To Bob and his Back Pages (so much older then, younger than that now). On the occasion of his 80th Birthday.
Let me state flat out that Bob’s 80th merits an entire column, maybe more than one. But somehow, this week, I didn’t have it in me. Maybe I’ll get to it in the next edition; if not, shame on me.
Meanwhile, several years back – more than I care to admit – I published a piece called “The Ten Commandments of Risk Management”. You can (if you care to review it) find it at the link provided below. For what it’s worth, I would probably now tweak it a little; not much but a bit.
Some such wisdom should be (but often isn’t) etched in stone. Anyway, here it is:
https://genriskadvisors.com/risk-philosophy/
I got to thinking about my risk tablets lately — in light of the current state of madness in risk-taking land. Some of its edicts are indeed universal – particularly my Commandment X (Ten): Obey the Actual Ten Commandments. Here, I refer to the ones in the bible. Like, don’t lie, don’t steal, don’t kill. Honor thy father and mother. And all the rest. In my many decades in the field, I have found that adherence to these gifts from above — as delivered by Moses himself – will do you no harm in your investment travels. And will do those with whom you interact a great deal of good.
But then my thoughts turned to what may be a more pressing (albeit earthbound) need: the development, if you will, of a Bill of Risks — a set of essential modifications to a yet to-be-written Risk Constitution. Just like our Founding Fathers saw fit to amend their divine original document, all those years ago.
But first, in terms of the above-mentioned Constitutional Bill of Rights, I have long held a particular partiality to the Third Amendment, which holds: “No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner; nor in time of war, but in a manner to be prescribed by law”.
Pretty important, right? Because I can assure those of you who have never suffered this indignity that encountering a bunch of soldiers quartered in one’s residence during times of peace (or, unlawfully, during times of war) without one’s consent is buzzkill of epic proportions.
But given what I’m currently witnessing, my attention focuses more acutely on the bottom of the list. I’ve always had a difficult time discerning between The Constitution’s #9 and #10, which essentially, and (perhaps) redundantly, advise us: “Hey you putzes, you are allowed to do anything you want to do that we (or the States) have not otherwise outlawed”.
In a better world, we wouldn’t need such guidance, but the Framers, in their infinite wisdom, knew us to be obtuse, so they chose to remind us that freedom means freedom. Does this still hold? Lately, and witnessing the relinquishment of certain liberties being conflated with virtue, I’ve had my doubts.
I have had neither the time nor the energy to put together a comprehensive Bill of Risks, but if I was to jump ahead to the penultimate one (#9), it would mirror its Constitutional Opposite Number, stating that portfolio managers can pretty much do anything you want with their books, provided that: a) it is consistent with their Offering Memoranda and Marketing Materials; and b) is not otherwise prohibited by Securities Law.
Oh yeah, and they probably should also clear any sketchy trades with your Risk Manager (if they have one).
Other than that, you PMs are pretty much at liberty to act as you see fit. Bail out of Bitcoin? Check. Fiddle around with factor models? If you wish. By some SPACs and then package them into a SPAC of your own? If you must (just leave me out of this last one, OK?).
And now to Number Ten: you and your investors/capital allocators must be willing to live with the results.
I’m not sure if the latest market doings rise to the dignity of a Constitutional Crisis (Risk Management Vintage), but we may, in fact be getting close. Returns in my universe have been nothing short of putrid. And are getting worse. And alpha, oh sweet angel alpha, is painted in redder hues with each passing day.
Our equity indices have more or less flatlined for several weeks. The Commodity Complex, somehow, and improbably in my judgment, has backed off from its rageful advances, Madam X remained at a sated and seductive ~1.6% yield. Vixen VIX, all the overwrought action around her notwithstanding, has stayed obedient like a genie in her bottle – around 20. Meanwhile, rolling monthly returns are plunging.
We can always (conveniently) blame the crypto market, which, in case you hadn’t noticed, is getting crushed. And I’m here to tell you that it’s about time. Not that I have anything against crypto – long may it reign. But it has been, is, and will be on a collision course with the current vibe of our political economy, which seeks to impose itself as rudely as it can into all our private affairs. In an environment where our Treasury Secretary is flying around the world in an attempt to set minimum global tax rates – so as to enable our government to jack up levies on these here shores with competitive impunity, where our central banks are whizzing out new cash that is dribbling into oceans of excess liquidity – do you really think that our paymasters are going to roll over and allow a parallel economy to shove them aside and dilute their money grubbing powers?
Consider the recent BTC selloff, therefore, to be a small taste of what’s to come. Which is not to say that Big Bitty couldn’t gather itself and climb to previously unbeached thresholds. The way things are going, it very well might. But when the Internal Revenue Service and even the Chinese are checking in to contain the crypto fires, well, let’s just state that I think governments have the juice to dampen or douse the crypto flames. It’s hard for me to believe that they won’t continue to do some hosing, digital currency style.
Much of the above-mentioned juice takes the form of excess fiat currency liquidity, which is reaching such frightening proportions that it defies verbal description in this family publication. So, let’s use a visual:
Now, unless you’re FRED (or a guy like me), these pictures may be confusing. But they do tell a story – one of: a) the printing new cash; which (surprise); b) is flooding its way into the money stock; but c) not circulating particularly well through the economy.
It’s enough to make a latter-day Moses (risk rabbi) smash down those Charlton Heston slabs, and consign his minions to forty more years in the desert.
And it’s also enough to bring about a couple of other outcomes. First, if I’m in control of this here show, the very last thing I want to see is a bunch of crypto mooks upstaging my narrative.
Perhaps more importantly, though, it socializes a critical message to those wandering tribes of investors: go forth and buy risk assets.
A look at the recent action in the Fed’s Overnight Repurchase Facilities illustrates the point. As mentioned last week, our Central Bank doesn’t just print money and let it sit; rather, it uses these proceeds to purchase securities issued by its besties over at the Treasury Department. The latter, now run by the former Fed Boss, is issuing a great deal of late, more than, like, even usual, and selling these creations – to insiders – at auction. Sometimes the buyers only want to hold this paper overnight (so as to obtain the microscopic level of interest income that cash balances fail to offer) and then want to return it to its natural receptacle – the Fed. So, the Treasury issues, the Fed prints, buys, and sells its holdings, overnight, to the banks, who are accumulating more cash deposits than they can handle. So, they buy more. From the Fed. And then return it. The next day. To the Fed. Then it’s lather, rinse, repeat. One has to admire the futile elegance of this circle jerk.
Because lately, the banks have been buying more of this overnight paper than ever before, and at higher prices/lower yields. As such, untold numbers of bank clerks are employed at the task of bidding for govies — issued by the Treasury, purchased by the Fed with newly minted currency — and then sending them back to the Fed in the morning, copping fractions of basis points for their efforts.
One would think there’s a better way, but I won’t get into that as of now.
I will state, however, that the charts rendered above (along with their explanatory notes) offer a vision of excess cash that almost certainly will eventually find comfort in the warm, if capricious, embraces of risk assets. There’s virtually nowhere else for it to go.
I know it’s tough out there, my loves, but here I refer you to the magnificent pre-amble of the yet-to-be-written Risk Management Constitution. “We the people of the coddled investor class, in order to form a more perfect self-image, secure returns for our allocators, and (more importantly) fees for ourselves, do hereby ordain and promise to someday establish this Constitution for the Risk Management of our Portfolios”.
Well, it’s a start anyway. In the meantime, before I get around to writing the document itself (along with the first eight of its sacred amendments), my best advice is to chill awhile. Maybe cut back on your books.
And look for buying opportunities, which will come like manna from heaven, and perhaps lead us into the Promised Land of the Next Big Rally. Like Moses, I can see it, but may not get there with you. It may fall to my (lovely) assistant to lead you out of the desert and inside the Walls of Jericho. If history is any guide, you’ll have to fight to penetrate this fortress. But with patience and intestinal fortitude, you’ll get there.
But, like Dylan said (or should have) “you don’t need a risk man(ager) to tell you to when to cut expose(ures). He turns 80 on Monday, and may God keep him. Moses is said to have lived to 120, so maybe Bob is only 2/3rds home. I certainly hope so, because he’s my Moses – the giver of my law. In one of my favorite biblical passages (Deuteronomy 34:6), it is stated that at the time of his death, Moses’ water had not left him.
And so it is with me, baby. Got plenty of juice, enough to lead us to the Promised Land. As for the rest of you, I suggest you adhere to the Commandments and the Constitution, which, absent other signposts, and the yet-to-be-written status of the latter notwithstanding, is about the best chance, you, I or any of us got.
TIMSHEL