An Ode to Cheerleading—Markets Still Ripping

Growing up in the Midwest, we played lots of baseball, all the way to college and then some. It was my passion; I loved it. Unfortunately, this spring sport didn’t encompass cheerleading squads, who, for whatever reason, were reserved for the football and basketball teams. Kind of a bummer for us baseball types. We missed the cheerleaders.

Fast-forward to my grown-up position (far from third base, the bullpen or any batter’s box) as a professional investor, and I see all kinds of stock and bond cheerleaders, most of them on CNBC, NPR, and FOX telling us everything is great. Rah. Rah. Rah.

It’s easy to pick on the pundits and sell-side commentators masquerading as financial “journalists.” I’ve been poking away at them for so long that even I’m starting to get tired of it/me.

Still, for anyone who has done time working in markets, gauging their history, their flows, valuations, risk profiles and asset classes in the silence of their Bloomberg terminals rather than before a camera, it can get a bit galling to see the same talking-heads whistling past facts, context or truth while cheering on clearly distorted asset classes.

Today, the S&P is at 2440, bond yields are on the floor, the President of the United States has an approval rating in the basement, the Fed is raising rates and America’s debt ceiling crisis (coming to a theater near you this fall) looms over us in ways never seen before.

And yet the cheerleading continues; the pom-poms are flying as high as the credit and equity markets. All seems wonderful on the screens, charts and pits.

Ah, That Mercurial VIX—Still Nothing to Fear?

And the fans (i.e. investors) love it. As these frothy markets (led by the likes of Apple and Amazon) churn toward, and then beyond, the lessons of history, rational multiples of PE or the tenants of common sense, we are betting on nothing but more sunny days ahead. Today, the “fear index”—or VIX –shows basically no fear it all.

But this overlooked and unreported little fact might just blow your mind: in the last month, the VIX has closed below 10 seven times. To keep this in perspective, the VIX has only closed this low eleven times in total—OVER THE LAST TWENTY YEARS. In short: we’ve seen more VIX complacency and fearlessness in the last 20 trading days, than we did in the last 5000 days, combined.

Now think about that.

Whenever I see this kind of complacency, data-ignoring delirium (i.e. 185+ PE multiples, or stocks nearing $1k/share) which always follows years of prosperity (and always precedes a sudden bust), I think of lessons learned.

As Facebook, Apple, Microsoft, and Google now race to 33% growth since January, I remember the NASDAQ’s 30% growth during the same period of early 2000, when (then, as now) the VIX was on the floor, hope was to the moon, yet the markets were just about to trip off a cliff.

The Smart Bulls–Happy Days Could Continue

Are we any safer today? The cheerleaders shout yes, and the VIX does too. But like I said, it’s easy for cynics like me to cite history or pick on bullish pundits or misleading VIX levels.

It’s worth noting, and even conceding, that there are in fact bullish investors out there who have tremendous market experience. Their voices and views matter too—in fact more so—than the prompt-readers.

And bears like me need to hear them out.

A Bullish Baron

Consider billionaire, Ron Baron. He is not your typical cheerleader smiling into a teleprompter. He’s a true veteran of the investment world, runs $23B in assets and knows a thing or two about market cycles.

Mr. Barron was on CNBC Tuesday and was anything but bearish. In fact, he sees the DOW at 40,000 by 2030 and stocks like TESLA trading as high as $600 next year and up to a $1000 by 2020.

Wow. That’s a bull.

Now I can’t just brush Ron Baron aside as a pundit. He’s a super bull. And maybe he’s right. Maybe, as he argues, years and years of continued low interest rates and low oil prices will tailwind the DOW to 40,000 and the American economy with it.

And maybe he’s right on TESLA, despite my many published concerns/rants to the contrary (or the company’s three consecutive quarterly losses of $100-300B each and it’s Goldman-Sachs life support of new equity and debt issuance), TESLA may just humble me and be the next greatest thing since the Model T (despite a lagging Model 3).

What do you think?

And I can also concede that there are other equally experienced bulls out there besides Baron. They see similar highs on the horizon, some pointing to inflows from Europe and Asia into the American “safe-haven.” Others point to Central Banks around the globe resorting to buying stocks en mass, thereby super-stimulating the markets. And there are the Trump investors who are confident his promised tax reform and pro-growth stimulus will add to the bullish trends.

Certainly the numbers for 2017 support these folks. The S&P is up over 8% year to date; and the tech sector is rocketing past 20% for the year thus far.

Although I (and Seth Klarman, Paul Singer, Ray Dalio and others) ultimately disagree with these themes, I respect them, and must acknowledge the numbers and opinions behind them.

I can even admit they may be right. I’m certainly no oracle.

A Bearish Grunt—I Can’t Help Myself

But I, along with my own market signal screen, think the bulls and cheerleaders are wrong. I won’t go into the TESLA balance sheet debate or the oil and interest rate meme.

Again, who knows?  Maybe Tesla hits $1K? Crazier things have happened. What I’m concerned with now is not bearishness for bear’s sake, but a simple regard for yesterday and its lessons for tomorrow.

In other words: I’ve seen this movie before.

Perhaps you have too?

When market complacency and record low VIX data combines with delusional hope, artificially low interest rates, unusually high PE multiples, radically distorted stock valuations, I (like the Minsky Cycle) sense a big popping sound ahead. (Just how far ahead? That’s the tough part…but see below)

In short, and despite deference to the bulls and the cases they defend, the over-all risk/reward metrics just don’t work in today’s context, regardless of what you or I or anyone else thinks about TESLA’s stock price or Amazon’s profit model.

For me, this market is just surreal, more so than any I’ve lived through, from 87 to 2000, or from 2008 to today.

And nothing seems to upset it. Not terrorism, elections, markets or tensions overseas, not gunshots against congressional baseball players, not special counsel investigations or looming debt ceilings, not rate hikes or over-valued markets. Nope, the market just keeps rocketing past facts and actually tends to “bump” up a notch on even the worst headlines.

Headline Risk

Speaking of headlines, the daily spin cycle increasingly demonstrates how the fates of politics (i.e. the “Trump Effect”) and markets are deeply intertwined.  Political hope—delivered as well as lambasted—through the main stream media, can be either a headwind or tailwind for bull markets.

At some point, the fates of one may depend upon the fates of the other. If markets rise, Trump will rise; if Trump “fails,” the markets will in turn slide. Whatever one thinks of Trump, he is certainly not to blame for the current market bubble or its pending crash; nor does he deserve credit for 8+ years of up and to the right securities. Nevertheless, most would agree that his popularity will tank if markets tank.

Of course, if Trump “tanks” first, then these markets could likely follow him as well. Stated otherwise, politics matter.

As more and more people ask when and how our securities bubble will eventually pop, I meekly respond: “I don’t know, I just know it will.” And I’ve been saying this since 2014, yet no headlines have pricked this bubble. Brexit, Greece, Syria, flash crashes in the fall and winter 2015 and 16,  the Trump upset, Fed rate hikes, special counsel appointments, and many senate investigations later, this market just keeps re-inflating.

So much for headline risk, right?

Perhaps. Triggers, after all, are hard to predict. During the dot.com crisis, for example, there was no “Lehman Moment”— or looming indicator to signal or “time” a pending crisis. Instead, the NASDAQ simply crashed under its own weight. (But many of us remember the fairly obvious warning signs then, as now.)

The same may be true of this “everything bubble.” In short, precise timing of this stripe is more for psychics than investors.

But general caution is easy enough to time, and the time for caution is now.

Debt Ceiling as Possible Market Trigger?

One potential trigger worth watching, however, is the debt ceiling, which rears its mammoth head this fall. In the recent past (i.e. 2011 and 2015), debt ceiling countdowns got a lot of media attention and some peak moments of tension followed inevitably by the anti-climactic resolution which everyone knew was coming anyway: the politico’s increased the debt ceiling and thus kicked the debt can (and problem) to the next generation.

Could This Time be Different?

Yet this debt ceiling, like just about everything in DC today, is different. First: America is broke. The US Treasury’s cash balance is down to $150B, and its burn rate is $3B/day. As Labor Day approaches and then passes, DC will be out of money and staring down the barrel of a $20T debt ceiling.

And if we think adding a few trillion or more to this debt level will be like the good ol days, consider the following: 1) Trump’s approval rating is in the mid 30% range; 2) unlike Regan in 81, he faces a debt to GDP ratio of 106%, not 30%; and 3) this ain’t the old GOP.

The odds of getting support from fiscally conservative Republicans and the Freedom Caucus for a debt-increase are slim to none without slashing the very entitlements and programs which Democrats as whole (and certain Republicans in particular) will never let go of.

In short, this next debt ceiling could easily unfold into a political crisis, and thus a market crisis. Without a majority in both houses to support a new debt infusion, the Treasury will be staring at empty coffers.

Trump’s Treasury Secretary has so much as admitted that things could turn bleak and that a back-up plan is needed, and by this, he can only mean resorting to the President’s “super powers” and the right to “allocate” revenue flows (dangerously low anyway) to what the Chief Executive determines is the highest priority.

Needless to say, any such “super power” option would send the media into a galvanic uproar. This time, we could actually see a government shutdown, which could be the one headline that finally puts an arrow in this otherwise monstrous market bubble.

Of course, if the debt crisis leads to a debt ceiling crisis, which in turn leads to a confidence crisis in DC, the odds of financing a “Trump Stimulus” (to which this market is so dependent) fall lower and lower.

Could such headlines therefore be a trigger? Could we have a political “Lehman Moment”?

Again, I avoid predicting anything certain in the face of this market beast; but eventually, something, including politics, will certainly bring this monster bull to its knees.

Stated otherwise, watch this debt-ceiling carefully. The fates of our markets and politics may be more closely linked than ever before.


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