General Franco Is Still Dead, the Stock Market Is Still Rallying
"This breaking news just in... Generalissimo Francisco Franco is still dead!"
--Chevy Chase, "Saturday Night Live"
The market ignored the continued North Korea threat, the disturbing Kabuki theatre in Washington, an administration with a reputation for real estate deals but that can't make a legislative deal and that appears, at times, untethered from reality with its "fake news" claims (as seen here and here), and reduced domestic GDP growth expectations -- and, by implication, reduced profits expectations -- as it rallied nearly 1% on Tuesday.
As Citigroup research put it on Tuesday:
"There seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of response to negative headlines"
Reflecting the rising trade deficit and inventories miss, Goldman Sachs reduced its fourth-quarter GDP growth projection from 2.6% to 2.3% and Bank of America lowered its estimate from 2.3% to 1.8% -- something I suggested yesterday would happen.
Despite protestations from the bullish cabal, on a statistical basis we continue to be in a valuation-driven, and not an earnings-driven, market in which fear and doubt have been driven from Wall Street.
Contradictions abound: A prominent talking head this morning glibly said on CNBC, "I don't think valuations are a problem." At the same time, yesterday morning, Goldman Sachs research commented that "valuations have never been higher."
Meanwhile, I continue to pound home that each day that goes by we get closer to a much wider monetary tightening next year -- $420 billion to be sucked out by the Fed and about $500 billion less in the way of buying from the European Central Bank. I would note for timing purposes that one trillion of reduced liquidity in 2018 is beginning in just four weeks.
Investors, both passive and active, remain conditioned to buying every dip no matter how slight in a sprint to this year's finish line as the global volatility short bubble continues to grow.
Like Sonny and Cher. the market's beat goes on.
"Grandmas sit in chairs and reminisce
Boys keep chasing girls to get a kiss
The cars keep going faster all the time
Bums still cry, "Hey buddy, have you got a dime?"
And the beat goes on, the beat goes on
Drums keep pounding a rhythm to the brain
La de da de de, la de da de da"
The only more remarkable asset class than equities these days is bitcoin, which I highlighted Tuesday in my opening missive. Trading at this writing at nearly $11,000, it only needs to double to reach my projection of $21,119 (the first five digits of my birth date).
"And the beat goes on, yes, the beat goes on
And the beat goes on, and the beat goes on
The beat goes on, and the beat goes on"
The year 2017 has been surprising to almost everyone, except those who have rewritten history and their forecasts. But you wouldn't know it from watching the business media, where mistakes are never admitted to and where they all profess to have gotten it right.
Regardless of one's political views, at the top of list of surprises this year has been the market's positive reaction to a solo act in Washington, D.C., that appears to have no sense of team and only limited legislative successes to date.
We are in a moment in time when we almost always wake up to a news item that makes us say "Wow!" Case in point: The news that NBC's Matt Lauer has just been fired for inappropriate behavior in the workplace.
I strongly suggest everyone read the 1995 open letter to the women of the world by Pope John Paul II -- which, despite being written 22 years ago, was remarkably prescient and forward-looking.
Continuing that observation but broadening it to the investment business, the most surprising feature behind the market's rally to me is that it is occurring at a time when so many adverse domestic and global outcomes remain possible.
Speaking of surprises, I am working on my 15 Surprises for 2018 -- they might surprise you! I might even publish them earlier than usual as they are unusually controversial.