parts of an email from yesterday

I guess you’ve seen all the stuff about huge buying of options on individual tech stocks, both by Bar Stool-style traders and by Softbank, driving tech stocks up.  My guess is that has ended for now.  If so, it will probably take a week or so for trading in the big tech names to settle down.

I’ve read that when the Tokyo market found out what Son had been up to, and had made $4 billion on speculative options trading, Softbank dropped by 8% (?), losing shareholders $20 billion in market value.  That’s because what he did is bet-the-company crazy.

One of the things I’ve noticed is that some second-line names are doing much better (meaning falling more slowly) than what must be Robinhood-ish favorites.


It’s never clear what triggers a market selloff.  In this case, though, it’s doing a healthy thing by readjusting relative values among different groups of stocks–something I’ve thought would happen by a temporary reversal of leadership in an uptrend.

I think the fact that at zero interest rates stocks are the only game in town means stocks will drop to some longer-term trend line, stabilize, and then begin to move up again.  A hope, not a belief–at the close today NASDAQ seems to have hit the bottom of a channel it’s been in since April.  (It’s also about 25% above its March high, which says these are not bargain-basement levels.)


Over the past 5 trading days, NASDAQ is down by -9.2%, the S&P by -5.5%, and the Russell by -4.7%, so there is outperformance of a sort by the R2000.
Very often after a big selloff, market leadership changes.  That didn’t really happen in March, although afterwards the R2000 began to keep up more with the S&P for several months.  My sense is that the market wants to broaden out to find non-tech stocks that will do well over the next year or two.  This is why consumer discretionary names have been doing well recently.  But because some kinds of tech are going to be long-term winners, the move has to be based on finding consumer names that have good growth prospects, not just that they’re in another sector. 

The market hasn’t gotten conviction yet with this idea, probably in large part because Trumponomics gets loonier by the day.  The near-term economic outlook in the US had already been deteriorating before his latest China ideas, and won’t have a chance to be better unless he’s defeated in November.

Then there’s the human side of things. Who’d have thought we’d see George Wallace reincarnated, or the Waffen SS recreated, or scary abuse of power in the Justice Department–or that the Joint Chiefs would feel the need to say they would not obey any Trump orders to use troops to deny Americans their civil rights.

 
The last two paragraphs both bear on stocks like NWL.  Arguably, NWL is a true “value” name.  That is, all the bad stuff–and more–that could reasonably be expected to happen has already taken place and been factored into the stock price.  So it has some downside protection. It’s also economically sensitive and non-tech; and maybe if management can use the company’s assets competently, good things will happen. 

Another way of putting this is that in a world where TSLA can be down 30% in a week maybe the value formula of dead money for now with the hope of upside later on isn’t so bad to have as part of a portfolio.

Wall Street and US elections

There are two pieces of Wall Street lore about market performance around presidential elections that have passed their sell-by date but which continue to float around. They are:

–the last year of a presidential terms is a good one for stocks; the first year of the new term is a bad one.

The idea behind this is that the incumbent president would successfully pressure the Federal Reserve into a looser-than-necessary money policy in the runup to the election. This would give an artificial boost to the domestic economy, enhancing his reelection prospects. This extra stimulus would be reversed after the election, slowing the economy down in the first months of the new term. Gerald Ford’s refusal to follow this custom is often cited as the reason he lost the 1976 election to Jimmy Carter.

With the exception of Donald Trump, who has continually pressured the Fed to loosen money policy throughout his term, this no longer happens. I’m not 100% sure why. My leading candidates: the world is a much more complex and mutually integrated place than it was a generation ago, so it’s not so easy to use the domestic money supply to give the economy a pre-election jolt; over the past quarter-century there have been a succession of crises, from Y2K/Internet bubble to 9/11, to the Great Recession, to Trump’s wrongheaded tariff wars, to his coronavirus bungling, that have dwarfed any monetary tweaking the Fed might contemplate .

In any event, there’s no reason to believe that the world economy will be weaker in 2021 than it is now or that a post-election tightening in money policy is on the cards.

–Republicans are good for stocks, Democrats are not.

The idea here, from a generation ago as well, is capital vs. labor. A high-level Republican goal is to protect the accumulated wealth of its country club backers. This means having low taxes and low inflation. The Democrats, on the other hand, represent workers whose chief asset is their labor. Their main economic goal is to obtain real wage/benefit gains. The inflation that results doesn’t hurt them because they have no wealth to begin with. And it makes them better off by eroding the real value of the goods and services they need to buy from Republicans.

Again, the class warfare that defined the old Democrat/Republican battle lines is mostly gone. As a former work colleague of mine was already writing thirty years ago, neither party has a relevant economic program for today’s world. Ironically, despite its business roots, the current Republican administration is supported mainly, I think, by workers disenfranchised through the demise of heavy industry in the US (and ignored in a worst-in-the-world fashion by both parties). And the head of the party is a stunningly inept businessman who continues to do enormous economic damage to the country.

A more reasonable worry about the election might be that a Democratic administration would partially reverse the corporate income tax cuts of 2018. That might lead to after-tax results from the S&P 500 next year being, say, 3% lower than expected. 3% is not a big number, though. And there might be positive effects on growth from reopening the borders, a more intelligent approach to the potential threat from China than shoot-yourself-in-the-foot tariffs, removal of some of the white racist tarnish of the American brand abroad…

the fight over unemployment benefits

My cartoon version of US politics:

A generation ago the Democrats were the party of the working people and the Republicans the party of the wealthy, especially of inherited wealth.

The Democrats’ goal was to push for strong wage gains, to improve the lot of their supporters. They were also for wealth redistribution–taxing the rich to get the money for social welfare programs like Medicare or Social Security. High wage gains would also eventually create inflation, eroding the value of the assets supporting hereditary wealth–an added plus.

The aim of the Republicans was to defend the status quo, the value of their bonds and their industrial operations, by advocating low wages, low taxes (no redistribution) and low inflation.

Even though both parties have strayed far from their roots, this old picture has some relevance in explaining economic forces at work in the US today.

The Congressional Budget Office estimates that the federal budget deficit for 2020–the amount that government spending will exceed income–will come in at $3.7 trillion.

This is where the current debate on extension of unemployment benefits comes in. Democrats are calling for another $3 trillion in aid to out-of-work Americans; Republicans are arguing for $1 trillion. In simple terms, the difference is between continuing $600 a week in extra benefits vs. reducing that to $200.

In the former case, the federal deficit would come in at about $7 trillion and total government debt would rise to just under $30 trillion. This compares with GDP of about $19 trillion this year–with real GDP growth (even before the pandemic) reduced to close to zero due to Trump’s epic incompetence. That would put us higher than perennial poor soul Italy in terms of debt/GDP and into the same bracket with Greece and Lebanon. Only Japan, with debt of 2.5x GDP would be out of our reach–for now, anyway.

(An aside: hard to believe one man could do so much damage so quickly–and that’s not considering his white racism, environmental recklessness, the secret police roaming Democratic cities…)

Anyway, the question wealthy Republican backers seem to be asking is at what point will creditors balk at continuing to fund the Federal government. Their answer can be seen in the Republican negotiating stance–we’re already there. In my view, a lot depends on whether Trump is reelected despite his devastation of US aspirations and value. I think we’re already seeing the first indications of the world’s worries in the decline of the dollar vs the euro. For wealthy holders of dollar-denominated assets–real estate, industrial plants, fixed income securities–losses could be very large.

the dollar, gold and bitcoin

the dollar

The biggest influences by far in the currency markets are the large global banks. I view them as playing a very sophisticated game that looks much farther into the future than the one the typical equity person like me is involved in. One consequence is that significant changes in the economic environment often start to play out in the currency markets before spreading elsewhere.

The currency markets aren’t infallible indicators. The dollar dropped by 20% against the euro (which is not a stellar currency, either) during the first year of Trump as president. Since then the euro has been sliding back, as Europe’s internal problems–Brexit, Italy, early, very deadly arrival of the coronavirus–came to the fore.

Despite all this European ugliness, since mid-May the US dollar has been dropping, steadily and sharply, against the euro. It’s now down by about 9% against the EU currency.

How so? mostly Trump’s incompetence, I think. Europe used US medical science to control the pandemic, while Trump’s urging his supporters to flaunt medical recommendations has it raging again domestically. I don’t think the currency markets are as much concerned about the deaths as about the second round of fiscal stimulus that his bungling has made necessary and its effect on the national budget deficit/national debt.

Trump has also compounded the risk of holding Treasuries by his suggestions that the the US may choose not to repay holders he doesn’t like.

There’s no reason to think the bad news is over, either. Trump is insisting that schools reopen on schedule without pandemic safeguards–creating the worry that a third multi-trillion dollar support payment may ultimately be needed. He’s also intensified his campaign of race hatred, drawing comparisons with Hitler’s rise in the 1930s. Then, there’s the test to detect signs of dementia that he keeps mentioning–which can be seen itself as a sign of the disease he insists he is not suffering from.

implications

Currency weakness is good for exporters and bad for importers. It’s also good for the many S&P 500 companies that have foreign subsidiaries.

gold

Gold is up about 12% since mid-May. An old, but still useful, rule about the gold price is that it remains stable in the stronger of the two currencies, US$ and DM (now the euro). In other words, most of the price rise is due to the decline of the dollar. Still, there has been a small upward movement. My interpretation–and I’m about as far away from being a gold bug as one can get–is that this is more a reflection of how pricey everything else is than a genuine desire to own gold

bitcoin

Personally, I think there’s a better case for bitcoin than for gold. There’s been a sharp spike in bitcoin this week, again more, I think, a result of how expensive other things are. Were Trump to be reelected and his fracturing of the US economy to continue, I imagine bitcoin would draw a lot more interest.

Trump underpins tech stocks …for now

The EU has a third more people than the US, has an older population and was in worse Covid shape than the US in early April. Today, however, US daily new cases are about 15x those in the EU; daily new deaths here are 7x those in the EU. The difference? The EU followed the recommendations of US medical scientists; Trump urged his supporters to ignore them.

The economic result for the US is a deeper, longer-lasting downturn than elsewhere in the OECD, huge amounts of Federal government assistance to keep the economy afloat–with a resulting budget deficit that could soon reach $6.0 trillion, vs. $0.6 trillion when he took office.

Rather than try to mitigate the suffering the US is going through, Trump appears to have decided to try to shift national attention away from his central role in creating this tragedy by creating a second, competing disaster. After the armed forces refused to help, Trump organized a gang of from other Federal agencies. Members wear identical camouflage combat gear and carry weapons. No identification on their bodies or vehicles, however. Not a thought about probable cause or excessive use of force, either. In other words, they’re shaped on the Gestapo/KGB/Stasi secret police model. Empowered by executive order and against the wishes of state and local officials, Trump envisions sending these groups into Democratic-leaning cities to instigate violence. Portland is his test case. News reports of the Navy veteran beaten in Portland (he decided to remind Trump’s minions they took an oath to defend the Constitution) show what’s going on. Kristallnacht in America is something no one would have believed possible four years ago. Talk about the banality of evil.

Relevance for the stock market? …a lot.

I’ve been writing for a while about the divergence between NASDAQ and the Russell 2000. The former is the part of the US stock market least tethered to the US by customers, revenues or physical assets; the latter represents the part most closely linked to domestic economic health. NASDAQ is up by about 55% since the beginning of 2018; the Russell 2000 is down by 4% over the same span. I read this 60 percentage point divergence as the stock market’s response to the ongoing economic damage Trump is doing to the US. The spread is very long in the tooth. It’s also so wide that it is begging for at least a temporary reversal of form. So far, however, every attempt at a counter-trend rally has been nipped in the bud.

How so? I think the pro-NASDAQ portfolio configuration has a second motivation. It is also the first step in capital flight from a country moving in the wrong direction.

Recently, coinciding with Trump’s more explicit white racist actions and the resurgence of Covid in the South and Midwest, we’ve begun to see a second aspect of capital flight–a 5%+ decline of the dollar vs. the euro over the past few weeks. The US currency has even lost ground to perennial weaklings sterling and the yen.

It’s hard to know how this all will play out. A Trump win in November is the easier case. I imagine it would create a seismic negative shift in global attitudes toward the US. That would result in a steady outflow of our most productive human and financial capital. The dollar would continue its decline. Maybe, government bonds would begin to sag, too. At some point, Washington would presumably close the border to outflows, a la Mexico 1982. NASDAQ would likely go up, led by firms announcing the relocation of intellectual property-creating operations abroad. Maybe dual listings in New York and China. China and the EU stand to be the big long-term winners.

I think a Trump loss would much more complicated. There’s the issue of repairing the enormous economic, financial and cultural damage he has done to the country. There are also the former heavy industry areas, core sources of Trump strength, which have been ignored by both parties for decades at great national cost. A counter-trend rally might finally happen–maybe even pre-election if a pro-Biden outcome were clear. Would it have legs, if so?