Negative Interest Rates – Empathy For The Devil
Mick Jagger has credited Charles Pierre Baudelaire for inspiring him to write “Sympathy for the Devil”. The French poet wove gorgeous verses around darker subjects that refuted mankind’s inherent kindness; his advocacy of the diabolical was pure allegation. As for the Rolling Stones, the song is a platform from which to present mankind’s atrocities from the devil’s point of view – to allow the devil himself to play devil’s advocate on history’s annals of tragedy. The controversial but undeniably timeless hit bridges from the trial and death of Jesus Christ to the Russian Revolution and World War II. The intense lyrics peak with Jagger demanding to know, “Who killed the Kennedys?”
A recent enlightening listen to this classic among rock classics reminded yours truly of the dangers of confirmation bias, the quest to validate one’s views by rejecting others’. After nearly a decade inside the Federal Reserve, one could only conclude that this contrarian-minded thinker would have been damagingly brainwashed to not bask in the clean light of skepticism.
Nevertheless, the dangers of deriving incomplete conclusions necessitates you play devil’s advocate to yourself from time to time. Caveat lector: this is purely an exercise in introspection. The writer’s full loss of faculties is not the conclusion you should draw at the end of this piece. So, now that we’ve set the stage, knowing said writer’s tongue is firmly in cheek, let’s channel our inner devil’s advocate. Shall we?
Our advocacy may as well start with the stalwart U.S. consumer, who we’ve all learned might take a body blow from time to time, but is never knocked out. The January release of retail sales was all it took to send those who’d temporarily jumped on the bearish bandwagon scurrying for their caves. Forget 2015’s Polar Vortex that made for easy comparables; the 3.4-percent gain over last year was still the best in a year. And December was revised up to boot. Isn’t it plain to see that the $140 billion de factor tax cut at the gas pump (which apparently kicks in with a long lag) and buoyant wages are finding their way into the real economy?
As for the strongest component of retail sales, it’s not only subprime loans that are behind the 6.9-percent growth in car sales over 2015. Super prime auto loan borrowers’ share of the pie is now on par with that of subprime borrowers – each now accounts for a fifth of car loan originations. What’s that, you say? Can’t afford that new set of wheels? Not to worry. Just lease. You’ll be in ample company — some 28 percent of last year’s car sales were made courtesy of leases, an all-time high. For bigger ticket items, anecdotal evidence suggests that while Gulf Stream sales have hit the skids, financing for yachts can still be had for two percent, a song in and of itself. So why not live a little?
And while you’re at it – turn up the heat! Not only are lower heating and gasoline prices paying off in spades for all households, Ford 150 and Ferrari drivers alike. But the other side of the story, that of the damage inflicted by crashing energy prices on all those displaced highly-compensated oil patch workers, is set to finally abate. All we need is for the always-accommodating countries of Iran and Iraq to both agree to play nice in the diplomatic sand box for the greater good of the world economy. Russia has held out an olive branch. Why shouldn’t they as well?
While we’re pondering the innate kindness of mankind, perhaps the Chinese, with all of that excess liquidity on hand, would care to splurge on bailing out Venezuela before the unkindness of civil war takes hold.
If you harbor any doubts at this stage of our journey, look no further than the Atlanta Fed’s estimate for first quarter gross domestic product. Following the retail sales report, it was revised up to 2.7 percent which will send the dismal last three months of 2015’s anemic performance where it belongs – to statistical aberration-ville, economists’ answer to corporate earnings’ one-time charge-off.
That’s not to say that all of those energy firms will live to tell the story of the recovery that saved them. But here too we find a silver lining. The growing divide between the compensation investors demand to hold energy bonds and that of the rest of the market is irrefutable evidence that the bond market is not about to fall off a cliff. Energy junk bond spreads are trading at 21 percentage points above comparable maturity Treasurys. Net out energy, which after all only represents 14.3 percent of the junk bond market, and the spread all but collapses to seven percentage points. Absolutely nothing to see here, move on.
Did someone say manufacturing recession? Not only did the January Institute for Supply Management survey rise to 48.2, it remains well above the 46 level associated with recessions. Looking forward, new orders leaped upwards by 2.7 points to 51.5, solidly above the 50 line that separates contracting and expanding activity.
Spreading out to the rest of the world, J.P. Morgan’s Global Purchasing Managers’ Index, which combines survey data from the U.S., Japan, Great Britain, Germany, France, China and Russia, remains in expansionary territory; the index rose to 50.9 in January from 50.7 in December. The new orders sub-index came in at an even more robust 51.4, up from 50.8 the prior month. Forget that industrial production figures are foreshadowing more downside to come in Europe. Full steam ahead!
Closer to home, you’d best not lose any sleep over the fate of your local mall. Amazon has awakened and read the news that buyers spend more when they’re inside an actual store. Impulse buying, anyone? There’s a good chance they could get as many Sears locations as they’d like, maybe with a bulk discount as an added enticement.
Moving on to the stock market: Apple and IBM have called an official halt to the stock repurchase drought. Two of the biggest buyback barons have announced mega debt deals to finance the feeding frenzy which should feed this nascent rally. Apple alone will borrow a cool $12 billion to IBM’s skimpy $5 billion offering. As an added bonus, the fresh funds will quiet all of those nattering nabobs of negativity who’d started to suggest that investors were no longer smitten with reducing share count to juice earnings per share. It doesn’t matter how you get there; it’s the eventual destination that matters most. Right?
Look no further than Apollo Global for signs of life in mergers and acquisitions land. Just this week the private equity titan made it clear that amateur hour had ended with the announcement of their $6.9-billion leveraged buyout of security system provider ADT. The acquisition price was only 56 percent above the company’s pre-deal closing price, which purely reflected how beaten down the stock had become. Of course it did.
And anyway, why leave all the fun to Steven Schwartzman’s Blackstone when there’s so much dry powder to go around? Add it all up and there’s some $1.3 trillion of ignitable potential burning a big old hole in private equity’s pockets. Buy we must lest we disturb Smoky the Bear’s peaceful hibernation.
Blackstone alone has $80 billion it can deploy. And they’ve vowed to be just as disciplined as they’ve always been per a recent Wall Street Journal interview. How so? Don’t you know? By continuing to target the cheapest asset class around, that is, of course, real estate.
Prudent public pensions, for their part, are sticking with Mr. Schwartzman’s shrewdly sensible guidance. They too are shoveling money hand over fist into private equity real estate, which is recognized everywhere as the most appropriate investment for little old ladies.
New Albion Partners Brian Reynolds tracks these flows like a bloodhound on the trail. According to his latest trophy hunt, February has been a barn burner. Pensions have voted to allocate more money to credit than any February on record and that’s only two weeks into the month. Can we please get an exclamation point?!
A few cases in point are de riguer. The New York State Common Fund is snow-plowing $775 million into real estate funds as is the Ohio Workers’ Compensation fund, which is safely shoveling $225 million into the same asset class. Following in a close third position, the Texas Teachers’ pension has studiously allocated $198 million to, you guessed it, real estate funds.
Peering over the horizon, Reynolds notes that pensions continue to submit fresh queries about subsequent credit fund allocations, and with good reason: “Most major states have scheduled more money to come in from their contributors to try to address pension shortfalls.” What better way to address a shortfall than to pour fresh funds into buyout and real estate credit a mere seven years into an expansion?
And then there’s the sheer will of the markets. Who, after all, ever wants to be the first one to stop dancing? Party pooper. Besides, we all know that over the long term, stocks always rise. In most of our investing lifetimes, so do bonds. So what’s the big worry?
Look. If worst comes to worst, the central bankers have our backs. Not only are they better educated than we are. They’ve done their homework and always get it right the first time. They never have to play devil’s advocate to themselves.
Their conclusion du jour: negative interest rates are the single best possible weapon in their over-stocked quiver. Surely they know what’s best. Plus, it will finally rid Washington D.C. of the true dreaded devil, the bank lobbyist, once and for all. And who has sympathy for them?
