The Three Blind Mice
The Three Wise Men
By The Ticker
It’s been a while since a changing economic climate has provided something to write about. Thanks for the positive reactions, thank you emails and compliments to everything from copper to coffee, the run up at the end of 2020 following into this year and more. The comment most appreciated is “I only post if, and only if, it expresses how I feel.”
With the benefit of 50+ years of technical analysis behind me accompanied with 40+ years of extensive macroeconomic theory the ability to compare and contrast different periods in time, along with the different “people” in charge during those periods, is somewhat unique. Having a “steel trap” for a memory doesn’t hurt either. With that in mind, if you are looking for a chart or technical analysis in today’s article you will not find it. It is far more important to compare the economic scenarios that existed in1980 versus today as well as contrasting those in power controlling the outcome than what any charts can exhibit.
This article is entitled “The Three Blind Mice v. The Three Wise Men.” I was first going to use The Three Stooges instead of The Three Blind Mice but I have far too much respect for Moe, Curly and Larry to do so. No, my “three” blind mice, Biden-Yellen-Powell, are in a class all their own, as are my The Three Wise Men, Reagan-Regan-Voelker from the 1980s.
I’m not sure how many of you go back with as complete of an understanding, of the late 1970s through the early 1980s as I do. It was the best of times it was the worst of times. Inflation under Carter’s choice of Fed Chairman Miller was bad and getting worse. Economic money flows were disparate at best creating a wide swath of variance between the political parties. Reagan, in his infinite wisdom brought Donald Regan in as the Treasury Secretary and Paul Voelker as the Fed Chairman. Voelker, by taking interest rates up to the middle teens, twice, snuffed out inflation while at the same time Reagan, and a more astute Congress dramatically lowered taxes. It worked and created perhaps one of the best economic booms we have ever seen. Switch to today.
We are now about to go “swimming” in about $30.0 trillion of debt. Inflation, although not at the same high real numbers, on a percentage basis is increasing as rapidly. The Three Blind Mice talk like they are captains on the Titanic saying, “do not worry, we are only stopping for ice.” You remember what happened to the Titanic, don’t you?
The street has taken interest rates higher and higher in complete contrast to what those currently in power preach. Same thing was happening in the late 1970s, early 1980s. The primary difference then was that we were at one of the highest levels of taxation in the United States, ever. Reagan had the ability to “put money into the pockets” of millions to offset Voelker’s interest rate hikes. Biden and his crew do not have such a luxury as taxes are at their lowest point ever. That’s a major problem as running the “printing” press past this last $1.9 billion gift to the “blue” states cannot be replicated.
I do not care what The Three Blind Mice are telling you; interest rates are going higher. For each 1% of increase the interest paid on the Federal debt will increase by $300.0 billion or about 1/3rd of the total of our national debt in 1980. Many will chime in saying rates are still low at 1½% on the 10-Year but in the last couple months they have increased by 200%. It’s not the actual rate that matters and it is not just the percentage increase, it’s the spread between the 10-Year and the 30-Year that is the best predictor of future interest rates and inflation. The current spread, the best predictor of inflation, brought to you by real traders, not political hypothecators and spin doctors, is at its highest point in ten years in real numbers. It’s going higher.
On the investment side of the world, last year was one of my best ever, surprisingly continuing into 2021. Robinhood and its merry “copycats” have helped to make this all possible; there are now upwards of 20.0 million more “investors” buying equities than at the beginning of 2020. There are two problems with that. First, the only way to initiate or open an order was to go “long”. That kind of skewed the market direction. In addition, since most investors have only been subject to “up” markets, how they react when the market goes down is yet to be witnessed. Chances are, like other unsophisticated traders, they’ll wait too long to sell, thinking the overall price direction will reverse then “join the herd”, selling into an increasing downside, liquidating when in reality they should be buying.
Don’t listen to those Three Blind Mice standing on the captain’s deck of the Titanic. Be more like Robert Preston in The Music Man and realize “we have trouble.” Better yet like, Peter Finch’s infamous speech from Network, stand up and scream “I’m mad as hell and I’m not going to take this anymore” . . . at least FOX News will broadcast your thoughts.
For years equities have been the only game in town as the earnings / income on most debt securities was dwarfed by returns on equities. Add in the effect low margin rates brought to the picture and the hedge funds had even more reason to act in this manner. I sense a change is in the air. Please note my biggest gain occurred in May 1981 when I bought 30-Year treasuries on margin (10% down) right before Voelker lowered rates by 50%. I don’t see that trigger being pulled yet as rates have a long way to go but when they top, trust me, the best hedge funds will be there doing exactly as I did years ago.
Through the use of options and related derivatives I got out of technology stocks and others that brought me tremendous gains over the COVID period in time. Thirty-day and ninety-day paper is king at this time; while you can only earn a tiny return, its best benefit is preservation of capital. I don’t doubt that The Three Blind Mice will eventually realize they can’t fight the street, my question is when, and remember, “greed kills”, there are times to be out of the market and one of these times is now.
Thanks for taking the tie to read this article. As most know together with Niels Koops we’re close to unveiling our platform. Interested in being part of the beta team prior to the launch email me at email@example.com and thanks. Best to all as always.