Loyal readers of this column are well-aware that its author is obsessively fixated upon anniversaries. We’ve celebrated a goodly number of these over the years, and this river is likely to continue to flow. As ’18 unfolds, we will mark a number of events 50 years in the past, because, well, because 50 years ago it was 1968, and let’s face it, 1968 was a big year.
This week, in slight misdirection, I’d like to begin by drawing reader attention to the 50th anniversary of Johnny Cash’s historic concerts at Folsom Prison: a cozy little enclave for convicted felons located just northeast of Sacramento, CA. In a gesture that I reckon could only be conceived by timeless cultural geniuses, on January 13, 1968, JCash performed two concerts at the notorious facility, and converted the recordings into a magnificent album. It was, to the best of my knowledge, the first time a bona fide superstar performer chose a venue of that kind to practice his craft. It’s important to understand here that while Johnny was a hard livin’ man, he was no jailbird. His history included many arrests, but no extended incarcerations. The record shows that over his decidedly rocky journey through adulthood, he spent, in aggregate, about one week in the stir; none of it in a maximum security state penitentiary. Still and all, one can safely assume that The Man in Black knew his audience that day. And that they knew him.
If you listen to the record (and here, if you wanna go full legit, vinyl is the only way to roll), you can feel the energy popping out of the grooves.
In an elegant little twist, Johnny was made aware that one of the prisoners, the otherwise forgettable Glen Sherley, had written a pretty catchy song called “Greystone Chapel”: an ode to the religious sanctuary situated inside the walls of the jail. Cash heard the tune, rehearsed it, and played it during the show – all as a surprise to its composer.
To my way of thinking, it was a classy gesture. It’s in moments like these, rare though they may be, that the invisible threads across our existence come together to form a magnificent tapestry. But more than this (and forgive the clucky transition here), it might very well have marked the tip of the 1968 spear: the point of the projectile pierces that the intended target, and brings about whatever outcomes the Good Lord intended. As mentioned above, 1968 was an eventful year, as 2018 also shows promise to be. But bear in mind that the show took place in the first half of January: the spot on the calendar where we currently reside. A great deal transpired over the remaining months of 1968, and, when it both mercifully and wistfully melted into 1969, one could not help but note with wonder all that had transpired over the preceding 366 days (’68, was, after all, a Leap Year).
The current news flow features nothing so sublime as the Cash Folsom Prison concerts, but perhaps I’m just searching in the wrong places. Moreover, as this publication exclusively concerns itself with investment matters and nothing else, the time has come to leave JCash to his curtain calls — in front of some of the baddest hombres ever rounded up by law enforcement in the Golden State.
So, then, where might we find the tip of the market spear, these 5 decades hence? Well, as for me, I’m watching the long end of the U.S. Treasury Curve, as I believe that, come what may, it is the behavior of this instrument class that are most likely to pierce the current cross-asset class pricing paradigm.
Nine trading sessions into the new year, we have a very interesting/arguably bizarre, set of market patterns emerging. Equities, as everyone knows, are a one-way ticket to the penthouse, with the first two weeks throwing off seasonal gains not seen over similar intervals for 30 years. We’re up ~4% in this jurisdiction, but the same story can be told pretty much everywhere around the globe. Commodities, too, are ripping, with the GSCI eclipsing its 2015 high and even the disdained and energy deficient Continuous Commodity Index recovering substantially from a horrific December:
GSCI Commodity Index:
Commodity Continuous Index:
All of this Commodity Love, combined with some encouraging early returns on Tax Reform, have, indeed, caused a noticeable lift to U.S 10-Year yields. Indeed, rates for the on-the-run 2-year and 10-year notes have hit gone up in a straight line for several sessions:
Bonds on the Run: U.S. 2-Year and 10-Year Yields:
Now, with equities and commodities capturing a gratifying bid, and bonds selling off pretty broadly, one might expect the USD to be the recipient of some inflows, somewhere. But as I like to write, one wound be wrong on that score:
USDX:
As It happens, the U.S. Dollar Index closed on Friday at its stone cold dead 3-year lows. And one wonders why. Shouldn’t capital be flowing into the Dead Prez – to capitalize on those high-flying equities and to take advantage of the upward trajectory of rates?
I would’ve thought so too, particularly as rates in Europe and Japan are stuck at “play handball against the curb” levels.
I think that the lack of confidence in our unit of account is a tacit message to the custodians of our monetary policy: one of doubt in the latter’s ability to lift the back end of the Treasury Curve. And who can blame them? Their forbears have tried, and failed, to normalize rates for quite a while. Why should they view this here yield bump, or so the thinking goes, as being extendable or even sustainable?
They may have a point or they may not; only time and tide will tell. But I do think that the battle of longer term yields is where the pivotal action will take place in the coming months. Is the deflationary impact of technological innovation, truly, as some would have us believe, an inexorable and overwhelming force? Do the increasing signals of tightness in the Labor Market portend wage inflation, which may be the holy grail of the bond bears? While I don’t have answers to these imponderables, I will opine that if the combination of reduced Global QE, Fed Balance Sheet shrinkage, the inflationary outgrowths of lower taxes and growing profits and revenues don’t cause the long-awaited Pavlovian selloff of long-term government securities, well, then, I don’t know what.
However, if this geriatric bond bubble does finally burst, it should unleash long somnolent concepts, once experienced but long forgotten in this long-term memory impaired era.
This could take a number of forms, including asset allocation away from stocks and into bonds, increased savings rates, the re-emergence of two-way volatility, and (most blessedly) higher borrowing costs catalyzing a capital economy where there are material, identifiable consequences to enhanced risk taking. As such, it would stand in strong contrast to the current, anesthetized paradigm, under which a combination of historically easy finance and a one-way stock market covers for a multitude of sins. On balance, I think we’d all be much better off if those trends petered out.
But I must move towards conclusion on a note of caution. The beginning of the Fed balance sheet un-wind, combined with the surprise Chinese freeze on the purchase of our paper did indeed appear to put some downward pressure on bond prices/upward pressure on yields. But this past Wednesday, our Treasury Department undertook an historically successful 30-year bond auction, in which investors around the globe hoovered up $12B of our paper at astonishing premiums to the already elevated prices they were asking. Our G-Men are expected to accelerate their bond issuance over the next several quarters, and if this most recent experience is any indication, the possibility exists that curve may remain flatter than a pancake for an indeterminate period into the future.
In summary, while there are modest, encouraging signs that we have a spear tip with a point slick enough to pierce one of history’s longest running financial bubbles, the actual proof will be in the piercing, which, by all accounts, has yet to manifest.
On the other hand, JCash didn’t know what he unleashed in Jan of ’68. By early April, King Junior (whose life and deeds we celebrate tomorrow) was murdered. By early June, somebody did RFK in the kitchen of LA’s Ambassador Hotel. There were riots all summer, LBJ (whose words and actions make Donald J. Trump look like a Trappist Monk) decided not to run for re-election. Later that fall, we put Tricky Dick in the White House. As such, it pays, on this crazy planet, to keep your eyes wide open and to pay particular attention to flying projectiles which may, or may not, feature tips that pierce to the core of the object at which we are aiming.
TIMSHEL