Welcome to Mondo Fugazi, my friends, where Fugazis abound – so much so that some of the Fugazis are actually Fugazi Fugazis, and are thus actually the real thing. Look around. Stay as long as you like. Stay forever if you will. But stay on your toes, because in Mondo Fugazi, the bona fide and the implausible blend into a dizzying vortex, which, if you’re not careful, could suck you dry.
Fugazi, of course, is the Italian vernacular word for Fake. However, in general, I prefer the former, mostly because of the way it trips off the tongue. Try it yourself: say Fugazi out loud a few times. My guess is that you will never use the word Fake again.
We’re all tired of the English word anyway, right? Let’s begin, for instance, with the wearisome, dubious and oxymoronic concept of Fake News. I’m just sick of hearing about it, and, if pushed I’d go so far as to state my belief that Fake News is itself a Fugazi. Using the full-on Italian phrase: Notiza Fugazi – helps, but only a little. Besides, we’ve got Fugazi issues that extend well beyond Notazi. So let’s start to unpack them, shall we?
I wish to begin with Fake IDs, or, if you will, Identificaziones Fugazi. A long time ago, I was something of an expert on this topic. Wishing, around age 16, to prematurely join the adult world in those most meaningful of ways – purchasing alcohol and patronizing bars — my friends and I all thought it would be a swell idea to obtain identification suggesting we were older than we were. Our first sojourns in this realm took us to the iconic Maxwell Street, the open air marketplace on Chicago’s Near South Side (For the uninitiated, please refer to the Aretha Franklin sequence in “The Blues Brothers”). There, after making discreet inquiries, we were ushered to a beat up trailer, owned by a middle aged African American gentleman who had suffered severe burn damage across his face. He snapped our pictures and typed some information (including changing our birthdates) on to orange cards, ran them through a laminating machine, and charged each of us 10 big ones for the service.
We were ecstatic, but, predictably, the ruse didn’t work very well. A lot of bouncers laughed at us, and one actually confiscated our cards. So we were forced to move to Plan B. This took the form of surgically altering our driver’s licenses, by flipping the 9 (we were all born in 1959) into a 6. The strategy worked for a while, but eventually the bouncers got wise. They’d shine a flashlight on our official IL DLs, see the holes, and send us away to raid our fathers’ liquor cabinets.
At that point, there seemed to to do but wait out the unforgiving calendar. But then the unthinkable happened. Just as my 18th birthday was approaching, Illinois raised its drinking age to 21, adding 3 years to my hiatus. I took this very personally, and it was time for all-out war. I’m not particularly proud of this, but I was forced to resort to bona fide identity theft. Somehow, I was able, in addition to my restored driver’s license, to obtain an Official State ID (with my mug in the upper right hand corner) in the name of one Kenneth Costigan, a real guy whose birthday was sometime in September of 1956. Here, not only had I solved my most vexing longstanding problem, but I gained the added benefit of being able to walk into bars in my college turf of Madison, WI, and demand a free drink on my Fake ID birthdays. One Mad Town bartender was a bit stingy, and didn’t want to come across, but I insisted. So he poured me a shot of what I thought was standard (if bottom shelf) Vodka, which turned out to be 190-proof Pure Grain Alcohol.
I fell immediately ill and stayed in bed for the following week. And this, my friends, cured me of such proclivities. I have NOT turned back since, and had not even thought of the concept for many years. But recently, I have found myself the victim of a new form of Fake ID chicanery. Specifically, through the marvelous conveyance of CALLER ID (for which Verizon hits me for an extra couple of bucks), I can see, at the point of first ring, who’s trying to reach me. Unfortunately, a depressingly large number of my incoming calls are unwanted solicitations for such products as extended warranties on cars I don’t own, refinancing plans on outstanding student loan debt that I managed somehow to retire in 1992, and instant access lines of credit. OK; fine. I get it. I’m a capitalist through and through, and believe (albeit with some caveats) in the principles of caveat emptor. However, many recent calls show IDs clearly intended to deceive. Just in the last couple of weeks, my phone has been lit up with caller identifications that have included Fox News, New York Presbyterian Hospital, Music Mogul Clive Davis (who still owes me a major label recording contract) and even actor Lloyd Bridges (who died in 1998).
With respect to the last of these, when the phone rang, instead of Lloyd’s golden pipes, my ears were assaulted by the recording of a female voice speaking rapidly in what I am assuming was Spanish, but can’t be sure. I tested my theory by shouting Fugazi, but her only response was to hang up on me.
So Identificazione Fugazi has clearly entered the information age, and it strikes me that there’s too much of this type of thing going on lately.
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I returned from dinner on Friday night to a phone notification that the North Koreans had suspended large portions of their nuclear testing programs. Was this Notazi Fugazi? Only time will tell, I suppose. All the news outlets confirmed the report, so perhaps there’s something there. But I recognize that the next time a welcoming proclamation issues forth from L’il Kim or his forebears is followed up with constructive action will be the first, so I’m a l’il skeptical on that score.
I am wondering how the markets will react to these tidings, but it’s the weekend so I really don’t know. Certainly it shades towards the accretive, but in Mondo Fugazi, one never knows.
As we retired on Friday, the Equity Complex had bounced around over the preceding week with little to show for its efforts:
But one element, of the action, the technicals, has a strong ring of non-Fugazi authenticity. Over the past several weeks, the Gallant 500 has dropped twice to the menacing breach of the 200 Day Moving Average, only to bounce jauntily in the aftermath. Conversely, the index has clawed back towards the 50 and 100 Day thresholds, it has been beaten back like a little you know what.
This here looks like a tough channel to break. Equity Markets appear to like the 2650 – 2700 range, and despite the somewhat Fugazi-like concerns about excessive volatility, it’s unclear to me that it is likely to break out in either direction any time soon. On the other hand, we’re in the middle of a content-rich information cycle, so stay tuned.
After a long hiatus, however, there appears to finally be some action in other Asset Classes. Over the last several sessions, yields on the U.S 30 Year Note careened past the 3% threshold, and even those precious Swiss Bonds sold off back into positive rate territory. The USD enjoyed its strongest week of the year, and commodities remain in play – mostly on upside.
Seemingly out of nowhere, All God’s Children are now concerned about the slope of the Yield Curve, which indeed have flattened to Olive Oyl thresholds, at both the short and long end of the maturity spectrum:
The Long Short and Flat of It: 2s/10s:
10s/30s:
Textbook economic analysis suggests that such trends are indicators of weaker economic conditions on the near-term horizon. However, here in Mondo Fugazi, I believe we may need to throw out the textbooks, and look to a new roadmap. Specifically, I feel that the relationship between short and long-term Treasury debt has decoupled, and that as such, we must look to each component separately.
It strikes me that with respect to the faster-approaching maturities, a number of factors should work to suppress prices and place upward pressure on yields. We begin of course with stated Fed policy to lift rates, and even they would tell you that all of their juice is on the short end. In addition, as the Fed goes about the righteous path of reducing its gargantuan Balance Sheet, its main tool is allowing shorter term notes to mature without repurchase, in the process removing perhaps the most important buyer from the near-term equation. Heroic efforts have been made in this respect over the last year, with the value of the Fed’s Holdings plunging from $4.48T to the current $4.38T. That may not look like much in percentage terms, and in fact it’s not; it’s just a little over 2%. But it is a divestiture to the tune of $100B, and to yet again paraphrase the late, great Everett McKinley Dirksen (R, IL): $100 Billion here, $100 Billion there and it all starts to add up to real money.
Almost all of this reduction has transpired at the short end, and, of course, we still have a long way to go, because, even those 30 year bonds whose maturities look like dots in the distance will someday become short-dated notes.
Finally, with respect to near term Treasury obligations, you should be made aware that Mnuchin and Company are planning to auction off $275B of freshly minted obligations this week – almost all of them with maturities of two years or less. By my count this will bring total 2018 issuance to the threshold of $1 Trillion, and we’re not even 1/3rd of the way through this infernal year yet.
If this bothers you, I suggest you write your Congressman or President who green-lighted our monstrosity of a budget, and, in doing so, if you invoke the memory of the fiscally conservative Senator Dirksen, you’ll get no complaint from me.
Moving on to the longer-dated end of the curve, we face something of a stickier wicket. Most believe that on balance, the economy would benefit from higher extended rates, but it has been nearly impossible to effect this in the markets. Reasonable minds can disagree over root causes, but clearly the opacity of inflation trends are a contributing factor. In addition, it is my belief that all of that global QE has created a financial dynamic where there’s more money sloshing around than low-risk places to put it. Thus, for what seems like eons, no matter how much long-term debt a given developed country wishes to issue, it gets hoovered up in ravenous fashion.
So I think there are divergent dynamics at play across the yield maturity spectrum, with multiple factors causing upward yield pressure on shorter term securities, while improbable supply shortages bring gravitational pull to bear at the longer end.
For what it’s worth, I also continue believe that, at 50,000 feet, there’s a shortage of stocks as well, but I’ve backed off on mentioning this in light of the heightened volatility manifested over the last rolling quarter. Stocks can be risky (or so I’m told), and therefore subject to more capricious pricing patterns. For now, the risk premium remains sufficiently elevated to counter the supply/demand imbalance. But imagine a world where our two political parties were not intent on blowing each other up, where our two historical adversaries (Russia and China) were not causing us untold aggravation and perhaps worse, where everybody minded their business and tried to do the best they could. Now take a look at the following charts:
Yes, Profit Margins are accelerating while P/E ratios are reverting to normalized levels. I dream of opportunity in these images, and I’m not the only one.
But unfortunately we must operate in the real world, which at least at present is a Mondo Fugazi. So take care. And now, if you’ll excuse me, I must take my leave. The phone is ringing and my screen says it’s Kenneth Costigan. I suspect that he wants his identity back, and, having no more use for it personally, I’d be happy to comply.
If only I could be sure that it was really him on the line.
TIMSHEL