William Shakespeare’s play Richard III starts with the line: “Now is the winter of our discontent.” In general practice this means ‘our’ unhappiness is reaching an end, as winter is generally considered to be the ‘last’ season for whatever reason. I suppose this is because Spring is the season of rebirth.
So, perhaps I should start the meat of this newsletter with: “Now is the winter of our content.” Why? Because I can’t remember a time in my professional life when the markets have had such little confidence and society so much, dare I say, anger for such little reason. Seriously, and it isn’t just in the United States. This angst is global.
But why?
To be sure, domestic economic data would suggest there is a sharp divergence between perception and reality, as the economy appears to be doing just fine…thank you very much. So much so, it reminds me of Mark Twain’s famous quote: “The report of my death was an exaggeration.” So, I can’t blame bad economic conditions for the wall of worry. It has to be something else. Indeed.
While not terribly scientific, I keep coming back to ‘a crisis in confidence’ as being the underlying reason the investment markets have been and are performing so poorly. As I type, almost nothing has worked very well in 2018. With the exception of some REIT indices, it is hard to find an asset class squarely in the black for the calendar year to date. Ordinarily, or at least intuitively, risk averse assets like government debt should do well when stocks slump, but not this year. Precious metals haven’t performed well either. Small-cap and mid-cap stocks? Don’t ask. International investments? Puh-lease; all major foreign benchmarks are doing worse than their American counterpart. I think you get the point.
The only thing which has really ‘worked’ is good, old-fashioned cash, you know, idle balances. Not surprisingly, the most often used proxy for the money supply, M2, has ballooned over the last couple of weeks. Over the last 4-weeks, M2 has grown at a 10% annualized rate, with a $118 billion increase in demand deposits in the banking system over the last week alone (11/26-12/03). That type of weekly move is, shall I say, most unusual. In so many ways, the phrase “rats fleeing a sinking ship” comes to mind.
But why and how has the message to investors become so muddled? Basically, why is there such a crisis in confidence? My thoughts run the risk of alienating a few folks.
Globally, it seems there is a lack of effective leadership, in general. Obviously, we all know the political divisions in the United States; Congress’ absolutely abysmal approval ratings, as well as the President’s less than favorable ones. Combined, it is kind of safe to say the average American doesn’t really hold its leaders in high regard. We are not alone; far from it.
To that end, the UK Prime Minister (Theresa May) and French President (Emmanuel Macron) make Donald Trump look like the most popular guy in school. This past week, May only survived a ‘no confidence’ vote in Parliament because she basically offered to step down. Macron? His approval rating is less than half that of the Donald’s, around 20%, and the ‘yellow vest’ movement is wrecking the place. For her part, Angel Merkel’s governing political party enjoys around a 25-26% popularity rating. Canada’s Trudeau? From what I have seen, he bounces up, down, and around Trump levels depending on the day. Japan’s Abe’s approval ratings are even more volatile than Trudeau’s, but it doesn’t appear as though anyone else really wants the job. Italy rounds out the G-7 and, surprisingly, it’s government alone seems to enjoy the majority will of the people. However, as we all know, political conditions in Rome can change at the drop of a hat.
Typically, I believe politicians get too much credit for the good times and too much blame for the bad. But you have to wonder what it means when the entire former 1st World, basically, is upset/angry with its elected leadership. This seemingly coordinated angst and dissatisfaction with leadership is sort of bizarre.
So, perhaps the disconnect between economic reality and investment psyche isn’t as strange as it would appear; investors have lost confidence in their leaders, and therefore ‘the system’ itself to some degree. Hopefully, this is a short-term phenomenon, but someone has to step up to the plate in a meaningful way.
Now, Dwight Eisenhower once said: “Leadership is the art of getting someone to do what you want because he wants to do it.” I like this definition a lot, because the underlying message is spot on accurate: an effective leader is able to persuade rather than coerce. Further, an effective leader also knows that is what they are supposed to do: lead.
At this point in time, given the fragile nature of the markets, among other things, there is really only one person who can assuage investors’ fears: Jerome Powell. Next week’s FOMC (Federal Open Market Committee) is going to be his chance to shine, to take charge, to be a leader. What is he going to do about it? What is the FOMC going to do about monetary policy? Is it going to stick its proverbial head in the sand? Or is it going to be smart, and understand the current state of things?
Make no mistake about it; a well-crafted statement, leaning slightly towards the dovish side on monetary policy and acknowledging the markets’ current turmoil, would be very strong medicine. Can Powell lead the remainder of the FOMC to do this? To put aside the academic mental gymnastics for a meeting, or two, in order to allay fears? While soothing investor worries is not one of the Fed’s so-called dual mandates, neither is facilitating the loss of billions upon billions of dollars in market capitalization by being stupid, which a hawkish statement next week would do.
In the end, make no bones about it, the global economy and markets need Powell to step up to the plate next week AND BE SMART. He needs to be a leader, and, if he can be one, the markets will regain some confidence here at the end of the year and make back what global discontent has lost here in the 4th Quarter.
Have a great weekend.
Norris