For those of you driven to bored distraction by all of this shelter-in-place folderol, might I recommend something in the way of sublime diversion?
OK then. Dial up your preferred streaming service and check out the film celebrated in our titular theme: the 1964 Jerry Lewis classic “The Disorderly Orderly”. Trust me here; you won’t regret it.
It is, among other matters, the quintessential JL vehicle, unleashing his singular site gag brilliance in ways not seen before or since. Trust me again. Hilarity, indeed, ensues.
A brief synopsis of the plot is as follows. Lewis plays a med school dropout who takes a position as an orderly at an upscale (pre-Covid) nursing home. Due to a confluence of factors (DNA, academic failures, and, alas, unrequited love), he manifests a condition under which he inadvertently adopts the symptoms and mannerisms of his patients. Particularly those of the unforgettable Mrs. Fuzzibee, who prances, stutters, flails and the like. Jerry isn’t making fun of her but cannot stop himself from aping these traits.
Like I said, hilarity ensues.
But the sad part of all of this is that I too have fallen into this trap of late, a condition akin to that which the person whose opinion I value most calls folie a deux. Probably, it lay dormant in me these sixty years, and, if so, what no doubt triggered it was this week’s trading action. In particular, that transient but positively surreal interval on Monday, when Crude Oil traded at a negative $40 to the barrel.
In other words, for an (albeit) brief instant, , holders of petroleum were paying big bucks for anyone willing just to take the stuff off their hands, presumably, never to be seen again.
This. Cannot. Happen. But it did, and we’ll discuss the implications a little further down the page. In the meantime, something inside me went a bit bonkers, and I started to act out the most outlandish pathologies of those individuals and events I have recently encountered.
First, I grabbed my face mask, hose and funnel, hopped into my car, flagged a couple of passersby, and offered $100 for them to transfer the fuel in my tank into theirs (no takers). Then I signed up a couple of clients under terms involving me paying them for me providing them risk management advice.
Next, I bounced over to the local Kohl’s and bought out their entire supply of toilet paper, the fact that I have been in a condition of full on constipation for nearly two months notwithstanding. To be more specific (if less elegant), I haven’t dropped a deuce in more than a fortnight.
I then went home and realized that my financial portfolio did not have nearly enough risk for my liking. So I bought some stocks when Neiman Marcus declared bankruptcy. Bought some more when the Weekly Jobless claims number clocked in at 4.4M, bringing the 5-week tally to a tidy 26.2M. Really loaded the boat when I learned that the Mortgage Bankers Association announced that 3 million homeowners had applied for forbearance over the past week.
Why? Because Crude Oil cannot trade at a negative price. Any more than rain can fall upwards, or the Brandenburg Concertos can be played wearing boxing gloves. It cannot happen. But it did. So my inner Jerry-Lewis-Disorderly-Orderly syndrome kicked in, and I was unable to stop myself from, just like so many around me, from hoovering risk assets at a point which, in my judgment, is the riskiest interval in modern market history.
Being a nuanced observer of the markets and all, I began to examine root causes, and I would like to take this opportunity to inform you of my hypothesis as to what is really going on out there. Why not? Everyone else is doing it, and no one wants to hear their opinions. This, combined with my Disorderly Orderly/folie a deux condition, renders it entirely fitting and proper that I do so.
And what I really think is this. You can draw a straight line from this current mess all the way back to the mortgage bubble that transpired last decade. Before the (last) crash. And to everything that ensued from then on. So, stroll with me, if you will, back to the aughts (00’s), when, at some point, the last blind grandmother in Mississippi had been talked into signing on for the last million-dollar mortgage. When said mortgage got packaged into a complex security, which received a “money good” grade from the Ratings’ Agencies and was sold to institutions as a sound investment. We don’t know which one it was, but this mortgage was the straw that broke the capital market camel’s back. The securities defaulted. And the banks needed a baller of a federal bailout, lest they go under themselves.
But they didn’t. Go under that is. The Fed bailed them out, and then started to print money like it was going out of style (which it is). And it worked. The economy recovered, roared. Facebook went public. Tesla started cranking out electric cars. Our smartphones became true gateways to the world. Cannabis began its journey to legalization/normalization. Jobs were created and stayed available in abundance. Due to in large part to reduced price information costs, stuff got cheaper.
All of this was something of a miracle, but it couldn’t last forever. And there were unintended consequences, notably a veritable orgy of borrowing, as catalyzed by artificially suppressed interest rates. Recognizing the problem, the Fed tried to turn off the spigot in late 2018. That didn’t turn out so good. So, early in ’19, it unplugged the stopper and let it ride. Asset prices soared. As did our indebtedness.
As 2020, began to unfold, it looked like we could keep the party going for quite a spell. But then the virus came, causing an historic collapse in demand, and an attendant plunge in incomes and cash flows. And what has happened to the pace of borrowings in the wake of this mess? Of course, they are accelerating. According to the oracles at Morgan Stanley, Investment-Grade debt issuance is clocking in at a record-shattering >$700B through April, projecting out to an impressive $2T for 2020. All of which tempts my JL side to pollute my currently pristine balance sheet and float some IG debt of my own. Except for this: no one has ever accused me of being an Investment Grade rated cat. So I’ll give it a miss.
One way or another, there’s an indisputably problematic amount of debt out there. And I’m not sure how many times I have to explain this, but when an economic agent owes a lot of bread to The Man, and the money flows stop or slow to a trickle, said agent finds him/her/itself flat busted quicker than you can say “Bob’s your uncle”.
Maybe an analogy will work. Up here in sleepy, quarantined Fairfield County, there are a lot of houses on the market, some listed for what seems like eons. As I drive by them, I envision a narrative under which a guy (Joe), now in his forties, embarks on a Wall Street career with his newly minted Wharton degree in tow. He lands a nice gig, and each year, he makes more than he did the previous one. He expects this trajectory to last a lifetime and is somewhat justified in this thinking. Pretty soon he’s got a wife and a couple of kids, whom the missus is tired of toting around Gramercy Park. So, they decides to bail for the burbs. Joe can probably comfortably swing that Mississippi granny $1M mortgage, but the wife of his bosom, his partner in all things, has her dear heart set on a dream house that (in addition to the indignities he faces in the form of hitting up his parents and in-laws for that fat down payment) requires him to borrow $2M. As long as he keeps climbing the professional ladder, he’s OK. But then his job gets eliminated, and he is offered, in tribute to his supreme competence, a position in Salt Lake City at 40% his current comp. What’s my boy gonna do?
Whether he takes this gig or not, Joe’s got to dump his dream house. And he’s not alone in this predicament. There were dozens of such houses on fire sale in my hood – even before the virus hit.
And, writ large, I submit that the American economy is in this same fix. It cannot afford to meet its obligations, much less to sustain the lifestyle to which it has grown accustomed. This is where the unintended, unforeseen, unforeseeable consequences start to kick in. Joe’s wife divorced him, and his former in-laws are hitting him up for a return of their portion of the down payment.
The financial markets analogue is an improbable, impossible sequence of negatively priced Crude.
And I’m thinking that this might be just the beginning of our dubious adventure — involving market action that cannot happen but does. It’s anyone’s guess, but I personally doubt that hilarity will ensue.
But across it all, the Gallant 500 and their comrades in arms managed to gin up a modest rally for the week, and one has to admire their intestinal fortitude. The corporate bond market held in there nicely as well, above-mentioned issuance binge notwithstanding.
One set of investors has less celebration fodder: the holders of the Baltic Dry Index:
Unless my lying eyes deceive me, this benchmark of shipping costs is down ~75% in the space of less than six months. On the other hand, there’s nothing to ship anyway, but perhaps we can all take some perverse comfort in the reality that if we ever did want to send cargo across the Baltic Sea and into, say, the Atlantic, we can arrange to do so at a deep discount. Be that as it may, though, my understanding is that those Baltic shippers live and die on borrowed funds, so the question remains whether, when we indeed are ready to ship, there will be any ships to do the shipping.
For now, though our rather empty boats have many knots to travel over rough seas. The FOMC meets this week and what else can they do but bring us further delights? Another gargantuan stimulus package is visible on the watery horizon, this one intended to bail out states and cities. Like Illinois. Forgive me for descending into the madness of politics here, but you could transfer every penny ever created to the Land of Lincoln, and, within a single year, they’d be broker than they are even now.
So, what do you do about all of this? My best advice is as follows: slow your roll. You have done so before and lived to tell the tale. It’s not the easiest thing to pull off, but, as always, I have faith in you.
And if you slow your roll, I’m almost certain to slow mine. Because I have this nasty Jerry Lewis syndrome still plaguing me. Here, I’m pretty certain that hilarity will NOT ensue, but maybe we can strive for something better. Something more lasting. We can at least try. And, trying, we will prevail.
Case and point: Joe now works for me. His wife has returned and is expecting. They’re doing fine.
In this disorderly orderly world, I hope and expect a similar happy ending for us.
TIMSHEL