“Sell ’em all, they’re not worth anything!” Ben Smith, the legendary short-seller, on a brokerage house floor in October 1929.
President Donald Trump’s reported opinions of heroes are spot on, and I endorse them. Heroes, he supposedly said, were “suckers” and “losers”. The so-called leadership were a bunch of “babies and dopes”.
I am not thinking here about Trump’s alleged opinions of the uniformed military. His remarks apply to the investment professionals who are still long equities, or at least at the long end of their allowed portfolio mix. This rally, by the way, is pretty close to the recovery in US shares between November 1929 and May 1930.
Those investment people are heroes, of a sort, who are willing to hold their positions without regard for danger. The rest of us will divide up their belongings before attempting to conduct an orderly retreat out of risk markets.
Consider the obvious signals. The Federal Reserve just concluded the least significant policy review in memory. Yet after the biggest monetary action in history, we still have a Eurodollar futures curve that is inverted well into next year.
What about further fiscal stimulus? The US Senate just published its own “re-stimulus” bill, which cuts off all unallocated Fed lending authority created by the Cares bill on January 21 2020, apparently so any president, but perhaps particularly a Democratic one, will not have anything to throw, immediately, at a new economic contraction.
Even the US government is hanging on to cash: there is more than $1.6tn in the US Treasury’s General Account
Did I say new contraction? According to the oil market we never got out of the last one. Despite producers agreeing on a peak of 9m barrels a day in production cuts, the oil curve is in contango, meaning that even after production declines, there is not enough demand. Good for our long-term carbon path, but not for any near-term economic recovery.
Then there is the Japanese yen. Along with being a currency that is actually used for transactions inside Japan among Japanese, the yen-dollar market is an important waypoint for dollars being borrowed in China. FX yen-dollar swaps have been a “risk free” way for Japanese banks to make a couple of basis points.
Now, either the west is unwilling to lend, or China is unwilling to borrow, and Japanese yen are moving back home. The consequent yen strength is very much not in the country’s interest. It also suggests that yen assets, a better haven than the Trump dollar, are more in demand. After all, they have already done their 20 years of stagnation and ex-bubble penance.
America has not, so the senior lending officers at its banks have been raising credit standards at the fastest rate since 2008. Consumers are paying down revolving credit lines. Even the US government is hanging on to cash: there is more than $1.6tn in the US Treasury’s General Account, which means even an election year administration is holding on to cash, as the bureaucrats worry about their next appropriation.
Where would an industrial recovery in the US come from? In the past couple of decades, the country has been an outstanding builder of aircraft and assembler of oil and gas production equipment. But the buyers for those products, which are not already bankrupt, are surviving because they cut their capital spending. There is no recovery in the aircraft market. And there is all the oil and gas we need.
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There is a lot of Hamlet-like indecision in the investment world. The only things that work are, basically, insane, such as paying five times more for Tesla now than in March, when at least it could buy enough nickel for its batteries.
September and early October have been a time of cash-shortness since farmers brought their crops to market in agrarian economies. September is when Long Term Capital Management ran out of cash to cover its short-Bunds position. September is when Lehman failed. September is when the repo market ran out of liquidity last year.
Commercial property lenders have not figured out how to turn nothing (rent from retail) into something (debt service). State and local governments think the Democrats in Congress will bail them out. They will not.
Why not be the one with cash when everyone else wakes up and blinks? Sometimes, the Ben Smiths are right.