Yossarian: That’s some catch, that Catch 22.
Doc Daneeka: It’s the best there is.
The intent of this essay is an attempt to frame the argument as to whether or not the good doctor’s statement, set forth above, still holds. Certainly, though, we can all agree on this: Yossarian’s comment remains good to go. Catch 22 was quite a catch; still is.
For those unfamiliar with the source – Joseph Heller’s seminal, 1961 novel about the exploits and tribulations of an overworked, overflown WWII squadron, the premise of “Catch 22” is as follows. It most specifically follows the thoughts and actions of principal character Yossarian (whose first name is never revealed. Nobody in the entire book seems to have a first name): a bombardier in an Air Force unit that is asked, due to the misplaced ambitions of its commanding colonel, to fly an impossibly cruel number of combat missions. Yossarian perpetually seeks a way out, including repeated requests to be declared insane under Section 8 of the Air Force Code. Doc Deneeka (who must decide these matters) is always impelled to turn him down, because, according to the rules: 1) the applicant must first ask for said relief; but 2) by asking, proves himself not to be crazy in the first instance.
Like Yossarian said, that’s some catch.
And, for nearly 60 plus years, Doc Deneeka’s reply has never been called into question. But then came the coronavirus, Covid 19, and with it, a new catch: call it Catch 19. I really shouldn’t have to explain myself here, but I’ve got nothing better to do, so here goes.
A wildly contagious virus spreads across the globe. Economies, including this here one, are forced to shut down in order to slow its spread, which, left unchecked, could certainly overwhelm the health care system, and might, under certain circumstances, kill us all.
So, everybody checks out for a stretch. Business flows stop. Millions of jobs are lost. The economy goes into a tailspin. But the strategy, at least with respect to its stated objectives, is successful. The health care system is stressed but is not completely overwhelmed. The curve flattens, and then even declines. Thousands upon thousands of entities race for a vaccine/cure. I think, despite all of our finger pointing and hand wringing, we can look at our behavior here with a sense of pride.
But the virus, stubborn bastard that it is, remains a threat, an enormous one. Meantime, with everyone broke and going crazy, a consensus emerges that society must begin the arduous process of re-opening. It cannot do so without enormous risk: taking the form, in the extreme, of a combination of a resurgence of the medical menace and a disappointing economic relaunch: one that does little to mitigate the financial carnage created by the shutdown itself. Again, let’s call this Catch 19.
That’s some catch, that Catch 19.
But is it the best there is? Does it supplant Catch 22? The answer lies above my paygrade.
And yet this is the dilemma that we now face. At this point, pretty much everyone this side of the Governors of Maine and Michigan understands that we kinda/sorta gotta get rolling again. I certainly feel that way. But how? For the most part, I think we’re taking rational steps. Wyoming is good to go. Hudson Yards? Not so much. We still don’t know much about how it will all turn out on either front (economic or medical). Whether or not those nasty Covid cells regroup and stage a renewed assault on us, and/or if those millions of jobs and businesses dealt mortal wounds by the crisis can lift themselves, in Lazarus-like resurrection.
This is how matters stood at the end of April. Which was Thursday. And when the books closed for that cruelest of months, it showed the strongest gain for equity indices since 1987 (also April). It ended on a bit of a sour note, though, and there was follow-through selling on Friday, May 1st. Perhaps this was a show of sympathy, on International Workers Day, for the millions that have lost their jobs this year. How many? Well, we’ll get a better idea next Friday, when the April Employment numbers are released. Current consensus calls for Non-Farm Payroll losses of 21,500,000, and for the unemployment level itself to have risen to 16.0%. Think about that for a moment.
In general, this best month since I scored my MBA came across the backdrop of an economy that had been decommissioned in a manner never even contemplated over the last few centuries. We have barely yet seen data deriving from April, but whatever it is, it ain’t good. Still pending, in addition to the Jobs numbers, is information about what rents and loans were not paid to creditors, which, by the way, are gargantuan. And what impact these payment impairments will have on the overall capital market
However, anyone who believes that the burgeoning credit bubble is showing any since of impeded expansion did not fly with Yossarian in Colonel Cathcart’s squadron (asked to perform 80 raids when no other crew in the entire Air Force had done more than 25). Estimates suggest that those enterprises still fortunate enough to (temporarily?) carry an Investment Grade rating issued a new record of nearly $300B of fresh paper in April alone. The Fed Balance Sheet has increased approximately 50% — from ~$4T to $6T since we’ve all been cooling our heels at home.
There is a longtime adage ‘round these parts that takes the following form: Don’t fight the Fed. On balance, I am a strong adherent to this wisdom. But the current base of incremental borrowing, even if Team Pow snapped up every single bit of this new paper, would cover only about six months of our historically impressive, still-surging credit binge.
And then there’s earnings. Most of the big dogs have now clocked in. Many have lacked the intestinal fortitude to issue forward guidance, so the analysts do it for them, as depicted in the following chart:
As a risk manager, I’m trained to worry about the divergence between the broken line and the solid one. Feel free to ignore it if you so choose. But at your peril. Be aware, though, that while we were all enjoying that April laugh riot, Q2 P/E ratios surged by an impressive 30%.
And there’s really not much more to add at this point. I did hear of an Orange County barbershop flouting State law and opening back up this week, while a restaurant in Maine did the same. I am sorely tempted to patronize both establishments, but I have no practical way to transport myself to the OC. And as for the latter, well, according to a time-tested idiom from our Northeastern-most state, if anyone is asked how one can get to Bah Habah (Bar Harbor, ME), the only appropriate answer is as follows: you can’t get theyah from heeyah.
So I reckon I’ll bag it and come around to see you instead. I intend it to be a surprise, but I have forgotten your address, so don’t be alarmed if I call you from five minutes away and ask you for it. I hope and expect you’ll be glad to see me. I’m looking a little scruffy these days, but I know that you will nonetheless welcome me with open arms. It may be a tearful reunion, but it’s one that I anticipate with great joy.
And, with respect to the markets, it looks like we’re destined to fly our missions, amid heavy fire, come what may. That Section 8 is probably out of the realm of possibility, because: 1) we’re all asking for it; and 2) we’re all crazy at this point.
SPOILER ALERT. Yossarian managed to beat Catch 22 by following the example of his seemingly incompetent roommate, a pilot named Orr, whose planes crashed on every mission, in what turned out to simply be a successful cycle of practice runs for his effort to go AWOL. Since we have the space, I will relate one final Catch 22 sequence:
Yossarian: Orr?
Arfy: Sweden
Yossarian: Sweden?
Arfy: Orr
Yup, that’s right. Orr bailed to Sweden, which of course is a jurisdiction that is hot in the news due to its controversial, yet at least superficially successful, handling of the Covid crisis. Maybe we’d all like to follow Orr to Stockholm (lovely this time of year), but like Bah Habah, you can’t get theyah from heeyah.
And even if you could, at least for the moment, they’d probably just send you home anyway.
So, on the whole, and with great regret, I’m gonna throw it out there that Catch 19 Trumps Catch 22. And will proceed with attendant caution. However, you can make your own judgments, which, as always, I trust implicitly.
But know this: as you take to the air, myriad anti-aircraft missiles are loaded and trained towards your trajectory.
Even if you can’t see them.
So please take care of yourself, and, as ever….
TIMSHEL