A Peaceful Easter Newsletter

Hard-boiled eggs and scrambled brains

It is proving difficult to focus primarily on financial news when the President decides Easter Morning is the time for vulgarly threatening war crimes (e.g. the specific targeting of civilian infrastructure) in an unhinged tweet/truth.  As I was finalizing this on Tuesday morning, though, there was not even the faintest scent of TACOs on the wind – instead, the Easter message (and the follow up of a civilization ending strike) suggested that the President’s mind (not to mention his messaging and war plans) had become, perhaps hopelessly, scrambled.  And more eggs right after Easter is not what I (or the market) wanted... we were all hoping for a TACO Tuesday.   [UPDATE: Taco Tuesday came through in the end. And it was after market close, but that makes sense because (i) Wednesday breakfast tacos (con los huevos revueltos) are the best tacos, (ii) everyone knows that the egg comes before the chickening out!  Ok, ok, I am done, I am sorry!  Though I am eagerly awaiting the revelations about which members of the military and Trump’s WH were placing bets on a truce in the waning hours of the market.   The market was not thrilled that Trump hadn’t already chickened out; but in one sense the resilience it’s showing in the face of this current political craziness is simultaneously terrifying and comforting.  The most optimistic take I can summon up is that this is a great lesson on the the value of inertia;  apparently, a madman spastically spinning the captain’s wheel, while babbling semi-coherently about autopens and ballrooms at the children's table, will still not materially change the direction of this massive ship which is the US stock market.  Perhaps the market is now moving on from TACOs to the 25^th Amendment, and, by the way, I hope all the news desks are carefully tracking Kalshi to see any spike on that question; the hedge funds (or their AI agents, at least) are definitely alert.   Though one has to wonder how the President’s recent cabinet shake-up could come into play in any 25th Amendment implementation.   My suspicion is that if the only two grown-ups, e.g. Bessent (Treasury) or Lutnick (Commerce), even hinted at stepping aside or spending more time with their family, the market would respond with utter dismay (the corollary being that if SecDef Hegseth were to check into rehab it would (i) give Trump an off ramp and (ii) be met with an enormous sigh of relief from the market).

Although I am cognizant that I misjudged how quickly the Iran misadventure would peter out, I am happy to say that while oil prices have increased, they have not gotten to an “oil shock” type level (at least now).  And the progress made in getting certain ships through the Strait (maybe 15 per day?) has been heartening.   The world economy wants trade to resume; and that means (along with the refusal of nearly every other country in the world to get involved) that we are probably still headed towards some sort of short term resolution (even if this ceasefire doesnt hold).   It is concerning, however, that Iran seems to have – at least in some sense – some significant the leverage against the US (or maybe just the Republican party).  So, if I can indulge myself and return to musings about game theory (from early newsletters), I admit I appreciate the conundrum that rational actors would face here (if the President still meets that "rationality" bar).   Iran has the Republicans (though probably not the entire US economy, as noted) over the metaphorical and physical barrel, but the US is not the ONLY threat to Iran.   This is a 3-way negotiation between Iran, Israel, and the US – and it’s not clear to me if Iran has any leverage to deploy against Israel – or, more specifically, against Netanyahu and the conservative/ultra-orthodox parties who are key to him staying in office (and, thus, out of jail).   I am also not sure if the US has any leverage over Netanyahu either (nor is it clear that the President or the DOD leadership even understands they need to negotiate with Bibi to cease hostilities).   Netanyahu is clearly taking advantage of the war, even if it costs the Republican party everything, and this is despite Israel being regarded, historically, as one of our strongest allies.   It’s a tricky 3-way game – and depending on the pay-offs you ascribe to each party, a Nash equilibrium could be difficult (hopefully not impossible) to achieve.  So maybe the Trump Administration should be looking pretty hard at how they can get Netanyahu on board with ceasing hostilities [maybe he gets to be Chairman of the Board of Peace, which comes with a floor in Trump Tower NYC and a non-extradition treaty?] 

But to return to game theory 😄, trying to imagine a 3-way Nash Equilibrium here is a gross simplification that ignores at least one other key player; Russia.  The Kremlin has gotten a massive benefit (higher oil prices and lifted sanctions on Russian oil) and, as you might suspect, they are probably not keen to see the war end; so you shouldn’t be surprised that Russia will do everything possible to (help Iran) keep the Strait closed.  Which, of course, leaves China as (probably) the long-term winner by not even having to play the game (in part because they have worked very hard to transition away from oil in the last few years), I just hope they aren’t also the short-term winner by choosing this moment to re-integrate Taiwan (and TSMC, more importantly, for the market).       

Jones Act Suspension (a good first step)

The President, besides waiving sanctions on Russian oil, has tried to take various actions to mitigate oil price increases in the US.  And, for one of the few times in history of this newsletter, you will see me praise the President for his decisive action! Which is pure coincidence, since this is an apolitical newsletter. That’s right, I am channeling my inner libertarian and celebrating the President’s suspension of the Jones Act.  Now I doubt it'll have a big effect on the oil price compared to other actions [Late Update: Brent Crude dropped almost 15% with the ceasefire, for comparison's sake], but it’s a good move that should be followed by congressional action to eliminate the Jones Act altogether.  As soon as our congressional representatives figure out to trade that, we will probably see some progress.  Why? Because it’s an insane and out-of-date law which has achieved few (or maybe none?) of its stated goals (i.e. to keep the US shipping industry strong).  And it drives all prices up for US consumers (because trans-shipments between ports are expensive), as well as concentrating economic power in huge international ports and contributing to excessive and inefficient truck transport [Ok, ok…I like trains too much to complain about them here, even though ocean freight is roughly 2x as efficient as trains]!  Moreover, the Jones Act is probably a significant factor contributing to Puerto Rico not reaching their economic potential (Super Bowl Halftime Show notwithstanding), as well as, quite possibly, a contributing factor for one of the most deadly U.S. ship wrecks of the modern era (TOTE Maritime's El Faro with 33 souls aboard).  Most importantly, it affects me personally by driving the housing costs (and the cost of all imported goods) higher in Hawaii (maybe by 1.2B per year?).  Now the American Maritime Partnership claims it has no effect.  And they were the top Google result (apparently outbidding the Grassroots Institute, which provided the $1.2B estimate).  That left the ILWU Local 142 languishing in third place (and if you recognized that as the local longshoreman workers union in Hawaii, you will not be surprised that they also argue the Jones Act has absolutely no effect on consumer prices).

Ok, I think all the rants are over! And that means a musical interlude is necessary to lower our (collective?) blood-pressure.  And since I got a few compliments on last month’s musical choices, I’ll try and provide more options here as well.  Again, you’ll have to vote based on your preference for trains vs. boats – because both songs are great (although very, very different).

Play A Train Song - written by Todd Snider, with a healthy dose of his typical sense of humor. Although Todd Snider's version is well worth a listen, I prefer Robert Earle Keen's version shown below.

Wreck of the Edmund Fitzgerald - an absolute classic that everyone knows. And although the Gordon Lightfoot original is always worth a listen, a slightly different version is courtesy of Chris Thile and the Punch Brothers [I think recorded on his short-lived "Live From Here" NPR show?] which is below. Now obviously Gordon Lightfoot blamed the weather for the tragedy (likely poetic license), but I do note that the Edmund Fitzgerald was the "Pride of the American Side". And because she was "coming back from some mill in Wisconsin" and headed "fully loaded for Cleveland", she was very clearly subject to the Jones Act. We just will never know whether, as I suspect, that church bell would have rung "29 times for each man on the Edmund Fitzgerald" if that 1920's anachronism, the dreaded Jones Act, had been repealed sooner. Though, it is probably hard to incorporate a critique of poorly thought through protectionist trade policies into his song, and still have a massive hit (even 40 years later).

Political (Insider) Trading

As noted above, I feel certain we will get some good stories about whatever insanely profitable short-term trades were placed by Trump’s inner circle (or others in the know) about the ceasefire.   But those will have to wait, I suppose, until next newsletter.  Not to worry, however, there are plenty of corruption stories to highlight here too.   My favorite is Markwayne Mullin – Kristi Noem’s replacement at DHS – who was one of the congressional representatives who purchased Chevron stock just days before Trump deposed Maduro (just the cherry on top of his consistent outperformance of the market, while not complying with what few regulations do apply to congressional stock trades).  But the craziest story is the investment that Tether made in Commerce Secretary Howard Lutnick; or technically I suppose it was a private credit investment (a loan in an undisclosed amount!!) in the trust which benefits Lutnick’s children, which purchased (and holds) a multi-billion dollar stake in Cantor Fitzgerald.   And Cantor Fitzgerald already (basically) owns a 5% stake in Tether worth many, many billions.  Why am I concerned?  It is not like I use Tether (since I am not in the international drug or human smuggling business).  But I grow more and more concerned that these deals like this one between Lutnick and Tether (i) destroy confidence in the stock market, generally, and (ii) specifically, increase risk of contagion by connecting Tether deeper and deeper into our financial markets [and 401Ks – see below], without the sufficient regulation.  Which means that when Tether is inevitably deemed “Too Big To Fail”, Lutnick will be trying to ensure that Tether's private credit investment in his family (and Cantor Fitzgerald, where his 28-year old son is CEO) will be first in line for the taxpayer's bail out money.  So, yeah – I am concerned we will all be paying for a Tether bailout. Which is all to reiterate that we are in dire need of significantly increased restrictions for the executive and legislative branch with respect to their personal finances (and concomitant conflicts of interest).  But I am not holding my breath. [See, not a rant, just a careful, considered demand for better governance.]  

Trump Accounts:

They are right around the corner (July 4th) and I’ve had a few clients ask me about them, a question typically tinged with a healthy dose of skepticism.  I assume that is mainly because I counsel skepticism about all sorts of investments/new approaches, but I can’t deny that part of their caution may be influenced by a generalized mistrust of (i) the President, both politically and with respect to his “business acumen”, and (ii) the financial markets overall, due to increased corruption (presumably).  Which – ok, I guess I wasn’t really helping matters with that last section.  But good news - the Trump Accounts are fine!  They aren’t the best things in the world, but if your children fall in the age range (<18 on Dec. 31) and you, or they, have the cash (up to $5000 a year!) then they absolutely make sense.  Of course, you definitely should do it if you have had a child recently, as (some of) those children will be eligible for initial grants of $1000 funded by the US treasury (and some others are eligible for receive gifts from various philanthropists).  You can read about them at the IRS, Vanguard, WSJ, Schwab, everywhere really.  But, last month’s newsletter warned about “gamifying” investing for your kids too much…and I’ve got some bad news.  Trump has picked Robinhood – the most gamified brokerage I know of – to run the accounts (along with BNY Mellon), at least, initially.   But still, apparently the investments will be restricted (including limits on fees!!), so you don’t have to worry about your child going all in on short dated OTM Gamestop options [thank god I wasn't writing this newsletter in 2021!].  Anyway, we will revisit this when the accounts are finally opened after July 4^th this year.

Private Credit and Your 401(K):

Although the private credit bad news continues to come fast and furious, the Labor Dept. did finalize rules aimed at getting private credit/equity [as well as cryptocurrencies, including Tether…and Lutnick probably didn’t even have to chat with Secretary Chavez-DeRemer about it] into your 401(k) by expanding the safe-harbor for plan sponsors (who have a fiduciary duty to have appropriate investments available in the plan) to allow a “process-based safe-harbor” to limit plan sponsor liability.  A cynical TL;DR for that last sentence would be: if they pretend to be thoughtful, they can put damn near anything into your 401(k) plan regardless of fees/risks/etc.  I am sure we will see plenty of horror stories in the future (including in 403(b) plans, which cover many public sector/non-profit employees) as fall-out from this, but most of you [my astute readers] shouldn’t worry, mainly because you guys are uniquely smart and won't be fooled, but also because you will surely keep your investments in the simple index funds that proliferate in most sponsors’ plans and you WON'T try to move to any new fancy thing that pops up.  There is still risk when/if Target Date Funds start to incorporate a lot of private credit/debt investments, which I will be watching for going forward.  And, if you are at a small company or one with a really shitty less reputable 401k plan sponsor (or 403(b) plan sponsor, which is sometimes more common, I gather), then you might need to be a little bit more discerning.   But then again, who knows; if private credit/private equity is cyclical  (and headed in the wrong direction now) then maybe in a few years private credit as a small part of the 401(k)/403(b) will make sense?   After all, conceptually, it makes sense to allow some of the most illiquid investors (the employees building wealth in their 401(k)s) to capture the “illiquidity” premium that private equity and credit funds claim to offer.   For right now, I am not rushing in, cause only fools rush in.  And since I have already used “Won’t Get Fooled Again” back in Episode 7, we will have to end with different song choices for Fools and Rush.

Though we still don't know why the President thinks he should/could fight Elvis, nor why he believes he would win in such a hypothetical fight, I would absolutely recommend betting on any random Elvis impersonator vs. the President if that fight makes it onto the UFC card at the WH (please, please). After all, Dana White needs a replacement for Jones? MacGregor? Who knows. Anyway, wise men say.....

And, despite the risk of including too many Canadian songs in one newsletter, here is Rush. Singing a song which (though somewhat incoherent to me) is still fun to listen to - and also, coincidentally, refers (at least in the title) to a famous US maritimer...or mariner...or rafter, at least. Yup, it's Tom Sawyer!

You've made it. Hopefully your sanity is still intact! Maybe some breakfast tacos and a mid-morning margarita will help?