Parting Thoughts on a New Era
The first quarter of 2021 — which closed on March 31 — was the worst quarter for U.S. Treasury bonds since 1980. The last time treasuries looked this ugly, Paul Volcker was Chairman of the Federal Reserve, and Jimmy Carter was president.
Prior to last quarter, bond prices at the long end of the curve (the 10-year and 30-year) had not fallen that far, that fast, in more than 40 years; that in turn means back-end yields had not risen that fast in 40 years. (When bond prices fall, bond yields rise in a mechanical relationship.)
It was also a historic quarter for copper, which now trades above $4 a pound for only the second time in its history. Other than a window of time spanning December 2010 to August 2011, the “metal with a Ph.D. in economics,” so-called because it has so many economic uses, has never traded at these levels before.
So, the question for Dr. Copper now is whether the $4.00 per pound threshold will mark a top for the second time, or whether the situation is more like crude oil trading above $40 per barrel for the first time ever in 2004. While $40 seemed wild at the time, the crude price would more than triple in the next few years; the same could happen for copper, given the dynamic mix of factors at hand.
To round out momentous first-quarter numbers, the U.S. jobs report for March 2021 thoroughly smashed expectations with 916,000 jobs created, nearly 40% above expectations. At the same time, the Institute for Supply Management (ISM) manufacturing index saw its highest reading since December 1983.
The story investors are used to is changing rapidly now. We are leaving behind the narratives and assumptions investors have grown used to for the past 40 years.
Growth and inflation are coming back — and low interest rates and stagnation are going away — because this is what happens when governments spend trillions, with cash funneled directly to households, in a manner that unleashes reservoirs of untapped demand from low-income households that now enjoy newfound spending power.
The stance that rich-world industrial nations are taking now, with respect to direct stimulus efforts and de facto “helicopter drops,” had not been seen in most of our lifetimes prior to the pandemic.
Even as technological advancements leap forward, monetary and fiscal policy efforts are traveling back in time, to a configuration last seen in the late 1940s. Fighting COVID was comparably expensive to fighting World War II, and now we are seeing modern-day revamps of the G.I. Bill and Great Society initiatives.
Then, too, a round of FDR-style big-ticket infrastructure initiatives is next up, and after that, who knows? It is the nature of government programs to entrench and expand, especially popular ones.
At the same time, we just witnessed the largest hedge fund blow-up in history — courtesy of Archegos, a family office that behaved like a hedge fund on steroids — and big bank risk departments are scrambling to weed out and dial back over-leveraged players with sizable amounts of hidden-derivatives leverage tied to a handful of stock positions.
(As a side note, all of our early hunches on the Archegos debacle as expressed in these pages — including the potential for criminal activity — are being borne out as new evidence rolls in.)
And of course, we can’t forget the slow-motion crypto asset revolution now unfolding, which is actually happening at hyper speed relative to the speed of past sea changes in the financial landscape. Transformative shifts that would have taken 20 to 40 years in past eras are now achieving critical mass in 10- to 15-year time windows instead. In our view, today’s banking behemoths and payment rail giants are not embracing crypto because they are future-forward thinkers eager to trash the status quo; they do so in terror of being left behind.
The events are new, the technology is new, and the particular configuration of factors is new, but the phenomenon of accelerating drama around a historical turning point is not.
At this point in human history, we have multiple centuries’ worth of data and investor behavior in the presence of jarring historical events and dramatic technological changes.
In some ways, the events of the day are always new and different. Because civilization moves along a timeline, there is always some element of “this has never happened before.”
The legendary banker J.P. Morgan, for example, rose up at a time when railroads were the only real blue chips, and represented 60% of assets on the New York Stock Exchange, even as railroad operators were rough-and-tumble entrepreneurs ready to compete each other to death via constant overbuilding and bloody price wars.
Morgan, in a sense, saved the railroad men from themselves by acting as a one-man private regulatory commission, reining in competition where it was destructive by taking control of board seats. Because companies were far less well known than merchant banks in those days — the capitalist process was too new and raw — Morgan was also able to amass great power by leveraging the bank’s reputation and second-generation family name to channel investment capital into various conglomerates, building the world’s most powerful “Money Trust” while doing so.
Morgan further played a role in saving the country from severe financial panics, which, for the latter half of the nineteenth century, seemed to occur every ten years or so — until finally, after the Panic of 1907, the powers that be realized Wall Street could not keep relying on a lone banker in his seventies to be a rescue mechanism of last resort.
And so, in an effort to create a sort of fire department and lender of last resort for Wall Street, secret discussions were held at Jekyll Island, one of Morgan’s favorite hideaway resorts, and the Federal Reserve was conceived under cloak of darkness.
And then, in March 1913, J.P. Morgan Senior died just a few weeks shy of his 76th birthday, and in December of that same year the Federal Reserve Act was signed into law. The 16th amendment, which enabled a national income tax, was also ratified in 1913.
In the above respects 1913 changed everything, marking a new era. And then, less than a year later, in the wake of an assassin’s bullet after a motor car’s wrong turn in Europe, World War I began.
The point of revisiting J.P. Morgan’s day, and the pivotal years of 1913-14, is that there are always a handful of present-day factors that drive the era, sometimes over a course of decades — and then, within the space of a year or two, the multi-decade era comes to a sudden and abrupt end.
A given market era can also have extended periods of tranquility that push the same familiar trends in a familiar direction, giving investors an opportunity to exploit a comfortable paradigm — a persisting mental picture of what is going on in the world. But then, inevitably, the waning era and the standard narratives of the day — whether they had previously held for five years, 20 years, or even 40 years — suddenly morph into a period of chaos and upheaval. When this happens, the old familiar building-block assumptions are toppled, like a skyscraper turning to rubble in an earthquake.
As mentioned, with any given era, the specific interplay of events and technologies and personalities is different every time. And yet, throughout the centuries and even millennia — investment booms and speculative manias were noted in ancient Rome — the things that have stayed the same are the basic functions of human nature (psychology, emotion, and so on) and the cyclical nature of quietude giving way to chaos, with long periods of stasis punctuated by gut-wrenching change.
Though the worst of the pandemic seems over, at least in the United States, a bigger story is playing out, for both the U.S. and the world at large. We are in the early stages of a chaos and upheaval period, one that will likely result in dramatic change — and is likely to up-end many, if not most, of the fundamental building-block investment assumptions that took hold over the past 40 years.
It has been said repeatedly, and we agree, that the most useful survival trait for any given species is neither speed nor strength, but adaptability in the face of change.
If you can adjust your game plan when the landscape shifts beneath your feet, and successfully adapt to new circumstances, you can survive and potentially even thrive. Given the forecast, and what now awaits dead ahead, the ability to adapt is more important than ever before — and could literally mean the difference between making a fortune or losing one in the days to come.
And with those thoughts, I offer you a fond farewell. You’ll still hear from me (Justice) in TradeSmith Daily from time to time, but this is my last official piece as regular editor.
As explained last week — via “Big Changes Are Coming to TradeSmith Daily” — it’s time to double down on expanding the breadth and depth of coverage for TradeSmith Decoder and lay the groundwork for expanding the research team. I invite you to join me on the Decoder journey and wish prosperity for you and yours. Thanks for being a TradeSmith Daily reader.