Making Hay Monday – May 28th, 2024
Making Hay Monday
High-level macro-market insights, actionable economic forecasts, and plenty of friendly candor to give you a fighting chance in the day’s financial fray.
Special Note
This Making Hay (Almost) Monday is in a different format in order to close the loop from last Friday’s Bubble 3.0, Part I. Readers will likely care most about the investment recommendations with the meat of those behind the paywall, as usual. (Similarly, while there are no Charts of the Week in this edition, we will run a Chartbook Haymakerthis coming Friday.)
However, I do think it’s important for readers to understand the linkage between Bubble 1.0 (tech), Bubble 2.0 (housing and sub-prime mortgages) and Bubble 3.0 (almost everything). In my view, it was the U.S. government’s response — especially, the Fed’s — to the implosion of the first two that has created our current situation of over $30 trillion of federal debt, increasing at a rate of about $5.5 billion PER DAY. The consequences of Bubble 3.0 and, what could be called Bubble 3.5, are yet to be determined. However, during the next recession we are almost certain to see the rate of debt growth dramatically increase.
Evergreen Compatibility Survey
“You’re an ostrich with your head in the sand if you think there’s not social unrest in this country… it’s breaking out all over… this is extremely similar (to 1968).” -The reigning King of Bonds, Jeff Gundlach
“We are moving towards a doubling of demand growth for copper due to the electrification of the world, including electric vehicles, solar panels, wind farms, but also military usage and data centers.” -Pierre Andurand, Chief Investment Officer at Andurand Capital
Bubble 3.0, Revisited: Part II
Last Friday, in the first installment of this two-part series on my book Bubble 3.0, I promised to concentrate the second installment on how to position portfolios for these strange times. As many of you are aware, most of Bubble 3.0 was written in 2021 and published in early 2022, when financial markets were in a wild celebration mode, fed by massive excess liquidity. Which is to say, a lot like right now.
What’s different is that the underlying problems with America’s economy, politics, fiscal condition, financial system fragility, wealth inequality, and structural inflationary forces have gotten worse not better. Hold on, you say! The stock market is doing great. The S&P has made another new high, and isn’t the stock market the ultimate forecasting machine?
To answer that question, let’s look at its price chart both in late 2007, on the eve of the worst economic collapse since the Great Depression, and in the fourth quarter of 2021, as the excruciating dual collapse in stocks and bonds was impatiently waiting in the wings.
S&P 500: December 31st, 2002-December 31st, 2008 – (Click chart to expand)
Bloomberg
S&P 500: December 31st, 2016-December 31st, 2022 – (Click chart to expand)
Bloomberg
Perhaps a key reason why the market has failed to anticipate serious trouble directly up ahead is that the majority of trading is a function of either non-thinking participants (i.e, index funds) and algorithm-driven computers. Or, it could be, it’s because market meltdowns create economic contractions; ergo, until markets crack in a material way, the economy can continue to grow, however modestly (and modest has been the trajectory of the last 20 years). Perhaps the markets don’t just make the news, but the economy, too.
Regardless, history is high-definition clear that a prudent investor can’t rely on the stock market for reliable indications about the future. This is particularly the case when excesses, be they economic or financial, have been building up to dangerous proportions. Going way back, 1929 was a vivid example of that, as was early 2000. In the former case, the economic consequences were catastrophic; in the second, they were comparatively mild, despite the horrors of September 11th, 2001, that soon followed.
Bizarrely, however, the mild recession at the start of this century/millennium had disastrous results, as well. This was due to the Fed’s panicked and ill-advised reaction to that economic hiccup. Rather than let it work itself out, then-Fed head Alan Greenspan took the advice of luminaries such as Paul Krugman. At the time, Dr. Krugman, a Nobel Prize Laureate, was urging a new bubble to be blown to offset the wealth wipe-out that the tech crash had produced. His recommendation was for housing to become the new object of asset-price inflation.
Mr. Greenspan never admitted he fell for that reckless suggestion. Yet, his actions were totally Krugman-esque. First, despite the mild recession, he drove short-term interest rates down to Great Depression-like levels of 1%. Then, he encouraged home buyers to use adjustable-rate mortgages which were significantly cheaper than the far safer 30-year versions. Next, he and others at the policymaking controls stood by and allowed the subprime mortgage mania to go viral.
In due course, this combination of active and passive bubble-blowing behavior nearly destroyed the global financial system and economy. There was a very real risk of a 1930s replay.
To their credit, the Fed, the Treasury, and Congress belatedly realized the existential threats. Rescue programs such as Quantitative Easing (QE), the first iteration, and the Troubled Asset Program (TARP) turned the tide, despite their multitude of flaws. Perhaps the biggest deficiency was the inability to exit QE. Rather than a graceful phasing out, as the Fed chairman, Ben Bernanke, promised Congress at the time, a series of monetary ocean liners were launched: QEs 2, 3, and, unofficially in 2019, QE 4.
Once the pandemic struck, the ante was upped on QEs to the once popular, and now deservedly discredited, MMT, or Modern Monetary Theory. (In May of 2021, I debated the celebrated Ed Yardeni on MMT and inflation; in those days, he felt like it was working while I warned that it would cause the CPI to go ballistic.)
The essence of MMT is that the federal government spends without abandon while the Fed fabricates the money needed to finance that largesse. As we all know now, that’s exactly what the U.S. government did with what should have been predictable results for inflation. For over a year, the Fed was in denial about inflation’s staying power before it caved in and began the most aggressive tightening cycle in history. (That last point is widely accepted but, personally, I still don’t think it was as forceful as what Paul Volcker did in the early 1980s.)
Now we have a situation where the fiscal side, deficit spending, remains at levels consistent with a DEFCON 2 emergency. The Fed, though, is no longer monetizing, or printing money to cover, these indefensibleextraordinary deficits during an ongoing economic expansion.
Ironically, the Fed’s tightening campaign, which has driven short-term interest rates from barely above zero, to north of 5%, may have had the unintended effect of goosing the economy. Admittedly, I was slow to realize this phenomenon. But for the affluent, these higher rates have definitely been stimulative. Now, however, the majority of Americans and a multitude of smaller companies are beginning to buckle under the strain of interest rates approaching 10%. In the case of credit cards, those are well over 20%.
The point of the foregoing, in addition to setting up my proposed investments to own, and those to avoid, relates to the sub-title of my book: “Who Blew It And How To Protect Yourself When It Blows Apart”. Unquestionably, the main “perp”, in my mind, was the Fed and its constant bubble blindness. As we’ve seen, in some cases it was actual bubble pumping. Their absurdly easy monetary policies also encouraged Congress and several administrations to engage in unrestrained spending. The nearly zero cost of financing was irresistible to our vote-buying political leaders.
Okay, that’s the “Who Blew It” part. As far as the “How To Protect”, that was the core of last Friday’s Haymaker. For those of you who looked up the results of the investments I felt in late 2021 and early 2022 would perform well given the circumstances, you have seen that they were more than satisfactory overall. (Again, my apologies that I’m unable to provide the exact percentage results, due to SEC rules and regulations.)
It should be no surprise that some have performed much better than others. As usual, I’m attracted to the laggards, though I will admit the future for uranium strikes me as glowing, despite the monster move it has had.
Here’s a brief list of the areas I like best right now. These certainly should be no surprise to regular Haymaker readers. …
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IMPORTANT DISCLOSURES
This material has been distributed solely for informational and educational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. All material presented is compiled from sources believed to be reliable, but accuracy, adequacy, or completeness cannot be guaranteed, and David Hay makes no representation as to its accuracy, adequacy, or completeness.
The information herein is based on David Hay’s beliefs, as well as certain assumptions regarding future events based on information available to David Hay on a formal and informal basis as of the date of this publication. The material may include projections or other forward-looking statements regarding future events, targets or expectations. Past performance is no guarantee of future results. There is no guarantee that any opinions, forecasts, projections, risk assumptions, or commentary discussed herein will be realized or that an investment strategy will be successful. Actual experience may not reflect all of these opinions, forecasts, projections, risk assumptions, or commentary.
David Hay shall have no responsibility for: (i) determining that any opinion, forecast, projection, risk assumption, or commentary discussed herein is suitable for any particular reader; (ii) monitoring whether any opinion, forecast, projection, risk assumption, or commentary discussed herein continues to be suitable for any reader; or (iii) tailoring any opinion, forecast, projection, risk assumption, or commentary discussed herein to any particular reader’s investment objectives, guidelines, or restrictions. Receipt of this material does not, by itself, imply that David Hay has an advisory agreement, oral or otherwise, with any reader.
David Hay serves on the Investment Committee in his capacity as Co-Chief Investment Officer of Evergreen Gavekal (“Evergreen”), registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. The registration of Evergreen in no way implies a certain level of skill or expertise or that the SEC has endorsed the firm or David Hay. Investment decisions for Evergreen clients are made by the Evergreen Investment Committee. Please note that while David Hay co-manages the investment program on behalf of Evergreen clients, this publication is not affiliated with Evergreen and do not necessarily reflect the views of the Investment Committee. The information herein reflects the personal views of David Hay as a seasoned investor in the financial markets and any recommendations noted may be materially different than the investment strategies that Evergreen manages on behalf of, or recommends to, its clients.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated performance level(s), or be suitable for your portfolio. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
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