Banana Scented Madness

This year we get March Madness times three: the college hoops free-for-all, an apparent suicide pact among Democrats now lurching towards a grisly culmination, and an astounding run-up in the Market that was finally interrupted on Friday. The Final Four, whoever it ends up being once the upset-prone bacchanalia that is the NCAA tournament has provided its now customary seasonal diversion, will be ancient history by the time “pennant race” finds its way back into the lexicon of the sports minded. Not so the other brouhaha that has been going on now for a little over a year. Even if they get the votes and the President were to sign it into law by Easter, the Democrats will have lost, and lost badly. Protestations to the contrary notwithstanding, Americans care about “process” at least as much as “substance” if by process one or more of the principals is doing grave damage to the Constitution he or she has sworn to defend. Obviously, one need not be a Constitutional scholar to intuit that we have reached this pass. Anyone who was brought up with even a smidgen of civic education and whose natural faculty for reason has not been short circuited by the deconstructionist tropes of what passes for higher education simply knows that Americans don’t do it this way. Millions of normally apolitical Americans have been jolted by what they take to be a whiff of banana. Not banana as in a party leadership that has gone bananas. That ship sailed some time ago. No, with the latest flurry of procedural innovation, such as what we have seen described as Demon Pass, one gets a distinct sense of once-great-republic being prodded onto that slippery slope that leads to banana republic.

This will not fly. The insularity of the progressive faction, replete with its ritualized reinforcement of the delusional caricatures by which it perceives the “unenlightened” masses it purports to lead, just might have proved fatal this time around. One senses a disconnect with reality that grows more palpable with each passing week. They chose an issue that is deeply personal at some point in almost everyone’s life, and against the backdrop of an unremittingly miserable track record (what has government ever done as well as it promised it could?) proposed to exacerbate an already crippling debt burden that is will be waiting for our descendants. It is hard to imagine what else they could have done to evoke an even stronger visceral reaction against their machinations. Having taken it this far, and so badly mangled what even the most cynical of us understand to be "the way its done" in America, the most successful experiment in ordered liberty ever, the signing into law of this so-called reform would be the exact opposite of “settling the matter”. Anyone who stills holds to the notion of American exceptionalism, which I suspect is still a large enough slice to swing elections in all but the (as the Brits would put it) rottenest of districts, has been scandalized by “process” that smacks of coup, as in bald-faced disregard for Constitutional norms. On that visceral level that gets patriots up out of their easy chairs and out into the street, it is ultimately more scary-making than whatever the “substance” of the yet unseen bill might do the doctor-patient relationship come that unknown but inevitable day when it really, really matters to each and every one of us. They have turned the people against them, a people whom history has shown to be normally placid but furious when stirred (ask the Germans). Many years will have to pass before their successors will be able to work this kind of mischief again.

Perhaps there is a bit of this meager silver lining in why the Market has been so inexorably strong of late, but not necessarily. That string of up-days-in-a-row for the Dow that ended on Friday was highly unnatural. Normal short term action can be understood as little more than “noise”, some of which is random (as in regression) and some not so random (as in helped along by the actions of speculators who have, or believe they have, the ability to exacerbate short term trends to their own advantage). It is most unusual to see equity markets go for more than about three days in either direction without some kind of roughly commensurate regression. The strength we have see since early February, and especially since March 1, has been less about future prospects than it has been about desperation. Investors would like to see some kind of pull-back, but there is increasing anxiety that the opportunity to buy at more reasonable prices might not be forthcoming. People want to “buy the dips”, and what constitutes a “dip” has been greatly diminished of late.

Why is this? It is first and foremost because we all underestimated the resiliency of the economy. It might not come back strong as those of us who have been around for a few decades reckon strong, but it is coming back stronger than almost everyone expected, and this is reflected in almost everyone’s portfolios. And while it is possible to concoct a dire scenario somewhere way out in the future (hyperinflation, etc.) you just can’t get there, based on the data coming at us each week, within the timeframes that all but a very few investors care about. Over against budget train wrecks ten years from now, we have announcements like what we heard from Boeing late this week. Nobody invested in or just following aerospace companies came to work last Monday thinking in terms of production rate increases for wide body aircraft, but there it was. Indeed, for what seems like forever (but has probably been only six or so quarters), the prime topic on just about every aerospace company conference call has been how companies expect to manage prospective rate decreases. Bear in mind, though, that what is good news for those already invested is bad news for those investment professionals who were still waiting for signs of improvement (i.e., are underinvested). If I were underinvested right now, I would be wondering what the next such “shoe” to drop, probably next week, is going to be. It is easy to imagine an unremitting series of them stretching out well into the misty future. There will probably be some kind of meaningful pullback in the Market sometime this year, perhaps akin to that which marked most of January, perhaps somewhat more so. However inevitable, though, waiting for a pullback can be just as fraught with anxiety if one is underinvested as waiting out a pullback when one is fully invested. Excessive pessimism has begot de facto market bets by professionals who might even know better than to try to time the Market, and their need to unwind that inadvertent bet is why the Market has had such a hard time selling off.

It has also mattered that there is a ton of money that out there that needs a return and is finding it increasingly difficult to find alternatives to equities. Just as pension funds have their assumed rates of return to live up to, so does a burgeoning generation for whom an erstwhile defined contribution plan is now the difference between a comfortable life and base, dependent subsistence. For all but an infinitesimal few, that rate is well north of what banks and money funds are offering. Bonds might have a little more juice in them, but more likely are primed to regress toward some mean that in another few years will have shaken off the specter of deflation. “Dead money” is simply not an option for millions of households. The funny thing is, though, that Markets are the one place where, if only for a while, wishing really can make it so. Markets reflect economic reality over the long haul, but they also take on a Price Reality of their own over lesser periods of time. If enough investors decide that stocks are more or less the only game in town (as last happened a little over a decade ago) there will be a self perpetuating phenomenon, if only for a season. Money is clearly, impatiently, inexorably flowing back into US equities. Stage Two of this rocket has been lit. (Stage One was the decompression, that gasping realization that the world wasn’t ending after all, that commenced just over a year ago.) Unless and until something we’re not even thinking about today derails this migration back in stocks, this Market has a long, fun ride ahead of it.