Forgive me, in this interval of Lenten Sacrifice for borrowing from the New Testament. Specifically, The Gospel According to Saint Luke, and most precisely Chapter 4; Verse 23, wherein Jesus is said to have rendered almost precisely the same advice to apothecaries. We’ll have to take Luke’s word for it, because everything we know about what Jesus actually said owes its source to the Gospels.
But that’s all I have to say about that. In the meanwhile, the imaginative among you already recognize that I can take this riff into several directions. And I will. Take this riff into several directions that is.
Mostly, the idea came to me because of my stone-cold baller call on the 10-Year, which I have been begging my clients to buy, well, for years now. I amped up the volume of my pleadings (preachings?) recently: socializing the notion that it offered a divine hedge against risk assets such as equities.
And I myself own a few stocks. And yes, I’m a Risk Manager. But did I buy the 10-Year Note to hedge my exposure? I did not. So, with reference to our title, feel free to view it as a pre-emptive recognition that: a) in the markets and in so many human endeavors – it is far easier to offer sound advice than it is to take sound action on one’s own behalf; and b) I myself am a bit of a putz.
Funny thing, though, I still think that long Treasuries is the best hedge against equities – even at these elevated prices and miniscule yields, but we will return to that topic anon.
This week’s thematic journey also allows me to segue effortlessly into a diatribe about the dreaded Corona. About which I have very little to say. Here’s hoping, at any rate, that if thou art a physician who has caught the bug, thou art indeed able to heal thyself. Because otherwise, we’re ALL in trouble.
And the virus does seem to be infecting the markets, now doesn’t it? In fact, it catalyzed one of the wildest weeks for the SPX that ever I can recollect. Somehow, though, amid all the drama, The Gallant 500 actually managed to gain ground this week – 61 big fat basis points to be exact. Which translates into 0.61% (I only offer the further explanation because some of the most brilliant and charming folks I’ve ever encountered remain – justifiably – confused as to exactly what a basis point actually is).
But basis points is as basis points does, and while we’re on the topic, perhaps the biggest news of the past week was the Fed’s surprise announcement, shortly after the markets opened on Tuesday, that it was trimming 50 of the little buggers from the eponymous Fed Funds Rate, in the process shocking anyone who knew, going in, what a basis point was, and even a few that didn’t.
And as for me (a fellow who wallows in basis points), it blew my socks off – quite a feat considering I seldom, if ever, wear any. Socks, that is. And I asks myself: why, with an FOMC meeting just a couple of weeks in the offing, would our central bank make such an aggressive move, and this in broad daylight.
Well, only the voting governors know for sure, but I have my own theories, which, of course, I am honor-bound to share with my readership. First, and in a blinding glimpse of the obvious, it’s pretty clear to me that the internal models run by all of those smart PhD’s they employ must be flashing red at the moment. I further suspect that a big focus of their agita is on the repo markets, which were lurching around in a state of impairment even as risk assets were prancing from one new high to the next. It was somewhat axiomatic that when the sushi (I LOVE sushi) hit the fan, they’d have to step up their support. And the sushi has certainly hit the fan, now, hasn’t it? And the Fed has indeed stepped up. This past week featured not one but two 12-figure, oversubscribed auctions hosted by Team Pow. There will be more.
Their socks-knocking shock did little to calm investor hyperventilation, however. Equities sold off for most of the rest of the session. And the long end of the Treasury Yield Curve? It continued to collapse. So, my second point is that our monetary policy nannies have yet again pushed their chips to the middle of the table, and will continue to do so, as needed. And it will be. Needed that is.
I also reiterate my belief that our Monetary Mother Hens are particularly worried about their little ducklings (so delicious when they grow to maturity, are slaughtered, stuffed, cooked and served up) in the Energy Patch. Again, I believe that this is due to credit concerns, as the tiny Energy Quackers live on borrowed money, and may go hungry if the Crude Oil market collapses. Last week was a putrid one from this perspective as well, as depicted in yet another chart I’d rather not show, but must:
While playing second fiddle to other tidings, the bubbling crude was on the receiving end of a double whammy: decreased demand tied to (you guessed it): Corona concerns, and a breakdown, catalyzed, according to published reports, by those pesky non-complying Ruskies, of discussions to cut production in the wake of the demand shock.
Not good. Banks aren’t gonna wanna lend to these cowboys at these price levels, and that was before Jamie went into emergency heart surgery. If their debt fails, it’s “look out below” on the credit markets.
So I kind of get where the Fed is coming from. And I expect them to ride their horses from Beaumont to El Paso to insure against such a breakdown. And this, in turn, reinforces my conviction that a triple-headed stimulus is galloping in our direction across the distant prairie. My guess is that the Relief Cavalry will be toting a short-term fiscal stimulus (Temporary tax cut? Please?), a 10-gallon hatful of corporate credit relief, and, of course, further monetary injections.
The worse matters get in the great beyond, the more certain that such a scenario becomes. So anyone who thinks that rates can’t go lower should think again. Because they can. And probably will. Particularly if the mad psychodramas currently unfolding across the globe continue to crescendo. Which they will. Continue to crescendo that is.
Thus, it a most perverse sense, I am leaning towards the serene side of the risk management hill. If the Corona doesn’t kill us all, and it won’t (kill us all, that is), I think the cures out there for whatever ails the markets will overwhelm the investment disease. Heck, even the crude selloff is strangely accretive, INSOFAR as it virtually ensures – particularly in an election year – a passel of manufactured credit support to those in debt with their bills coming due. Six months ago, WTI threatening to breach into a 3 handle might’ve been a default disaster in the making. Now, with CV and an election pending, it may virtually guarantee a mulligan to any borrowers that are thinking about cutting and running.
And did I mention that this was an election year? If I did, then I owe y’all an update from last week’s Bernie-gan’s Island note, because a great deal has happened in those tropical realms since we last reasoned together. Somehow, the Skipper, with the help of some old nautical buddies, managed to arrange the reluctant escape of virtually all of the castaways. With the exception of himself and Bernie-gan. Few, including yours truly, saw this coming, but the Millionaire and his (un-named) wife disembarked, as did Maryanne, offering, upon taking their leave, an undying pledge of loyalty to the old, misanthropic skip. Last to depart was the Professor, who is indeed gone, but has yet to choose sides in the final showdown (Ginger is still sauntering somewhere, but no one is casting her even a nominal glance). At the point of this correspondence, it appears that the Ship’s Captain will also dispatch Bernie-gan in short order, leaving the balmy field entirely to himself. But I’m not so sure, because Bernie-gan, whatever else his weaknesses may be, is a world class bitcher-upper of the best made plans of others.
And if this were not enough to report upon, we also were treated on Friday to a bonzo jobs report, showing remarkable strength across the board in the hiring sector, but failing to move markets in time-honored direction. Counterintuitively, Equities failed on the news and Bonds rallied. Go figure. Obviously, though, the March numbers will look very different. And likely not it a happy way.
Beyond this, the derivatives markets were a hot mess, and it is likely that within the next several says we will hear more casualty details – some of them terminal. But I’m going to be kind here and spare you further commentary on that shady subject.
For all of the above, my main takeaways from a risk management perspective (yes, I am a risk manager) are as follows. First, while they may descend further into the netherworld, I wouldn’t want to be short the equity markets for any extended periods of time. Not if the virus doesn’t kill us all. Not in an election year. And not, especially, with the Fed’s monetary cannons fully loaded and ready to roar.
I’d also avoid the options markets, and yes, I still believe that longer dated Treasuries offer the best hedge against further damage to your equity exposures.
However, and finally, I implore you to consider the source of these musings: a risk manager who failed to hedge himself.
It’s pretty clear that my reading of the bible has been imperfect and incomplete. So I’m gonna take another look. I’ll start with the Old Testament, and specifically the Book of Exodus. Of particular interest to me at the moment is trying to understand why the Good Lord chose to include Frogs among the 10 Plagues. Locusts? Check. Boils? Double Check. Pestilence? Natch. But Frogs? Not sure, because Frogs are actually kind of cool. Someone whose good opinion I value above all others asked me about this recently, and I didn’t have a good reply. Maybe it’s time I figured this one out.
I think I’ll then revert to the Gospel According to Saint Luke, but not without some trepidation. These musings are the longest of any section of the New Testament, accounting for >25% of the entire Gospel text. Moreover, nobody is quite certain who this Luke character even was. Biblical scholars believe he was a companion of Paul’s, but Paul wasn’t even Paul originally; he (perhaps justifiably) changed his name from Saul as a young cat.
Still and all, “Physician: Heal Thyself” offers some juicy food for thought in these troubled times. And it is certainly a catalyst for some major introspection on my part. Heck, it might even cause me to rethink my whole hedging strategy.
When the bond markets open Monday Morning, I might even step in and buy a few. On the other hand, given the reality that the clocks moved ahead early this morning, I just might be an hour late in pulling the trigger, which procures me an elegant pretext to do nothing at all. As a risk manager, I afford myself such allowances. Which begs my closing question: what’s your excuse?
TIMSHEL (Genesis 4: 6-7)