As Stocks Soared This Week, This Is What You Missed

Authored by Michael Every via Rabobank,

Ark B

Friday. End of the first full week of 2020. What have you missed so far if you are only going back to on Monday?

To date, you would have missed the Brexit bill finally passing in the UK – and Europe reminding the UK that they can’t have a free trade deal without being closely aligned with them on all fronts, and the UK saying “Oh yes we can.” As if this were still pantomime season.

Then there were Prince Harry and Princess “Suits” Meghan deciding that they would like to be independently wealthy and royal in a tax-payers-pay-for-our-travel-and-security-bills and living-off-royal-estates kind of way, while also doing dignified things like selling energy drinks and avoiding undignified things like the whole dull public duties kind of stuff.

And how about US stocks at an all-time high again? Indeed, we also have the US President tweeting: “STOCK MARKET AT ALL-TIME HIGH! HOW ARE YOUR 409K’S DOING? 70%, 80%, 90% up? Only 50% up! What are you doing wrong!” Of course, Trump has tweeted similar things before, but this is a blatant apotheosis which takes us to a political-economy of ‘liberté, inégalité, équité’. I seem to recall similar headlines to the Trump tweet, albeit worded differently, in the Chinese press during their epic equity bubble of 2015.

What else have you missed? That it’s not just the current occupant of the White House leading the charge into an equity-fetishist weltanschauung. The Fed are also doing their part to support asset prices and prevent any bad investment decision from ever being punished, as repo operation piles on top of repo operation to ensure that all have liquidity in ever-increasing amounts. With nearly free money and increasingly risk-free investing, is it any wonder we have flying cars being touted as the solution to our lack-of-public-transport problems? I seem to recall the PBOC also forever shovelling cash down the maw of a financial system that will collapse without it – and yet still not able to generate strong, sustainable, equitable growth.

And what else? Oh yes, brief fears of World War Three over Iran. As we wrote several times this week, that scream was reflective of the same lack of critical thinking that has now seen markets run all the way back to “Don’t worry, all geopolitical risk no longer matters!”. And apparently it doesn’t. Did it ever? I don’t think it did – right? (NB Sarcasm.)

You would additionally have missed the market increasingly convinced the US-China trade deal to be signed next week is the real deal, and not just a piece of political theatre for both sides to avoid escalation before November 2020. Trump even now says that “phase two” negotiations will begin straight after signing a “phase one” deal that doesn’t look to have any real substance. That’s the same voice telling you stocks are going to get even stockier ahead.

Putting this all together, a pattern emerges.

And is spells GOLGAFRINCHAN. In ‘The Hitchhikers Guide to the Galaxy’–the original book and not the vacuum of a movie–the Golgafrinchans are a species who had to flee their doomed planet in three ships, Ark Fleet Ships A, B, and C. Arks A and C contained all the “useful people who ruled, thought, or actually did work”. Ark B consisted solely of “telephone sanitisers, account executives, hairdressers, tired TV producers, insurance salesmen, personnel officers, security guards, public relations executives, and management consultants.”

Arks A and C rapidly “lose contact” with Ark B, led by an ablutophiliac captain who spends all his time having a nice bath with a rubber duck. It eventually crash-lands on a heavily-forested blue-green planet, and is settled by the crew and passengers without any of the ship’s destroyed technology.

A year later, the Golgafrinchan Colonization Committee have met 573 times – and have an inflation problem to tackle. This is because they had opted to adopt the common leaf as their currency unit, and had consequently “all suddenly become very rich”. Money literally grows on trees for them. The proposed solution to this inflation is that they should revalue the leaf by burning down all the forests.

Of course, it turns out that the planet the Golgafrinchans land on is actually Earth of the distant past; and while our current central bankers act like they belonged on Arks A and C, they are Ark B all the way, it seems.

In a country with plenty of forest and fire issues, sadly, Australia has just seen a bumper retail sales number of 0.9% for November, well above the downwardly-revised flat October reading and the 0.4% consensus. Perhaps the Golgafrinchan RBA and their rate cuts, and looming QE, have succeeded in making Aussies believe that their rising mortgage debt makes them “suddenly very rich” again. However, I think the warm water in that particular bath is still going to get cold, and fast.

Please continue to ponder the wisdom of the Golgafrinchans as you sit in your own metaphorical bath and ponder today’s main highlight, US payrolls, which we can all pretend are important when actually the Fed is locked and loaded to do nothing on rates right up until the economy slips into recession in H2 2020, which is still our house call.

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We give the last word to Bankhaus Metzler strategists, who wrote in a note to clients this week:

“There are plenty of reasons for stronger corrections, especially in the overheated U.S. stock market: declining growth, historically ex­pensive stocks, euphoric sentiment, boiling geopolitical risks, the U.S. Federal Reserve ‘on hold’ and a US president who keeps the world on tenterhooks…”

But apart from that…?