Yip Harburg wrote the gorgeous ballad “April in Paris,” but it’s a lie. Paris in April is cold and rainy. Know your countries.
The rise in Chinese power past five years is spectacular, particularly in the UN and now the present tariff chess game with us. According to François Delattre, just retired as French ambassador to the U.S. and UN, so no ax to grind. Meanwhile, Trump keeps moving away from multilateralism towards a Fortress America stance.
Trump reminds me of Andrew Jackson’s presidency of unilateralism and belligerency. After all, Jackson presided on near extinction of the southern Indian tribes, forcing them into an unwanted resettlement. This opened up their lands to our frontier settlers, ferocious for fertile farmland.
Huge U.S. errors of commission in the Middle East started with the generous backing of the Shah of Iran who later took a powder, jetting away from sure destruction. Later, we invaded Iraq, sure Saddam Hussein held nuclear bomb capability. But, he was just posturing to intimidate Iran that had also received much largesse from us for nuclear reactors.
I’m finishing Peter Frankopan’s The Silk Roads, a nuanced history of the world. Not something you learn in grade school. Frankopan points out that under President Reagan our missile shipments escalated. We were backing Iran against Iraq in a 6-year war. Multitrillion dollar mistakes were made in the Near East and across the spine of Asia, embracing Afghanistan which took the cake for a costly stalemate.
Nobody cares to mention that our explosion in national debt can be laid at the feet of our politicians’ obtuseness in invading Iraq. This cost us into the trillions, with some estimates as big as $6 trillion, nearly 25% of present GDP and equity valuation on the Big Board.
Where was our press and Wall Street pundits on such colossal faux pas? No way did the Street parse the impact on interest rates, hyperinflation and GDP advancement. The geopolitical setting never gets parsed properly, particularly Cold War gambits like the Cuban missile crisis and later 9/11, then entry into a futile engagement with Afghanistan. As Frankopan puts it: “Protecting the global order that suits western interests is simply a new chapter in the attempt to maintain position in the ancient crossroads of civilization. Stakes are too high to do otherwise.”
I’ve been coming back to Venice biannually since early fifties, when I landed at the railroad terminal, rucksack on my back. Pocketing maybe $300 which had to last me all summer. Past decades, the Venice Biennale tops my list because it hopes to catch the feel in the world. Organizers invariably fail, too influenced by academics. This year’s theme is “May You Live In Interesting Times,” which I find very foolish because all times are interesting just so long as you can link the moving parts into a whole zeitgeist.
Exhibitions by most countries were shrouded in darkness, even man-made mist. I needed a seeing-eye dog to get me through country-by-country pavilions. Most work on view was minimalist, Arte Povera, concept art, even forms of propaganda disguised as artworks and vice versa. Nothing memorable or pictorial. Most everything was swathed in grays and blacks. One of the most boring, academic shows I’ve ever been subjected to.
Venice sank into the mud as a prosperous city state as early as 1600. It was outdistanced in trade with the East by northern European countries. London and Amsterdam usurped the financial center with faster, better designed ships. Then as now, you had to be in the right place to succeed in the financial world, not just smart. Venice then became a stop on the Grand Tour as early as 1600, but no longer mattered in the financial world. Competition and military conflict were endemic to Europe over several centuries, culminating in Hitler’s Final Solution to the Jewish Question.
After putting down Frankopan’s 611-pager, I thought of whether the price-earnings ratio of our market is justifiable at 18 times earnings. My gut feel is backed by our entire postwar history of armed conflicts, recessions, inflationary spirals and interest rates pressed as high as 15% by the FRB with 90% margin posted under McChesney Martin. All this rests as refutation that the sunshine can be counted on lasting.
Even 15 times earnings disturbs me. Makes me restive. Bald deflation in commodities starting with oil, and zero interest rates scare me as an operator. Deflation lurks around the corner. Europe is stagnant, China a touch wobbly and still inscrutable. Who knows where Trump’s big stick takes us?
The state of economic forecasting, Street punditry and FRB policy emphasis are as wishy-washy as they get. Does GDP languish at 1% or cruise at 3%? Are 10-year Treasuries headed to a zero return? ¿Quién sabe? The Fed is a lagging, not leading indicator.
Build your own model, but I’ll offer some hints on where I’m headed:
- No recession because personal consumption expenditures hang in. Consumer debt is high but manageable.
- Corporate profit margins are toppy, particularly for industrials, materials and energy operators. No pricing power and weaker demand abroad, particularly for machinery producers like Deere, Caterpillar, Cummins and infrastructure houses like Honeywell and 3M.
- Flattish yield curve crimps banking’s net interest margin as well as trading, underwriting and investment management fees. Citigroup sells at 10 times earnings so I hang in.
- Tech is challenging because it’s half a dozen different businesses. I’m disinterested in semiconductor houses like Intel while extreme valuations, Salesforce.com, turn me off. Same problem with Netflix.
- Biggest play is Facebook, then Alibaba which I regard as contrary opinion paper. Great position on the board for Alibaba’s e-commerce footprint and Facebook’s 2.5 billion users being monetized with rising advertising revenues and soon coming personal financial applications.
- Internet and e-commerce stocks trade at least 1.5 times the volatile S&P 500 Index. They could lead the market down if we and China maul each other with punitive tariffs, a tough call.
I’m saying there’s nowhere to hide excepting maybe AT&T, which does yield 6.3%, viewed as a prospective wasting asset in the roiling satellite entertainment sector dominated by Netflix, Walt Disney and Comcast.
If more than 50% to 60% committed to stocks, you’ve got a lot of explaining to do. Pleading passivity and pointing to the positive long-term rate of return for the market won’t cut it. You could be wrong for the next 5 to 10 years.
Sosnoff and / or his managed accounts own: Citigroup, Netflix bonds, Facebook, Alibaba and AT&T.