The wise man is one who knows what he does not know.

– Lao Tzu or Socrates or neither


It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.

– Mark Twain or Josh Billings or Artemus Ward or none of the above


Stocks are at all-time highs, credit spreads are as narrow as they’ve ever been, and someone just paid $24 million for some cartoons of apes:


LONDON, Sept 9 (Reuters) – A set of 107 non-fungible tokens (NFTs) representing images of cartoon apes sold for $24.4 million in an online sale at Sotheby’s auction house on Thursday, as the market for the niche crypto asset continues to heat up.

The images were part of the “Bored Ape Yacht Club” collection of NFTs – a set of 10,000 computer-generated cartoon apes, made by the U.S.-based company Yuga Labs. Owners of the ape NFTs become members of an online club.

Well, my goodness. I mean there are only 10,000 of these things so get’em while they’re hot, I guess. And you get to be in a club! That, to me, is the artistic statement of these pieces but it says a lot more about the buyers than the creators. It is the digital equivalent of Fountain by R. Mutt. Marcel Duchamp used a urinal to represent his disgust at world war – and changed the art world forever to boot – and it may be that the creators of many of these NFTs are expressing their disgust as well, maybe at inequality or materialism or systemic racism or something else. Or maybe they are just taking advantage of the situation. But it seems obvious, at least to me, that the artistic nature of the pieces lies in the buying, not the creating. And the higher the prices rise, the less likely the buyer is to get the joke. One can’t help but wonder at the supply of fools today; there are days I think it might be infinite.

You can go read the story at Reuters if you want to see a picture of said bored ape. It is exactly as stupid as it sounds although it may be worth it just to get in the club to see what you can sell to the other members. Stocks near all-time highs isn’t exactly news these days and most people don’t even know what credit spreads are but, along with the bored ape idiocy, they are all indications that investors these days maybe don’t have all their oars in the water. Rational investors may be an endangered species. Or so it seems. One of the oddest things about the current state of markets is that the pool of pessimists continues to be well-populated.

Skepticism about the state of the economy is growing and with some justification. But every negative economic news item is met with an avalanche of Tweets and articles and podcasts and TikTok videos telling us why this latest piece of news is the one that will – finally! – tip the markets into the crash that we all know is coming. And when it doesn’t happen, the tweeters and pundits and podcasters find the next chart of something that has never happened before to share with us lucky few who have access to social media, the next time the world as we know it is sure to end.

Away from the permas – bulls and bears – the real world isn’t neat and orderly and predictable. I do not consider myself wise but I do know what I don’t know and it is a long list. It’s why I spend a lot of time asking questions, for most of which I don’t have answers. Here are a few I’m pondering now, most of which have something to do with how the economy will perform in the future:

Will the economy continue to slow? The current slowdown was telegraphed by the bond market – as it usually does – and we’re now in the midst of it. There are any number of reasons to think the economy will just keep fading all the way back to the pre-COVID trend of about 2%. But the 10-year Treasury yield appears to have made a bottom in early August at 1.13% and is now at 1.34%. The 10-year TIPS yield has also risen from its lows but is still negative. The copper/gold ratio is still stuck in a range but has recently turned higher, approaching the high for the cycle. If we trusted the bond market when it was peaking, I think we have to trust it now too.

Will Delta be followed by another wave in the winter? That seems to be the consensus but that is probably a result of our collective experience of the last 18 months. Based on recent data from the CDC, around 80% of the US population has either natural immunity (because they’ve had it already) or are vaccinated. Is that sufficient for some kind of herd immunity? I don’t have an answer to that but it is certainly not an open and shut case for a winter wave. If Delta does die out, will the economy reaccelerate? I would think so as there is still a lot of pent-up demand for travel and other in-person services. The holidays could be a frenzy of travel.

What are the long-term impacts on the labor market from COVID? There has been a lot of commentary about how we’ll never go back to full-time, in-the-office, type work and I think that is largely accurate. But there is more going on here than just work from home. How we view work may have changed permanently. GDP has already recovered its pre-COVID high but with a couple million fewer workers. Job openings get a lot of press but the quits rate is at an all-time high too. Maybe that has changed (the latest data is from July) but it shows either a lot of confidence or a lot of chutzpah. It may be the latter considering that new businesses are being formed at rates about 50% above the pre-COVID level. How will migration within the US during COVID affect regional economies? Will large cities continue to dominate GDP or will it get spread more evenly across the country? Does that matter? I think it does. I don’t think we’ll know COVID’s true impact on the labor market or the economy as a whole for years, maybe decades. And I don’t even know if the impact will be positive or negative though I lean to the former because we’ve seen this before. There were clear innovation surges in the late 1800s during the long depression and also in the 1930s during the Great Depression.

What, if anything, does this chart mean?

Those are core capital goods orders which have just broken out of a 20-year holding pattern. Will productivity follow? If this keeps rising it may signal that we are finally past the overhang of the dot com boom of the late 90s. This is obviously a small part of the economy $76.5 billion out of a $22.7 trillion economy. But this is the real multiplier in the economy, not money creation or government spending.

Are stocks really as expensive as we think? What if Delta does fade away and what if we don’t get a winter wave and what if those new company formations and rising capital goods orders raise productivity? What if we pile a trillion or more in infrastructure spending on top of that? What if the rest of the world economy also rebounds? Could we be looking at more than just a temporary surge in post-Delta activity? What if we get a couple of years of above-average growth? What will that do to corporate earnings? Are P/Es more reasonable than they appear? Or do current prices already reflect that future growth? Could stock markets just slow their ascent or stagnate for a while without crashing? How far could interest rates rise before having a significant negative impact on the economy? Would higher rates reduce P/Es even if earnings are growing rapidly? Could multiple contraction outpace earnings gains?

Where are we in the business cycle? I don’t see any reason to believe we are near recession. From yield curve to credit spreads to CFNAI none of our recession warnings are flashing right now. Assuming no further shock that puts us back in recession quickly, this cycle would seem to have more to go. How much? The last cycle was not very fast but lasted 11 years with calls for its demise at every turn. If government intervention in the economy compresses the amplitude of the economic cycle – and it generally does – it should also increase the wavelength. In this case, we have large government intervention and the private sector potential of capital spending and entrepreneurship. We might get a longer cycle and one whose growth exceeds the last cycle.

Why is China turning inward? Some of the recent moves by China are frankly a little disturbing. They are systematically closing themselves off from foreign capital. Are they preparing their companies for a day when they won’t be able to access foreign capital? That is a scary thought even if I think the obvious (taking Taiwan) is highly unlikely. But a lot of wars have started on things that people deemed highly unlikely. The flip side of this fear is that I wonder if Chinese stocks might not be a bargain right now. Not exactly blood in the streets but what reaction would you have if someone close to you said they were buying Chinese stocks heavily? Concern? Horror? No one said being a contrarian was easy.

What will become of QE and all the other Fed facilities? QE’s track record on economic growth is pretty lousy. You could make the argument that the last decade of 2% average growth would have been worse without it but that is impossible to prove and seems doubtful. There are big debates ongoing about its impact on markets (please don’t send me any Fed balance sheet/S&P 500 charts) but I find it hard to reconcile little economic impact and great stock market impact. QE is a swap of a useful asset (T-Bill, note, bond) for one that has little utility (reserves). There is a great argument there about why QE is actually deflationary. But if all that is true, why are stocks so expensive? Why is there so much speculation across multiple markets? Is there a transmission mechanism to markets but not to the real economy? That seems highly unlikely. Are we missing something in our analysis of QE? And if QE is the reason stocks are so high in the US, why hasn’t it had the same impact on Japanese or European stocks? What about fiscal policy? Does the huge amount of deficit spending mean QE has a bigger impact (monetizing debts) now? I know what we (Alhambra) think we know on these subjects but I worry that there is something we don’t know or won’t know until it has had an impact we don’t expect.

That’s just a sample of what has been going through my mind recently. There is an entire section of my brain dedicated to thinking about how politics might impact things over the next year and after the mid-terms. I don’t generally think that politics has as much impact on the economy as we think but in this case, the numbers are pretty darn big and the policies pretty intrusive. Of course, Donald Trump wasn’t exactly a “let the market sort it out” kind of guy either so maybe my concerns are overblown. There are also a lot of market-specific questions such as the value vs growth debate and the active vs passive debate (which we tend to straddle). And what about environmental policy in the Biden administration? Will US energy production recover to the pre-COVID peak? Or fall more? What about anti-trust policy? Will the Biden administration really go after the tech giants? If so, how?

There are always a lot of unknowns for an investor. We just can’t possibly know enough to predict how the economy will do in the future except in broad terms. And even if we knew what the economy was going to do, it is doubtful we could predict the market reaction with much specificity. All we can really do is try to determine where we are right now. Right now that means growth in the US that is slightly above trend but slowing. It means record earnings for the S&P 500 last quarter at a level 29% above the Q4 2019 peak and 26% above the previous all-time high in Q3 2018. It means US large-cap stocks trading at very high multiples versus history and foreign markets while small and mid-cap stocks trade at pretty reasonable valuations. It means a 10-year Treasury yield that is down from 1.75% to 1.34% today but roughly double where they were a year ago. It means copper that recently hit an all-time high and gold that peaked a year ago and is down 14% since then. It means the dollar trading near the bottom of a range that has prevailed for nearly 7 years. It means Europe rebounding and China very obviously slowing. It means Taiwan, Korea, and Japan stocks performing well, and Latin America flailing as it usually does.

What does all that add up to? In my view, it adds up to a defensive tactical stance as we wait for more information about the economy and the direction of the dollar.

The data released last week was unsurprising. Inflation is higher than expected, new jobless claims are falling and there are a lot of job openings.


It could be an interesting week for data with more inflation numbers, two important regional Fed surveys, industrial production, retail sales, and the preliminary look at consumer sentiment for the month.



It was one of those weeks when nothing works. All the major asset classes were down last week but Japanese stocks continued their recent hot run. Growth beat value in large-cap but everything was down.



There really wasn’t any kind of trend by sector last week. Real estate and industrials were hardest hit but health care and utilities were also down hard.



I think it is our job as investors to ask questions, to be skeptical about the conventional wisdom. I don’t know what the economy or markets or the Fed or Joe Biden or Congress will do over the next year or two years or three years. I don’t know what all those people quitting their jobs are thinking and what they plan to do in the future. I don’t know what Xi Jinpeng will do next, what company he will decide is not taking his shared prosperity seriously enough. I don’t know whether to take bored ape NFTs seriously…well, actually I think I do know that one.

Never think you have it all figured out, that you know what is coming. You don’t. But you can ask questions and, if you are patient, the market will provide answers.



Joe Calhoun