Section I
Although the stock market has been a veritable roller coaster ride this week, interest rates and gold really haven’t done much of anything substantial. Oh sure, a few basis points here and a couple of dollars there, but nothing I would call out of the ordinary. This is significant, because if hell really were coming to dinner like a lot of people think, so-called safety assets would be performing a lot differently.
Two weeks ago, the 2-Year US Treasury Note had a yield to maturity of 2.26%. It is 2.27% as I type here on April 6th. An ounce of gold would have run you about $1,350/troy ounce a fortnight ago. Today, it will cost you roughly $19 less. Finally, the granddaughter of them all, the 30-Year Treasury Bond closed at 3.06% a couple of Fridays ago, around 3 basis points higher than where it is trading this afternoon.
This wild week hasn’t been a lot of fun, but I will really start worrying when investors start noticeably putting their money in ‘bunker mentality’ assets. While that is still a possibility, I don’t mind stating what I think is obvious: no one really knows what a trade war, or increased tariffs with the Chinese, will ultimately engender, because no one working on a trading desk in 2018 can remember the last time we had one. After all, ‘we’ have been pushing for freer trade with our partners for the better part of three decades, using the US-Canada Free Trade Agreement of 1/1/1989 as the starting point.
To be sure, the free flow of products, services, and capital across the global economy is good for growth, and the average, um, earthling is better for it. However, that doesn’t necessarily mean American mill towns and our blue-collar workforce are. We could debate that until the cows come home, and probably not come to a conclusion: will a 25% tariff on 10% of our imports from China ($50 billion as of today) drive the US, and potentially global, economy into the dirt?
Could be, but the Treasury and precious metals markets aren’t suggesting as much.
Interestingly enough, with all the brouhaha over the Chinese, it seems more people are concerned with the Facebook situation. As an article by Navneet Alang from The Week so aptly put it:
“Nowadays, with the Cambridge Analytica scandal dominating headlines and the social network home to billions of users, those more humble origins can feel a universe away.
In response to the controversy — in which the data firm is alleged to have accessed the private information of millions of users without permission — we have seen understandable calls for something to be done about Facebook. Critics say tech companies must adjust how they harness data, a problem to be addressed by something like a Digital Protection Agency. Others demand that Facebook be regulated.
These are all perfectly reasonable reactions. But overlooked in the focus on data is also how we use Facebook — that is, the social norms that govern Facebook’s place in our lives.”
Huh? What do you know? People are starting to wake up about how much they are sharing and with whom they are sharing it, or at least some people. Laughingly, sort of, I told this to a client yesterday: “you know, when we were kids, we all assumed the CIA knew everything about us. Today, we know Mark Zuckerberg does.” Yeah, it is kind of scary.
I can’t remember if I have previously shared this, but long years ago I opened a Facebook account. I had just recently watched the premier episode of ‘The Walking Dead.’ While I had never cared much for zombie flicks, that was quality television. So much so, I “liked” it in my profile, and didn’t think a thing about it. In fact, I forgot all about it.
So, I was very confused with all the ads about zombies and other horror stuff with which Facebook bombarded me every time I logged in. No, I didn’t and still don’t like Iron Maiden, and I think the group’s mascot Eddie is creepy. So, I didn’t care about their greatest hits album or US tour dates. What the heck? Being sort of slow on the pickup, this went on for quite literally months.
Then it dawned on me, and I wondered what would happen if I deleted ‘The Walking Dead’ from my “likes.” Guess what? I quit getting all that weird advertising, and it kind of freaked me out. So much so, I deleted all my other “likes” as well, and the number of ads, in general, fell through the proverbial floor. The best part? I had willingly given all of this information about myself to strangers. What a rookie mistake. My mama didn’t raise me to be so stupid.
Oh, the mind boggles when you start thinking about that long and slippery slope. Does Google track and maintain each search you make? Does your ISP have a log of all the sites you have visited? Is there someone out there tracking each so-called friend and/or follower? Did a friend of yours befriend a terrorist? How can you control that? Is someone watching when you tweet and retweet? Can folks take control of the camera on your monitor without your permission? Can someone watch you through your phone as you read this? Is there a company or government agency tapping into the wireless network at your home or office?
Do you really want to know the answers? For some reason, the first line of “1984” comes to mind: “It was a bright cold day in April, and the clocks were striking thirteen.”
It would seem Big Brother is among us. But what does it mean?
In truth, probably nothing for the vast majority of people, say, 99.9999%. Most of us just aren’t rich or interesting enough for anyone to really care about our favored websites, whether we watch reruns of The Gilmore Girls, or have any Sinatra in our playlists. Nope, most of us are nothing more than a crypto-folder of zeros and ones some program can decipher to determine what goods and services we are most apt to purchase. That’s it.
…but the data is out there AND someone or something could get ahold of it if they really wanted to do so, right? Well, I am no tech whiz, but the answer would seem to be a completely unqualified yes. The only issue is whether the costs associated with dredging up the dirt on Joe Sickspaque are worth it. They probably aren’t.
Regardless, Facebook CEO Mark Zuckerberg is testifying before the House Energy and Commerce Committee next Wednesday about his company’s data privacy procedures. He could also end up in front of the Senate Commerce Committee, as well as the Senate Judiciary Committee. This will be incredibly interesting, because it could very easily set the wheels in motion for increased regulation of the tech sector, social media in general, and the Internet. In essence, our free flow of information, our freedom to stupidly share personal information with the masses, could be endangered.
Trust me, this could be a much bigger economic story than a 25% tariff on $50 billion worth of Chinese imports. So, what should we expect?
Here is what a Jennifer Wells at The Toronto Star has to say about it:
“What Zuckerberg will fail to do is present a convincing case that American Facebook users, victims of what [Senator Ed] Markey shrewdly calls “privacy malpractice,” are in control. Just last Wednesday Zuckerberg informed reporters of evil hackers roaming the Dark Web feasting on a handy Facebook feature that enabled them to harvest all manner of personal information. “We built this feature, and it’s very useful,” Zuckerberg said with understatement. “There were a lot of people using it up until we shut it down today…
Similarly, the broken contract between Facebook users and the company will be the key focus of the proceedings. Mark Zuckerberg will no doubt be well prepped in how to appear contrite before whirring cameras and a phalanx of politicians. Perhaps he will appear modest, describing himself to interlocutors, as he did on a Freakonomics podcast, as “an accidental CEO.” Perhaps he will say, as he did to Stephen Dubner in that interview, that he didn’t start Facebook with the intention of building a company.
He would be wise to stay clear of grand pronouncements about creating meaningful social bonds, having a positive impact on the world and breeding happiness through connectivity. That won’t wash.
A Congressional hearing is not the place for candy floss mission statements.
What Congressional leaders should be probing are internal controls at Facebook, a structure that allows for free-wheeling engineers, a hands-off policy by Zuckerberg himself, which conflicts with an unacceptable governance structure that has him in both the CEO and chairman’s chair. Where are the checks and balances?
If committee members have done their homework, the company’s past run-ins with the Federal Trade Commission — and Facebook’s failure to abide by past promises — should be a pivotal moment.
Facebook has lied before. Why should anyone believe Zuckerberg now?”
Now, I don’t care a fig about Mark Zuckerberg, and know very little about him as a man. With that said, that particular reporter’s predictions seem pretty prescient. IF they are, we might be just witnessing a veritable Pandora’s Box, and we will do our utmost to stay ahead of the curve. Further, again IF they are, we might just see those bunker mentality assets behaving a little differently.
Section II
Volatility much?
At the beginning of last year, we told our clients to expect a positive year with some ‘chop’ during the 3rd Quarter, read summer. That didn’t really happen. In fact, 2017 was quite possibly the least volatile year I can remember in my career. The numbers suggest it actually was.
So, we kind of doubled down at the start of 2018, and told folks: “you shouldn’t expect another double-digit year this year. While that was certainly nice, and I am not complaining, it just isn’t going to happen again. The math doesn’t work. At the end of this year, you will look at your statement and think “that wasn’t so bad after all.” However, it will feel like you went through a prize fight to get it.”
Right now, we are in Round 4 off a scheduled 12-round championship bout. It likely isn’t going to get any easier, but it will get better. At some point, investors will get back to reality, and the pendulum will swing back the other way. Regardless of the recent turmoil, the data pretty much all screams for modest GDP growth and decent corporate earnings. Those two things usually aren’t in the recipe for a meaningful stock market downturn.
Certainly, this time could be different, and perhaps it is. However, I almost always, if not always, find each time is less different than I initially thought, if that makes any sense. Perhaps the markets will collapse despite decent economic and earnings growth. The fact that doesn’t ordinarily happen, if ever, doesn’t mean it won’t this year.
But, couldn’t the recent stock market volatility trigger some kind of domino effect? Again, it could but it isn’t necessarily probable. The sell-off would have to be significant to significant dent financial system liquidity and household wealth. We are still quite a ways from that happening.
Going back to the bond market….the nuts & bolts are this: the yield curve is still positively sloped. Interest rates are slightly higher than they were at the start of the year, and little changed (for all intents and purposes) over the last couple of weeks. What’s more, for all the flipping and flopping, the S&P 500 is down only about 2.5% YTD after a suspiciously strong 2017. Things could be a lot worse, a lot.
Before you think I am being too cavalier, we are going to have an investment committee powwow next week to determine near-medium term strategy. Today wasn’t fun, but it is a reason to freak out? As I type, I would say not.
Have a great weekend
John Norris