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You know what a lot of the best surfing spots in the world have in common? A dangerously shallow reef. The reef at Maverick is about 20 feet deep at the break. Pipeline's reef is less than 10 feet from the surface. The reef at Teahupo'o is less than 6 feet deep.  Give a wave a lot of open ocean to conserve energy, then stick a shallow reef with a steep drop-off down to the continental shelf in front of it. The drag caused by the bottom of the wave interacting with the seafloor drives all that wave energy up into a crest and over into a hollow barrel. (Knew that oceanography degree would be good for something!).
How is this relevant to investing, you may ask? Well, despite a false start a couple months ago, the Blue Wave finally materialized this month, and it looks like it's carrying an entire 4-year ocean's worth of fiscal stimulus.
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The "What Comes Next" title is a reference to one of the songs sung by King George in Hamilton. We can't quite put our finger on it, but it feels like there are certain parallels between Mad King George and our current situation.
What exactly is our current situation? From an S&P 500 standpoint, we're back to where we were at the start of September. These 11 weeks have been far from flat, though. Down 10% over the first three weeks in September, then up 10% over three weeks into October, then down almost 8% in the three weeks leading up to the election, and then up 10% in what can only be described technically as a face-melting rally since the election. To recap: pre-election, there were widespread expectations of a "blue wave", and the market sold off a bit because it didn't like seeing the specter of inflation in all the anticipated government spending that presumably Democratic Executive and Legislative branches would entail. As election results came in and the blue wave never materialized, the market rallied. A Deomcrat presidency with a Republican Senate probably means gridlock in DC and not much in the way of fiscal stimulus. Thus, the burden of economic stimulus continues to fall to monetary policy and the ever-ready dovish accommodation of the Fed. Moar QE, in short. And as we have detailed previously and somewhat exhaustively, QE is good for stock prices. Then Monday morning last week, Pfizer came out with a positive announcement on their vaccine's Phase 3 trial, and the market rips. Small caps up 8%. Airlines up 16%. Cruise lines up 23%. Movie Theaters up 60%. Retail up 24%. Even Hertz (still in bankruptcy, by the way) up 25%. Face melting. Because we're also doing a live market update this month, this note is (hopefully) going to be on the shorter side...but no guarantees.
We've written about inflation before. It was a couple years ago now, and the thesis was basically that wage inflation would pick up, signaling minimal slack in the economy and the need for tighter monetary conditions going forward that had the potential to prick the stock bubble. Spoiler alert: that didn't so happen so much. Real wage inflation did pick up and actually spent most of 2018 and 2019 above 3% before sliding back to the mid-2%'s as the calendar turned into 2020. What ended up popping the equity bubble was not wage inflation but rather a little spike protein on the surface of the SARS-CoV-2 virus. Of course, that equity bubble was subsequently reinflated faster than you could say "Thank you sir, may I have another", but there's still an interesting question of inflation on the table. Namely: are we headed into disinflation/deflation, or are we headed in the other direction into (perhaps significantly) higher inflation? It's an important question, because the kind of investments that tend to do well during inflationary regimes are categorically not the kind of investments that tend to do well during deflationary regimes. "Capitalism is the worst economic system ever invented...except for all the other ones."
- Winston Churchill (paraphrased) et al. One of the main effects of this virus - and our response to it - has been to shine a light directly on all the broken parts of our societal system. A really harsh, fluorescent light. In some cases even a seizure-inducing strobe light. Whether your particular flavor of failure du jour is institutional, political, economic, macro, or micro, there is something there for everyone. Remember all the outrage over "faithless electors" a few years ago? That was people waking up to the fact that their vote doesn't matter. In point of fact, you don't actually vote for President at all. You are really voting for which party you want to appoint a donor fundraiser elector to vote for you. This is like that, but with everything. In the interest of page limits, we'll stick to our broken economic system for now: Covid killed capitalism. What a time to be writing an April newsletter! We've picked up a few new readers since last year, so before we jump in here, just a quick reminder that April is the month we let our tinfoil hat flag fly. In previous years, we've looked at The War on Cash, the Looming Pension Crisis, and the Magical Groupthink necessary for our economic system.
In a spooky bit of foresight, last April's newsletter asked you, dear reader, to "put 1984 back on top of your summer reading list". If you didn't, do yourself a favor and definitely put it on your quarantine reading list, because we are there. What do Machiavelli, Churchill, Rahm Emanuel, and the Washington Post all have in common? This newsletter. This month we'll look at the intersection of the phrases "Never let a good crisis go to waste" (Machiavelli/Churchill/Emanuel) and "Democracy dies in darkness" (WP). Because what we have right now in this country is a very good crisis and a whole lot of darkness. This will be a link-heavy newsletter, as we attempt to shine a light on various things that are actually happening. We leave it up to you to make your own connections and follow the rabbit hole as deep as you'd like. There is so much fear flying around right now. And we loathe it. We have written about this before, but using fear to compel action is just the worst. And what we have right now is large-scale policy responses born out of fear. There was a meme that was shared with us the other day that we feel is very appropriate:  Back in the USA! And for our first meal in Atlanta after two months, we had...Chinese. Which was delicious, but our fortune cookie said - no joke - “Don’t invest in the stock market. Invest in family instead.” Well played, China. Apparently we have progressed to the psyops portion of the trade war. But let’s leave China to the side for the time being (until we get into what it means to have the world’s reserve currency) and stick with Europe for another month. Europe is a hot mess. Let’s start with Brexit. Boris Johnson is brilliant. Well, perhaps not. I mean, he kind of looks like he never outgrew his second year of boarding school where experimentation with sloppy hair and dress was all the rage, which admittedly taints our opinion. But he and/or his advisors (rumor has it Dominic Cummings is largely the brains behind the Brexit tactics) have played this beautifully.  Bonjour mis amis! Cette newsletter arrive du France, ou est cette auteur pour deux mois pour regard le clime economique et political de l’Europe...mais est comme ca truque de “Flight of the Conchords”. Parlez-vous Frances? Eh...no.  So fear not, that will be the end of the French. Language, anyway. The French themselves will be around for a while still. Despite themselves.
We managed to catch part of the Tour de France last week...and by “catch”, I mean there was a parade of...floats? But they weren’t really floats, they were decorated cars. One was a giant chicken. And they going at a solid 20mph, too, not your leisurely float pace. And people were harnessed in to the top/back/sides throwing knick-knacks at you as they whizzed by. After accumulating a big pile of free loot, you wait and wait and then watch some cars go by with about three times the value of the car in bikes on the roof rack, and then BAM! The riders fly by and are gone in about 10 seconds. There wasn’t even time to look for the different jersey colors, though in hindsight we got a good picture of Peter Sagan and whoever was king of the mountains in Stage 15. There’s probably a nice, drawn-out analogy there between cycling strategy and investing...teamwork, pacing, endurance, and so forth. But that’s not where we’re going with this. No. Instead, we are going to take you on our own little tour of France, and try and discern what makes the French so, well...French. |
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