Remember that AWS throw-down I wrote about last week? I’ll bet y’all thought I’d thoroughly exhausted the topic, and, for what it’s worth, I thought so too.
But we were wrong.
Because just as I was ready to ditch the subject for all time, another form of AWS presented itself, namely Acute Wariness (of) Scaffolds (AWS). You see, I am very wary of scaffolding. Stated plainly, while recognizing the important function that it serves, I don’t like scaffolding: those temporary construction overhangs that perpetually litter the landscape of cities like Manhattan. I remember when I moved back here in the early ‘90, after having resided the preceding decade in my old home turf of Chicago. In the intervening years, I had developed a romanticized vision of the Big Apple of the ‘80s – the one where dangerous looking cats on 125th Street burned fires in garbage cans to keep warm, where the Village still had music clubs and record stores. Where I was young, thought I was cool, and, in any event, felt keenly alive. I wanted it back.
But when I returned, I couldn’t find that New York. I looked everywhere, but to no avail. I knew it was there somewhere, but it wouldn’t come out.
And I blamed the scaffolding. I figured that my New York was hiding behind these flimsy structures. And ever since, I have avoided walking under them – even when it’s raining (OK; maybe not when it’s raining). This personal policy causes me some routine inconvenience, but so be it. I find it’s worth the trouble, because scaffolds bring out my claustrophobia, reduce my field of vision, and generally creep me out. In recent years, these problems have been rendered all the more acute by the emergence of two-sided scaffolds that form little, corridor-like prisons on the streets of Manhattan. One can move forward or backward — but up, down, left and right have been removed from the equation – not only in terms of motion options, but also with respect to sight lines. In general, a two-sided scaffold is like nothing so much as a blind alley. And blind alleys, my loves, are truly terrifying.
I mention all of this because from my vantage point, the market is at present assuming the financial form of a two-sided scaffold. Investors are moving through it, as well the must, but they do so unawares of what is transpiring in any direction where they might point their attention (or their toes). To wit: will interest rates rise up from under their feet and devour them into the earth? Will Vlad or L’il Kim lob one that will crash down upon them from the skies? Will the wall on their left collapse on them in an impeachment/redistributionist/Deep State massacre? And from the right, will the anti-trade/anti-immigration/deficit-hating partition squeeze them to their entrails? For the moment no one can say.
Each of these threats is certainly plausible, but all us poor market wretches can do is attempt to move, with limited vision, in a forward direction, because going backwards is counterproductively unthinkable, and staying put is not an option.
The rhetorical constraints described above certainly appear to be taking their toll. Last week, Equity Indices offered a roller coaster ride that left them, depending upon the benchmark, 2-3% leaner. Best hopes and prognostications notwithstanding, yields at the long end of the Treasury Curve retreated back to levels where they began that crazy month of February, when the Gallant 500 appeared poised to continue its unending stream of all-time highs. Meanwhile, shorter term rates actually rose, placing the Curve, as measured by the 2s/10s spread, at the tightest it’s been since before last decade’s big crash:
Those seeking to understand this graph should draw their exclusive attentions to the blue line, because I have no idea what the “Detrended 10-Yr. Yield” is, and neither, I suspect, does anyone else (including, most likely, the engineers that created this monstrous metric).
But a careful review of these time paths suggests that periods of unambiguous gravitational pull coincide with dilutive conditions in the Equity Complex, and, if one wishes to fully extrapolate, to economic recessions.
I don’t think we’re in danger of the latter menace – at least not yet. On the other hand, it’s hard to review these trajectories against the backdrop of an SPX that is still 550 basis points below its all-time highs and showing scant signs of recapturing its vigor any time soon, without feeling some sense of concern. On the other hand, matters could be worse: at least Mr. Spoo and Captain Naz are in positive territory for ’18, a status that separates him materially from Herr DAX (-7.8%), Sir FTSE (-8.04%), Monsieur CAC (-3.3%) and Nikkei-san (-6.95%). Conversely, if you want to search for happier confines, the Russian Index (Comrade RTS) is up thus far a cheery 9.29%.
Perhaps the oomph evidenced in the last of these derives from Supreme Leader Putin’s proclamation, earlier this week, that he has a bunch of ICBMs – impervious to our defense systems, sitting on launch pads, and poised to begin their short but menacing journey to our shores at the mere word of Vlad the Election Disruptor’s whim.
But hey, who cares about Russia anyway? I mean, it’s not like anybody over here has even thought about them in quite a while. So we’ll leave Vlad – for now – to his own bovine/porcine devices.
Last week, on the land masses west of the Atlantic, there were two fundamental catalysts that upset the digestion of investment types. First came Chair Pow’s introductory address to Congress, during which he confirmed his commitment to balance sheet divestiture, and raised the ugly specter of (count ‘em) 4 Fed rate hikes this year. Now, the Fed Funds rate today currently stands at 1.5%, and is all but certain to climb to 1.75% after the next FOMC meeting – scheduled for a couple of weeks down the road. By my math, 3 subsequent 25 bp rate hikes would place Fed Funds at 2.5% — a figure roughly equal to the 5-year yields at the point that this publication went to press. For those who worry about flat or inverted yield curves, this is a vexing prospect. Presumably, the powers that be (whoever they are) are anticipating that the long end of the curve will rise in sympathy with its shorter life span fellows. But we should bear in mind that lifting longer-term rates has been something of a Sysyphean struggle – particularly in recent times.
In my judgment, something here has to give. And in his inimitable way, the magnificent Jim Grant perfectly illustrated the niggling conundrum of the wandering global interest rate complex, through the presentation of the following chart (it’s the one on the left; I added the one on the right – just for good measure):
Thus, the Non-Investment/Grade 4-Year debentures of an Italian Telecommunications Company (which happens to sport the most appealing ticker symbol in Christendom), whose stock can be had for less than a single euro, and which has lost nearly half its value over the last three years, are both more expensive and offer a lower yield than our own T-Bills. For once, I am at a loss for words.
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The other high profile buzz-kill event came Thursday, when Trump, to the surprise of everyone (including, apparently, his own staff) announced stiff tariffs on imported metals of various chemical composition – most notably Steel. I really don’t want to waste much space on this, because it’s been widely reported and analyzed, and virtually everyone agrees that it is a numbskull idea. Yes, it was a campaign promise (though not a particularly well-thought out one), and yes, we are often gamed by our global trading partners – particularly in the realm of raw materials. But, to summarize what everybody who’s looked at this already knows: 1) if this is a job protection move, it bears mention that the domestic steel production industry employs at most 200,000 people, while the job rolls for steel consuming companies are on the order of 7 million; 2) our trading partners will retaliate, unnecessarily raising costs across the globe; 3) our own corporations will game the new rules (including raising prices) – to nobody’s advantage but their own; and 4) if this is intended to tweak the Chinese, it should be noted that China accounts for about 2% of our steel imports. It does, however, own about 19% of our Treasury paper, and is almost indisputably the linchpin to any effort we may expend to neutralize L’il Kim. Google the term “leading with your chin” and a picture of Trump at his Tariff Presser pops up as the first 27 search results.
And a nervous capital market simply didn’t need the worry of this – particularly against an economic backdrop strong enough, at least arguably, not to need the, er, boost of a burgeoning global trade war. This past week, Housing, Consumer Sentiment and Manufacturing all clocked in with strong results, and even Q1 GDP Estimates, recently showing signs of taking in water, have perked up a bit:
But I reckon we must render unto Trump that which belongs to Trump, and this includes his inability to resist stirring the pot. Perhaps he will think better about his tariff stunt, and maybe it won’t expand into a huge global economic donnybrook.
And maybe investors will decide it doesn’t matter. But as for me, I will for now revert to my recent hypothesis that we’re in an index pricing paradigm that is constrained by technicals. Consider, again, the following SPX Chart:
Last week’s selloff cast the SPX below the 50-Day Moving Average, and it is now firmly affixed around the 100-Day. The more ominous 200-Day Moving Average looks to be a safe distance away.
But the chart does look a little bit like a 2-sided construction scaffold, now doesn’t it? And that, as indicated above, is a scary place to be.
Over the years, while I have never recaptured that 80’s Billy Idol/Ed Koch/MTV/Bernard King NYC vibe, I do see portions of the City I fell in love with popping out now and then from between the planks and rails of those dreadful scaffolds. Maybe that’s all I’m entitled to, and maybe we’ll have to live for a spell within the flimsy walls of the chart displayed immediately above. If so, while remaining Acutely Wary of Scaffolds (AWS), I shall strive to make the best of it, and my advice to you is that you do the same.
TIMSHEL