Let’s get back to the music, shall we? After all, it’s been several weeks, and I don’t know about you, but as for myself, I’m Ready 2 Rock. Today’s subject (though perhaps not its direct object) is Blue Oyster Cult: in my judgment one of the finest and most overlooked bands in rock’s pantheon. They are comprised of a bunch of erudite New Yorkers, most of whom attended fancy private colleges in the region. They burst onto the scene in the early ‘70s, when rock most needed the boost, and released 4 killer albums (self-titled debut, Secret Treaties, Tyranny and Mutation and Agents of Fortune), featuring wicked riffs, cerebral lyrics and tasty hooks, at a time when our heroes were fading into mediocrity, and it was becoming increasingly clear that the next generation didn’t have the goods to do the job.
Like many such outfits, they captured a following, rode a modest crest of fame, lost their composition touch and have been mailing it in, under various lineups, for most of the past four decades. However, for better or worse, the apex of their awareness in the public eye came in the form of an SNL skit called “More Cowbell”. In it, a fictional lineup of cast members takes to the studio and do a fantastic job of replicating the band’s sound with respect to their biggest hit: the accessible but on balance forgettable Don’t Fear the Reaper. The punchline derives from the perfect casting of Will Ferrell as the band’s cowbell artiste, and Christopher (Bruce Dickenson, aka The Bruce Dickenson) Walken as the record’s producer. Walken is so enchanted by Ferrell’s cowbell work that he forces it into an overwhelming domination of the arrangement (“I really want you to explore the space of the studio” Walken declares to Ferrell). Ferrell is magnificent as the clueless percussionist, and Walken is at his sleazy best in his role as the grease ball, know-it-all producer. The band at first is skeptical that the cowbell should take the lead, and the affable, sheepish Ferrell offers to stand down, but in the end everyone agrees that Will should take center stage, and, as the scene fades to black, he’s blissfully banging away (maybe still is to this day).
As a result, the term “More Cowbell” has entered, perhaps for all time, the cultural lexicon of this great nation. As a public service to my uninitiated readers, I offer a link to the full sketch, below (courtesy of the National Broadcasting Company; all rights reserved, natch):
http://www.nbc.com/saturday-night-live/video/more-cowbell-with-will-ferrell-on-snl-video-saturday-night-live-nbc/3506001?snl=1
The whole thing is beyond silly, and (though the band gracefully and even enthusiastically embraced its incremental 5 minutes of SNL fame) doesn’t give a great ensemble its props, but I believe it captures the American ethos about as well as anything that comes to mind on this warm, mid-summer weekend.
But perhaps more importantly for our purposes, it begs the following question: does any corner of the investment universe need more cowbell?
Now, here, in trademark mashup fashion, I must loop in my University of Chicago roots. It is there that I learned (from Nobel Laureate Eugene Fama, no less) of the Efficient Markets Hypothesis, which avers that markets, and, by extension, all economic factors, are oriented to point-in-time perfection, based upon available information and sentiment. From this perspective, one can argue that markets must be “cowbell efficient” as well, featuring precisely the amount of cowbell that conditions demand, and that any incremental additions or dilution of current cowbell quantities would only serve to diminish the mix.
Well, maybe, but even Fama himself has admitted that markets are not at all points perfectly efficient, so perhaps we’ve got some wiggle-room, cowbell-wise. If so, we can probably first turn our vision to the equity markets, which few would argue at the moment are cowbell-deficient in any sense of the term. The SHAZAM effect referenced in the preceding edition was in full force in the early part of last week, catapulting markets yet again to new record highs (both here and across the globe) before ending the cycle in flat-line mode. The main driver here once again appears to be Q2 earnings, which are now nearly 1/5th in the books. On balance, they’re strong, but while there are a number of Netflixian-like triumphs to celebrate, there were also some General Electrician disappointments.
Perhaps more pertinently for our purposes, it is clear that the expectations bar has risen. As reported across the wires, “beats” are being welcomed this quarter, but perhaps with slightly less valuation enthusiasm than in past cycles, “meets” are facing disdain, and misses, as always, are suffering merciless punishment. Indices continue to rise to the heavens, but the breadth is putrid. Moreover, in messaging that would be more difficult to miss than Ferrell’s percussive whacks, equity investors continue to shrug off darkening macro and political clouds. As a case and point, ask yourself whether, in the middle of a brutally serious investigation of potential criminal activity at the top, with members of his administration facing one subpoena after another, a President insults the Attorney General and practically begs him to resign, would you want to load up on stocks or lighten the cargo?
Investors have responded with a resounding “Buy ‘Em”! Ergo, we can conclude, at minimum that no additional cowbell is required in equity-land.
But how about other asset classes? Well, it appears that Mr. Ferrell might very well consider pointing his solitary drumstick at the U.S. yield curve, which, due to a fairly dramatic end of week selloff of 3 Month T-Bills, actually inverted at the short-term end:
There was a good deal written about this over the past few days, and the stock explanation is concern about a Washington throw-down over the debt ceiling – due to expire on 10/1. If you own October T-Bills and Uncle Sam defaults, you may be left holding the bag, or so the argument goes. But as for me, I think we’ve got more important concerns to vex us.
If any feature component of the global risk factor combo could use some bell, it may be the USD, which took a pretty significant beat-down over the latter part of the week, and is now, on a weighted basis, sitting on >2.5 year lows:
US Dollar Index:
It is said in financial circles that while sunblind equity investors remain unconcerned about Investigations, Legislative agenda breakdowns and the like, these matters do tend to get under the skin of those who bang around in the Fixed Income/FX complex, and who knows? They may have a point.
My most abiding belief at present is that while smarter guys and gals than me may justifiably debate the appropriateness of current asset values, I will stand by the following precept: whatever their other merits may be, said valuations fail to fully reflect the risks embedded in both the political and capital economy. I don’t in my travels run across too many souls who are unmindful of the hazards looming on our collective horizons, but in terms of voting with their trading accounts, they have for the most part chosen to ignore the warning signs. Evidence of this ostrich dip abounds everywhere the eye meets, including the collapse of short interest mentioned in last week’s installment, and the widely discussed weakness in risk measures such as the VIX, now hovering at fractions of basis-points above all-time lows:
As such, and channeling my inner Bruce Dickenson, if I was to add more cowbell, I would apply it perhaps exclusively to measures of the risk premium, including the above-displayed VIX, realized index volatility, and other, similar dynamics.
Unfortunately, however, there’s only one Bruce Dickenson, The Bruce Dickenson, and he alone carries the vibe to take us to the Promised Land. But Good Sir: Oh Keeper of the Controls, Oh Captain of the Cowbell, please consider its wider application, Pete Seeger-like, to ring out danger, to ring out a warning to all our brothers and sisters, all over this land. For, from my vantage-point, the Efficient Cowbell Hypothesis is sorely in need of the type of recalibration that you and you alone can provide.
TIMSHEL