Finance blog


King Canute

March 23, 2022

If you are anything like me, you may have heard of King Canute.

Also like me, until just recently, you probably couldn't give me his brief history. It turns out, he was quite an important king in the history of England. Most history books will refer to him as Cnut, but he was also known as Cnut the Great. He was a Danish King of England from 1016, King of Denmark from 1018, and King of Norway from 1028 until his death in 1035. During his reign over all three kingdoms, his realm was referred to as the Great North Sea Empire. Interesting side note: His father was known as Sweyn Forkbeard…now that is a cool name!

I am calling upon the memory of Canute, believe it or not, as a great analogy for the current realities of the capital markets, especially the massive moves we have seen in interest rates, spreads, and sentiment over the last three months. The 12th century historian Henry of Huntingdon gets the credit for recording one of the most famous stories about King Canute. The king was a very powerful man for his time and was known for being a tremendously brave fighter. He was also known for his wise insights and commentary. Back in those days, it was not acceptable to ignore a king's direct and specific order. In fact, if you did ignore the king, you would likely be put in prison and quite possibly sentenced to death.

So, what's the story? King Canute realized that his courtiers, generals, and noblemen would never disagree with him. It was dangerous under the norms of the times, both physically and financially, to cross the king. However, he was also very aware that sometimes it is much better to have someone confront you with differing views than to be surrounded by only "yes men." He knew that he was not omnipotent, nor did he have unlimited power. To demonstrate this to all his lackeys, he commanded that his throne be put down on the beach at low tide and then marched the whole court down to the seashore. He then commanded the tide to not come in. He did this knowing that he could not command the tide, but he wanted to demonstrate that even though he was in control of many things and was ultimately "in charge," there were some things he could not control.

It strikes me that we have faced and are facing several situations which might remind me us the infamous tide that could not be controlled.

The COVID-19 pandemic immediately comes to mind. Many of our leaders thought they could control the pandemic via lockdowns, masking rules, vaccine mandates and other means. China just recently completely locked down Hong Kong again. They have blocked off entire neighborhoods and put incredibly strict social rules on the citizens, including banning meetings of more than two people! The Chinese leadership has declared a zero COVID-19 policy. They are trying to command the tide to stop coming in. Science suggests that sooner or later virtually every human on the planet will contract some form of COVID-19. Thankfully, recent variants seem to have picked up their much higher transmutability only by exchanging virulence for it. Can we control this tide? No, we cannot.

What about the financial markets? The tides have suddenly gotten very strong.

"There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability," Mr. Powell said during remarks to a conference of business economists.

Policymakers raised interest rates by a quarter point last week and forecast six more similarly sized increases this year. On Monday, Mr. Powell foreshadowed a potentially more aggressive path ahead. A restrictive rate setting would squeeze the economy, slowing consumer spending and the labor market — a move akin to the Fed hitting the brakes rather than just taking its foot off the accelerator.

"If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so," Mr. Powell said. "And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well."

Source: Bloomberg

The tide appears to have turned from extremely accommodative (ebbing?) to potentially harsh (flooding?). Additionally, there is deep uncertainty both about events in Europe and our dealings with China. I recently listened to an interview with the CEO of BlackRock (sym: BLK), in which he discussed the loss of the "peace dividend" we have enjoyed over the last 10-12 years (basically post financial crisis), a period in which companies and individuals felt very comfortable dealing with overseas partners. Just think of some of the major U.S. companies with very serious ties to China. Whether it be the raw materials, chips, finished goods, rare earth metals…pick your poison. If, and this is a big if, China decides it would be a good time to make a move on Taiwan, many of these companies would find themselves in a very uncomfortable position. Was it hard to sanction Russia? Eh, kind of. Sure McDonalds, some retailers, Visa, Mastercard and many others suspended operations or had to close some locations, and yes, the disruption in oil and gas is painful, but few will have to shut down operations globally.

As Dr. Seuss might say: Should we/could we/can we/will we be able to impose similar sanctions against China? We've been in a tizzy over supply chain disruptions for many, many months now, without sanctions. This uncertainty meshes perfectly with Mr. Fink's contention that the decade-long peace dividend is going away. Everyone is suddenly very curious to know which partner, which counterparty, which supplier is reliant on whom and for what. Uncertainty causes markets to falter, and we have seen that materialize in credit spreads across the spectrum.

I like to go to a map when I am trying to think about countries like Taiwan to put things in perspective for me.

In my 2022 predictions, I stated that I believe China will make some sort of move on Taiwan. They consider Taiwan to be a part of China, and they want it back under their central control. Will their attempt take the form of a military coup? An invasion? A blockade? I don't know. I fear that China thinks the West is weak and feckless and that this makes for an opportune time to move. If they do, what would we do?

Now, let's throw some fuel on the fire. Let's talk about oil, natural gas, and gasoline. I know many people that would love to own and use an electric vehicle. I see lots of electricity producing windmills around the country. I will occasionally see a house with solar panels (keep in mind, I live in Illinois!). But I am certain—in the same way the King Canute was certain about the tide—that we are not ready for getting 100% of our electricity derived the sun, wind, and water. We need fossil fuels. According to the New York Times, as of March of last year (dated, I know), "There were approximately 250 million cars, S.U.V vans and pickups on American roads. The vast majority run on gasoline. Fewer than 1 percent are electric."

I think if China suddenly decides to stop delivering chips, that number could even go down. Oh, and by the way, electricity doesn't just pop out of nowhere (except for lightning)—it needs to be produced. This is, of course, why the incredibly fast rising gas prices hit so many Americans so hard. We could argue all day about whose "fault" it is, but the reality on the ground is that for 99% of vehicles across our country, their operating cost has gone up dramatically.

So, the inevitable conclusion.

Tides go in and out. Rates go up and down. Night follows day and day follows night. Stock prices rise and fall. Once again, we don't know the future and there really isn't much we can do about these larger trends. As I have been saying over and over for the last two years in this blog, the best time to establish leadership and the veracity of your ideas is during periods of change, and we are in the thick of one right now. That's why scenario-based analysis is so incredibly important. The more reasonably designed potential outcomes we can test before making decisions, the better. I can't promise you that there aren't a bunch of challenges coming in the near term—or long term, for that matter—but as King Canute demonstrated, at the cost of getting his fine robe and slippers wet, when the tide rolls in there is sometimes nothing even the richest of courtiers can do to stop it. Manage living in a tidal flat? Yes, that can be prepared for. Change strategies during high spring tide and storm surges? Sure. Command it not to come in at all? Not so much.

Final, final thought: Thinking about King Canute makes me think of English food. Two of Performance Trusts very own, Kace Galloway and Aaron Salgado, hosted a cooking class for Shepherd's Pie on St. Paddy's Day. Give it a try—it is really good.

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The information, analysis, guidance, and opinions expressed herein are for general and educational purposes only and are not intended to constitute legal, tax, securities, or investment advice or a recommended course of action in any given situation. Information obtained from third-party resources are believed to be reliable but not guaranteed. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Past performance does not guarantee future results.