Out of the Box: On the Road to Emerald City
“No thief, however skillful, can rob one of knowledge, and that is why knowledge is the best and safest treasure to acquire.”
-L. Frank Baum, The Lost Princess of Oz
When something does not make sense, then you have to dive into your barrel of knowledge to make sense of it. Greece is about to come out with a new 7-year note. The Financial Times states that “The Mediterranean country is seeking a yield of around 2.10% on its new Euro-denominated seven-year paper, according to two term sheets…” That yield is 13 basis points behind the yield on the U.S. Treasury 7-year note. Some have argued that the Greek yield is a result of better economic conditions in Greece. With all due respect, that argument is a fallacy based upon a fantasy laid bare in a pipe dream.
The yields for all of the sovereign debt in Europe is based upon one thing, and one thing only, which is the European Central Bank’s bond buying program, which is highly likely to increase in size and scope, in the coming weeks. We have $13.4 trillion in negatively yielding debt now and I think this will double in size, as Ms. Lagarde takes over the helm at the ECB. She is going to walk into the door and say, in French, the equivalent of “You ain’t seen nothing yet.”
The Italian 10-year sovereign is now at 1.59% which is 51 bps less than the American 10 year. Sort that out in your head. It must be, of course, because Italy has a much stronger economy and a bigger bond market than the United States and because there is far less risk in buying Italian debt than American debt. “Nice dream, time to wake up,” Mark Grant tells you.
Repeat after me:
We are not playing the “Great Game” with the Lollipop League, you know, or even the Horse of a Different Color. All of the participants are boys and girls fanned out across the road and trying to get to Emerald City, and its riches, before the other boys and girls.
Therefore, since the European Union cannot afford their national budgets, or their social programs, or to raise taxes to pay for these things, then they use the artifice of their central bank to make money from the blink of Berlin’s eye.
The road goes on and on, just like the markets. Good times, bad times, and on we go. The bricks are yellow, which tells you that the light and the shadows, of booms and busts, can make them appear to be a variety of shades. Stare at them carefully, as you walk along.
“Never give up… No one knows what’s going to happen next.”
-L. Frank Baum
Grant’s Rules remain in force. They are the accumulated knowledge of my forty-five years of heading down the road and, while I have grabbed a few emeralds along the way, I am still on the quest. Grant’s Rules were hard won, I can assure you. I have the lacerations of the various experiences flayed across my back.
Rules 1-10: “Preservation of Capital”
Rule 11: “Make Money”
Rule 12: “When a company is under Federal investigation for Fraud-Sell!”
Rule 13: “When a company gets an “Ongoing Concern Letter” from its auditors-Sell!”
There are also a wide variety of characters that are on the road with you. One is the Fed, which reminds me very much of the Scarecrow. They crow. They scare. They tell you on October 3 that we are a long way from neutral interest rates and then we are informed on November 30 that we are at just about neutral interest rates. Then President Trump weighs in and next it appears as if the Fed is right on the threshold of cutting rates.
Did they listen to him, did they consult with Ozma, or the Good Witch of the North, who knows who they might have consulted but the one thing you can know for sure, no one will ever tell you. The odds on them ever admitting how they reached their decision are about the same as someone mailing the Hope Diamond to you and then telling you to keep it. So, we just keep going.
“If we walk far enough,” says Dorothy, “we shall sometime come to someplace.”
-L. Frank Baum, The Wonderful Wizard of Oz
Then there are the Cowardly Lions. They are afraid of telling you the truth, so they don’t. They are the smartest, their firm is the best, their new product is the most incredible and the markets are either going straight to Heaven, on the backs of Angels, or straight to Hell, on the backs of the Demons. Cowardly, you see, and all very far from the truth.
“Some people without brains do an awful lot of talking, don’t you think?”
-Frank Baum, The Wonderful Wizard of Oz
To make it very far down our Yellow Brick Road does have some requirements. You need honest numbers, a methodology that is based upon deductive thinking, a good dose of common sense, the experience of the journey, and then some imagination. You also need to be able to “get it done,” which is a trait found in very few people. “Trying” just doesn’t count.
“Imagination has brought mankind through the Dark Ages to its present state of civilization. Imagination led Columbus to discover America. Imagination led Franklin to discover electricity. Imagination has given us the steam engine, the telephone, the talking-machine and the automobile, for these things had to be dreamed of before they became realities. So, I believe that dreams – day dreams, you know, with your eyes wide open and your brain-machinery whizzing – are likely to lead to the betterment of the world. The imaginative child will become the imaginative man or woman most apt to create, to invent, and therefore to foster civilization.”
-L. Frank Baum, The Lost Princess of Oz
During my long tenure in the financial markets I have seen many schemes to “take over the world.” Let me inform you, no one is going to do it. I have watched Germany and the European Union, and then Japan, and now the Chinese, and it is not going to be accomplished. America, by the way, has not accomplished it either, as the world is just too diverse a place, so that everyone’s motives and incentives are not fit for everyone. One size does not fit all.
It is all just a global “Game of Thrones” where every nation vies and competes for strength, position and power. There is nothing wrong with that and, as a matter of fact, there is everything right with it, as long as life, liberty and equality are not endangered. It keeps everyone on their toes and it moves the markets to the place they always go which is the riches go to the best and the brightest, because they understand how to win at “The Great Game,” and the determination to make it happen. Strategies change, depending upon the times, but great minds, focus, being a stand-up guy, and innovative thinking, will always prevail. Luck is created, it does not fall from the sky.
I mention your intellectual capacity, along with your reputation, with great purpose. One, without the other, will doom your ability to remain on the Yellow Brick Road. You can have years and years of doing the “right thing” and then one turn to the Dark Side, just one, where you do the “wrong thing,” will end the Munchkins from ever doing business with you again. Your reputation is everything,
Guard it like your life!!!
“Somewhere over the rainbow, skies are blue, and the dreams that you dare to dream really do come true.”
“Make them happen,” I say.
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc.
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