Extraordinary Idiocy

"We must just pray that when your head is finished turning that your face is to the front again."
--Sir Thomas More (A Man for All Seasons)

So much foolhardy commentary is posted on social media that it is easy to build an immunity to it after a while. Every now and then, though, one stumbles across posts of such extraordinary idiocy that they are difficult to ignore.

"There is, in fact, in the writings and teaching of those who nowadays call themselves “economists,” no longer any comprehension of the operation of the economic system as such." - Ludwig von Mises https://t.co/F1GH9dRFwv

— Mises Institute (@mises) January 31, 2020

The post above comes from a professor of economics at the University of Utah. He did his undergrad at Oxford and his doctoral works at the University of Chicago.

How someone like this gets past his comprehensive exams much less defends his dissertation and gets hired by an R1 university is beyond my comprehension.

Corrupt Motives Doctrine

"Sometimes, in order to see the light, you have to risk the dark."
--Dr Iris Handyman (Minority Report)

The Democrat's impeachment argument has withered into a 'corrupt motives' slant (not this first time corrupt motives doctrine has been tried against the president). President Trump broke no laws, they say, but his motives justify him being removed from office.

Aside from the problem of getting inside the president's head to identify his true motives for any action, motivation cannot be grounds for legitimate conviction. In this case, if the argument is that the president was wrong because he acted in his own self-interest (e.g., for his re-election), then all pelicans are guilty of 'wrongdoing', as is the public at large. All of us act in our own self interest.

Moreover, president surely equate their re-election with the 'national interest.'

The corrupt motives doctrine circulating among so-called 'impeachment managers' demonstrates once more the brazen political hypocrisy in Washington.

Safety Trading

I say
We can go where we want to
To a place they will never find
And we can act like we come
From out of this world
And leave the real one far behind
--Men Without Hats

Although domestic equity markets haven't surrendered much in the face of coronavirus and other current crises, govies are acting like the safety trade is on.

Ten yr yields have broken their multi-month uptrend in a hurry. They're now eyeing the repo madness lows of last Sept at ~ 1.45%.

Fascism and Political Expedience

"What we need right now is a clear message to the people of this country. This message must be read in every newspaper, heard on every radio, seen on every television. I want everyone to remember why they need us!"
--Sutler (V for Vendetta)

Interesting proposition here that politicians will generally prefer fascism (i.e., government control but not necessarily ownership over means of productive capacity) over socialism (i.e., outright government ownership of productive capacity). The idea is that by not owning assets outright, politicians can lay off blame for problems on the so called private sector.

Of course, it can be argued, as Hayek did, that there is little difference between socialism and fascism in reality. In fact, fascism is really a flavor of socialism. Ownership is about who has decision rights to dispose of property. If government controls production, then government effectively owns it.

Nevertheless, the proposition helps explain why we tend to see socialism expressed in fascist forms more than in communist forms. Fascism can be a politically expedient choice.

Info Tech Growth

"Here's the deal. Gary and Wyatt...they created me on their...computer."
--Lisa (Weird Science)

Growth rates of various information technologies shown below. One takeaway is just how quickly some of these technologies moved up the curve toward maturity. It took radios and TVs decades. Smartphones reached an 80%+ usage rate in just a few years.

The other takeaway is that take-up rates of all these technologies are leveling out. On the upswing, info tech was a tremendous contributor to productivity improvement which, in turn, kept price inflation at bay.

Now that these technologies are maturing, their positive effect on productivity is declining and their brake on inflation goes away.

Life's Priorities

"Not sure you've got your priorities straight, Brantley."
--Fred Melrose (The Secret of My Success)

On heels of last week's March for Life, this post offers good perspective.

Priorities:

An eagle egg:

— Illegal to destroy
— Punishable by $250,000 fine
— Destruction can carry a 2 year prison sentence

A human life:
— Legal to abort
— Taxpayers forced to fund abortion providers
— Abortion actually encouraged by 1/2 of lawmakers

🤔

— Charlie Kirk (@charliekirk11) January 24, 2020

Life--human life--is God's greatest gift.

Electricity Production

You got me running
Going out of my mind
You got me thinking
That I'm wasting my time
--Electric Light Orchestra

Interesting study of US electricity production. From the time lapse graphic you can see how things have evolved away from coal.

Evolved is the correct word, however. Contrary to a popular media narrative, alternative energy is not taking over the grid. Share gains of Alt E over the past few years are very small. In fact, most of coal's decline has been replaced by another fossil fuel--gas.

Note also the highly fragmented state of renewable energy, and the dependence of various types of renewable sources (e.g., wind, hydro, solar) on geography.

Perpetual Racket

"Now, tomorrow you collect $400 from Del Rio. And if I tell you to break a guy's nose or thumb as a 'late payment notice,' you do it!"
--Gazzo (Rocky)

Why is Social Security (and any other entitlement program for that matter) a ponzi-like racket? The poster below explains it well.

How it works:
1. Government robs generation A.
2. Generation A gets old.
3. To pay for generation A's welfare/social security, they rob Generation B.
4. Generation B gets old.
5. To pay for generation B's welfare/social secuirty, they rob Generation C. https://t.co/g6YCB2WxuD

— Eric July (@EricDJuly) January 24, 2020

Another name for this is generational theft with the government serving as strong-armed agent for the robbing generation. Once implemented, it's hard to stop because the older 'paid in' generation feels that they are naturally entitled to what's theirs by 'social contract.'

A new generation may complain up front, but once it antes in, it's hooked. First you get robbed, then you rob.

Perpetual racket.

Time to Shine

There used to be a graying tower
Alone on the sea
You became the light 
On the dark side of me
--Seal

Stocks continue to outpace commodities. Ratio of $SPX:$CRB hitting new highs on a daily basis.

Ratio of US Stocks to Commodities continues to hit new all-time highs. $SPX $CRB pic.twitter.com/uqKs9432UI

— Charlie Bilello (@charliebilello) January 23, 2020

From the graph, the two previous periods where commodities outperformed weren't economically similar. The early-mid 70s were times of classic 'stagflation' while the mid 2000s saw commodities and stocks both run for a while--commodities just ran hotter. Oil peaked at ~$150/barrel in 2008.

What will it look like when it's once again commodities' time to shine?

Shop and Drop

"Do you have a bra to match that...something in leather, rubber, or barbed wire?"
--Lisa (Weird Science)

Interesting data on the evolving face of retail. Over the past 20 years, e-commerce has grown from less than 1% to over 10% of total retail sales (actually less than I would have thought).

Rise of e-commerce and fall of bricks-and-mortar retailers@StatistaCharts pic.twitter.com/qp4CR9Y3SV

— Liz Ann Sonders (@LizAnnSonders) January 16, 2020

Assuming the second panel reflects brick and mortar retail only, store closures have been outpacing openings--and the gap widened from 2018 to 2019.

Good Gun Law

Lilly Raines: You know, between the LAPD, the FBI, and the rest of us, there are 229 people protecting Traveller tomorrow.
Frank Horrigan: Lotta guns. Hell, if Leary gets off a shot, we could be killed in the crossfire.
--In the Line of Fire

If there is bad gun law, then what qualifies as good gun law?

Sure, There Should Be Gun Control --- But On The Government's Guns

Watch the whole show here: https://t.co/3V5Wb3k8Hs pic.twitter.com/Ihhkzs4xUw

— Ron Paul (@RonPaul) January 21, 2020

Ron Paul nails it.

Bad Gun Law

"I think that when statesmen forsake their own private conscience for the sake of their public duties, they lead their countries by a short route to chaos."
--Sir Thomas More (A Man for All Seasons)

A Virginia sheriff says that he will not enforce state gun control bills if they are passed as currently written because he believes the bills are unconstitutional.

Sheriff Richard Vaughan of Grayson County, VA:

“If the bills go through as proposed, they will not be enforced. They are unconstitutional.”#VirginiaRally #Richmond2ARally #Virginia2A pic.twitter.com/tfweiB1Uv5

— Michael Coudrey (@MichaelCoudrey) January 20, 2020

But isn't it the job of law enforcement officers to...enforce the law? Not if it is bad law. Because it opposes the natural rights of man, bad law always requires aggression to enforce. Yes, those behind the creation and passage of bad law are at fault. But so are those who are 'following orders' to enforce it.

This sheriff is saying that he chooses not to be a lever of aggression--an agent for those who wish to enact bad gun law.

Fossil Fuel Fossils?

Here I am in silence
Looking 'round without a clue
I find myself alone again
All alone with you
--Information Society

Is it possible to find value in markets that mark all time highs seemingly every day? With thousands of stocks to choose from, it is likely that investors overlook some attractive names here and there--no matter how 'efficient' markets behave.

While diligent investors will likely stumble upon an attractive situation on occasion, it seems less probable that an entire sector remains undervalued after the run we've had. My sense, however, is that energy may offer an exception. This sector has under-performed now for some time.

I get the bear story. With green narratives and ESG (environmental, sustainable, governance) agendas echoing in fund managers heads, 'carbonated' energy producers' days are numbered. Fossil fuel makers are, well, fossils.

Perhaps, but even if the 'common wisdom' turns out to be true in this case, it will likely take decades to play out. Meanwhile, daily life demands energy of the old fashioned variety.

I like the integrated oils--particularly the two big US players, Exxon (XOM) and Chevron (CVX). Both have strong internal cultures and exemplary management. Because they are headquartered in the US, I can keep an eye on them and their operating/institutional environments far better than I can their international peers.

XOM appears to be resolving a near term triangle pattern to the downside (bearish) but as a long term investor this presents opportunity. Here is a company with a dominant worldwide production footprint with a capex plan to make it even larger, strong culture with a long track record of execution, and a 5% dividend yield.

CVX has a more benign technical pattern. Also well managed, CVX is dialing back on capex a bit after some big spending. The stocks yields just above 4% here.

I also view these names as inflation hedges in an environment that, increasingly, is being shaped by monetization policies of central banks.

Unloved, strong competitive positions, strong dividend yields, inflation hedge. I'm happy to take the other side of the fossil fuel fossil trade here.

position in CVX, XOM

Lopsided Sentiment

Ooh, see the fire's sweeping
Our very street today
Burns like a red coal carpet
Mad bull lost its way
--The Rolling Stones

Adherents to the magazine cover indicator will take note of this week's Barron's cover.

In his Friday Rap, Fleck shared a list of indicators reflecting extreme bullish sentiment:

US equity allocation, highest on record
cash allocation, lowest on record
TRIN, five yr low
CBOE intraday composite put:call, two yr low
10-day equity only put:call, six yr low
US 10-day composite put:call, five yr low
CBOE 10-day equity only put:call, four yr low
NAAIM bullish sentiment, highest in history
AAII bullish sentiment, highest in history
Hulbert sentiment, highest in history
RYDEX bull-to-bear ration, highest in history
speculative call buying volume to open as % NYSE total volume, highest in history

Sentiment getting very lopsided.

Out of Place

"Some of your fingers are out of place. I have to push them back. If I don't do this, there's a chance you may never use them again."
--Arthur Castus (King Arthur)

Which one of these pictures is out of place?

1. S&P 500, Dow, Nasdaq: All-Time High
2. Home Prices: All-Time High
3. Expansion: longest in history (126 months)
4. Unemployment: 50-yr low (3.5%)
5. Job growth: longest in history (111 months)
6. Fed: expected to cut rates for 4th time in '20, growing balance sheet $100 bil/mo pic.twitter.com/Pc5lKL12zY

— Charlie Bilello (@charliebilello) January 18, 2020

Radical monetary policy is supposed to be reserved for bad times, not good.

Triple Trillion$

And so we turn on the TV one more time
And we see that everything is fine
--Flesh For Lulu

With Google (GOOG) recently crossing the $1 trillion market cap threshold we now have three stocks now worth at least that much--the other two being Microsoft (MSFT) and Apple (AAPL).

Theoretically, what this means is that each of these companies is valued to return $1 trillion to shareholders over the course of their operating lives on a discounted cash flow basis.

Will these be one of those data points that, when we look back on this period, will seem an 'obvious' indicator of how stretched valuations have become?

no positions

"The Era of the Fed is Over"

Hardy Jenns: I see no reason to carry this on any longer. It was a joke. It's gone to far. It's over, ok?
Keith Nelson: You want the truth? You want the plain truth? You're over.
--Some Kind of Wonderful

Hard to pass up a WSJ article when the title is "The Era of the Fed is Over. Prepare for a More Perilous Road Ahead." After all, the Fed is the hero of modern day markets.

The basic thesis is something these pages have noted for years. By employing increasingly aggressive monetary policy over time, the Fed has perhaps been able to forestall some recessions and end others before their time. The data clearly show fewer recessions as the Fed has become more active:

This so called 'success' comes at a cost, however. Interest rates have been declining over time, as the Fed can never return rates to previous levels without blowing up a system that has become more leveraged...due to the Fed's easy monetary policies. With rates near the 'zero bound,' the Fed has little traditional ammo left to combat another downturn.

Recognizing that it has created a monetary roach motel that it can never leave, the Fed is tinkering with new policies, including negative interest rate policies (NIRP) and outright monetization of financial assets.

The article stops short of discussing the irony. By employing ever more aggressive monetary policies to reduce the frequency of recession, the Fed may very well be setting us up for a single Mother of All Downturns when it inevitably loses control of interest rates, or prints up a hyperinflationary blizzard.

Government and Prices

You could have a big dipper
Going up and down, around the bends
You could have a bumper car, bumping
This amusement never ends
--Peter Gabriel

Proposition 1: The more that an industry is regulated by government, the higher the prices of output produced by the industry.

Proposition 2: The more resources that an industry receives from government, the higher the prices of output produced by the industry.

Proposition 3: The more that an industry competes in markets unhampered by government intervention, the lower the prices of output produced by that industry.

Earnings and Stock Returns

I walk along the city streets
You used to walk along with me
And every step I take reminds me
Of just how we used to be
--Naked Eyes

Simple but interesting scatter plot of sector earnings growth over the past decade vs sector returns over the same period.

Strong correlation between earnings & returns by sector@biancoresearch pic.twitter.com/N2CdSElBpr

— Liz Ann Sonders (@LizAnnSonders) January 8, 2020

Pretty good R-squared associated with this relationship, me thinks.

Note lagging performance of energy. My sense is that low valuation placed on this sector as a result of this historical performance offers opportunity going forward.

Bears Watching

So glad we've almost made it
So sad they had to fade it
--Tears for Fears

Measures of extreme bulllishness continue to surface.

Bullishness, measured by nearly all sentiment measures, extremely high @SoberLook @CFTC pic.twitter.com/rARAuRJRsJ

— Liz Ann Sonders (@LizAnnSonders) January 13, 2020

Am not tradin' 'em anymore but if I was, then I'd be dusting off the bear costume. Am definitely cautious deploying new capital right here.

Large and In Charge

"You can walk out of here...or be carried out. But have no illusions, we are in charge."
--Hans Gruber (Die Hard)

The relationship between central bank monetization programs and stock market prices cannot be overstated.

Note the blue shaded 2016-2018 period. The Fed's balance sheet was flat while the SPX legged higher. Correlation breakdown?

Not quite. As noted on the graph, this it the period when monetization programs at other central banks kicked into overdrive. ECB, BOJ, and others initiated QE programs that made the Fed's look like child's play. The graph above captures the global central bank leg a bit better.

But now the Fed is back. Large and in charge.

War Power Patriotism

Friends all tried to warn me
But I held my head up high
All the time they warned me
But I only passed them by
--Mike Curb Congregation

With President Trump authorizing a drone strike last week that killed a high level Iran military official, calls have once again surfaced about restraining presidential authority to act with military force. Typically, these calls come from the opposing party.

It is not surprising, therefore, that Democrats are amassing against Donald Trump, just as it was no shock to see Republicans protesting against Barack Obama's liberal use of drone strikes. Hypocrisy here has been evident for a long time.

Really worth watching the full six minutes of @Senmikelee's comments. He gives a great quick class on the Constitution and War Powers and how failure to follow the Constitution is why we've had a disconnect between the people and the wars we find ourselves in. https://t.co/xN8ZVj3DGm

— Mollie (@MZHemingway) January 8, 2020

On the other hand, it is refreshing to watch a small group of congressmen exhibit what is a rare trait in Washington: consistency. At the forefront of this group has been Rand Paul, accompanied by Mike Lee and Thomas Massie. This trio has been unwavering in their opposition to the clearly unconstitutional practice of ceding war powers to the president. They opposed it under Obama just as they oppose it currently under Trump.

I agree with @RandPaul and @SenMikeLee that the Constitution calls for Congress to debate and decide whether to further escalate the military conflict with Iran. The three of us have been consistent on this point regardless of which party has been in the White House. https://t.co/cILen9foXF

— Thomas Massie (@RepThomasMassie) January 9, 2020

The War Machine reflexively calls this group unpatriotic and claims that they are helping the enemy by the opposing the president. As Kat Timpf notes, however, there is nothing unpatriotic about standing up for the Constitution. Our founding ancestors wrote the Constitution in rejection to the English model--a model which granted a single individual discretionary power to put a country at war.

"Both parties are at fault here," concluded Paul. "It isn't just Republicans. President Obama usurped the war powers. Bush did it. Truman, LBJ, you name it. It's hard to find a president who hasn't done it, but Congress has abdicated that role." https://t.co/R61xijl40X

— Senator Rand Paul (@RandPaul) January 10, 2020

The Constitution clearly places authority for declaring war with Congress. Congress has clearly abdicated its role in a bipartisan manner.

Sanctions Escalate Tension

Hands across the water
Heads across the sky
--Paul and Linda McCartney

People often view economic sanctions as a peaceful deterrent. However, sanctions deny people their natural right to produce and trade with others to better their situation. When voluntary exchange is prohibited, then standard of living falls. When people are starving due to another country's prohibitive policies, they are, as noted below, likely to 'do desperate things.'

Desperate people do desperate things. Like this, and lack of proper crowd control at Soleimani's funeral so 50+ are stampeded to death.

Ukrainian airplane shot down by mistake by Iranian anti-aircraft missile, Pentagon officials believehttps://t.co/kn7JSTuLzT https://t.co/MWAfoc4Img

— Jim Bianco (@biancoresearch) January 9, 2020

From their standpoint, sanctions are acts of aggression. As with any aggression, people have a natural right to defend themselves sanctioned aggression.

Sanctions do not relieve geopolitical tensions. They escalate them. Sometimes to the point of war.

Low Short Interest

The fever's hot
The winds are blowin' cold
The captain's crazy eye
Puts the fear in your soul
--Jay Ferguson

Always cause for pause when short interest probes cycle lows. Suggests giddy sentiment and too many investors sitting on same side of boat.

Short interest in SPY lowest in 2y@IHSMarkit @business @SoberLook pic.twitter.com/yl56bMHW7r

— Liz Ann Sonders (@LizAnnSonders) January 9, 2020

Never matters till the boat capsizes.

War to Peace

The war machine
It springs to life
Opens up one eager eye
--Nena

Last nite Iran fired missiles at two US military bases in Iraq. US stock futures plunged nearly 2% and gold creased $1600/oz for the first time in about seven years.

Overnight ES futures down 1.7% and recovered to positive BEFORE the NYSE open.

The last example of a 1.6% OVERNIGHT decline and recovering BEFORE the NYSE was the election night 2016.

ES futures were limit down 5% on election night. They recovered to up over 1% BEFORE the NYSE. pic.twitter.com/aT4KlnNczA

— Jim Bianco (@biancoresearch) January 8, 2020

After news circulated that a) damage to the US bases was light and there were no casualties, b) President Trump was not immediately going to respond to the attack, and c) Iran leaders signaled that they were unwilling to escalate the situation further, the fear trade came off and US stock futures were in the green pre-market.

One tiny example of what can happen when a situation moves from war to peace.

Lower Corporate Taxes

Oh sweet freedom
Carry me along
We'll keep the spirit alive
On and on
--Michael McDonald

Many are waiting for record high profit margins of US corporations to revert back toward the mean. They might, but to the extent that lower corporate tax rates stay in place, the mean may be higher than before.

Global effective tax rates by S&P 500 sector (pre- and post-tax cut) pic.twitter.com/Y2qQb7vksz

— Liz Ann Sonders (@LizAnnSonders) January 7, 2020

This has been a big contribution of the Trump administration. Lower taxes (to any entity) increases freedom. Capital is freed for other endeavors that in the long run benefit standard of living.

Gold's Perfect Storm

Oh, a storm is threating
My very life today
If I don't get some shelter
Oh yeah, I'm gonna fade away
--The Rolling Stones

As these pages have frequently noted, gold is a bet on disorder, whether that disorder be economic or more broadly social in nature. We're witnessing that bet being put on now.

Gold is up another $20 this am as geopolitical tensions with Iran escalated over the weekend. At ~$1575/oz, gold is marking six year highs. All time highs rest ~$300 higher.

Couple the geopolitics with central bank easy money policies, and you create a near perfect storm for gold.

position in gold

Dividend Growth

Come up off your color charts
I know where you're coming from
--Blondie

Unlike bond coupons, stock dividends tend to increase over time. In my view, this makes dividend-paying stocks superior income-producing instruments.

S&P 500 annualized dividend growth rate...
1990-1999: +3.5%
2000-2009: +3.4%
2010-2019: +10.4% pic.twitter.com/bwFMwT1rrf

— Charlie Bilello (@charliebilello) January 3, 2020

However, annual dividend increases over the past decade were about triple those of the previous two.

It should not be surprising, therefore, if we should happen to experience some 'reversion to the mean' in dividend growth over the next few years.

ISM Slump Continues

There's so much to say
That's better unsaid
Like nothing's for keeps
--The Apartments

Institute of Supply Management (ISM) manufacturing index continues to print below the 50 level proposed to divide expansion from contraction. Current 47.2 reading was last seen during the Great Recession.

Recessionary predictive power of the ISM number is not great, however. As seen from the graph, there have been plenty of periods where the ISM number lingered below 50 with recessionary consequences.

That said, the longer the index stays below 50, the greater the chance of recession.

Palmer Raids

I must have dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
--Genesis

President Woodrow Wilson's long train of abuses aimed at curbing public dissent about US involvement in WWI, which included the Committee on Public Information (CPI) and the Sedition Act of 1918, culminated with the Palmer Raids.

In 1919, Wilson named a new attorney general. A. Mitchell Palmer was, in the president's words, a "young, militant, progressive" lawyer who Wilson tagged to put down the original Red Scare (not to be confused with its contemporary equivalent). Several labor strikes, public riots, and bombings (including one at Palmer's residence) helped motivate the ambitious AG to squash the Red menace.

The centerpiece of Palmer's campaign were a series of raids beginning in late 1919. With another newly appointed young turk J Edgar Hoover spearheading the operation, federal agents arrested thousands of legal immigrants in warrantless raids. Many detainees were beaten while others were subsequently deported.

The largest of the Palmer Raids occurred in early January 2020-- precisely 100 years ago. Let us pray that this dark period in American history does not repeat.

Eyes on Exxon

I walk along the city streets
You used to walk along with me
And every step I take reminds me
Of just how we used to be
--Naked Eyes

Keeping an eye on Exxon (XOM) here as the stock continues to taper inside defined uptrend and downtrend lines as well as its 50 and 200 day moving averages.

Current action suggests upside resolution but time will tell soon enough.

position in XOM

Ready, Set, Go

Ah, if she called me I'd be there
I'd come running anywhere
--Phil Collins

What day sports the highest avg absolute percentage change? Why, January 2nd--the first trading day of the year.

Looks like the pattern will continue today with markets ready to rip out of the gate in 2020.

New Year's AA

Sometimes you picture me
I'm walking too far ahead
You're calling to me
I can't hear what you've said
Then you say, "go slow"
And I fall behind
The second hand unwinds
--Cyndi Lauper

Every now and then I like to estimate my asset allocation (AA) across all financial accounts. Helps keep me aware of where I stand.  Here's my current AA as we usher in the new year:

Equities   40.3%
Fixed income   1.0%
Cash   48.0%
Alternative assets   10.7%

Note that this breakdown is for securitized (i.e., paper) assets only. It does not factor in physical assets such as my house.

Fixed income portion would be higher if my work 401(k) would make certificates of deposit (CDs) available. Instead, I have to settle for money market funds that currently yield close to CD rates (although they do not provide FDIC protection). If CD's were available in the 401(k) account then I would be targeting an asset allocation of ~ 40 equities/30 fixed income/20 cash /10 alt assets.

Top stock holdings include D, INTC, JNJ, MRK, PAAS, WFC, XOM. Alternative assets consist largely of closed end gold and silver funds CEF and PHYS.

Asset allocation should evolve this year as funds from pension fund buyout are allocated primarily toward dividend paying stocks and precious metal proxies.