Guest Making Hay Monday - September 25th, 2023

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.

Sep 25, 2023

Charts of the Week

A market sub-sector on which I was increasingly negative as it pushed near all-time highs this summer was homebuilders. As I wrote several times, it surprised me that it was behaving so well with buyer traffic and affordability at subterranean levels. Another way of looking at this situation is Current Conditions for Buying Houses. As you can see, courtesy of the prolific David Rosenberg, these are at their worst since the early 1980s, when mortgage rates were in the teens and the prime rate was over 20%. Note, also, that when this metric broke decisively below its multi-year (actually, -decade) trading range it was a case of “look out below!”. This illustrates a point I’ve often made, that these definitive breakouts and breakdowns, also known as range expansions, provide valuable signals even with macro-economic data. As an aside, the leading homebuilder ETF is now down 8% this month. However, it remains up 26% for the year, after a brutal 2023.

Most U.S. investors are reluctant to buy emerging market debt. With certain perpetual basket-case countries, that is certainly understandable. However, many developing nations have been following fiscal and monetary policies superior to the U.S. (which, I admit, isn’t saying much). Moreover, they have amassed trillions of dollars in foreign currency reserves. This is another contrast to America which is now the planet’s biggest debtor. Even taking into account foreign assets the U.S. owns, America’s net liability position is nearly $17 trillion.

The Fourth Burning Turning: Revisiting Howe

“The public braces itself for the dark hour when the Fed can no longer ease and Congress can no longer borrow no matter how badly the economy founders.” -Neil Howe, The Fourth Turning Is Here. (Haymaker note: the first domino has already tumbled.)

“There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation has a rendezvous with destiny.” -Franklin Delano Roosevelt, June 27th, 1936

“You can’t handle the truth.” -Jack Nicholson as Colonel Nathan R. Jessep in A Few Good Men

As many Haymaker readers are aware, I’ve been captivated by Neil Howe’s new book The Fourth Turning Is Here. For those who missed my article on it, we’ve attached a link at the end. (Yes, like all of our most important content, it’s behind our “exorbitant” ~dollar-a-day paywall.) But the Twitter/X version of his main concept is that there is a master cycle that lasts about 80 years, divided into four roughly equivalent 20-year segments, each representing an approximate generation. The fourth of those, completing the meta-cycle, is essentially The Great Reckoning. Fortunately, at least in America’s case, this has also historically been The Great Resolution. Examples are this nation’s three epic conflicts: The Revolutionary War, the Civil War, and WWII.

Mr. Howe believes the start of this Fourth Turning was the Global Financial Crisis that began in the summer of 2007 and hit its crescendo in early 2009. He convincingly likens it to the stock market crash that ushered in the first phase of the last Fourth Turning, the Great Depression. Here’s a relevant excerpt that describes the eerie similarities between the 1930s and the decade from 2009 to 2019:

Both decades played out in the shadow of a massive global financial crash, followed by the most severe economic contraction in living memory. Both were balance-sheet depressions, triggered by the bursting of a debt-financed asset bubble. Both were accompanied by deflation and the chronic underemployment of labor and capital. Both failed to respond to conventional fiscal and central-bank policy remedies. Terms used to describe the 2010s economy, like ‘secular stagnation’ and ‘debt deflation’ were in fact resurrected from celebrity economists (Alvin Hansen and Irving Fisher) who first coined them in the 1930s.
Both decades began with measures of inequality hitting record highs, ensuring that social and economic privilege would move to the top of the political agenda. In both decades, leaders experimented with a multitude of new and untested federal policies. During the New Deal, Americans lost count of all the new alphabet soup agencies and programs (AAA, NRA, WPA CCC, TVA, PWA) — as they did again during the Great Recession and the global Covid-19 pandemic (ARRA, TALF, TARP, QE, QT, CARES, PPP, ARP).
* * *
In both decades, populism gained new energy on both the right and the left—with charismatic outsiders gaining overnight constituencies. In both decades, partisan identity strengthened, the electorate polarized, and voting rates climbed….Around the world, in both decades, authoritarian demagogy became a sweeping tide)…In both decades, meanwhile, globalism was in rapid retreat. Dozens of nations began or extended border walls. The grand alliances by which large democratic powers had earlier governed global affairs were weakening. Autocrats, their political model now gaining popular appeal, had widening room to maneuver. And maneuver they did, with terrifying impunity.

This edition of our Guest Making Hay Monday is very much in sync with Neil Howe’s overarching thesis. It’s written by my friend, the widely respected Michael Lewitt, author of The Credit Strategist. (As with this publication, Michael’s newsletter is eminently affordable and well worth the modest investment.) Like nearly all of the myriad newsletters I subscribe to, Michael eschews individual security and asset class guidance. Rather. he focuses on big-picture trends and does so with great skill. In fact, at the end of his note, he derides the short-termism that is so prevalent today, as exemplified by CNBC’s most famous ~~hyperventilating~~ talking head.

The “tyranny of the transitory” is also one of my pet peeves, particularly with such existential threats playing out right before our eyes. Like Michael, my mega-fear is of an immediate federal funding crisis. There is around $15 trillion of U.S. government debt that needs to be rolled over in the next 18 months. In addition, at the current budget deficit trajectory, there’ll be another $2½ trillion or so of fresh money that needs to be raised. With the Fed and the biggest foreign central banks sellers of U.S. Treasurys, that’s a totally toxic brew. As I’ve repeatedly written in recent months, this massive supply/demand mismatch has the potential to destabilize currently complacent financial markets (though the longer-term Treasurys are showing definite signs of stress).

Where I diverge a bit with Michael’s understandably dystopian view, is that I believe America is on the cusp of a radical political makeover. It’s been a while since I’ve discussed No Labels in these pages, but I think now is an opportune time to do so. In my almost 68 years on this planet, I’ve never been involved with politics. However, I no longer feel I can stay out of the fray. (If you are satisfied with the prospects of a Biden/Trump re-match, you should stop reading right now.)

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When I first discussed No Labels in past Haymaker editions, it was almost as anonymous as I am; over the course of this year, that has changed dramatically. The mainstream media is giving it increasing attention, much of it of a hostile nature, particularly from the left-leaning elements. But both hard-core progressives and conservatives fear it will pull votes away from their candidates. Frankly, I think they’re right… and that’s precisely the idea.

Polls consistently show Americans want a rational and viable alternative. No Labels’ proposed “Unity Ticket”, to be made up of two centrist individuals, one from the Democratic party and one from the GOP, is not a third party. Rather, it is meant to be a “Coalition of the Thinking” to be led by a pair of thoroughly electable people who represent America’s common-sense majority. For the past 20 years, we’ve been increasingly governed by the fringe elements of both parties, with the disastrous consequences we all witness on daily basis. (By the way, this is no pipe-dream; No Labels is closely affiliated with the Problem Solvers’ Caucus in Congress which has dozens of members from both parties, including arguably the most powerful “Joe” in Washington, D.C. — Senator Joe Manchin.)

Even though the last thing I need is more to do, I’m currently Washington State co-chair of No Labels. Additionally, I’ve committed to attending its first-ever convention next April in Dallas (where, ironically, one could argue, the moderate wing of the Democratic party was murdered almost 60 years ago). It’s because of the accelerating momentum No Labels is garnering that I’m much more optimistic about America’s future than is Michael. (Neil Howe also speculates that a new political force will rise out of the morass that is the current state of America’s political parties.) However, if No Labels fails in its mission, and either Biden or Trump are re-elected, my optimism will have to be put on ice for at least four more years. If that happens, let’s just hope and pray America’s Fourth Turning does not lead to a violent political makeover.

If you are intrigued by the No Labels movement, please download their Common Sense booklet (linked below). On page 9, you’ll see their succinct Foundational Beliefs. For those suffocating from the toxic fumes of our current political atmosphere, you are nearly certain to find this an invigorating breath of fresh air.

No Labels: Booklet Link

"This Is Later"

The Credit Strategist - Michael Lewitt

(Originally published September 3rd, 2023)

Since the year 2000, the world experienced three seminal events that changed the course of history – the 9/11 attacks, the 2008/9 financial crisis, and the Covid-19 pandemic. Each of these events unleashed political and policy responses that adversely changed the ways we govern ourselves and reinforced or accelerated negative economic and social trends. The consequences of those responses include not merely our ruined cities and their broken citizens but a debt-dependent economy and an ungovernable and corrupt political system. The last twenty years saw America rot from the inside physically and spiritually. We can pretend that we still have time to reverse our decline but the sad reality is that “This is later.”

The response to 9-11 intensified and expanded the surveillance state, increased the costs of everyday life, and directly led to the multi-trillion dollar wars in Iraq and Afghanistan that destabilized the Middle East and eroded American hegemony.

The response to the 2008/9 financial crisis unleashed unprecedented monetary and fiscal policy stimulus that expanded public and private sector global debt to unsustainable levels and massively expanded and intensified financial regulation, burdening the financial system and economy with enormous unproductive costs.

The response to the pandemic involved an unnecessary shutdown of the economy and extraordinary fiscal and monetary measures that further boosted the post-financial crisis measures still in place to create the biggest financial bubble in modern history that unleashed an explosion in global inflation that permanently elevated prices.

Looking back over the last twenty years of crisis management, we see the enormous damage wrought by intellectually and morally deficient policy responses that left the United States (and the rest of the world) far too indebted, regulated, and divided. Just as we were led by “the best and the brightest” into the disaster of the Vietnam War, over the last two decades we were led into sequential economic, military and public policy morasses from which we are unlikely to recover under our current system. The forces driving these negative conditions are too powerful and too locked-in to reverse. And our system leaves us consigned to repetitive cycles where political and business leaders - men and women with degrees from the best schools working at the most highly respected financial institutions and government agencies – make decisions that are destroying the world.

When I titled my 2016 book about some of these errors The Committee to Destroy the World, I was referencing a 1979 Time magazine cover that called Alan Greenspan, Larry Summers and Robert Rubin “The Committee to Save the World” as those three men dealt with earlier financial crises. My title referred to the world’s central banks but my publisher refused to put the photos of central bankers on the cover (which is among the reasons they won’t be the publishers of any future books I write). My point about the fecklessness of our central bankers, unfortunately, applies across the spectrum of economic and non-economic policymakers who over the last twenty years presided over the entirely avoidable deterioration of our fiscal, physical and social environment.

The evidence of these failures is irrefutable and the sooner we start speaking honestly and openly about them the better chance we have of reversing the damage. But as we watch the incredibly painful process of the next presidential election start to unfold, I don’t see any solution coming from within our present system that can possibly save us. The answer is going to have to come after we suffer a crisis so severe (much more severe than any we experienced over the last two decades) that the system is forced to change and new leaders unbeholden to our current broken system emerge with the support of enough good and decent people to carry us forward. There is nobody – nobody – on the political scene today who meets that standard. Anybody who might has the sense not to expose him or herself to the toxicity of the press, self-righteous inhabitants of glass houses passing judgment on others with the goal of destroying them and their families. Until our society again values high standards of achievement, character and decency, we stand no chance of cleaning up the messes that the people currently governing our country created.

There is no market for truth in America. Accordingly, there is a total lack of candor regarding the true state of the American and global economy. Headlines like “Resilient Economy Defies Expectations” that appeared over the byline of Fed whisperer Nick Timiraos in The Wall Streeet Journal on September 2 are eyewash designed to distract the masses from the underlying rot. Wherever you turn, the media and Wall Street are focused on discussions of topics that only matter if you have the life-span of a dragonfly (4-6 months – yes I had to look that up). The following largely irrelevant questions dominate the financial media these days:

Is the Fed done raising interest rates?

When will the Fed start lowering interest rates?

When will inflation hit the Fed’s two percent target?

Will the Fed raise its inflation target above 2%?

Are stocks expensive? Are they cheap/

Is the dollar overvalued? Is the dollar undervalued/

Are interest rates going higher? Are they going lower?

Blah, blah, blah….

My response to all of these questions is, “Who cares?” The question – the only question – that matters to those with the time horizons of humans and who are investing money in a serious manner (i.e., not worrying about meaningless things like beating benchmarks) is how to protect and grow capital as the world spins on its unsustainable debt-fueled course to oblivion. Who cares what happens over the next six months if everything is going to hell-in-a-handbasket after that? Without question, we are headed into a period of major economic dislocations unless we change how we govern virtually every aspect of our society starting with our economy which determines how we sustain life on earth. If we think the financial crises, wars and pandemic of the last two decades were tough, wait until we see what the world has in store for us over the next twenty years if we keep mismanaging our people, our environment and our economies.

To be clear - every major government in the world is engaged in a race to the economic bottom and nobody is willing to acknowledge that a race to the bottom only ends in one place – the bottom!

September 5th MHM

Haymaker

Guest Making Hay Monday - September 25th, 2023

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.

The Fourth Burning Turning: Revisiting Howe

"This Is Later"

The Credit Strategist - Michael Lewitt

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