Market Musings / GSE Gyrations / Book Recommendations

Kaoboy Musings 3 – 9/27/2019

Market Musings

It’s been an interesting week on a number of fronts. Markets chopped around and ended generally on a weaker note, likely due to the following factors:

• Impeachment concerns around the Ukrainian controversy

• Lack of progress on China trade talks and new talk of limiting investment flows into China

• Weak market reception to the high-profile Peloton IPO (not to mention the shelving of the WeWork IPO)

• A 20% drop in Bitcoin, as yet another barometer of “risk off” sentiment in speculative instruments

• A collapse of oil prices back to pre-Saudi attack levels due to earlier-than-anticipated restoration of output as well as rumors of easing Iran sanctions

• Continued collapse of streaming stocks like NFLX and ROKU

In my humble opinion, none of these factors are terminal to this market, and I find myself somewhat in the minority these days in terms of believing that the economy remains in decent shape and that a recession is not imminent.  Anecdotally, I generally hear that business fundamentals remain strong (if not gangbusters) amongst my peer group – even as there is a generally pervasive “wall of worry” of imminent recession simply due to the duration of the current expansion.  Although manufacturing has slowed appreciably due to trade concerns, the consumer remains strong, the Fed has become accommodative again, and I believe there will be a trade resolution prior to 2020 elections. 

The duration of the expansion does not concern me because the intensity of the expansion for the bulk of this 11-year period has been very tepid – although there are certainly bubbles in sub-sectors of the market, I simply don’t see an atmosphere of “irrational exuberance” across-the-board.  Picture yourself stretching one of those resistance bands at the gym – as long as you’re not holding this pose with maximum tension, you can probably hold the pose for a very long time.  That is how I see this economy currently.

In fact, as a “value investor,” I would say there are as many pockets of cheapness and value as there are of “giddiness” – the energy sector, for instance, is at multi-decade lows in terms of valuations.  Last I checked, market busts aren’t usually heralded by relatively healthy business and economic fundamentals coupled with “wall of worry” concerns that inherently stymie overconfidence and overcapacity – it’s usually exactly the opposite mix of these factors that we need to worry about.

GSE Gyrations

Enough macro talk, and onto some “micro” talk about my current favorite investment idea – the Fannie/Freddie preferreds. 

Although the market awaits the “Big Kahuna End of Net Worth Sweep” press release with bated breath, nothing has hit the tape yet.  I got some questions as to why these got hit earlier in the week only to rally back by end of week.  First, let me say that as an 11-year holder of these securities, I’m about as inured to volatility in these as I believe the market has become inured to impeachment talk!  

Nevertheless, my best explanation for the initial selloff is that impeachment concerns engendered a “risk off” move in the markets and these prefs specifically because the recapitalization plan is generally a Trump Treasury/FHFA-backed plan.  Certainly, a successful impeachment of Trump or a Trump loss in 2020 has the potential to slam these – although I’ve opined in the past that the market reality of unwinding the GSE’s will prove unpalatable to any Administration.

Then, on Wednesday, the plaintiff attorneys in the Collins case that recently “won” the 5th Circuit decision filed an unexpected writ of certiorari to the Supreme Court, which I read to accomplish the following:

1. It attempts to preempt a remand/appeal by the Defendants and accelerates the timing of an outcome, creating max pressure for the Treasury/FHFA to settle

2. It opens a new battlefront directly to the SCOTUS by attempting to insert the Plaintiffs’ assertion (that the FHFA is unconstitutionally structured) in front of the highest court because of another case before the SCOTUS regarding the constitutionality of another regulatory body, the CFPB

3. It still keeps the option alive in the lower courts

Bottom-line: this was an unexpectedly aggressive tactic coming from the Plaintiffs, but one that is very smart in my opinion. 

Book Recommendations

Lastly, because I’m a huge fan of Charlie Munger’s idea that one must have “multiple mental models” to be a good investor, I’m going to share some periodic book reviews/synopses from my admittedly eclectic reading list. Here are a couple of my favorites of the year so far:

Endurance: Shackleton’s Incredible Voyage by Alfred Lansing

Incredible true account of Ernest Shackleton’s doomed expedition to Antarctica in 1914 and the amazing story of grit, leadership and the will to survive against seemingly impossible odds.  Very engrossing and quick read.

The Silk Roads: A New History of the World by Peter Frankopan

I read this earlier this summer en route to the heart of Turkey for our family summer trip.  I generally like to read something topical to where we visit, and this was a phenomenal book about the importance of geography.  Of particular interest to me (due to my trip) was how and why Constantinople held such an important role in world history due to its geographic position straddling Europe and Asia.

Prisoners of Geography by Tim Marshall

Continuing down this theme of the importance of geography, I found this gem of a book which takes you around the globe and frames age-old conflicts and modern geopolitics in geographical terms. Fascinating to see how geography plays a huge role in a lot of current world conflicts like Russia/Ukraine, India/Pakistan, the instability in the Middle East, etc.

The Happiness Curve: Why Life Gets Better After 50 by Jonathan Rauch

Although I’m not yet 50, I guess I’m already prepping for it!  This is somewhat of a dense read, but I found it fascinating nonetheless.  In short, the author cites clear statistical evidence that happiness follows a U-shaped curve, starting off high during youth when “the world is your oyster,” declining into middle-age ostensibly due to unrealistic expectations gaps as well as biological reasons, and then rounding the corner and going back into the highs thereafter – surprisingly even in infirm old-age situations.  Apparently, this pattern generally holds true across geographies, ethnicities – and even in other primates.  To my middle-aged friends – we all have something to look forward to!

‘Til next time…

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About

Kaoboy Musings is a private distribution list/blog that I created to encourage dialogue regarding the economy & markets, geopolitics, investment ideas, and life in general. I have a passion for the markets and investing, and even though I no longer accept investor capital, I try to keep current on global events and opportunities and remain active in the markets.  I’ve always found that writing my ideas down, sharing them with smart people, and encouraging two-way discourse and devil’s advocacy is often the best way to validate or invalidate a thesis and stay mentally flexible.

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