Engaged readers will recall that last week I used a few of the 1,500 odd words that I allot to these ramblings, to pine in mournful, nostalgic fashion, for the year 1985. In that note, my ode to days gone by was triggered by a mob hit that reminded me of the takedown of Big Paulie, boss of the mighty Gambino Family. But now, according to published reports, it appears likely that the Frankie Boy hit may not have been a mob hit at all, but rather an ill-advised act of violence perpetrated by a local loser with a touch of reckless gallantry in his soul, but clearly a deficiency in the cognitive processing department.
Upon learning this I thought: OK, so maybe it’s not 1985 after all. But then I thought again. This past week, the Walt Disney Corporation completed its acquisition of 20th Century Fox, leading to inevitable mash up headlines about the Fox in the Mouse House, and uniting, under a single corporate umbrella, the stylings of the studios which, in the year we seek to celebrate, gave us Mr. Belvedere and The Wuzzles. But what sealed the deal – at least for me – was Thursday’s IPO of the iconic Levi-Strauss Corporation, which went private back in ’85, and remained so until this past week.
So yes, let’s continue to wind the clock back 34 years, and nothing could mark the occasion more appropriately than everyone busting out their skinny jeans. Let’s face it, we’re all young again, some of us are babies; others of us are not even yet born, so how difficult should this be?
Certainly the hedge fund industry is doing its part, as recently published data indicate that the field is shrinking:
Those that remain are mostly moving into the optimum range for our desired fashion statement, mostly by virtue of their tepid returns, shrinking AUMs, compressed fees, and, in consequence, diminished revenue streams.
On the other hand, the concept barely existed in 1985. Alfred Winslow Jones, the George Washington of the industry, coined the term in 1949, and backed it up by creating a product to match it. But no one paid much attention for the next 40 years. It wasn’t until the late ‘80s that the industry began to binge out, and the binge has lasted to the present day, so there’s still some treadmill/salad work to be done before the skinny jeans paradigm can be fully realized.
Elsewhere in our field of vision, however, progress towards the donning of those narrow-waist, pencil-legged denims is more visible, and perhaps in no region so much so as the yield side of the global bond market.
Here, our story begins with Wednesday’s FOMC presser, where Fed Chair Powell (i.e Mr. Kite), jumped over men and horses, hoops and garters (and yes, lastly through a hogshead of real fire) to reassure the public that his and the ECB’s (i.e. the Hendersons) production will be second to none. More specifically he froze rates through at least year end.
We thus concluded the week with the two largest and most powerful Central Banks having committed to the maintenance of sub-atomic interest yields for the final three quarters of the year. This, mes amigos, in a global economy which is indeed slowing but nonetheless still growing, is nothing less than astonishing.
And, for about a session and a half, investors had no idea what to make of this – at least on the equity side of the equation. Our indices sold off in the wake of the release, rallied back on Thursday, and then, in reaction to a truly disastrous factory output report from the Eurozone, followed closely on its heels by the lowest domestic manufacturing PMI in two years, puked out nearly 2% by Friday’s close:
U.S. Manufacturing PMI: Producing Much Indigestion:
By contrast, Fixed Income investors reacted in Pavlovian fashion – by gobbling up every global bond in sight. The German Bund went negative for the first time since ’16, the Swiss upped their reverse vig, and now demand nearly a half a percent a year for putting our money to use, Japan tumbled to -0.08%, and even the often-ignored Danes are on the verge of demanding payment for their borrowings.
But most of the attention is focused on the U.S. yield curve, which – horror of horrors – inverted at various points. To illustrate, I actually created my own chart here, using Excel, and sourcing the data from the United States Treasury Department itself:
Now, I admit that it ain’t hardly pretty, but I’m enormously proud of my handiwork nonetheless.
I leave readers to their own devices in terms of figuring out which spreads are actually inverted, but mostly they reside within the realms of very short-term durations as plotted against the middle of the curve (3s through 5s). Suffice to say that there was a great deal of hand wringing respecting these configurations.
There is some irony in the realization that it is the elevation of front end of the curve – i.e. the part that is most explicitly controlled by the Fed – that is causing most of the inversion agita. My guess is that this won’t last long. Investors are likely to pile into the rich-by-contrast short end as early as Monday.
But one way or another, for anyone wishing to trade yield spreads, the moment when skinny jeans become de regueur is indeed upon us. There’s simply no juice in the alternative: the 1990s-bred “Levi’s With a Skosh More Room” investment construct of borrowing short and lending long – in the action. And, since this is precisely what the banking industry is supposed to do, it bore the brunt of the last couple of sessions’ brutal action:
KBE Bank ETF:
Thus, while broad-based indices plunged on Friday to close nominally down for the week, the Banking Sector experienced a one-way drop of more than 10%.
There’s not much comfort for them to take in all of this, but for those wishing to look on the bright side, at least the banks aren’t Boeing, which is down more than 20% from its highs in less than a month.
I’m on the whole feeling pretty smug about all of this action, because I am on consistent record in stating my belief that interest rates are more likely to go down than up. Moreover, I feel I am vindicated in suggesting that the Central Banks have reviewed the data against their models, and have concluded that rates must continue to be aggressively suppressed, or the world will face a nasty and politically problematic recession. My own belief is that policy makers are most terrified of the bursting of a credit bubble. The amount of short term, borderline junk paper – particularly in the energy sector – that must roll over or evoke a potential cascade of cross-sector defaults is enough to incentivize our monetary custodians to keep priming the yield pump. The hope is that this will keep asset valuations up and impede defaults. I’m paying particularly close attention to the Energy Complex. If Crude drops, it could cause a domino-like credit event that is unpleasant to even contemplate.
Someone said to me last week that the latter half of 2018 was an experiment in interest rate normalization, and this comment stuck with me. He’s probably right, and if so, the experiment was a failure. Policy makers tried this, and found that the global economy cannot abide higher borrowing costs. Central Banks know it, and will act accordingly — by extending their historic cycle of monetary stimulus.
Someone else called what’s happening now an interest rate and currency race to the bottom, and this makes sense to me as well. Both, in fact, I feel, are correct. But here’s the good news: the intent of all of this monetary love is to sustain and, if possible, boost, asset prices, and I believe it will be successful – at least for a time. It won’t end well, of course, but in the meantime, I’m not at all troubled by the end-of- week equity puke. In fact, I rather hope it continues, because at finite distances down from here, I think investors will be impelled to do a little bit of shopping, and it’ll be party time once again.
Call it a form of financial bulimia – the binge and purge kind. And the latter will certainly be necessary if we’re ever to hope to fit into our skinny jeans. As for me, I’d probably need to hork up about two decades-worth of gastric excess to hope to fit even one leg into those buggers. But I can’t find them anyway, and there’s nothing the newly public Levi Strauss can do to induce me to by a new pair. So all I can do in this regard is to wish the rest of you a heartfelt:
TIMSHEL