Friday Haymaker
Great Minds Edition: Part II
Great Minds Edition: Part II
“Saying what we think gives us a wider conversational range than saying what we know.” -Cullen Hightower
Last week’s sampling of recent thoughts from several of our most highly regarded fellow financial newsletter scribes generated an unusual level of interest. As most of you are aware, we asked our prized sources to share their views on the extreme volatility, both up and down, seen in the financial markets in recent weeks. Consequently, we thought we’d include a few more, including a couple that came in after we sent out last week’s edition and some others from outside the Haymaker inner-circle.
One of those late arrivals is from Luke Gromen, publisher of The Forest for the Trees. Some of you who opened last week’s Haymaker edition later in the day, or in subsequent days, already saw his comments. However, we wanted to make sure all our loyal subscribers didn’t miss Luke’s response to our inquiry.
Luke is making a critical point with which we agree; namely, that Western policymakers are prepared to inject as much liquidity into the system as needed to prevent a major market convulsion. In America, we suspect that reaction function is likely to persist until the November presidential election. After that, all bets are off, in our view. Essentially, we’ve learned never to underestimate the Fed and the Treasury’s ability to stabilize the stock market, particularly to achieve a desired political outcome.
As Luke has often articulated in his newsletters, federal government tax receipts are now highly reliant on buoyant stock prices. With the deficit already pushing $2 trillion (again!), a further budget blowout would be about as well-received as a visit to the Kremlin by Ukrainian president Zelenskyy (unless he was “visiting” in a hearse).
One way policy poobahs could goose the markets between now and November might be by releasing $500 billion or more from the Treasury General Account (TGA). That is basically Treasury Secretary Janet Yellen’s checking account. She has proven herself most adept at bending markets toward her will, regardless of the long-term costs of levitating asset prices to dangerous levels.
The next entry, from Jim Grant’s organization, was admittedly not in response to our request for their thoughts, as were Luke’s. However, the factoids Jim Grant relayed in his August 2nd issue from Accumulus Capital Management’s Sam Wood turned out to be brilliantly prescient. Frankly, we believe they are still applicable to the fact that markets have put forth a decent rally (or maybe because of that return to the no-worries mindset). As you will shortly read, they are a wonderfully succinct summary of the set-up for serious market dislocations.
Don’t get us wrong: it may take another serious shakeout to trigger the usual fiscal and monetary trickery coordination known as the plunge protection process. It’s a policy prescription that began almost 40 years ago, under Alan Greenspan. We’re not sure at what point the Powell/Yellen put option will kick in, but we have no doubt it’s waiting in the wings of the Marriner Eccles and U.S. Treasury buildings.
Coincidentally, the author of the next section is also named Wood, in this case Christopher. He’s the brains behind one of my regular weekly reads, his chart-rich GREED & fear report.
One of the unique observations he’s making is that the exponential growth in illiquid private equity investments among institutional “whales”, such as endowment funds, has a feedback loop into public markets during periods of turmoil. When margin calls go viral, as they did recently, these entities are forced to sell what they can: their listed securities. It’s not that they want to, it’s that they need to. As Jeff Gundlach has said (slightly paraphrasing), when it comes to the financial markets, a force even more powerful than fear or greed is need.
It’s possible we are past the worst of the cascade of involuntary selling these de facto global margin calls precipitated. Yet the potential for another series of liquidation spasms should not be dismissed. In other words, it’s not a bad time to hunker down a bit and take advantage of some of the powerful snapbacks that have occurred.
In the next section, our friend and partner Louis Gave makes his case for why some caution is in order. In our view, he’s on the money when it comes to appreciating how literally explosive the situation is now between Israel and Iran. Of course, the Russian/Ukraine war is another geopolitical risk that has entered a new phase with the latter’s surprisingly effective incursion into Russia. If it continues to penetrate deeper into “The Motherland” – admittedly, a big “if” — Putin may threaten to deploy tactical nukes. If the threat becomes dire enough, he might go beyond threats. Regardless, the U.S. stock market continues to behave as if this is the late 1990s when the federal budget was solidly in the black, the economy was booming and geopolitical risks were negligible (at least for a few more years).
After those wise and cautionary words from LVG, we have a superb take from friend of the elder Haymaker, Trader Ferg, who has some concerns about the risks associated with too much free money and what current market conditions mean for commodities.
To end on an upbeat note, we’ve included a link to another Adam Taggart podcast. It seemed like the perfect counterbalance to the one we ran last week when he interviewed Danielle DiMartino Booth, another staunch Haymaker ally. For those of you who listened to that, you know she is convinced a recession is already underway. In fact, she contends it may have started almost a year ago.
Conversely, Adam's most recent interviewee, Darius Dale, is of the opposite mind. His firm is called 42 Macro because, logically, it tracks 42 different macro, or big picture, indicators. This remarkably comprehensive set of economic and financial signals has allowed Darius to make some of the best forecasts we’ve witnessed over these last few very confusing years. We’ll be the first to admit some of our anticipations have been thrown off by unprecedented conditions (such as the aforementioned federal deficits). Believe us, we’ve got a ton of company in that regard. However, that does not apply to Darius. For at least two years I’ve been tracking his forecasts and positioning. Those have been impressive enough to cause us to subscribe to his institutional service this week.
Accordingly, you’ll be reading some of his insights in future Haymaker editions. In the meantime, we think you’ll find this a fascinating listen… and be sure to check out the end when he discusses one of our favorite overarching themes: the Fourth Turning.
The Haymaker Team
Formatting Note: As with last week’s piece, we have not used a block-quote format for the externally sourced content; all externally sourced/provided material is indicated by a respective content banner and an introductory passage identifying the author(s).
