Friday Highlight Reel - Edition #11

A sampling of interesting observations from the Haymaker's network of market experts and favorite resources.

(Directly quoted content appears in block-quote format, unless otherwise indicated)

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#1: Evergreen Gavekal Senior Analyst, Gherman Howell, Referring to a Recent Goldman Sachs Chart: 

“Sharp declines in breadth like the one we’ve seen recently tend to precede some meaningful reversals in market direction.”

Goldman Sachs

Haymaker Take: For anyone who has watched my recent podcasts or read our Making Hay Monday articles, you’re aware that market “halitosis” is one of my repeated themes. The fact that 95% of the S&P 500’s first quarter 7.5% return was generated by just 10 stocks is a classic example of bad market breadth. In fact, 90% of the Q1 gain came from a mere five stocks. To that point, the above Goldman chart drives home the risks much better than I have, despite my best efforts. (It’s an age-related thing!)  When you combine this with a still-militant Fed, the potential for a bruising debt-ceiling battle, a severely inverted yield curve, an earnings recession, growing odds of an actual recession, it’s hard not gravitate toward the safety of 5% short-term government bonds. (This is not to say investors should exit the stock market; rather, I believe being unusually defensive is appropriate.) 

#2: The New York Times Taking a Soft View on Cause-Driven Destruction

The New York Times

You don’t often see a realistic story about sabotaging Texas oil infrastructure on American movie screens, but ‘How to Blow Up a Pipeline’ dramatizes in detail the bombing plot of a group of young environmental activists.

Haymaker Take: If that doesn’t send chills down your spine, then I’d suggest you have become much too numb toward our nation’s terrifying flirtation with civil war. In the past — including my book, Bubble 3.0 — I’ve written about the Swedish academic, who also advocated blowing up pipelines. His call to action was favorably — and, in my view, deplorably — showcased by New York magazine. But at least he suggested only attacking uncompleted pipelines. (Undoubtedly, he was thrilled by what happened to Nord Stream 2, perhaps not as much with NS 1.) Incredibly, the above-referenced film received acclaim when it was shown last year at the Toronto International Film Festival. Do these people not realize the extent to which their climate fanaticism is jeopardizing the welfare of millions of Americans? Does it not dawn on them that by kneecapping the U.S. energy industry they are playing into Putin’s blood-soaked hands? Ironically, they tend to be the same folks who are most passionate about defending Ukraine. My suggestion is that for those who truly want to dramatically reduce the use of fossil fuels they: 1. Install solar panels on their homes (I have); 2. Support a tax on burning coal and/or tariffs on the leading coal-consuming countries that are also massive exporters (I do)*; 3. Invest in one of the many small modular nuclear reactors start-ups now in existence (I have). Frankly, I’m appalled The New York Times ran this article without any sense of balance or appreciation of the support for anarchy it implies. 

*The European Union does, as well.

#3: Seeking Alpha on The Stagflation Situation

Seeking Alpha

Arguably the most disconcerting word in the economic lexicon, stagflation (stagnant-inflation) refers to a period of low growth and low consumer demand combined with rising prices.

Recent data indicates that growth has indeed begun to slow down while prices have continued to creep up.

While the economy has been choppy throughout 2022 and thereafter, GDP momentum appears to have shrank materially in the past quarter and could very well lead into a contraction in the following quarter. This is a widely expected outcome at present, although there continues to be disagreement about the severity and duration of the purportedly imminent recession.

Haymaker Take: It's been quite awhile since America has had to stare down the economic boogeyman known as stagflation. The last time the U.S. dealt with this particular phenomenon, which is characterized by the awkward conflation of rising interest rates and a stagnant economy, Paul Volcker was the head of the Fed and bands like Captain and Tenille, Barbrara Streisand, and the Bee Gees were at the top of Billboard Music charts. 

I see a number of stagflation signs out there presently. In fact, as the economy continues to lose steam and the CPI remains elevated America increasingly seems to be going “stag”.  Based on the Fed’s preferred measures of inflation, it is stuck at a stubbornly high level, in the 5 1/2% to 6% range. (Core CPI was clocked at 5.6%, which is actually higher than it was in 2022.)

On the positive side, lower commodity prices, especially energy-related ones, should provide inflation relief going forward… for a while. It continues to be my belief that oil prices, in particular, are set to soar later in the year. Thus, I am also of the mind that the Fed will continue to struggle to push inflation down near its dream target of 2%. 

As far as the economy goes, the ongoing meltdown in the share prices of the regional banks has to be a significant headwind to growth. With all but the largest banks losing deposits and facing mounting worries of another First Republic outcome (equity-, preferred- and bond-holders wiped out), lending is almost guaranteed to precipitously decline. In reality, it already is, with loan standards tightening even further. 

Not to worry, though. Yesterday, Jay Powell assured the world that the U.S. banking system is “sound and resilient”. Obviously, he must not own many regional bank stocks in his personal portfolio! (Yes, I realize his personal investments are highly restricted — unlike past Fed officials who were caught making some very questionable trades — so please consider that my feeble attempt at mere humor.) He also reiterated his belief that the U.S. will avoid recession, a view at odds with a phone call he had earlier this year with someone purporting to be Ukraine’s president Volodymyr Zelenskyy.

#4: Business Insider on an Economic Crisis... of People?

Business Insider

The United States is already running low on critical positions such as nurses, home-health aides, farmworkers, and truckers. And there are fewer young people on the way to make up the difference: The National Bureau of Economic Research found that birth rates in the US have declined by nearly 20% since 2007, while the fertility rate has been below the replacement level for decades.

That means that unless people start having a lot more kids, the US population could eventually start to shrink — just like China's population has. The problem, though, isn't just a smaller population, but an aging one. With fewer people to pay into Social Security to support the growing number of retirees and fewer workers in critical industries, including healthcare and agriculture, a declining population would have devastating consequences for the American economy.

Haymaker Take: When we think of the American economy, not having enough people to fire the locomotive isn't typically the first thing that comes to mind. Yet, population data suggests that a shortage of U.S. workers may be on the horizon. The National Bureau of Economic Research claims that birth rates in America have declined by 20% since 2007, and the fertility rate has been below the replacement level for decades. Highlighting the demographic deceleration, in 2021, population growth registered an unprecedented reading of just 0.12%. In the same year, deaths outpaced births in 2/3 of U.S. counties, which demographers refer to as "natural decrease". The larger issue, however, is that the overall U.S. population is senior-heavy and without enough younger people paying into Social Security to support retirees. Accordingly, a smaller population could have major economic consequences. 

One apparent solution to the problem is looking to immigration to replenish a population that has apparently shifted its opinion on procreation. Typically, immigrants are younger than the median American, which increases their likelihood of having children and boosting overall productivity. But this is a hot-button political issue and many Americans would like to see fewer immigrants entering the country, not more. The U.S. is short on options, however, and desperately needs an injection of young and productive workers in order to bridge the gap between young and old. The solution to this problem is not a quick fix and will require some strategic thinking in order to avoid an American workforce crisis with potentially disastrous economic repercussions. 

#5: The Credit Strategist on Our Debt-Based Economy

Lewitt

The term “fictitious capital” points to the speculative and unstable basis of wealth in a debt-engorged world.  In such a world, the value of all financial assets including stocks and bonds is suspect because it is inflated by borrowed money.  In the most recent bubble, which is bursting regardless of bloated equity indices and the huffing and puffing of Wall Street talking heads, equity values were fictitious because they were grossly inflated by zero interest rates that distorted the discount rates used to value them and lured investors into a psychological state of complacency and delusion. Because these low rates persisted for over a decade, they created a mistaken belief that they would persist indefinitely (even though a decade is a blink of time, it is eternity in financial markets).  The combination of zero rates and dependency on future events to vindicate their value rendered these equity values among the most highly questionable in history.  This explains the devastation of many stocks that lost virtually all their value since the peak of the bubble and serves as a warning to stocks whose valuations are unsupportable by fundamentals and are likely to suffer similar fates.  Just because these stocks haven’t yet succumbed to the end of zero rates doesn’t mean they won’t if they can’t vindicate the promise of future profits upon which their stock prices depend. 

Haymaker Take: Yes. We agree. Michael Lewitt, one of my favorite big picture thinkers, outlines the fundamental problems with our current measurement of wealth — namely, that any system wherein bloated illusions of real wealth run alongside parallel accumulations of deep indebtedness is not a system that can sustain itself for long. Haymaker subscribers and those of you who have read Bubble 3.0 know that this is a formula for gargantuan bubble growth, the sort than, once blown up, can wipe out major financial institutions and retail investors in one indiscriminate explosion. You may have noticed, a lot of that has been going on lately.

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To learn more about Evergreen Gavekal, where the Haymaker himself serves as Co-CIO, click below.

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#6: Forbes on an Odd Alliance Against Active Trading in Congress

Forbes

An eclectic group of lawmakers, including progressive Rep. Alexandria Ocasio-Cortez (D-N.Y.) and far-right Rep. Matt Gaetz (R-Fla.), proposed a bill Tuesday to effectively prevent members of Congress from actively trading stocks—the latest push to stop congressional stock trading, though previous efforts have faced opposition from both parties.

Haymaker Take: Those of you who have seen Mel Brooks’ History of the World, Part I might recall this line: “The Roman Senate is the best legislature that money can buy!”, a joke delivered by the comedian Comicus (played by Brooks). Of course, the joke goes over poorly, as Comicus is in the halls of power when belting out his routine, and Emperor Nero himself (Dom Deluise) is less than amused by the notion of his government being effectively for sale.

Here, some 2000 years later, we are all numb to the reality of elected representatives arriving at the Capitol Building either well off or kind of well off, only to leave a few terms later fantastically well off or preposterously well off. We don’t always know the details, but we don’t need to — elected office for many is a means of personal enrichment, and many of the system’s beneficiaries don’t even have the decency to be shy about it. So, if AOC and Gaetz want to form the oddest odd couple ever to oddly go about achieving some good in the way of reform, they deserve our praise for the effort, provided it’s not merely theatrical. Creating at least an impression that government service is meant to do right by the citizenry rather than guarantee extra zeroes in the bank accounts of those “serving” would be a sizable step towards restoring faith in yet another of the republic’s ailing institutions.

#7: Wired on Tesla’s New Rare-Earth Goals/Policies

Wired

... there are plenty of reasons for a car company to get rid of rare earth elements, if they can swing it. Ever since the early 1990s, when China’s leader, Deng Xiaoping, declared the metals to be his country’s equivalent to Saudi oil, they’ve been a kind of buzzword for trans-Pacific geopolitical anxieties. Never mind that rare earths are nothing like oil—the total market is worth about the same as the US egg market, and the elements can theoretically be mined, processed, and turned into magnets all over the world. But China is the only place that does all of it. 

China’s near-monopoly is partly due to economics—in the 1990s, cheap Chinese rare earths flooded the market, hastening the shutdown of mines and processing in places like the US—and partly due to environmental concerns. Mining and refining rare earths is a notoriously toxic business, in part because the most valuable elements, like that magnet-boosting neodymium, come tightly bound with other rare earths, as well as radioactive elements like uranium and thorium. Today, China produces nearly two-thirds of rare earths mined worldwide and processes more than 90 percent of the world’s magnets.

Continued…

It’s unclear whether other automakers will follow Tesla’s rare earth trade-off, Kruemmer says. Some might stick with the baggage-laden materials, while others go with induction motors or try something new. Even Tesla, he says, probably will have a few grams of rare earths sprinkled in its future vehicles, spread across things like the automatic windows, power steering, and windshield wipers. (In a possible sleight of hand, the slides contrasting rare earth content at Tesla’s investor event actually compared an entire current-generation car to a future motor.) Despite workarounds like those in the works at Tesla, rare earth magnets sourced from China will remain with us—including Elon Musk—especially as the world pushes to decarbonize. It might be nice to replace everything, but as Kruemmer says, “we simply do not have the time.”

Haymaker Take: There is little doubt that EVs will continue to gain traction (pun slightly intended) in the consumer automobile market for year to come. They have been very well pitched and sold as green-friendly alternatives to ICE vehicles, and Tesla ownership, almost like mask-wearing after the Covid pandemic ended, is meant to signal a certain conscientiousness on part of the owner.

So, if that’s the case, their manufacture should at least be aligned with the ecological and humanitarian principles their owners claim to hold. If Tesla can both realize their stated goals in this regard and also navigate the growing EV industry in that same direction, perhaps the narrative and the reality of EV manufacturing can be brought into closer agreement with one another. Musk has many flaws but he has been able to accomplish some truly remarkable feats… including constantly skirting around SEC regulations with but a few wrist-slaps as a result.

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Bonus: The Return of “David Squared”

Haymaker Note: Below is an embed of my second appearance on The David Lin Report, and my third time being interviewed by David (first was on Kitco News). I call these our “David Squared” discussions, a humorous title which David is happy to use himself. This was interview was scheduled for 15 minutes but ran triple that time, as there was just too much to cover in a quarter hour. Hope you can find time to listen and share some thoughts in our Comments section. Thank you!

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