The Profits Driving Market Narratives and Hyperbole

“Spencer bought NIO a few days ago, and he is already up 35%”

The quote above is a friend’s text describing his 15-year-old’s investing prowess. When asked if Spencer realizes NIO Company (NIO) is worth about twice the Ford Motor Company (F), the reply was the equivalent of a blank stare. 
Spencer, and many new investors/speculators, both young and old, are currently enamored with stocks.
Most of these new entrants are passive. Passive investors and speculators are taking center stage. As they do, they diminish the role of active investors. By default, this means that liquidity and capital flows become paramount to investing strategies. At the same time, fundamental and technical analysis fall by the wayside.
For more on the popularity

You’ve got to ask yourself one question. Do you feel lucky?
On November 9, 2020, Pfizer announced encouraging test results pointing to an effective COVID vaccine. In response, investors aggressively bought the stocks most negatively affected by COVID and sold those stocks that had benefited. For example, Netflix was down 8.6% while Disney was up 12%. Banking, industrials, materials, transportation, and energy stocks did well while technology and communications fell sharply. The divergence of winners and losers was one for the ages.
To wit, in our latest Technically Speaking we shared the following:
“The recent rally has been driven by the former losers and much of this performance happened after the PFEs 11/9 announcement of very positive vaccine data. The moves since 11/9 are so dramatic

Cobras, Windows, and Executive Compensation Part II
In Part One of this series (Tales of Cobras, Windows, and Economic Promise), we discuss the “cobra effect.” It is a term that derives from a venomous cobra outbreak in India. We chose this tale to exemplify how solutions to problems, on occasion, have the opposite of the intended effect.
In this article, we present a two-headed cobra effect. First, government legislation designed to limit executive compensation and second, the influence of economists and academia to base executive compensation on “performance.”
Bush vs. Clinton
In the early 1990s, like today, there was a disproportionate gap between corporate executive compensation and employees. There was also discontent from academia that the level of executive compensation was not

Tales of Cobras, Windows, and Economic Promise
The heart of him who has understanding seeks knowledge, but the mouths of fools feed on folly. Proverbs 15:14
The term “cobra effect” is used when an attempted solution to a problem worsens the problem by unleashing unintended consequences. The name derives from a tale originating in Delhi, India. The government’s concern about rampant venomous cobras prompted them to offer a bounty for each dead snake. Although the strategy initially worked well, citizens began to breed cobras for income. When the government discovered what people were doing, they ended the bounty program. The cobra breeders, with worthless venomous snakes on their hands, set them free. Despite the best intentions, the solution made Delhi’s cobra problem worse.
As you might

What The Hunt Brothers Can Teach Us About Gamma Squeezes
“Almost anything is better than paper money. Any fool can run a printing press.” – Nelson Bunker Hunt
A year ago, the phrase “gamma squeeze” would have caught many of Wall Street’s most astute investors off guard. Today, both traditional and social media regularly parrot the phrase. It won’t be long before the shoeshine kid tells the Bank President about his gamma squeeze exploits.
A Gamma squeeze is just the latest innovation in centuries of market manipulation schemes. Given this activity is a source for significant volatility and instability, it is worth exploring.
Before continuing we share a recent tweet from Chris Cole at Artemis Capital.

Think about his powerful statement for a second. Essentially Chris states that stocks

Trump vs. Biden on the Economy, Fed, and Markets
On November 3, 2020, the White House, one-third of the Senate, and the entire House of Representatives are on the ballot. In case it is not obvious, this election will be significant.
In the current politically charged environment, either Presidential candidate will be powerless to enact significant change if the opposing party holds a majority in the Senate and House. Conversely, a sweep whereby the President and both houses are from the same party can produce substantial change.
This article’s focus is on Donald Trump’s and Joe Biden’s policies; however, we stress the outcome of the legislative elections may nullify or exaggerate our forthcoming thoughts.
Does It Matter?
The age of passive investing is upon us. Passive investors do not

The Market’s Invisible Guardrails Are Missing
If you have ever driven on California’s Pacific Coast Highway (PCH), you understand risk. For those that haven’t made the drive, you are missing out on a spectacular winding road perched between a steep cliff and the ocean well below. Staying safe on this harrowing road requires strong driving skills and a good set of brakes.
Above and beyond what is in the driver’s control, the essential defense protecting drivers are the guard rails. If the PCH were fortified with 20-foot concrete walls, the risks of driving the road would be minimal but the incredible views lost. Conversely, if there were no guardrails, the risks increase substantially. A healthy compromise lies between these two extremes.
Investors also have the ability to employ

The Federal Reserve’s Gaslighting of America
Man is the Reasoning Animal. Such is the claim. I think it is open to dispute. – Mark Twain
Around 350 BC, Aristotle was the first person to formally study logic and reason. Aristotle did not invent logic and reason any more than Isaac Newton invented gravity. He merely discovered and defined the rules already in place as a necessary condition for human beings to carry on meaningful discourse. He identified the principles of reasoning already built into our humanity.
Logic measures the relationship between ideas, premises, and propositions. It allows for two or more ideas to be compared to see if they are consistent and coherent or contradictory.
Logic is a necessary condition for meaningful communication and analysis. Logic is necessary for a

The Fed’s Bazooka is Broken – Will Direct Lending Be Next?
One of the Fed’s congressionally charted objectives is to promote stable prices for the goods and services we all purchase. Investors have been lulled to sleep for over 20 years by “price stability.”  As a result, few investors have an appreciation for how inflation can impact their investments.
Despite stable price increases for the last two decades, the Fed now wants more inflation.
Given the negative impact inflation has on our wealth, why does the Fed wish to boost inflation?  Maybe more important, how can they generate inflation?
Before progressing, we explain the hypocrisy between the Fed’s 2% inflation target and true price stability. For this, we lean on David Rosenberg quoting Alan Greenspan: “When asked at the July ’96

The Future Promise Of Value Versus The Allure of Growth
Many investors, especially those with limited investment experience, are declaring that value investing is dead.
If one’s investment experience runs over the last ten years, who can blame them? Since 2010, growth stocks have outperformed value stocks, on average, by 6.11% a year.
If one’s experience runs deeper, and/or they appreciate history, they may have a different perspective. Over the last 100 years, including the last ten, value has outperformed growth by 3.19% a year.
So, is value dead or does value offer incredible opportunities versus growth?
All value and growth data in this article comes from Kenneth French and Dartmouth University. In particular, we use the HML factor from the Data tab. 
What are Value and Growth?

Growth or Value? Take Our Blind Taste Test
Given limited resources, it should be no surprise that we aim to maximize the value of our everyday purchases. In most cases, we seek to optimize between acquiring the best product at the most reasonable price.
Intriguingly, most investors do not apply the same discretion when investing their hard-earned wealth. Think about the problem: we seek value when we spend our wealth, but few seek value in protecting and growing their wealth.
In this article, we give a blind taste test. From this, we hope to show you how the lack of discernment, blindly picking stocks based on cache, and yesterday’s momentum is winning out over the logic of maximizing value through prudent intellectual rigor.
Blind Taste Test
Imagine going to your favorite winery and

How To Find Value In An Upside Down World
“When the world turns upside down, the best thing to do is turn right along with it.”   – Mary Poppins
Is Mary’s advice proper when it is your hard-earned wealth at stake?
There is no doubt that investors are living in an upside down world. A speculative frenzy fueled by extreme monetary policy is sending stock markets to all-time highs and bond yields and spreads to record lows. At the same time, a global recession is raging, and social unrest is worsening by the day. We shouldn’t forget a pandemic is still having a significant effect on our lives.
Maybe investors are just an optimistic bunch and able to look beyond the current problems. However, it could be that investors are again falling victim to greed and cannot see the forest for the trees.

A Dose of Reality About the Labor Market
The language used to describe recent employment data is confusing. The Bureau of Labor Services (BLS) reported that the U.S. regained 9.3 million jobs since May. In reporting on those results, the business media characterizes the jobs market as “better than expected.” Given that no one expected 22 million jobs to be lost, why should we use expectations as a meaningful gauge?
Although it is encouraging to see improvement in employment amid the COVID-19 pandemic, investors would be wise to avoid rose-colored lenses just yet. Despite the job gains, the U.S. still has about 12 million fewer people employed today as compared with February before the pandemic shutdowns hit the economy. Additionally, though down from over 15%, the unemployment rate

The Ludicrous Deviation Between Bond Spreads and Reality
 “The current environment may be more uncertain and riskier than any we have seen in our lifetimes. Yet, spreads say the future has never been more certain.”
We recently wrote that line in The Markets Are Sending Confounding Messages. The article discusses a “metaphorical fog”, induced by central banks. The fog envelops all market signals and, in the process, take away all means of orientation. Investors, unaware of the fog, are pushing the pedal to the metal with little concern.
This article examines the corporate bond fog. In particular, we show how corporate yields are priced for perfection while the economy languishes in what some describe as depression.
Quantifying Warped Perceptions
There are many ways to quantify risk. For

The Decade Long Path Ahead To Recovery – Part 2 Depression
The first article in this series, Part 1 Debt, details the massive accumulation of debt and how it will handicap economic growth in the future.
Debt is but one crucial economic factor to consider when assessing economic growth. There are three other “D” problems worth considering- Depression, Demographics, and De-globalization.
To assess where the economy is going, you first must know where it is. With that in mind, the focus of this article is depression.
Visualizing a Depression
Will the current economic slump be called a recession or depression? No one knows for sure because there is no precise definition of depression. That said, recessions tend to be relatively brief periods of economic contraction – 18 months or less.

The Difference Between Good Economics and Bad
“Real protection means teaching children to manage risks on their own, not shielding them from every hazard.” ― Wendy Mogel, The Blessing of a Skinned Knee
In the five weeks from February 19 to March 26, 2020, the S&P 500 fell 33.9%. Because of all the bizarre things we have seen since then, that seems like such a long time ago. Despite serious questions about how quickly the economy will ultimately rebound from the global shutdown, investors are pricing the stock and bond markets for perfection. Many individual stocks sit at new all-time highs, and credit spreads are tighter today than before the COVID-19 outbreak.
Meanwhile, Treasury yields have fallen to levels well below those seen before the pandemic. Mortgage rates for a 30-year term

The Markets Are Sending Confounding Messages
On December 11, 1990, at about 9:10 am on a stretch of Interstate 75 between Chattanooga and Knoxville, Tennessee, a fog so thick “you could move it with your hand” settled over Calhoun, Tennessee.
Just north of the Exit 36 Bridge, Deputy Bill Dyer arrived on the scene. Getting out of his cruiser to help a bloody car crash victim, in the distance he immediately heard tires screeching and metal crunching.
In that horrific incident, 12 people died, 42 were injured, and 99 cars and trucks were mangled.
The Calhoun pileup occurred for three reasons.
Drivers were practically blinded when a thick fog descended.
Drivers began to reduce their speed at various increments leading to the initial collision and the ones following.
The fog was dramatically

Volatility Is More Than A Number. It’s Everyting.
“Volatility” is a pedestrian word on Wall Street. Traders, investors, and the media throw it around as if everyone understands its financial definition. What matters, of course, is outcome. Volatility is an important determinant of outcomes and therefore deserves close consideration.
The word “volatility” refers to rapid and unpredictable change, but how many investors truly understand financial volatility? How many investors grasp the influence volatility has on their investment results/outcomes?
Even more critical, who understands that volatility is an inverse gauge of liquidity, the foundation on which smooth-functioning markets and asset prices rest. 

Textbook Volatility Defined
Volatility is a measure of the historical dispersion

Passive Fingerprints Are All Over This Crazy Market
Apple’s stock is up over 20% since the market peak in February. Without a doubt, Apple, the company, is worse off due to the crisis and global recession. Revenue and earnings will be inferior to what Wall Street had forecast at lower stock prices. Valuations, shown below, are now astronomical.

So who is paying a higher price for Apple with the promise of less?
Let us be more direct. Why do investors prefer stocks based on the size of the company versus its valuation?
The popularity of passive investment strategies has grown markedly over the last thirty years. Throughout the period, these strategies have increasingly become a more significant factor in asset pricing.
It now appears as though passive investors may be the marginal

Tesla’s Moonshot, How High Can It Go?
Since the beginning of 2020, the aggregate market cap of the twelve largest automakers is up 9.30% to $803 billion. Quite an increase considering the COVID pandemic is causing a global recession and weak auto sales. 
The obvious question is, why is the auto sector doing so well amid such uncertainty?
It’s not!
The optics are “driven” by one stock, Tesla (TSLA). TSLA’s stock price continues its moonshot while other automakers languish. The gross divergence of fortunes in the industry is worth exploring. 
As has always been the mandate of our articles, we look at data on auto sales, industry trends, and demographics to help you come to your conclusion about Tesla and the auto industry. This, in turn, allows you to assess Tesla better independently.

The Decade Long Path Ahead To Recovery – Part 1 Debt
This article is the first of a four-part series on the vectors driving future economic growth. Forthcoming articles will tackle Depression, Demographics, and De-globalization.
The discussions about economic recovery and the path ahead are ongoing. The shape it will take will defy the simplistic “V”, “W”, and “L” expressions being used by forecasters. One thing, however, is certain. Every bazooka, tank, and A-bomb of stimulus is being used to combat the downturn.
The question, so few seem to ask, is at what cost?
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” 5/29/2020 Jerome Powell Peterson Institute of International Economics.
As we will

Years of monetary policy which has consistently driven yields lower, along with economic growth, have now left investors nowhere to hide from risk.

The graph above shows how many basis points benchmark U.S. Treasury securities are from their record lows. The table below the chart provides possible return scenarios if those bonds fall back to those records.
As you can see, the potential upside in most Treasury bonds is marginal at best.
Do portfolio managers understand the repercussions of such a return outlook? Simply, there is nowhere to hide.

Traditional Portfolio Management
Many individual and institutional portfolios have allocations to stocks and bonds. For some investors, the ratio of stocks to bonds is static. For others, it vacillates based on risk preferences and market

The next iteration of monetary policy may well be “yield curve” control?
Debt and interest rates have become the predominant driving force of our economy. Unfortunately, a majority of the debt is unproductive, resulting in declining long-run economic and productivity growth rates.
In the 1950s, each dollar of debt drove nearly 70 cents of economic growth. It has fallen ever since. Recently, each dollar of debt bought less than 30 cents of growth. That number has deteriorated further in the last few months.
The Fed, as manager of monetary policy, can use policy to either encourage long term prosperity or shorter-term economic activity. They have chosen the latter and, as a result, have dug themselves into quite a hole. Each dollar of debt drives less growth than the prior dollar of debt,

The Fed’s Monetary Animal House
“…seven years of college down the drain.” – John “Bluto” Blutarsky, Animal House
The inspiration and credit for this article belongs to Emil Kalinowski and his recent publication The Silent Depression: Trundling Is the New Booming.
Most profound about Kalinowski’s piece is that it was published just eight days prior to the February 19 S&P 500 market peak. Mr. Kalinowski’s article highlights the same problem that we have been discussing for many months now. That issue is how the media, Wall Street’s “finest,” and Ph.D. economists misrepresent economic conditions.
Their economic euphemisms and overly optimistic expectations remind us of a Dylan Grice quote “Linguistic precision yields cognitive precision.” Or, put a little differently, linguistic imprecision

Why The Recovery Will Fall Short of Forecasts
Market pundits seem to have strong opinions about how fast or slow the economic recovery will be once it starts. Such clairvoyance is stunning given the uncertainty of the current GDP forecast, which is already two-thirds in the books.
If the world’s leading economists cannot come to any consensus about today, why should we assume anyone has clarity for tomorrow?

We do not have great clarity either, but we can provide guidance using what we know about the past and present. Our logic presented here is grounded in optimistic assumptions and historical data. The result is an outcome that is well below the hope-based forecasts of most economists. 
Quite frankly, what we present today may be the best possible scenario. It strays far from the

The Crosscurrents of In/De-flation Part 2
Extraordinary times call for extraordinary measures.
Extraordinary times and extraordinary measures do not usually lead to ordinary outcomes.
In the first part of this article, The Crosscurrents of In/De-Flation, we raise the specter that inflation may result from the synchronized combination of a variety of factors, including surging money supply, fractured supply chains, and in time, economic resurgence.
The current environment is deflationary, but what matters for investors is what will happen to prices tomorrow. Because monetary stimulus and economic activity are dynamic, answering the question is akin to solving an enormous jigsaw puzzle. Adding to the complexity and frustration, the image of this puzzle is changing as we work through it.

The Fed Enters Monetary Light Speed
Ben Kenobi: How long before you make the jump to lightspeed?
Han Solo: It’ll take a few moments to get the coordinates from the navicomputer.
Luke Skywalker: Are you kidding??! At the rate they’re gaining—
Han Solo: Traveling through hyperspace ain’t like dusting crops, boy! – Star Wars, Episode IV
Light Speed
In the early Star Wars movies, Han Solo was the captain of the rusting Millennium Falcon spaceship. When making a daring escape, Solo would command the ship to jump to light speed. The surrounding stars would blur in streaks as they left their pursuers in stardust and suddenly ended up somewhere across the galaxy far, far away.
On April 9, 2020, the Fed made the jump to light speed with their announcements of even more remarkable stimulus packages.

Putting a Price on the S&P 500
Honey, I bought a new set of golf clubs for 40% off. What a deal!
Dearest, I also found a bargain. I bought XYZ stock at $30, and it was trading at $50 two weeks ago.
Our happy couple seems to have found some great bargains. Their purchases may be cheap in their minds, but are they? To answer the question, we need an understanding of what the right price is, not what the price was yesterday.
Why Do We Invest Our Hard-Earned Money?
There is no way to value a set golf clubs conclusively. Those that play three times a week value the latest and greatest set of clubs much higher than hacks like ourselves.
Stocks and other financial assets, on the other hand, are a little easier. Various forms of quantitative valuation methods allow a calculation of “fair value.”

On April 29, 2020, Jerome Powell said: “both the depth and duration of the economic downturn are extraordinarily uncertain.”
We are often critical of Federal Reserve policy and contradictory economic jargon coming from Fed presidents and governors.  However, to our amazement, Fed Chairman Jerome Powell surprised us with a moment of clarity.
No truer words were ever spoken.
His statement is so obvious, it is profound. Yet, if you only follow the financial media or much of social media, you might think his statement hyperbolic. The future, according to so many “experts”, is certain.
In case you haven’t heard, the economy will gradually re-open, and, in time, everyone will go back to work and resume the same lives and consumption patterns they were leading in 2019.
This reassuring picture of

The Crosscurrents of In/De-flation
The remarkable deflationary and inflationary crosscurrents swirling through the economy are grossly underappreciated and misunderstood. Need proof? Watch CNBC or read Wall Street research and consider the likelihood of the smooth path back to “normal” they tout.
It is comforting to think about “normal” and what that may entail for our lives and portfolios. However, given the global economic tsunami and extraordinary monetary and fiscal stimulus, we would be remiss if we did not raise awareness that economic and market recovery may be far different from “normal.”
One of our deepest concerns is a highly inflationary outcome, an experience not seen in fifty years, and one for which we are least prepared. Markets always have a strange way of finding investors