“Better a live donkey than a dead lion.”
-Sir Ernest Shackleton
Over the years, I’ve read a number of books about the life of Sir Ernest Shackleton. The most recent, “Shackleton’s Way,”is a “study of the leadership lessons of the great Antarctic explorer.”
There are many key lessons to learn from Shackleton. In particular, his ability to manage a small group of disparate characters in the most challenging of environments. From my perch, the most significant lesson is how Shackleton “always put the well-being of his crew first”. In terms of morale and minimizing turnover, this is a lesson leaders across the spectrums of business, sports, politics, and the military can take to heart.
Put another way: generals should eat last.
Inasmuch as the book tends to idolize Shackleton, he ultimately died heavily in debt and on the short end of many failed business ventures. His true Antarctic ultimately wasn’t the one he conquered, but, rather, the one back in England that ultimately conquered him.
These days, no doubt, the stock market seems like the Antarctic to many of us – depressing, dark, and endless. Year-to-date, the SP500 is down -6.8%. If we annualize that return to the end of the year, the SP500 will be close to zero. Lucky for us, that’s not going to happen.
There will be an end to The Antarctic that is the U.S. and global equity markets this year. Ultimately, equities won’t bottom on some arbitrary call on valuation in which the denominator of the multiple is likely wrong, but as they usually do when a recession has hit and the economic news is as dark as an Antarctic winter night.
On that front, clearly some economic news is getting increasingly bleak. As we highlighted in our Q1 Themes presentation a few weeks back, a whole slew of economic data including manufacturing, PMIs, exports, capital investment, durable goods, and corporate profits are showing are showing y-o-y declines.
That said, one of the most focused on lagging indicators -- employment -- still appears strong. But as the Chart of the Day highlights, employment is very long in the tooth. Not only have jobless claims bottomed (meaning employment is worsening on the margin) the current length of time at/below the critical threshold of 300K jobless claims would imply only six more months of economic expansion.
So... has the stock market bottomed yet? Probably not. But it certainly will in time, as it always does. But be forewarned, it took Sir Ernest Shackleton three attempts before he was able to cross the Antarctic.
Back to the Global Macro Grind…
In what has become the new standard for "good" stock market news, China closed well off its lows. At one point during the trading day, the Shanghai Composite was, well, getting Shanghai-ed down almost 4%. Finishing down only 50 basis points on the day and avoiding the another two day -10% loss? Well, it's a victory, of sorts.
This “victory” was catalyzed by rumors of an increased crackdown on short sellers. As conjecture goes, the PBOC is giving guidance to some offshore banks in Hong Kong to suspend offshore Yuan lending. In addition, the PBOC supposedly asked both the banks and various companies to collect information about short sellers in the offshore Yuan market.
If this all sounds familiar, it should. In the 2008-2009 time frame, the crackdown on dastardly short sellers was rampant globally. When all else fails, blame the shorts! That all works fine in some central planning "La-La Land" of economics, but back in the real world blaming short selling doesn’t suspend economic gravity. In fact, if anything, it makes markets less efficient. (Note to Chineses policy makers: the $1 trillion in capital that exited your economy last year wasn’t due to short sellers!)
Back in the U.S., the central planners aren’t yet intervening, but the news over the last 24 hours certainly isn’t all that encouraging. In fact, the all-knowing indicator of U.S. economic health, iPhone sales, grew at its slowest pace since 2007.
We will be receiving more information from the Fed today, but since they just raised rates, it is unlikely they will be getting dovish anytime soon. In the world of globally connected markets, this means the U.S. dollar is likely to strengthen even more from here.
A strong dollar is fine, to a point. But it's also detrimental when it's crushing the U.S. energy, industrial and export sectors. It is great that gasoline is cheaper in Houston than Saudi Arabia, but the derivative impact on the high levered energy industry and debt markets is not going to be pretty. In the short run, it looks like the Fed is tightening into deflationary headwinds and a potential recession. No doubt we know how that ends.
In lighter news, I wanted to highlight this interesting excerpt from my colleague JT Taylor’s "Morning Bullets" at Potomac Research Group relating to Donald Trump:
What Does The Fox Say? – In a campaign that’s been defined by redefining conventional wisdom, this new twist takes the cake. Donald Trump announced last night that he will not participate in Thursday’s debate. As part of the ongoing, sophomoric feud between the front runner and Fox, the network put out a press release essentially taunting Trump (itself unprecedented), who then called Roger Ailes' bluff . . . we can be almost certain that Trump will dominate the news cycle from now until the caucus in Iowa on Monday.
Meanwhile, according to the most recent Washington Post poll, Trump’s lead is as strong as ever. 60% of Republicans see him as the eventual nominee. The Antarctica of politics? It is just beginning.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.96-2.09%
DAX 9 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research