KEN GRANT: Hedge #45: The Chicago Fix for Trump Drama (and Everything Else)
Hedge #45: The Chicago Fix for Trump Drama (and Everything Else)
August 26, 2018
Please take me in earnest about this: I hate writing about politics. Hate it. For one thing, my staff always yells at me when I do, and, being a man of sensitive feelings, their rage cuts me to the quick. Equally important, like those unspeakable points of lower body dorsal human egress, everyone has a political opinion, and, by and large, they all share the same unpleasant characteristics.
But when it’s late summer in an important election year, with earnings in the books along with most macro data, with all playas heading to regions like the Hamptons (or, for stone cold ballers, the Wisconsin Dells), and with mad troubles of various strains a’brewin’ in Washington and other government power centers, do I really have a choice? Didn’t think so.
I ask you to bear with me as I begin with some editorializing. Whatever one thinks about our Commander in Chief (and I am on consistent record in stating that he gives me a headache), one thing is clear: his organization (particularly selected members) has been subject to alarming assaults on their civil rights. Documented evidence confirms that (whatever else occurred), the Trump Campaign was the victim of sabotage by its opponents, working, regrettably, in coordination with members of a sitting government. They were infiltrated without warning. There was deep collaboration between the Democratic Party, the FBI, the CIA and the Justice Department itself. To the extent they found foreign threats, these entities failed to either disclose their concerns or warn the targets – that is, until it suited them to do so.
The process ensued past the election/inauguration, and continued or continues well into the tenure of the present Administration. Some fancy footwork has given us a Special Counsel, who has had free reign to harass and entrap anyone deemed to be useful to his apparent objective: removal of a president by any means necessary. As a result, a couple of shady Administration associates are now convicted felons, and may be ready to say whatever they believe that may reduce their punitive burdens. Trump’s oily lawyer copped a plea, and his reps are now all over the ionosphere seeking money and other forms of assistance to support his efforts to abet the takedown. His drive-by former campaign manager stands convicted of crimes that will certainly send him to prison for the rest of his life. None of the charges that have taken hold of either, er, gentleman has anything to do with the mission of the Special Counsel’s Office when it was originally framed. As I understand the current situation, because Attorney Cohen has implicated the President in the unproven and seldom-prosecuted crime of diverting campaign funds for personal benefit, there’s now a socialized theory going about that casts Trump as an un-indicted co-conspirator, evoking cries for his immediate resignation.
OK; fair enough. But I offer the following warning to anybody watching this episode with a measure of glee. You yourself (or someone you admire or support) may someday find that empowered, aggressive political opponents instruct the guys with the hoodies to break into a lawyer’s (or close associate’s) office and home and confiscate everything in sight, with an objective of finding dirt on their target. Perhaps they find something unrelated or more than a decade old. The unfortunate associate may then land himself (or herself) in solitary confinement – a step that former uber-cop/current Trump acolyte Rudy Giuliani only took once during his storied tenure as a prosecutor: in response to Colombo Crime Family Boss Carmine (the Snake) Persico’s offer of $200K to kill him.
But this, my friends, as Rachael Maddow said on election night, is our country now, so I reckon we’ll have to take it as we find it.
By all accounts, the market has ignored these proceedings, as the Gallant 500 fought its way through sustained resistance to set an all-time record close on Friday. Again, fair enough, but I’m going out on a limb to suggest that investors won’t be in a position to ignore political considerations from their valuation calculus for much longer. It strikes me that the sequencing of these cable news-dominating events is entirely political in nature, and if I’m correct on that score, then we can expect an upping of the ante in the weeks after the Labor Day hiatus. I strongly suspect that Mueller will release at least a preliminary report on his quixotic quest to connect the Trump Campaign to Russia by late September/early October. If so, it is certain to be filled with a passel of innuendo – all designed to put his fat thumb on the scales of the mid-term elections for the benefit of the Democrats. To whatever extent he’s successful in doing so, it will likely add to the already-material probability that the Dems recapture the House, and maybe even the Senate.
In terms of investment fortunes, there’s a lot riding on all of the above – even for those that don’t particularly care who pardons the turkey on the Thanksgiving Day White House lawn. Even a slim Democratic House majority (to say nothing of an entirely plausible broad one) would be absolutely impelled to begin impeachment proceedings almost immediately after the 116th Congress is sworn in on January 3rd. As I’ve stated previously, I don’t think the Democratic Leadership is overly warm to this notion. I suspect they’d much rather keep Trump where he is -- as an Orwellian/Goldstein-like foe -- at whom they can take shots all the way up until 2020. But millions of their constituents (including, notably, most of their big donors) will not allow them to do so. They will demand that the Leadership do everything in its power to place that big orange head, with its one of a kind hairdo, on a silver platter.
Of course, based on what is currently known, they don’t have a prayer of winning an impeachment trial – a nigh-impossible task requiring 2/3rds of the Senate to vote guilty. But I think the process will be an ugly one. I suspect, for instance, that millions of Americans on the other side of the spectrum, who would on the whole prefer to mind their own business, will finally lose their patience. And rightfully so. Elections cannot be justifiably overturned on the basis of 15-year old, tax evasion crimes committed by subordinates, or because a middleman paid off some women to keep quiet about decades-old affairs.
As these matters unfold, the parallels to the Whitewater investigation of 20 years ago come eerily into play. Then, just as now, a dubiously appointed Independent Counsel received a mandate to look under rocks, and (of course) he found some bugs. Folks who probably shouldn’t have gone to jail faced prison terms. Unseemly details about a president’s private life (that had nothing to do with the original investigative mandate) took center stage. The accusing political party hopped on the Impeachment Train and tried to ride it all the way to the Office Removal Depot. Not only did they get thrown off the tracks, but they paid a terrible political price at the next voting cycle. Meanwhile, a wickedly strong equity tape continued unperturbed, and didn’t hit any air pockets until a couple of years after the episode fizzled out.
Sound familiar? Well, yes, but I’m not convinced that we can expect the same happy outcomes here. To be sure, the economy looks strong, and market participants are positively giddy. But this time ‘round, we have no internet revolution to propel us to higher valuations like an angel ascending into the heavens. Trump never had the personal charm of Bubba, and, for that matter, when he did get elected, he received approximately 3 million fewer votes than Bubba’s long-suffering, insufferable wife.
So, particularly if I’m correct about Mueller sticking to the political timetables and attempting to drop his load at a point of maximum damage to the governing majority party, I suspect we’re in for a rocky ride in the markets over the next few weeks. This will be particularly true if the bomb he detonates comes earlier rather than later in September. It bears mention, here, that contrary to popular conception, September, not October, is the historically-worst performing calendar month for equities, and this by a wide margin. The Q3 earnings cycle doesn’t begin till October, so no help can be expected from that quarter. Fed Chair Powell has all but committed himself to a rate hike, to be announced a short week after Yom Kippur.
Meanwhile, not only are investors snapping up equities to beat the band, they are also purchasing longer-term government debt at a frenzied pace. As a result, the U.S. yield curve is now flatter than even Japan’s, and looks ominously like its headed towards full-on inversion:
Who’s to say, before the above-described worst happens, that these happy trends won’t continue? Plus, if the demonstrated (if uneven) political skills of the current Administration come into play, there’s every likelihood that they will pull rabbits out of their own hats. Perhaps trade deals with China and Mexico; maybe a big temporary fiscal stimulus on their part.
I certainly don’t expect them to roll over and get stiffed by hostile actors across the opposition party, the media, and selected members of their own administration.
Thus, once we get through the Labor Day ritual, I am projecting a significant increase in volatility – perhaps in both directions. This will be difficult to play in the markets, in what has already been an extremely frustrating year for professional investors.
I casted about for an answer, any answer, to this dilemma, and, perhaps out of force of habit, my search took me to my home turf of Chicago. This, arguably, is the birthplace of the “borrow your way out of debt” School of Finance, and, as those who are paying attention are aware, they’re up to their old tricks again. Facing $28B of unfunded pension liabilities and an additional $9B of delinquent payables – all against an annual revenue budget of $8.5B, the custodians of the City with the Big Shoulders have all but committed to the biggest debt issuance in the history of municipal finance. Specifically, the Chitown crowd is likely to lay some $10B on the market within the next few weeks, at a projected rate of between 5% and 5.5%. But not to worry, they’ve got a plan: they’re going to invest the proceeds in the market and are certain to get a rate of return of at least 7%. If you doubt they’re ability to do this, just ask them.
By my math, they’ll book a ~1.5% spread here, allowing them to pay both interest and principal down by, say, the year 2050 – all at no incremental cost to taxpayers.
And now, at long last, I’m able to reveal my 45 hedge: invest with the Chicago Pension System. You are guaranteed a rate of 7% under any and all market conditions, and if you’re greedy, you can do like they do in the Windy City and even lever the trade up.
By doing so, you will be immunized against any adverse developments in Washington, Wall Street, and, for that matter, Brussels, Tokyo, Pyongyang, Beijing and even Moscow.
This was a bold move by my Midwestern peeps, and I salute them for it. It took guts and vision – particularly in a year when both the Mayor and the Governor of Illinois must face the voters. However, nothing in this world is either certain or can be taken for granted. So, my backup approach, which I will call the Pritzker plan (in homage to the likely winner of the state’s gubernatorial race), involves being born into one of the richest families in the country, and spend your days dreaming up ways to help the less fortunate – all while keeping your big fat wallet intact and growing.
And this, mis amigos, is about the best I can offer in this quickly elapsing summer of discontent.