“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where—” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“—so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
— Lewis Caroll
Oh Lord we pay the price,
With the spin of a wheel – with the roll of the dice,
Ah yeah you pay your fare,
And if you don’t know where you’re going,
Any road will take you there
— George Harrison
Hard to believe that George has been gone nearly for 20 years. On the other hand, we’ve managed to scrape by without the living presence of Charles Luftwidge Dodgson (aka Lewis Caroll) since early 1898.
Harrison’s final album: the magnificent, posthumously released “Brainwashed”, opens with “Any Road”, in bouncing, joyful tribute, to the above-mentioned writer/inventor/mathematician, and his most famous work.
I got to thinking about all of this – not gonna lie – because I’ve been feeling lost lately, more lost than even usual. I’m on a road, but I don’t know which one. And I don’t know where I’m going. So, I reckon them dead Brits are right – under the circumstances, any road will do.
At least I’m not alone. In fact, I observe this condition pretty much everywhere I turn my attention. Take the Economy, for instance. And the markets.
First, the Economy, which looks like a combined on-ramp/off-ramp, attached to a roundabout, in the middle of a cul-de-sac. The most vivid image that comes to mind is that of the Chicago’s Circle Interchange, often referred to by local traffic reporters as the Spaghetti Bowl:
The Nexus of this madness is the intersection between the Eisenhower, (successor) Kennedy and Dan Ryan Expressways. I’m not sure how Ryan (who rose no higher than Cook County Chair) made the list. But then again, Chicago, like a lot of cities, has a rather idiosyncratic manner of deciding such matters. The entire matrix is named after a whirling dervish of a former mayor (Jane Byrne). The City Council just passed an ordinance rebranding the functionally but elegantly named Lake Shore Drive to honor its first “non indigenous” settler: Jean Baptiste Point Du Sable – who was indisputably one hella guy. But I thought, these days, we were all about indigenousness. Did I miss a memo?
Anyway, you gotta admit, it’s a hot mess of an automotive puzzle. Especially (trust me here) at Rush Hour. You merging out? Merging in? Veering off course? Going in a circle?
Well, Yes (and Yes and Yes and Yes). And so, for that matter, is the Economy.
By way of elaboration, the BLS recently served up an exceedingly tepid April jobs report, featuring a disappointing number of new gigs created, along with an increasing Base Unemployment Rate. Then, this past Tuesday, this same group of tax-payer-funded statisticians improbably informed us that there are now 8.1 million career openings – the highest number in at least ten years, and, maybe, ever.
Retail Sales clocked in at a big fat goose egg (0.0%).
It was also Pi Week (the Greek symbol that us dilatant economists use for inflation; not the truncated appellation of that dude who survived nearly a year in the lifeboat that also carried a zebra, an orangutang, a hyena and a Bengal Tiger), with a great deal riding on its outcome. And, sure as sh!t, on Tuesday, the Consumer Price Index dropped in at a somewhat-alarming 4.2%. But that was just prelude. Wednesday, the Producer Price Index landed like a Bunker Buster at 6.2%.
Now, in a normal economic paradigm, CPI and PPI usually come in pretty close to one another, and are often, as economic indicators, indistinguishable. However, now, it seems to me that Producers are, indeed, in receipt of an important memo — not yet distributed to us put-upon Consumers. Supply chains are tighter than Penn and Teller (or you and me).
I heard from a friend about a friend in the meat distribution business who says that the wholesale cost of skirt steak has more than doubled over the past few months. Now, I like skirt steak, provided it is not prepared by my late Grandma Sylvia, who (god rest her soul) could turn the finest slice of Kobe Beef into shoe leather in a heartbeat. But it is widely considered to be at the bottom rung of the cow meat ladder.
One doesn’t envy the plight of Ponderosa patrons this summer, as (in addition to missing the salad bar) they may experience an extreme form of sticker shock. And if they want to order a Filet? Fugeddaboudit.
Oh yeah, and then there’s that whole pipeline hack, which idled most of the filling stations in towns like Washington and Atlanta — and caused long lines across nearly every spot on the road in between. For those patient petrol purchasers, which road thus doesn’t matter; they can’t traverse it anyway. Word is that the owners, in what is the first such episode, in, like, ever, actually paid ransom to the hackers.
None of this, of course does anything to stem the rising scourge of inflation, which, as discussed last week, has achieved sufficient critical mass to silence any residual debate as to the signage of real interest rates. They are unambiguously negative.
So, they should rise, in a pseudo-Newtonian sense, must rise. But they don’t; arguably can’t. Too much cash floating around. Early in the week, the Treasury Department staged another one in its never-ending stream of auctions, this time of short-term T-Bills. It was over-subscribed and priced at 100.00 – the statutory cap on bids in this market. Why were buyers rushing in to purchase government obligations that yield 0.00%? Well, a) because they need them; and b) they are priced at negative yields — in the nonauction markets. The Fed is printing $120B of new money and using it to elbow aside other buyers (banks), who are burdened with tragically excessive supplies of reserves and demand deposits. These institutions are required to hold government paper and prefer not to pay (accept negative returns) for this privilege. Therefore, they buy what they can at auction and push rates down.
So, whatever economic road we is on, it is one that features troubling crosswinds such as surging inflation trends combined with miniscule or negative interest rates and disappointing growth, along with both an excess (unemployment rate) and deficiency (job openings) of warm bodies in the labor force.
Thus, if investors are confused as to where the market is headed, and by what route, they come by this condition honestly. And the nonfunctional state of their economic compasses and sextons is only part of the problem. The murky world of factor rotation has added to the quagmire, creating portfolio allocation dilemmas reminiscent of those faced by Pi – after the tiger had consumed the zebra, orangutang and hyena, and turned his hangry eyes towards human flesh. Due to the V-like action from last spring, the constituents of benchmarks in such chic factors as Momentum and Growth have shifted from recently infatuating names like Tesla and Twitter, to long-time lumbering lingerers – including Caterpillar and Bank of America.
In part for these reasons, the tape began the week in an extremely menacing mood, reacting to all the potholes in the road described above, with an arguably justifiable selloff. But then it reversed course, recapturing much of its lost ground by Friday’s close, and sending us into the weekend unaware of its destination, or the slightest hint of the path it will take to get there. But, like the Cat told Alice, if we keep walking, we will eventually arrive.
All of which has catalyzed the most gruesome assault on alpha that I can recall across my ancient days. Many, if not most, of the investment pools that I track continue to get pounded. Have gotten pounded all year. And not in the good way. They got gashed by GameStop (January), accosted by Archegos (April) and felled by factor rotations (May). And now, they have little recourse in discovering the way forward other than to inquire of the Cheshire Cat and accept his inscrutable answers.
So, what to do here? From a risk management perspective? Well, if you don’t know where you’re going, or which road is taking you there, my advice is to lighten the road and slow down. Under the circumstances, I don’t see why there is any rush to reach a destination, which, at the present moment (I hasten to remind you), is unknown to you.
My best guess is that my whiny description of our current quagmire notwithstanding, there’s simply too much excess cash out there for it not to continue to find its way into risk assets. I do think that the easy Beta trade is probably over, I anticipate heightened two-way volatility, economic ambiguity, and many other roadblocks, on our journey towards outperformance. The (easier to traverse) rivers of liquidity, however, slant upward, and should lead us towards higher ground. But the climb will be a difficult one, and, without great care, our rafts could get upended or lodged on the rocks. Be forewarned.
Meanwhile, the sun is shining, and the birds are singing. The ducks are just waking after an extended slumber. Last time I saw Alice, she was still in dainty, serene repose, surrounded by her friends, on the northern bank of the Central Park Lagoon.
Why don’t you meet me there? We don’t have anywhere else to go for the moment, and if we take proper time, we can figure out together where we want to go, and which routes will best suit our purposes.
If it rains, we can go window shopping, or, if all else fails, hop a train and head West (again).
TIMSHEL