Lest anyone form a different idea, I’m carrying forward with my Catch 22 theme — largely due to the overwhelmingly gratifying response I received from the teeming millions that comprise my readership, to last week’s note. And, as everyone is aware, I’d be the last guy to stop a party while the juices are still flowing, and the music is still pumping. Even if I risk running it into the ground.
Besides, the C-22 well runs deep. Shall we call it infinite? Perhaps not. But I reckon I can squeeze one more round out of it at any rate. We (I) can at least try.
So, for now, we’ll let it ride. And this week’s episode features tribute to Milo Minderbinder, the titular Mess Officer for Yossarian’s squad. He is, more specifically, the novel’s quintessential, caricatured capitalist, whose deal-making escapades play a prominent role across the entire narrative. He is, for instance, on record with his opinion that the war effort would be best served if government got out of the business altogether, yielding command and operational details to Private Enterprise. And he may have a point. One way or another, he spends most of his service trying to achieve that precise objective.
Among his many convoluted deals, the most mysterious of all is how he manages to purchase eggs from the government at 7 cents, resell them at 5 cents, and still turn a profit. However, other exploits bear mention as well. In one uncharacteristically unsuccessful trade, he corners the market on Egyptian cotton, and, being unable to sell it, he coats it with chocolate and tries to serve it up to the regiment as dinner. Also, inevitably, he contracts with the Germans to supply weaponry, and then bombs his own squadron.
So, hats off to you, Milo. And to your philosophical progeny, such as Jobs, Gates, Musk and Zuck. But, in the meanwhile, what does any of this have to do with Numerical Catches?
Well, consider the reality that this past Friday, the Bureau of Labor Statistics released April unemployment figures, and a Base Rate that came in at a better-than-expected 14.7%. The equity markets rejoiced, taking the weekly gains to a tidy 3.5% (half coming in Friday’s post-Jobs Report session). Captain Naz, leading the charge, is now in positive territory for the year.
But there is, as always, a catch.
Specifically, in what I’m pretty sure is an unprecedented move, the BLS release included a footnote which indicated that because a significant portion of the workforce had been furloughed (as opposed to being formally and finally being kicked to the curb), the rate is arguably understated by as many as five percentage points. If so, then the real unemployment rate is 19.7%, which (of course) rounds up to 20.
Let’s designate this CATCH 20, shall we?
But for many a year, us smart market professionals have ignored the Base Unemployment Rate and have chosen, instead, to pay slavish tribute to the Non-Farm Payrolls figure, which came in at an elegantly precise 21.500M. In a spirit of hope, and in order to avoid landing squarely on 22 (a number that within this context, belongs entirely to Joseph Heller), we’ll round this down to 21.
So, in this instance, instead of rounding up, we’re truncating. Call it CATCH 21.
And, again, the markets loved it. I will cop to wondering what the catch is, but unfortunately, I’m out of them (catches, that is), so perhaps you can tell me.
Because this week, the equity markets crossed a significant milestone, insofar as they manifested a P/E ratio in excess of 20.0, for the first time since two thousand freaking two (2002):
Now, of course I’m sorely tempted to designate this Catch 20.4, but that would be rather obtuse of me, now, wouldn’t it?
But one can only marvel at the relentless enthusiasm of the investor in American equities. Milo, if he was only here, would no doubt be moved to tears at this show of profiteering patriotism. Of course, the rally itself is kind of concentrated, with substantially all of it deriving from the performance of a handful of companies whose performance is analyzed, ad nauseum, across the financial wires. I can only add this: God help us if these names begin to suck wind.
I do hope the bulls are right. I really do. And not just because our interests are aligned (contrary to a longstanding urban myth, when you do better, I do better). But I do kind of wonder, setting aside killing it in the markets, how we’re going to pay our bills. I’d also draw everyone’s attention to the extraordinarily tight correlation between labor markets and aggregate solvency:
Thus, unless there is a break in these thirty five-year trends, we can certainly expect a surge in both payment delinquencies and bankruptcy filings. Maybe Milo would have some ideas as to how to turn this mess into an investment profit, but he’s not here; never was. He is, after all, a fictional character.
I did see a titch of rationality enter the late week proceedings, when, albeit for a brief time, 2-Year Treasury futures traded to negative yields. I’m not gonna lie: this pleased me. Because Treasury yields across the curve remain too high. But I’m not particularly inclined to yet againlay out those arguments.
And Milo has a problem. As does Colonel Cathcart. As do we. And that problem is Yossarian. Having in my own way brought about this dilemma, I truly empathize. Because, as recently as 2 weeks ago, there were no Yossarians in anyone’s field of perception. And now they’re multiplying like hobgoblins.
And the problem with Yossarians is that they stubbornly take in all the information that is presented to them, and then act according to their own lights. It should surprise no one that I myself aspire to be a Yossarian, and the inputs I see suggest a major disconnect – one that is not by a long shot factored into current market paradigms.
The unemployment rate is soaring to depression level thresholds. Borrowers are unwilling or (more broadly) unable to make good on their galactic obligations. And they continue to add to these debt loads at record velocity. Enormous swaths of the economy are in sustained, comatose condition. Air Traffic, Hotels, Restaurants, Auto Dealerships, General Contractors, Casinos, Retail Outlets, Manufacturing, etc.
States and Municipalities – those always sober custodians of public funds – are spending a lot more and taking in a great deal less, Heck, hospitals are even going broke – during a frigging pandemic – because the government has shut down the portion of their operations that actually are designed to turn a profit.
I suspect the patience of the public is about to dissolve at an accelerated pace. And a couple of dynamics aren’t helping. I’m telling you right now that the ~$6T of fiscal and monetary offsets applied to the economy by its elected and appointed officials is a mere drop in the bucket relative to the hole created by the shutdown. And it’s far from over. The shutdown, that is.
More will be needed, MUCH more. And let me ask you this. How much is going to be forthcoming while the investment class is booking fat profits? And how long will the beleaguered citizenry, led by the ~35M of newly unemployed (not to mention the MILLIONS of other poor schlubs whose jobs are hanging by a thread) put up with this nonsense?
Not long I say. And as to equities, you can have them here; I’m out.
And if you sense my dour mood, I will offer my best mea culpas. I’m jonesing for you, baby. And if I don’t see you soon, I think I’m gonna die. I’ve got plans. We’ve got plans. And the clock is ticking. I know that. But with snow in Mid-May, and everything shut down, I’m well-nigh is driven to despair.
Plus, Little Richard has died, and this is a big blow. And I’m pissed because instead of devoting an entire column to him, I’m forced to relegate him to a note about his passing in the 12th paragraph. Rest well, Rich. You came. Kicked up quite a fuss. We’re all greatly enriched by your having done so.
And I think, as such, all of us need to find both our inner Yossarians and our inner Milos. I do wish that we could call on the wisdom of the latter. However, I’m afraid that even the greatest capitalist of all time might be flummoxed by the current proceedings. I mean, you can cover the entire, rotting capital economy with the finest of the fare produced by Hershey’s, and I don’t think we’d be inclined to choke it down any better than the Catch 22 crew was able to digest chocolate-covered, Egyptian cotton.
And for those who care to know, the egg mystery resolves itself as follow. It was one big arb. Milo generates positive P/L by first buying the commodity for 1.5 cents in Malta. He then sells it to the military at 5 and buys it back at 7, booking 3.5 on the original trade and giving up 2 at a later stage, presumably for optics sake. There’s something like this going on at present (e.g. our pathetic efforts to borrow our way out of debt) but I doubt it will cure our ills. Bombing our own squadrons may be a more lucrative answer; may very well lead to better financial outcomes.
But I reckon, even here, there’s a catch; after all, there always is.
And now, with great reluctance, having thoroughly run through my Catch 19-21 scenarios, I think it is probably time to give this theme, and this note, a rest.
Fair warning, though. If, in subsequent weeks, you receive a note from me entitled Catch 23, you can safely conclude that we’re all in REAL trouble. Happy Mother’s Day, and, as always…
TIMSHEL