so infects the corridors of all of today’s institutions, theirs included.

People who can openly discuss how their coming CBDC digital currencies can be ‘programmed’ at government behest to both reward and punish those behaviours of which the state respectively approves and disapproves; who can insist that granny’s pension monies can hence only be used to subsidise fat cat windmill builders and rent-raking solar barons; people who have foresworn their formulaic injunctions that state budgets should be better controlled in favour of issuing extravagant promises to finance the coming Millennium with nary a qualm or a quibble are not really those upon whom we can rely to rein in an inflationary trend before it develops an awful imperative all of its own.

Markets are still – just – clinging to the tenuous belief that inflation is indeed ‘transitory’ because the converse is simply too dreadful to contemplate. But rather than fret that its persistence will compel central bankers finally to ‘take away the punch bowl’, what they should be worrying about is that the Monetary Guardians instead continue to spike it.

After all, if we latter-day Kulaks ARE to be collectivised and herded into our cycle-only, 15-minute, Smart City, Eco-feudal demesnes, what better way to make us subject to the state diktats necessary to enforce our servile status that to ensure that we really do “own nothing” – and our promised, consequent “happiness”, be damned?