Market Beat: The New Normal Is The Old Normal
Plus: More recession stuff, and life imitates art
Good afternoon! A quick announcement, I’ve updated the name of this newsletter to The Market Beat. The decision to do so was made to make the aim of the newsletter more readily apparent (Ironside Research meaning largely nothing to anyone). Thank you for your continued readership and support!
The New (Old) Normal
An odd quirk of human psychology is that, fundamentally, we all suffer to some degree from recency bias. When things are good, we tend forget that things were ever bad or that they could turn bad, and when things are bad, then, of course, they will never ever be good again. This thinking plays out in the markets like a rollercoaster as Ben Graham’s Mr. Market wakes up depressed or elated depending on the news.
One of the byproducts of the zero-interest rate environment, then, has been a conditioning of investors to think that the natural state of things is for interest rates to go back to their ‘normal’ (read: zero) levels. That thinking, of course, is kind of silly. Interest rates are something that we can trace back hundreds (if not thousands) of years. And, for pretty much all of recorded human history, the last ten years or so have seen the lowest interest rates of all time.
The Wall Street Journal published an article today, in which the authors speculate that rates will, in fact, remain high (at least by the standards of the previous decade), and that interest rates falling to zero is something of a fever dream. They write:
In their projections and commentary, some officials hint that rates might be higher not just for longer, but forever. In more technical terms, the so-called neutral rate, which keeps inflation and unemployment stable over time, has risen.
On the surface, this just seems kind of obvious. The last twenty years of human history saw the rise of globalization and persistent deflationary pressures on goods that could be produced more cheaply overseas. Covid, and the resulting exposure of the supply chain as woefully unprepared for a disruption of any significance, along with rising geopolitical tensions, has threatened to upend all of that. While that’s a simplistic version of things, it seems to hold water broadly speaking.
In other words, holders of 7.4% mortgages will probably have to wait a little longer than expected to refi.
More Recession Stuff
Yesterday we talked about the idea that the odds of a recession are rising because, suddenly, Wall Street types are saying that it’s tough to see a recession happening. In addition to the specter of student loan payments resuming in October, freight shipments have also been on the decline, nearing the -10% mark on a year-over-year change timeframe that has often preceded or happened concurrently with past recessions.
Now, there is no surefire indicator out there of a pending recession, but freight volumes are generally a pretty good place to start, since declining freight shipments is a good real time indicator of demand.
Other News…
Life imitates art
Perhaps wanting to avoid the same fate as Logan Roy, Rupert Murdoch has announced he will step down as chairman of Waystar Ro—I mean, News Corp, to be succeeded by son Lachlan Murdoch (whose name reminds me of some Hannah Barbara cartoon villain). The news comes in the wake of the high profile Dominion lawsuit, which was settled for a whole lot of dough, the exit of host Tucker Carlson from the channel, and other wave-making events.
If you can’t beat ‘em, buy ‘em
Cisco announced it was buying cyber security firm Splunk for $28 billion, or $157 per share—a steep price for a company that recoreded $3.6 billion in revenue for FY 2023. While the move is sure to raise eyebrows (and the ire of certain investors—the stock has dropped by close to 4% on the news), it may eventually be seen as shrewd given the high profile hacks that have taken place across corporate America in the last week (which we talked about recently). Of course, the deal will have to pass the scrutiny of antitrust regulators who have been in hyperdrive recently.
Final Thoughts
Truist may be turning itself around. Starbucks baristas want you to knock it off with the insane drink orders. 10-year yields keep moving on up. More bad news for home sales. Rail freight volumes are falling, too. Crypto-bros are looking to Europe. Hedge funds are betting oil goes over $100.
Great post!!