Apologies in advance but we’re not going to waste much space on the passing of Eddie Money. Or time. I personally won’t be sitting Shiva, because my calendar won’t allow for allotting seven days to the ritual. I won’t even be saying a mass, as, among other excuses I might offer, I’m not authorized to do so. Heck, I’m not even not baptized.
Beyond this, I’m not a big fan; never was. I don’t wish to be over harsh here. I did like the Geico commercial where he played a travel agent, creeping out his customers by incessantly singing, in sotto voce, his smarmy, ubiquitous hit: “Two Tickets to Paradise”, as I feel it demonstrated self-awareness that is becoming an increasingly rare commodity in this world of accelerating self-involvement.
But the hard fact is that his music annoyed me, and, to be fair, this wasn’t entirely his fault. The songs weren’t that bad, but his emergence in the latter half of the ‘70s (along with the likes of such mediocrities as Huey Lewis) offered stark confirmation of the biggest fear of those of my ilk. That a Golden Age of music was indeed over, that what would follow would be of unilaterally inferior quality, and that we’d never (in contemporaneous time at any rate) recapture the magic of what had just ended. In other words, I blame him (and others) for not living up to the impossibly high standards established by his musical forebears. And if that is the worst that can be said of him, perhaps we owe him some small debt of gratitude after all.
So we will bid a casual farewell to E. Money, and move to the more timely, relevant topic of ∉ Money, or more specifically, Euros. This past week, as was widely expected, ECB Chairman Mario Draghi used the occasion of his penultimate turn at the podium to throw some stone cold ∉-Love at his constituents. Cut the deposit rate. Announced a new round of Quantitative Easing — to the tune of ∉20B per month. Pulled a few other obtuse rabbits out of his hat – including a further sojourn into negative overnight rates, the tiering of same, and an expansion of the hideously acronymed LTLRO: a concept that no one under heaven, including anyone at the ECB, can explain or even understands.
But who cares, right? Suffice to know that all of this was intended to prime the Continental Monetary Pump, and early returns suggest that it worked. Global equities rallied unilaterally. Bond yields backed up in fairly dramatic fashion (more about this below). And for my, er, Money, this is all prelude to the main event, when Madame Lagarde takes over the helm and gets the ∉QE action rolling in earnest.
So I reckon ∉ Money will be on the charts with a bullet for a good while into the future. Probably, there’s no choice here, but one has to wonder about the need to turn up the volume dials on money printing, a full decade into the improbable recovery of the global capital economy. My own strong belief is that (the reality that all economic text books would deem the whole escapade a rather unholy action notwithstanding) the doubling down on inhaling monetary helium is probably the only alternative to bearing witness to this whole decade-long rager of a party coming to an abrupt and unpleasant end.
But no one should deceive themselves. This is not an offer of a Ticket to Paradise – much less two of these vouchers. The global capital economy is under significant pressure, world-wide indebtedness, as we have covered extensively in this space, is at all-time highs and growing rapidly, and, given the fragile political conditions, both domestically and abroad, now is certainly not the time to sober up – at least in a monetary sense of the term.
Super Mario said the right things at his presser. Begged for some fiscal relief. Admonished the custodians of the European financial system to get their sh!t together. But as he knows perhaps better than anyone, these were empty words, uttered to a constituency that will nod in agreement and do nothing of the kind. And I don’t mind stating that I’m gonna miss Mario. He did what he had to, under near-impossible conditions, and did so with a certain savior faire.
But to reinforce just what a strange, Felliniesque turn of events this is, consider the above-mentioned fact that in the wake of an announcement that the world’s second largest/most important Central Bank is about to purchase a pant-load of member debt, the targeted bonds actually sold off (implying higher yields). And the selling spilled, in dramatic fashion, onto these shores:
US 10 Year Note Yields:
You have to go pretty far back in time (and I’m not gonna do it for you) to find a half month where these here benchmarks manifested a 40 basis point increase in rates. But perhaps more importantly, the ECB announcement: a) came in the midst of this yield upswing already in full swing; and b) did nothing to slow its momentum.
So, let me get this straight. Our notes are selling off hard just when the big monetary dogs in Europe are announcing that they are bulk-buying their own jurisdictional equivalents? At the risk of committing, yet again, the horrible transgression of mixing metaphors, this indeed is tantamount to the tail wagging the dog
But I’m going to retain my bullish stance on govies nonetheless. Yes, they are on offer, and the offer might sustain itself for a spell. But it says here that any economic headwinds, any selloff in the equity markets, and those yields will come careening down – across the globe.
Anyone among you believe that these headwinds are improbable? Well, I’ll take the over on that one. And I’m going to go y’all one further and predict that we haven’t seen the peak of pricing or trough of yields – in any major jurisdiction in the world.
All eyes will now turn to next week’s FOMC meeting, where nothing unexpected will happen. The Fed will cut the overnight rate by 25 bp. Further, any deviation therefrom will catalyze a redux of what transpired last week in Brussels: if the Fed cuts by more than 25, yields at the long end of the curve will accelerate their heavenward ascent. If they adopt a more hawkish stance, said yields will come careening down.
It’s just that kind of world we live in at the moment.
It’s been more of a mixed picture in Equity-land, as, earlier in the week, the hand-wringing from a rather annoying shift of risk flows out of Momentum names and into Value plays caused my phone to blow up more than once. In response, I have tried to reassure my minions that it’s all just so much noise. We are now in the last innings of a very complex and non-intuitive quarter. But at this point in the three-month cycle, information flow is at a low ebb. So why did that capital shift away from our darling tech companies and into such wallflowers as Proctor and Johnny John? Well, probably because it could.
And I will not hesitate to blame the algos, because I love to blame the algos. Everyone loves to blame the algos. So as far as I’m concerned, it’s case closed. It was those damned algos. My hypothesis is that they were just stirring the pot, perhaps out of sheer boredom.
They do that from time-to-time, you know.
So I’m advising anyone who asks/will listen, as follows. I don’t, from a fundamental perspective, presume to opine on what you should own, but if you like names that have a strong Momentum motif, you should not sell them down here. In fact, if they dip again (late in the week, they recovered some of their equanimity), and you have the wallet, you should probably buy more.
And yes, rates are coming down, if not over the next several sessions, then soon thereafter, so you have not only my permission to buy bonds, you have my full sanction.
Because this here rager rally will continue to sustain itself on monetary helium – at least for the foreseeable future. I’m not sure how much higher this lifts our balloons, but it should, at minimum, keep them aloft at current elevations. If they dip, I say buy ‘em. And that construct is almost certainly more in play in the bond market than it is in equities.
To repeat my oft-documented soothsaying, none of this will end well. Eventually, the party will wind down, and you don’t want to be the last guy partially snoring on the couch as your hostess (or host) frustratingly lifts your legs off of the coffee table to run the vacuum. Believe me, because I’ve been that guy. It’s not pleasant, and the reputational after-effects are often lingering. Among other consequences, you may find your invitations dwindling, or disappearing altogether.
Yes, all parties must, by definition, come to an end. I’m just here to tell you that this one has a little bit of juice left in it. Any increase in risk or financial/economic impairment will push down rates, which, in turn, will provide the catalysts to resume the equity soiree.
Thus, in closing, I’ll give a shout out to E. Money’s other passable mega-hit and just say to you “Baby Hold On”. There may be justifiable reasons for you to bail on your names, but macro risk is not for the moment among them. So baby hold on to them.
But Poor E. has left us, as they all do, now with depressingly accelerating frequency. Others will take his place, because that’s the way of the world. Hopefully, they will pump out better hooks than he did.
In the meantime, we can look forward to a whole passel of new ∉s floating down from the European heavens, and onward we go.
Paradise, it ain’t. In truth, it isn’t even a ticket to the Promised Land. But wasn’t there (to borrow from Thackeray) a serpent in Paradise itself? Instead, it’s the real world, and we must comport ourselves to it’s idiosyncracies.
So my advice is to keep your wits about you. Don’t drive past your own house. Don’t get on the wrong subway train. We’re all distracted, but focus is what’s needed most. Otherwise, we’ll either miss the last, joyous strains of this seemingly endless party, or overstay our welcomes.
And, for the life of me, I am unsure at the moment as to which would be the more unpardonable sin.
TIMSHEL