wknd notes: America is Stormy Daniels

“I promise you he is not President Perfect,” replied Billy Graham III, one of America’s fabulously rich television evangelists. The interviewer had asked if Trump has a sin problem? “He’s a flawed man. I’m flawed too,” admitted Graham, considering his reflection in the camera lens. And across the nation, Americans peered into 324mm iPhones, their reflections a wide-eyed gaze. “I’d hate for people to see all the baggage I have in my life, but the fact is God’s forgiven me and I’ve asked for his forgiveness -- I think the president has too,” confessed the Pastor, as we simultaneously bared our souls to NBC/WSJ pollsters. 51% of Americans strongly disapprove of Trump. 39% approve. 38% confess to being disgusted. 24% are scared by what they see, 23% are hopeful, and 12% of us are proud. But what these numbers really reflect is how we look at ourselves. You see, Trump is our mirror. Trump is America. This nation was never really Obama -- articulate, idealistic, aloof, ineffective. Obama was Presidential. America is Stormy Daniels. It’s reality TV, Kardashians. We’re Big Macs and Diet Cokes. America is obesity and ADHD. We lie about our bodyweight and bank accounts. We’re fake news, conspiracies, comedies. America is religiously open-minded, provided the Islamic immigrants end up in Sweden. We’re racist and divided, like all nations. We’re Democrats who allow South Chicago to become Falluja. We’re Republican pro-life congressmen paying for their mistress’s abortion. We’re opioid-dealing doctors, DC swamps rats. We’re liberal elites on casting couches. We’re Evangelical Christians without commandments. Of course, America is extraordinary too, magnificent beyond measure. But American Exceptionalism has become a burden too heavy to bear. We’re tired of pretending. We’re done. So we’ve finally elected a President in whom we can see our true reflection, to come to terms with who we really are. And decide if it’s who we want to be. 

Week-in-Review (expressed in YoY terms): Mon: Dollar index hits 3yr low, Bundesbank includes renminbi in currency reserves, Airbus 2017 deliveries +4% to 718 aircraft (order backlog +1,109 aircraft to record 7,265 valued at $1.06trln), Carillion files for liquidation (UK 43k person outsourcing firm focused on public-sector), S&P closed (MLK); Tue: Xi/Trump discuss Korea nuclear issues, Chinese credit rating agency downgrades US on “political deficiencies,” HK stocks all-time high (eclipsing 2007), Swedish home prices -2.5% (Stockholm prices -9%), Brazil equities all-time high (up over 100% from mid-2016), Ford warns 2018 profit decline on higher commodity prices, S&P -0.4%; Wed: Chinese home prices +5.3% (1st price acceleration in 1yr), Japan core machine orders +4.1%, Korea rates unch, Aussie unemployment unch at 5.4% 4yr low (1st year since 1978 of rising employment each mth), Junker and Tusk express openness to UK remaining/reentering EU, 6 top EU economists push for completion of monetary union, UK BOE “2018 pay growth should accelerate on tight labor markets,” EU CPI -0.1 to +1.4%, Canada hikes 25bps to 9yr high of +1.25% (hints at slower pace of hikes), probability of three 2018 Fed rate hikes hits 55% (2yr yield 2.04% -- late 2008 highs), Fed’s Beige Book “modest to moderate gains in the economy with Dallas reporting a ‘robust’ increase,” Apple outlines $30bln US capital investment plan and claims 5yr $350bln contribution to the economy, Bitcoin trades sub-$10,000 (down 50% from highs and -30% in 2days), homebuilder confidence slips from 19yr high, industrial production +3.6% (Q4 +8.2% annualized on hurricane rebuild), S&P +0.9%; Thur: China 2017 GDP +6.9% (2018 consensus +6.7%), South Africa keep rates unch (lowers 2018 inflation forecast 0.5 to +4.9%), Turkey rates unch at 8% (CPI ~12%), US House passes stop-gap funding bill (goes to Senate), Moody’s “US leverage loan covenant quality hits record low,” US inflation expectations 4yr high (10yr break-evens 2.09%), S&P -0.2%; Fri: German 2017 PPI +2.6% (first annual increase in 5yrs), Germany/Spain 10yr spread 8yr lows, UK retail sales -0.1 to +1.4%, Amazon hikes mthly Prime membership fees 20%, US 10yr yield 2.64% (3yr high), consumer sentiment 6mth low, 4wk US equity market inflows largest ever, S&P +0.4%; Sat/Sun: Senate talks fail and US gov’t shuts down.    

Weekly Close: S&P 500 +0.9% and VIX +1.11 at +11.27. Nikkei +0.7%, Shanghai +1.7%, Euro Stoxx +0.6%, Bovespa +2.4%, MSCI World +0.5%, and MSCI Emerging +1.6%. USD rose +20.9% vs Bitcoin, +1.5% vs Turkey, +0.8% vs Chile, +0.3% vs India, +0.3% vs Canada, +0.2% vs Russia, and flat vs Sweden. USD fell -2.1% vs Mexico, -1.4% vs South Africa, -1.0% vs China, -1.0% vs Australia, -0.9% vs Sterling, -0.3% vs Brazil, -0.3% vs Indonesia, -0.3% vs Yen, and -0.2% vs Euro. Gold -0.5%, Silver -1.3%, Oil -1.3%, Copper -1.3%, Iron Ore +6.1%, Corn +1.5%. 5y5y inflation swaps (EU +3bps at 1.77%, US +14bps at 2.42%, JP +6bps at 0.46%, and UK +1bp at 3.50%). 2yr Notes +7bps at 2.07% and 10yr Notes +11bps at 2.66%.

2018 YTD Equity Indexes: Italy +10.6% priced in US dollars (+8.7% in euros), Russia +10.1% in dollars (+8.4% in rubles), Brazil +9.8% (+6.3%), Argentina +9.6% (+11.7%), Colombia +8.6% (+3.7%), Austria +8.4% (+6.5%), HK +7.7% (+7.8%), Greece +7.5% (+5.6%), China +7.2% (+5.5%), Portugal +6.8% (+5%), Poland +6.8% (+4.9%), Norway +6.8% (+2.5%), Czech Republic +6.6% (+4.2%), Mexico +6.6% (+0.7%), Japan +6.4% (+4.6%), Chile +6.4% (+5.2%), Belgium +6.4% (+4.6%), Netherlands +6.4% (+4.5%), NASDAQ +6.3% (+6.3%), Thailand +6.2% (+3.9%), Spain +6.2% (+4.3%), Finland +6.1% (+4.2%), Taiwan +6% (+4.8%), Euro Stoxx 50 +6% (+4.1%), France +5.9% (+4%), Germany +5.8% (+4%), Singapore +5.6% (+4.3%), Sweden +5.2% (+3.4%), UAE +5.2% (+5.2%), S&P 500 +5.1% (+5.1%), Malaysia +5% (+1.8%), South Africa +4.4% (+2.9%), Saudi Arabia +4.3% (+4.3%), Indonesia +4.2% (+2.1%), Denmark +4.1% (+2.2%), Russell +4% (+4%), Hungary +3.9% (+1.6%), India +3.5% (+3.5%), Israel +3.5% (+1.9%), Ireland +3.5% (+1.7%), UK +3.1% (+0.6%), Philippines +2.7% (+4.2%), Switzerland +2.6% (+1.4%), Korea +2.6% (+2.1%), Australia +1.4% (-1%), New Zealand +1.3% (-1.3%), Canada +1.3% (+0.9%), and Turkey -0.7% (-0.2%).

Overjoyed: “Under the political ecology which is built by the factional rivalries, factional interests are prioritized, and it is hard for the gov’t to focus on the management of the national economy and social development,” wrote China’s credit rating agency, downgrading US gov’t debt from A- to BBB+. “The perennial negative impact of the superstructure on the economic base has continued to deteriorate the debt repayment sources of the federal gov’t, and this trend will be further exacerbated by the govt’s massive tax cuts,” continued the Chinese, our largest foreign creditors, utterly overjoyed, maintaining America’s outlook as negative. 

Focus: “In the 1980s we switched objectives,” said the historian. The 1970s focus on full-employment shifted to containing inflation. “We felt if we contained inflation, everything else would work out.” For nearly 40yrs inflation has declined, each high lower than the last. “But what we’re beginning to discover is that a low inflation regime produces a whole new set of unanticipated problems.” Debt levels and leverage, income inequality, vast wealth disparity. “And with inflation downgraded as an economic problem, it’s natural to consider letting it rise.” 

Whew: “The balance of risks is shifting away from inflation being too low, to the risk of the economy overheating,” explained NY Fed chief Dudley, relieved. You see, the Fed’s worst nightmare is falling into recession with low inflation and even lower interest rates. But the largest late-cycle fiscal stimulus in US history, and a global economic boom, have allowed central bankers to avoid that fate. And having narrowly avoided a decent into a deflationary trap, Dudley joined Williams and Rosengren in contemplating an increase in our 2% inflation target. 

What’s Old is New: “Last time we had negative term premia was the 1960s,” said the CIO. “Last time we had realized volatility in the bond market this low was also the 1960s,” she continued. “These things correspond to periods of inflation complacency.” US core CPI has bounced between 1.3% and 2.0% since 1994. “Very quietly, we’ve crept to extreme levels of economic data.” UK unemployment is at levels last seen in 1975 despite Brexit (perhaps because of it). “US unemployment has been lower only twice, and once was in the 1960s.”  

What’s Old is New II: “When valuations move completely out of line with long-term norms, markets can really move” said the same CIO. “But this really requires a new narrative to justify such misalignments.” In the dotcom era, we convinced ourselves that earnings no longer mattered. And in 2007, we believed national housing prices could never decline. “Today, we’ve become so complacent about central bank policies that we’ve quietly tolerated a rise in financial asset prices to the point where even a little inflation would devastate portfolio returns.” 

So: “Nearly all financial assets are ultimately priced off the US 10yr yield,” said the investor. “And treasuries are being priced at extraordinarily low yields because of negative term premia,” he continued. “So implicitly, negative term premia are distorting the valuation of all financial asset prices.” And what has driven term premia lower is a combination of an extraordinary experiment in central bank policy combined with complacency that inflation will remain permanently low - because it has. “So, in fact, investors have made one gigantic inflation bet.” 

Anecdote: “Totally failed. The second he told me how he figured it out, I wanted to puke,” admitted my 16yr old, “can’t believe I didn’t think of it first.” I’d asked Jackson if he solved the problem. You see, last summer, my friend flew his family to Santa Barbara to surf. But discovered that Great White Sharks now mysteriously infest the waters. It’s a problem for most, but not him. He’s mad. The greatest humans always are, each in their own magnificent way. “These Great Whites are just juveniles, no longer than 8-9 feet,” he told his kids, who nodded, following him through the whitewash. A film crew, shooting a shark documentary, caught him and his blonde baby seals on video. The piece aired Dec 29th. “Jackson, I can’t get the documentary here in the UK. Please figure out how to get me a copy,” he asked. Which sounds easy, but wasn’t. For weeks, Jackson kept asking for my help, not realizing I already had. You see, one of the greatest gifts we can give children is to fill their lives with extraordinary adults, heroes, guides. Then retreat. To let them develop those relationships. To glimpse the world through the example of the exceptional, the passionate, the curious. To discover through others the art of living life like a great adventure. “I searched everywhere, Google, Facebook, Twitter. Blogs, the director’s website. The network kept rescheduling the screening time. But he got it himself. You know how?” asked Jackson. I shrugged. “He contacted the producer, told his surfing story, and got it directly.” I smiled, thrilled my son is learning to admire exceptional adults, and cared so genuinely about disappointing this one. “Yeah Jackson, he just makes things happen. That’s the only way to become the kind of man he is.”

Good luck out there,

Eric Peters

Disclaimer: All characters and events contained herein are entirely fictional. Even those things that appear based on real people and actual events are products of the author’s imagination. Any similarity is merely coincidental. The numbers are unreliable. The statistics too. Consequently, this message does not contain any investment recommendation, advice, or solicitation of any sort for any product, fund or service. The views expressed are strictly those of the author, even if often times they are not actually views held by the author, or directly contradict those views genuinely held by the author. And the views may certainly differ from those of any firm or person that the author may advise, drink with, or otherwise be associated with. Lastly, any inappropriate language, innuendo or dark humor contained herein is not specifically intended to offend the reader. And besides, nothing could possibly be more offensive than the real-life actions of the inept policy makers, corrupt elected leaders and short, paranoid dictators who infest our little planet. Yet we suffer their indignities every day. Oh yeah, past performance is not indicative of future returns.