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Saturday, March 30, 2024

2024-03-30

***** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:

Bloomberg's Cameron Crise discusses credit-market dynamics and offers perspective on the unreliability of economic data at turning points.

.... What makes things particularly difficult is that the rush to publish economic data in a timely manner means that it can be inaccurate, or sometimes downright misleading. Particularly as the economy appears to be approaching something of a turning point, it’s worth retaining your sense of skepticism and taking much of the data that you see with a grain of salt.  

..... It is an unfortunate, but nevertheless true, feature of modern life that an incorrect opinion confidently stated seems more credible than an accurate view laced with caveats.

... I was reminded of this last week when the Conference Board leading indicator posted a monthly gain for the first time in two years. That broke one of the longest streaks of negative readings in history, and apparently makes the Fed’s ongoing guidance toward rate cuts seem all the more perverse. Here’s the thing, though. That indicator is subject to very substantial revision, to the degree that it’s hard to look at what it says with a straight face. Take a gander at the readings around the GFC, for example. The revised monthly prints (shown by the white line) tell a much different message from the initial release of that index, which actually rose during the second quarter of 2008 as well as the eventful September of that year.


... By way of disclosure, a number of years ago I wrote a piece trumpeting the virtues of the leading indicator as a recession indicator, only to be apprised of its Orwellian revision history by a few readers. A relevant recent example of a similar phenomenon can be found in the ADP survey, which was suspended a few years ago while it was re-jigged to make it ostensibly more accurate in real time. Even official data can be highly misleading. Regular readers may recall that I have cited the change in continuing jobless claims from their one-year low as a useful recession predictor. Well, it now seems less useful than it used to; a couple of weeks ago some changes to the seasonal adjustments dramatically altered the trajectory of that data, and the rise in claims from its lows now looks much less severe than it did prior to the revisions.

... It wasn’t my recession call that was bad, it was the data that I used to make it. Yeah, right. Either way, wrong is wrong, and misleading inputs are one of the occupational hazards of making forecasts or taking investment positions. The Fed is obviously aware that data can be misleading at turning points, and has perhaps adopted a more traditional risk-management strategy into their policy deliberations now. That’s a fact of life, whether you’re worried about Orwellian data revisions or not.



.......................... Ok... but what does all of that mean in English?

Well, to make some more sense of the data, we went through the Early Benchmark state-level data excel spreadsheet provided by the Philly Fed (link), and simply added across the various states to obtain aggregate, country-level data so that we could compare the far more accurate QCEW data with what the BLS had been peddling for the past year.

The result was - again - shocking, and as shown in the chart below, a little over a year after we, or rather the Philly Fed, found that the BLS had overstated payrolls in 2022 by 1.1 million, here we go again, only this time the BLS had overstated payrolls by 800,000 through Dec 2023 (and more if one were to extend the data series into 2024). It's truly statistically remarkable how every time the data error is in favor of a stronger, if fake, economy. ......

As such, we urge all readers to read Philly Fed analysis (link here) and to analyze the excel data (link here) at their own leisure





Activity and jobs growth have slowed to a more trend-like pace in recent months. A couple of hot inflation prints have reignited market doubts over the disinflation path. We see little reason to think this will persist; on the contrary, pipeline price pressures remain benign. We continue to expect the Fed to begin lowering rates from June.

… Indeed, financial markets appear more worried about inflation than about downside risks to the growth outlook. Near-term market-based measures of inflation expectations have risen sharply since the start of the year, and markets now expect three rate cuts from the Fed this year, compared to almost six cuts back in January (we continue to expect five rate cuts). Inflation in January-February did come in on the firm side, although this followed some especially weak readings at the tail-end of 2023. The core CPI, for instance, rose 0.4% m/m in both January and February, which is around double the normal rate of price growth (though still far below the 0.7-8% readings at the height of the inflation surge). We did not see anything in the reports to suggest these firm inflation readings would persist. The strength was driven by three main factors: 1) pass-through from the recent jump in oil prices to some core components, such as airfares; 2) lumpy pass-through of earlier rises in housing rents; 3) possible residual seasonality in the m/m data (as Fed Chair Powell also suggested).


The bottom line is that pipeline price pressures still point to significant disinflation to come, especially from housing rents, with rents for new leases growing at rates below the pre-pandemic trend already for the past half year…



“Why do people feel that to be a good leader, they must absolutely believe in one direction over another, one path over another, one person over another?” asked the investor, an allocator.

“Why do most people feel they have to live in a world of absolutes?” We were discussing the illusion of certainty.

“We live in a world filled with questions. And the best traders I’ve known have never been sure of anything.”

The blessing and curse of this business is that it forces us to come to terms with how little we know.

It is at once terribly humbling and awe inspiring, in that to maintain your balance you must continually seek to define a wide range of possible outcomes, possibilities. ........



Bubble Fare:

Technical Measures And Valuations. Does Any Of It Matter?

Technical measures and valuations all suggest the market is expensive, overbought, and exuberant. However, none of it seems to matter as investors pile into equities to chase risk assets higher.

........... As noted, valuations are terrible market timing indicators and should not be used for such. While valuations provide the basis for calculating future returns, technical measures are more critical for managing near-term portfolio risk.

.................. “Mean reverting events,” bear markets, and financial crises result from a combined set of ingredients to which a catalyst ignites. Looking back through history, we find similar elements every time.

Like dynamite, the individual ingredients are relatively harmless but dangerous when combined.

Leverage + Valuations + Psychology + Ownership + Momentum = “Mean Reverting Event”

Importantly, this particular formula remains supportive of higher asset prices in the short term. Of course, the more prices rise, the more optimistic investors become.

While the combination of ingredients is dangerous, they remain “inert” until exposed to the right catalyst.



What You Need to Know
  • Artificial intelligence is an example of companies opening a new industry deemed likely to be pathbreaking.
  • The emerging technology draws parallels to electric vehicles and PalmPilots.
  • With sticky inflation and higher interest rates, inflation is unlikely to be sorted out in the next year or two.
  • Investors shouldn’t bet against the artificial intelligence bubble that’s driving the U.S. stock market but don’t need to participate in it either, financial analyst Rob Arnott suggests.
“One of the points that I like to make with regard to bubbles is never short-sell a bubble. It can go further than you can possibly imagine,” Arnott, Research Affiliates founder and chairman, told ThinkAdvisor in a phone interview this week. “Be very, very careful about the notion of shorting bubbles but you don’t have to own them.”

Nor should advisors and clients assume that an S&P 500 index fund would leave them diversified enough to avoid damage from a bursting AI bubble, he said.

“The dot-com bubble was special and rare but shockingly similar to today,” he said, adding that investors who were broadly diversified across the S&P saw a roughly 45% loss by the time the market reached its lows. ........



Every week, usually once or twice, I sit down to put onto paper my thoughts about the market. And every week, my disgust not only for the rigged system that encompasses our equity markets, but also for the sound of my own whining, grows exponentially.

When I sit down to perfunctorily prattle on about how nothing makes sense and how I constantly see things the polar opposite of 99% of everybody else in the world of finance every week, I usually wonder two things.

First, I wonder whether or not today will finally be the day that I capitulate, get bullish on the stock market ......





Podcast & Vid of the Week:


"Today is in the top percent on the Shiller P/E of all time, and when you start from this level, you have a very hard time going up materially. You’ve done it once or twice, but you’ve only done it for a while: in the last gasp of 1929; in the last gasp of 1999; and notably and most impressively in Japan, where maybe for two and a half years you kept going. And in each case, they ended incredibly badly. So, the price you paid for bucking that kind of law was a very high price.

In general, if you want to make a lot of money, and you want to have a long bull market, you need high unemployment, depressed profit margins, and depressed P/Es. It’s beautiful double-counting. Multiplying depressed earnings by a low P/E is really double counting. Multiplying peak earnings by a high P/E, which is what we’re doing today, is also double jeopardy the other way. And the gap between peak P/E times peak profits all the way to trough P/E times trough profits, that’s a big run. That’s the kind of thing we saw ending up in 1974 and 1982, and to some extent in 2009. Yes, it was somewhat higher in 2009 than 1982, but the discount rate, interest rate, everything else had shifted, and it was down an awful lot from its peak.

But it feels good at the top of the spike, always feels terrific. And people always torture the logic to think, like in 1929, that it’s a “new high plateau.” 1929 – in the most predictive model that I have come across, which is run by Hussman, the only one that is about the same is 2021, and a little bit higher, both of them, than today. These are not good times to start a 10-year bull market, and yet, one or two bulls are saying whoopee, this is the beginning of a great bull market.

We have totally full employment, totally wonderful profit margins. All the things you would not want to start a bull market from. This is where you start bear markets from. Great bull markets start with exactly the opposite. But it always feels wonderful. Peak profit margins, getting there takes years, and it feels nice. And so you’ve got a great track record. You can’t get to peak margins without leaving a terrific track record. You’ve got the peak P/E, so you feel wonderful, the stock market has gone up and up and up and up. So everyone feels great, and that’s how you get to a market peak. You feel great about everything. Of course, almost by definition.

When do you start going down? You still feel great. You just don’t feel quite as great as you felt the day before. That’s why it’s so damn hard, at both ends."


Animal spirits have certainly been running wild in the stock market of late.
The S&P is up over 1,000 points (roughly 25%) in the past 4.5 months.
Is this a new era of easy gains as giddy bulls are proclaiming? One investors should jump in and make the most of?
Or is this the latest incarnation of irrational exuberance? And is caution warranted instead?
For insight, we're fortunate to speak today with Jonathan Treussard, former partner and head of product at Research Affiliates, and now founder of Treussard Capital Management.
Jonathan, who authored academic research on financial bubbles at UCLA, indeed concludes we are in the midst of another such bubble now.
To hear why and what that means for investors, click here or on the image below:




Quotes of the Week:

“A recent study by economists at the Federal Reserve found that less than half of the published papers they examined could be replicated, even when given help from the original authors.”



Charts:
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RIP:



Joe Lieberman was a fairly unremarkable Washington politician who managed to get famous by becoming a particularly enthusiastic, inveterate warmonger and corporate marionette within the Democratic Party.



(not just) for the ESG crowd:


Accumulating evidence supports the interpretation in our Pipeline paper: decreasing human-made aerosols increased Earth’s energy imbalance and accelerated global warming in the past decade. Climate sensitivity and aerosol forcing, physically independent quantities, were tied together by United Nations IPCC climate assessments that rely excessively on global climate models (GCMs) and fail to measure climate forcing by aerosols. IPCC’s best estimates for climate sensitivity and aerosol forcing both understate reality. ..............

Our paper, Global Warming in the Pipeline was greeted by a few scientists, among the most
active in communication with the public, with denial. Our friend Michael Mann, e.g., with a large public following, refused to concede that global warming is accelerating. We mention Mike because we know that he won’t take this notation personally. Accelerated global warming is the first significant change of global warming rate since 1970. It is important because it confirms the futility of “net zero” hopium that serves as present energy policy and because we are running short of time to avoid passing the point of no return. ............

The fact that the climate physics is understandable is no reason to relax. On the contrary, we have shown that the world is approaching a point of no return in which the overturning ocean circulation may shut down as early as midcentury and sea level rise of many meters will occur on a time scale of 50-150 years. Time is running short to make the public and policymakers aware of the threat posed by the delayed response of our climate system and of the actions that should replace present wishful thinking (hopium).  ................




Drastic polar ice melt is slowing Earth’s rotation, counteracting a speedup from the planet’s liquid outer core. The upshot is that we might need to subtract a leap second for the first time ever within the decade


Biden is calling on Congress for an additional $8 billion in funding for the program.



Geopolitical Fare:




Former President Barack Obama compared anti-genocide protesters to rude Trump supporters Thursday night as they repeatedly interrupted him and Joe Biden and Bill Clinton at their $26 million schmoze-fest as Radio City Music Hall. .....

.... According to Obama, no matter how outrageous the behavior of their leadesrs may be, now matter how much death and destruction these powerful leaders spread throughout the world, the only permissible response of the citizenry is abject silence. Protest is not civil, and civility trumps everything else. If you want to be a loyal Democrat more than you want to be a free-thinking humanist, then you will pretend that Clinton, Obama and Biden are angels and that it is only the "other side" (Trump) who is the demon .......


Russia has already shown that Western ostracism is not necessarily fatal.




25 years ago, NATO began bombing Yugoslavia in violation of international law. This was the fall from grace that officially turned NATO into an offensive alliance and ushered in the beginning of the “rules-based world order.”

.......... The war was based on lies, as the German state television station ARD showed in a report a few years after the war . But this report was not shown often and quickly disappeared into the channel's closet.

Instead, the Western media and politicians to this day glorify the war as a “humanitarian intervention” that was justified due to Yugoslavia's alleged war crimes. That was the beginning of the “rules-based world order” because the US-led West ignored international law and created its own rules, according to which the West has since then attacked other countries under any pretext. ..........


Again. In a manner of speaking.

Right, then.

We are now in the degenerate phase of the Ukrainian crisis, and more especially in the sorry and pathetic story of the West’s collective attempts to manage it. Western political leaders are in zombie mode, staggering forward in various states of disrepair, blundering on because they have no real idea what to do, completely overmatched by events that they did not see coming, and cannot now understand. Declarations by national leaders and politicians become more and more bizarre and surreal, and most of them are not worth parsing, because they have almost no actual content. They are really cries of rage and despair from the depths of misery. Only President Macron and some other French government figures, have been saying anything remotely consistent, although hardly anyone in the media seems to have the command of the background and language to understand properly what they’ve said.

The subject of this essay is one I’ve lived with, and in some cases worked on, since the end of the Cold War. So I thought it might be useful to offer a (hopefully) reasonably informed view on three points. I’ll explain where we are politically and militarily, and how western leaders are actually fumbling towards an exit strategy. In addition, with a short diversion into history, I’ll explain where I think the French are coming from, and then I’ll set out very briefly some thoughts about where this may all lead.

The idea that this crisis has its origins in culpable ignorance and stupidity by western leaderships is pretty widely accepted now. But what hasn’t had enough publicity, I think, is that this ignorance was actually willed and deliberate. That is to say, certain things were simply assumed to be true, and no attempt was actually made to verify their accuracy, because it was not thought necessary. The belief in a weak Russia that could be pushed around, the idea that even if the Russians didn’t like what was happening in Ukraine there wasn’t much they could do about it, and the conviction that any attempted Russian intervention would collapse into chaos after a few days leading to a change of government in Moscow, were not judgements arrived at after proper analysis, they were articles of ideological faith, for which no evidential support was necessary or looked for.

And this isn’t the first time either. The grisly list of western political disasters of the last twenty years, from Iraq to the 2008 financial crisis to Libya, to Syria, to Brexit, to Covid to the rise of so-called “populism,” is distinguished less than by malevolence or stupidity (though both were present) than by an arrogant belief in the rightness of the opinions of the Professional and Managerial Caste (PMC) and by their ignorant but strongly-held views about the world, which the world itself had a responsibility to adhere to. Why bother with the labour of finding out the facts when are sure you know them already?

It’s one thing for governments to accept that they were wrong about some issue of fact, even if it’s not easy: it’s quite another to accept that they were deluded and that their brains were out to lunch.  When your public estimate of Russia, and your comments at the beginning of the war, are not based on any actual knowledge or any professional estimates, but just on ideological assumptions, then you lose the ability to respond and adapt as circumstances demonstrate the falsity of your assumptions. It is this incapacity that is causing an incipient nervous breakdown among western leaders, who resemble increasingly patients at a nursing home for the mentally afflicted, with their antisocial and sociopathic behaviour. ......................

So we can take it for granted that the western political class and their pundit parasites will never admit that they fundamentally misunderstood what was going on because they couldn’t be bothered to find out. It’s as if something as basic and menial as discovering what’s happening is too difficult, and anyway beneath them. There’s an entire, vicious, pointless  controversy being fought out in a virtual space by people completely separated from reality. In the past, this hasn’t really mattered because the consequences of our ignorance have never come back to haunt us. This time they will. ....................



Historical Fare:





Sci Fare:

In a recent paper, biologists outlined a three-part hypothesis for how all life as we know it began.





Other Fare:


....... The FAO and corporate executives have attributed recent food price increases to disruptive supply chains for oil, gas, fertilisers and staple goods. This is a half truth, and thus deceptive. They don’t mention how the current structure of the food system encourages and amplifies such disruptions.

For decades, the World Bank and the International Monetary Fund (IMF) have promoted structural adjustment policies, and green revolution technologies (hybrid seeds + chemical pesticides and fertilisers) across the world. We now have a global food system designed around the production of a small number of agricultural commodities (wheat, rice, maize, soybeans, palm oil) in a few areas of the world totally devoted to the massive industrial production of monocultures dependent on the supply of inputs, and concentrated in the hands of a few companies. Any disruptions within this global system, be it war or drought, can have major impacts on people’s access to food. This is particularly acute in countries of the global South that are now highly dependent on food imports because of policies imposed on them through multilateral banks and free trade agreements. Moreover, we are entering a period of intense climate crisis, water crisis, geopolitical tensions, and declining crop yield gains that are set to generate more frequent and more severe disruptions. .........


Valter Longo, who wants to live to a healthy 120 or 130, sees the key to longevity in diet — legumes and fish — and faux fasting.


How do you tell that a defender of factory farming is lying? Their lips are moving.

Tara Vander Dussen has a piece, as short as it is dishonest, about factory farms not existing. It was written in the service of defending the existing farming industry and is rather typical of factory-farming apologia—insanely misleading, with nearly every sentence being either flatly false or in some way misleading, and filled with confident yet baseless assertions, and all done in an attempt to get people not to think too hard about the tortured animals that adorn their plates. .......




In the beginning there were many different sons of God – Western Christianity triumphed not by destiny but accident.



Pics of the Week:




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Sunday, March 24, 2024

2024-03-24

***** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:

Right from the get-go, the report authors warn that whatever Canada’s current situation, it 'will probably deteriorate further in the next five years'

A secret RCMP report is warning the federal government that Canada may descend into civil unrest once citizens realize the hopelessness of their economic situation.

“The coming period of recession will … accelerate the decline in living standards that the younger generations have already witnessed compared to earlier generations,” reads the report, entitled Whole-of-Government Five-Year Trends for Canada. ...



This week marks a new phase in the battle between markets and central banks about the timing of rate cuts. We are not at the end—no one is expecting the assorted central bank meetings to produce rate cuts this week. We are not at the beginning of the end—explicit forward guidance of rate cuts also seems unlikely. But we are at the end of the beginning. Ongoing disinflation forces continue to make a forceful case for rate cuts in the second quarter.

Rate cuts this year should not be considered to be policy stimulus. As inflation continues to slow, rate cuts are needed to prevent rising real rates, which would choke growth more aggressively. This year’s policies are anti-depressants, not stimulants....



... As regular readers are aware, an inverted yield curve has been the best predictor of a US downturn of any variable through history: the yield curve has always inverted before all of the last 10 US recessions, with a lag that is usually 12-18 months, but some cycles - certainly this one - take longer.... much longer.




The Fed simply cannot even

.... Central bankers have long argued that changes in interest rates affect global economies with “long and variable lags”.

So the continued strength in markets (including labour markets) doesn’t necessarily conflict with orthodox views of monetary policy. Nor does it mean that the Fed’s current monetary policy won’t ever affect the broader US economy. It might just be taking a while, for whatever reason. .......

..... All of this means that the US economy (and global economy) could still be due for a recession driven by lay-offs and falling incomes at current interest rates.

If the explanation is really that Fed policy is working but with a long lag, Perkins lists some “monetary canaries” that could show US policy is actually hurting growth. He’ll be watching residential property markets in Australia, Canada, the UK and Sweden; commercial real estate in the US and Germany; US corporate debt; and default rates from US consumers on credit cards and auto loans.

...... Although this scenario does not seem very likely and the hurdle for rate hikes remains high, the lesson of the past few years is not to take anything for granted. This is no ordinary business cycle.


The ‘pretend and extend’ tactics playing out in the sector need to end

That doughty — somewhat dull — Canadian insurance company known as Manulife does not often attract attention. This week, however, it caused a frisson in the real estate world.

Shortly before Jay Powell, Federal Reserve chair, announced that the central bank was keeping benchmark rates at 5.25 per cent to 5.5 per cent, Colin Simpson, Manulife’s chief financial officer, revealed that the group had written down the value of its US office investments by 40 per cent from a pre-Covid peak. 

“I like to think our property portfolio is of reasonably high quality and quite resilient,” Simpson told Bloomberg. “But the structural forces of higher interest rates and trends around return-to-office make it a difficult market.” In plain English: working from home has hurt.

At first glance, that looks scary; 40 per cent is a big number. But in reality investors should celebrate. One bit of good(ish) news is that Manulife has relatively deep pockets, and thus can absorb this blow. The second, more important, point is that Manulife’s move shows that some players are finally getting more honest about America’s commercial real estate pain. ....


.....


The evidence is overwhelming that the post-COVID inflationary spiral enabled many companies to hike the prices of their products considerably so that profit margins rose sharply because wage rises did not match price increases.  Inflation bit into the living standards of most American households, but not into the profit margins of the US multi-nationals and mega firms. ......

...... Profit-driven inflation seems to have been highly concentrated in a small number of firms and a small number of ‘systemic’ sectors, including extractive industries, manufacturing, IT & finance.

....... And most important, there is an issue of definition here.  Profit margins are not the same as profits.  Profit margins are the difference per unit of output between the price per unit sold and the cost per unit.  But the profitability of capital should be measured by total profits against the total costs of fixed assets invested (plant, machinery, technology), raw materials and the wage bill.  On that measure, outside of the ‘magnificent seven’ of US mega tech and social media corporations and energy companies, the rest of the US corporations are experiencing low profitability on their capital.  Indeed, it has been estimated that 50% of quoted US firms are unprofitable. ....

And remember, it is now well established that profits lead investment and then employment in a capitalist economy.  Where profits lead, investment and employment follow with a lag.



This strategy appears to be the path of least resistance for governments to reduce debt and keep bond vigilantes at bay

Financial markets and fiscal rules are pressuring governments to lower historically high public-debt-to-GDP ratios. Fiscal restraint and inflation are politically unpopular ways of doing that. And growing out of debt is less likely today, given low expected real GDP growth rates. What is known as financial repression appears to be the path of least resistance to reduce debt and keep bond vigilantes at bay.

This is defined as any policy with the explicit purpose of reducing the cost of government debt — such as forcing down real interest rates or steering central and commercial banks to buy up government bonds. There is historical precedence for financial repression as an effective solution to reducing the public debt burden. Following the debt accumulation of the second world wear, the US Federal Reserve pegged interest rates on government debt at a low level until 1951. Thereafter, the Fed kept interest rates below the level of inflation for many years. As US president, Richard Nixon put pressure on Fed chair Arthur Burns to ease monetary policy in 1971 ahead of the 1972 election. A recent IMF working paper estimates that financial repression during this time led to a reduction of over 50 percentage points in the debt-to-GDP ratio. .....


........

....... He said this high amount of debt that has been extended and modified rather than refinanced "helped mitigate a default wave and a sharp pick-up in losses on CRE loan portfolios." He noted the main driver of this has been the "willingness of lenders and borrowers to modify and extend maturing loans rather than refinancing or forcing a foreclosure." In other words, the can was simply kicked down the road ....



Abstract
The free market works because no one person or company is making the decisions. In a competitive market, businesspeople make the wrong decisions all the time, just as central planners do. But the consequences of those decisions don’t infect the market as a whole. Businesses that guess wrong lose money or go out of business. But as long as there is a competitor out there who guesses right, the market provides people what they want.

But it turns out that the very last thing capitalists want is a free market. Capitalism may thrive under
conditions of robust market competition, but most capitalists don’t. They would much rather operate in an environment free from government restraint but also free from the discipline of a truly competitive market.

Unfortunately, we have obliged them. At every turn, we have allowed the dominant forces in a market to erect barriers to protect themselves from being dislodged and to maximize their own profits at the expense of everyone around them. The result has been that while we have a capitalist economy, we no longer have a free market. Nearly every market sector is less competitive today than it was fifty years ago. We have centralized control over important sectors of the economy in a handful of companies. And we have given them the tools to use that control to prevent new competition, to make it hard for consumers to take advantage of what competition there is, to drive down wages, and to extract as much short-term profit as possible rather than invest in long-term productivity. Late-stage capitalism isn’t the free market run amok. It is the capture of markets by actors who have a vested interest in making sure there is no free market. And the consequences have been dire, not only for consumers, but for inequality and political stability in the U.S. and throughout the world ......



Bubble Fare:

********* Hussman: Universal Capitulation and No Margin of Safety

Based on the valuation measures we find best-correlated with actual subsequent S&P 500 total returns across a century of market cycles, the stock market presently stands at valuation extremes matched only twice in U.S. financial history: the week ended December 31, 2021 (the 2022 peak occurred the next trading day) and the bubble peak in the week ended August 26, 1929. While our investment discipline is to align our outlook with prevailing, observable market conditions, my impression is that investors are presently enjoying the double-top of the most extreme speculative bubble in U.S. financial history.

Present valuation extremes might only be a long-term concern if our measures of market internals were not also divergent and unfavorable here. It seems popular to imagine that “this time is different” – that the economy has entered a new era of permanently high profit margins and credit expansion; that a narrow, selective, two-tier frenzy among large capitalization glamour stocks is enough to carry the market ever higher. History is not friendly to these ideas, but no forecasts are required. Our outlook will change as observable conditions change.

This month’s comment offers an expansive and data-rich dive into profit margins and market composition. The objective is not to argue, or convince, or urge investors to do anything. We share our research, and we ask nothing in return. Still, if there is one suggestion that might be useful to investors here, it is simply to allow the possibility that market conditions will change. Whether your outlook is bullish or bearish, the notion that the current situation is permanent is exactly what will make you suffer. 

Current market conditions
I think we can all agree on two propositions.

First, if enough speculators believe that stock market gains are driven by a tap-dancing squirrel monkey named Bobo, and Bobo starts tap-dancing, well, the stock market is going up, at least in the short run. Neither truth nor logic have anything to do with it.

Second, because stocks are ultimately a claim on future cash flows that must be delivered over time, higher starting valuations still mean lower long-term returns, which is why no speculative episode in history has ever ended well.

Both of these propositions can be true at the same time. .......

The chart below shows our most reliable valuation measure, the ratio of nonfinancial market capitalization to gross value-added, including estimated foreign revenues (see the chart text for calculation details). We’ve observed greater extremes only twice in U.S. financial history: the week ended December 31, 2021, and the week ended August 26, 1929.

... The market can certainly advance during periods of unfavorable internals, particularly over the short run. Still, these periodic advances tend to lag T-bills on average, and the gains are often abruptly surrendered. Accepting market risk during periods of unfavorable market internals always comes with elevated risk, and that risk becomes steeper when extreme valuations and overextended market action are present, as they are today. Put simply, I trust the guidance we have from valuations and internals, and our defensiveness here is both uncomfortable and intentional.

If you can’t stand “missing out” on any market advance, and speculative exuberance tempts you to abandon your discipline, you might benefit from some passive investment exposure – not because we think it will do well, but to relieve your psychological discomfort. That’s a personal decision, and we need not be involved. For our part, our outlook will change as observable conditions change.

The scatter plot below shows the relationship between starting valuations and subsequent 12-year S&P 500 average annual total returns. I’ve broken the chart into two subsets, not because I actually believe the long-term relationship has changed, but to isolate the effect of repeated speculative episodes since 1998. As I detailed more fully in The Structural Drivers of Investment Returns (see the section titled “You may not like this part”), the apparent “shift” in the relationship between valuations and returns is a reflection of speculative bubbles that front-load returns, and then resolve with negative returns, as usual.

...

That said, we do find P/E ratios to be fraught with risky and unobserved assumptions. As Jeremy Grantham reminded investors last week, “if margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy – for waiting somewhere in the future is another July 1982 or March 2009 with simultaneous record low multiples and badly depressed margins.”

.......... While we’ve increasingly prioritized the condition of market internals in our discipline, valuations still matter. It’s just that they matter for long-term returns and have less reliable effects on short-term outcomes. ..............

Meanwhile, as Graham and Dodd observed about the advance leading to the 1929 market peak, investors seem to have abandoned an analytical approach, except to the extent that it reinforces the idea that “good” stocks are sound investments regardless of how high their prices may be .........


Quotes of the Week:




Charts:
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(not just) for the ESG crowd:









Due to a flurry of western support for Ukraine, now escalating to ground troop insertions, Russia had to move its special military operation in Ukraine into the bigger scope of a full fledged war. .....



This should be seen as the Kremlin’s clearest signal yet that it’ll respond to the scenario of a conventional Western intervention by striking those opposing forces in line with the international laws governing this form of conflict... Kremlin spokesman Dmitry Peskov told the Argumenti I Fakty newspaper that “We are at war. Yes, it began as a special military operation, but as soon as this group was formed there, when the collective West became a participant in this on the side of Ukraine, for us it already became a war.” This is unprecedented since national security legislation prohibits the use of the word “war”, which is regarded as a mischaracterization of the way in which Russia is conducting what it refers to as a special operation.

The distinction is important regardless of whatever Western commentators claim since a special operation is a voluntarily limited military action whereas a war is only restricted by the international laws governing it (and only then if they’re abided by or externally enforced). Additionally, fighting what’s legally designated by the state as a war instead of a special operation pressures the authorities to respond accordingly to the West’s participation in this conflict, thus heightening the risk of escalation. ........


***** Lawrence: Authorized Atrocities
Israel’s lawlessness has a history that those in the West share with the apartheid state.


Our culture of ennui

............ As a former correspondent abroad, I have taken up the peculiar habit of collecting headlines that reflect on the commonly shared preoccupations of Americans, their thoughts and feelings—the American zeitgeist, this is to say. These are drawn from a large inventory stored in my computer. What do they tell us?

With Russia’s intervention in Ukraine—a military operation I consider regrettable but inevitable given the Western alliance’s incessant efforts to subvert the Russian Federation—the U.S. brought us as close to “nuclear Armageddon,” Biden’s phrase, as we have been at least since the Cuban missile crisis 62 years ago. In the case of Gaza, the U.S. fully supports Israel as it bombs, shoots, and now starves Palestinians in the cause of an ethnic-cleansing genocide that begs comparisons with the diabolic viciousness of the Reich in the 1930s and 1940s.

There is something quite “off,” even indecent about Americans’ fascination with Taylor Swift and garden hoses in these circumstances. ........





At some point, an America President will shut down the southern border, ban social media, and openly wage genocide and/or start World War III. And it won't be Trump that starts it. Biden has already done Trump's homework.

Biden has already laid the legislative groundwork for a President shutting down the border and banning media he doesn't like. He has already done the wetwork of starving millions of civilians to death in Palestine and starting a land war in Eurasia. Trump doesn't have to start anything. He can just finish it.

In the same way, Biden just picked up Trump's homework and cribbed from it. Biden has continued Trump's 'cold' wars with China and Iran, and added Russia to the mix. Biden has continued caging people at America's illegitimate southern border and continued deporting them from stolen land. Whereas Trump merely yelled media and social media, Biden has pushed legislation to ban entire platforms. And whereas Trump merely looked like he'd start World War III, Biden has effectively done it in Ukraine.

American Presidents historically just hand-off homework to each other, and the big assignment is fucking up the world as much as possible. Americans like to act like Trump is some unique evil and he's not. He's just an honest American, like Hitler was the last honest European. Trump is honestly evil, whereas Biden is just a sanctimonious sack of shit, doing the same things except more organized. He's laying the groundwork for a fascist Trump Presidency quite capably and in 2025 you'll see them shake hands.

Blockquotes
As the (racist) Hannah Arendt said about pre-Nazi Germany, Trump's positions are “actually the attitudes and convictions of the bourgeoisie cleansed of hypocrisy.” ............

............... What are the actual choices here? It's like a choosing between kicked in the left nut or the right nut. Who gives a fuck? The fact is that Biden and Trump are just two wrinkly old nuts in the same sack. ..........

As I've said, Biden deserves to lose (to be hung, actually) and Trump doesn't deserve to win. You could say America doesn't deserve this, but oh yes, it does. Americans are just Nazis that won. ..........



The New York Times reports that the Biden administration is dispatching a whole "army of lawyers"  on a special mission to aggressively seek and destroy any and all challengers to the unpopular incumbent's continued reign in the White House.

What - you still thought that democracy included giving voters an actual choice on Election Day? To the contrary. Anybody still operating under the delusion that our form of government is anything but a fascist oligarchy should be getting a cruel wake-up call with this latest news. Not only are they acting like the dictators that they accuse Donald Trump of wanting to be, they are flaunting their own authoritarianism right out  in the open. No matter to them that they are also flaunting their abject fear of the voting public  right out there in the open.

Not for nothing does the Times headline characterize such anti-genocide candidates as Cornel West and Jill Stein as "threats" - literal enemy combatants of the World Order.

These and other upstarts are, according to the article, "peeling away" votes that Joe Biden presumes that he, and he alone, rightfully owns. If this tired old flaying-alive nonsense doesn't plant an image in your head of a puckered rind being pulled off an old lemon whose pulp is revealed to be covered with toxic mold, then I guess you're not as much into horror as I .....





... I’m always talking here about the need to fight empire propaganda to help the public awaken to the fact that everything we’ve been trained to believe about the world is a lie, because that insight taking root in sufficient numbers would be the first step toward the revolutionary changes our world so desperately needs.

But large numbers of people opening their eyes to the reality of mass-scale psychological manipulation by the powerful would by itself be insufficient, because people need not only to see the truth — they also need to care. ..........



Sci Fare:




Other Fare:

You don't need to know that.

.......................... What we may call the “signal to noise” ratio of data available today has probably never been lower, even while the quantity continues to grow. .................

The sheer quantity of data —again, let’s not confuse data and information, let alone knowledge—is burying us .............

What this does is to clear an enormous amount of space in your brain, and to avoid stressing yourself with unnecessary emotions about things you can’t influence. So once you have decided that what’s going on in Gaza is terrible, which it is, how many more videos and stories do you need to subject yourself to in order to confirm that view? ............


The infantilizing social control of the university.


Perception-altering drugs are going mainstream. Could a new movement driven by profit bring more harm than healing?


Trillions of black soldier flies slowly starve to death

1 Beneath the giants’ heels
The giants ruled the world and

They reshaped it a lot

Nature warped beneath their hands

Vast palaces were built, but not

Much heed was paid to those below

Those trampled by their feet

They didn’t really care to know

What those tiny beings could be

One day some giant scientists performed some basic tests

On those tiny little creatures, who got crushed and squashed and bled

It turned out those little guys, by the word human, that were addressed

Could feel, and laugh, and love, and yet their blood was flowing red

A few especially caring giants wondered what to do

For these beings that they killed and maimed

Were, as they said, “just like me and you.”

And were screaming out in pain

They hoped and prayed that this would change

The way that things were done

That they could mitigate the insane

Destruction wrought upon the tiny screaming ones

They asked those advocating change for giants ill-treated

If they’d support reshaping

The practices done to these creatures

That they were mercilessly razing

But those progressive giants shook their head

And in their heels dug

For though these creatures became dead

Nothing should be done

And though the science did suggest

That they could feel all

Could morality need one acquiesce

To the demands of one so small

Meanwhile, many miles below, the little humans screamed

They wished that they’d have respite from

The giant torturous fiends

2 Reasons to care
Soon, trillions of insects will starve.

This article is about the mistreatment of insects. I write this knowing that virtually no one cares about insects being mistreated, however badly. I am going to try very hard to get you to care about these creatures that matter, that cry out in agony by the trillions. Yet I recognize most of you will continue to be indifferent.

Caring about insects is treated as so manifestly absurd that people reject any view implying we should do it, however otherwise plausible. Bryan Caplan thinks we shouldn’t care about animals because if we do, we’d have to care about insects, and that’s clearly crazy (his argument is wrong).

And yet the evidence is mounting that insects can feel pain, just as non-insects can. ........



Pic of the Week






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