Jan

11

These are hard times for those of us who live in a Rogers Hornsby world. When asked what he did after the baseball season, Hornsby replied, "Look out the window and wait until spring". Note: he said spring, not spring training. It is only baseball when the games count. So, one is left with the short-timer calendar and idle thoughts.

The idle thought for today is this: the fundamental correlation with stock prices is not "the economy" or even expectations about "the economy". What moves quotes is the supply of free and easy money. Leverage, through central bank and government guarantee lending, offers easy money; but the stuff that is both free and easy is never borrowed. It is the cash flow from businesses, colonies, possessions, conquests that have wonderful margins between what they cost and what they earn. The great bubbles of the early years of stock trading all came from one source: the discovery of a new territory that would duplicate the wealth that the Spanish had enjoyed for nearly two centuries from their ownership of the mines of the New World. "Mississippi" and the "South Sea" were going to produce the same fabulous returns. (Secondary idle thought: bubbles are created when pricing reacts not to the flows of free and easy money but to mattress money - the stuff people have been saving - that is tired of its meager returns.)

Since 1973 the free and easy money of the world has come from one source: the Middle Eastern oil fields. For the third of a century after the embargo that quadrupled the "normal" price of oil, the spread between what it cost to produce the black gold and what it reliably sold for was never less than 20 times the profit margins of everyone else's business. The collapse in prices in 2008-2009 was the first time that the sovereign wealth funds of the oil-exporting countries had had to examine the question of what to sell rather than what to buy. The current episode is a repeat, with the added pressure of the end of the Iranian embargo.

Is there any free and easy money left? The answer may be "yes, but not from energy but from American business itself". The Byron Wiens of this world have no idea of what regulation and taxation do to "average" profit margins. How could they? They live in a city where space itself is rationed by the government. If Mr. Wien's prediction about the Queen of the Night's election proves false, we may have one of those infrequent "ah-hah" moments in American political history when a significant number of the regulators are sent packing. Grant's election in 1868 was one; the Schlesingeristas in academia are still trying to square the circle of how the last third of the 19th century saw the country's greatest ever explosion of wealth, immigration and technology during a period of what they called "ruinous deflation". Harding and Coolidge's election in 1920 was another. 2016 might be yet another. After all, it is another even year. Go Giants!

Vince Fulco writes: 

Every seven years, roughly, since 1973/4 at least, we have seen spots of liquidity vacuums, and as I have made mention on here before, it's the liquidity vacuums that re the thing to fear, not the proverbial "bear markets" (though they can coincide, see 80/81). Yes, 94 wasn't much of anything, but the recent action (go look at the opening on big, broad stocks on August 24, 2015) and it all fits the cyclical pattern of 7 year liquidity messes (and translates out into the future years of troubling asteroid flyby's coming up).

Is the liquidity vacuum that began in August over? Or do we have another wave coming? Either way, every single one of these situations we have seen, the market has moved on to higher highs in very short order, and I can;t find any compelling reason for that not to be the case here.


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