Holy Moses, I have been removed,
I have seen the specter, he has been here too,
Distant cousins from down the line, brand of people who ain’t my kind,
Holy Moses, I have been removed
— “The Border Song” by Elton John and Bernie Taupin.
Ooooh, I’m stuck on the border, all I wanted was some piece of mind,
Don’t tell me ‘bout your law and order, I’m trying to change this water to wine
— “On the Border” by Don Henley, Bernie Leadon and Glenn Fry
The first of week’s theme songs is from one of my guilty, lifelong delights. I wish I didn’t like early Elton as much as I do. — but bow to the cold reality of his brief interval of unmixed genius. For three or four albums (including the unspeakably brilliant “Tumbleweed Connection”), he absolutely crushed it. All that, though, came to a whimpering halt in the mid-seventies, and, as a songwriter at any rate, he’s been mailing it in, albeit to his enormous enrichment, ever since.
I also find it passing strange that there’s almost no composer whose songs I prefer to play on guitar (I mean, he’s a piano player, right?). I nonetheless have about ten of his tunes at the top of my permanent shred rotation, as led by the magnificent “Amoreena” (maybe my favorite song), which I’ve been strumming for about forty years.
I came to “Border”, the first of his tunes to hit the Billboard Top 100, much later. And I can’t stop playing it.
Then there’s the Eagles’ contribution to our limited, boundary-based musical canon. It’s the title track to their widely (and I believe unfairly) panned third album. It, too, is a delight to pick on a decent sounding axe. All four founding members cover the vocals, but none of them, to the best of my awareness, have achieved the thematic objective of changing water to wine. Here, of course, they’re in good company, because the transformation they seek is highly elusive to us all.
Borders are, of course, much in the news these days, particularly in certain parts of the realm, where our geographic barriers have functionally disappeared. Not terribly sure that this is good policy – particularly with infectious diseases, violent crime (don’t tell me ‘bout law and order) and other plagues multiplying like hobgoblins before our very eyes, but I’m gonna do everyone a favor and keep my further opinions on this topic to myself.
Besides, the markets have border issues of their own, so let’s focus on those, shall we? Our equity indices are showing their own price frontiers mad respect, bouncing around in +/- 5% ranges for most of the quarter. The preceding week ended in tears for most of them, and the carnage spilled over into Monday and Tuesday, after which they gathered themselves to generate a pretty solid weekly return. Most of the action centered around two catalysts: the slow-motion, technical default of a bloated Chinese Real Estate developer, and, of course, the Fed.
Did I mention the Fed? I hope so because they are (for a change) at the center of the latest action. What, with Chair Pow, while offering himself an escape hatch the size of the border crossing in Del Rio, TX, coming out with plans to begin his official taper trot in November and all. Or maybe December. Because, you know, it depends. On a lotta sh!t, as it happens. But anyway, it’s too complicated to explain to us, so we’ll just have to wait and see. And even if they do taper, what’s to stop them from un-tapering shortly thereafter?
Anyway, that’s how the markets took it. They rocketed on Wednesday and again on Thursday. On Friday, they even beat back some rather ominous news that China was criminalizing all crypto usage, to close out the week with a touching rally.
We also, or so it appears, seem to have survived that dreadful, cross-border rager known as U.N. week.
But back to China. Because, in addition to sporting a border wall that is visible from outer space, all roads seem to lead there. This week, they were vexing us with the potential uber-default of Evergrande — their biggest property developer – a potential cross-border event itself — insofar as its top debt holders hail from countries other than the People’s Republic:
I know this is a little hard to read, but I can’t find a single Chinese name on this lender-about-to-be-stiffed list. Americans? check. Swiss, French, Canadians, Japanese, Germans? Quintuple check.
But no major Chinese bond holder exposure doesn’t mean that a lot of those folks over there won’t be left holding the bag. Millions of homes and buildings under the EG umbrella will be left unfinished, and therefore useless, to those who laid down good renminbi for them.
Investors shrugged this of as well, feeling perhaps justifiably, that they have other, more pertinent matters with which to attend than the plight of sovereign wealth funds, trillion-dollar investment platforms, and domestic Chinese property purchasers.
All the above, though, left most of our markets border bound. Equity indices, as mentioned above, remain well within recently occupied jurisdictions. Domestic credit benchmarks, Evergrande notwithstanding, are positively motionless.
There are, however, some risk factors adopting a more migratory mindset. Yields on sovereign benchmarks are up particularly in Europe, with the soon-to-be-Merkel-less Germany now only collecting a skinny twenty odd basis points for its ten-year borrowings, and a hard-pressed-Macron-led France now actually paying a nominal amount on its debt it issues. The yield associated with our own Madame X are also on the rise:
A Tale of Rising Rates: Germany, France and the United States:
If this displeases any of you, and you’re looking to ascribe blame, the most accessible culprit is inflation, as catalyzed by such factors as over-easy money, supply chain cock ups and labor shortages. Our own policy makers continue to describe the phenomenon as “transitory”, implying multi-directional, price-based border crossings in the days ahead. I personally have my doubts about this and am instead inclined to believe that we must view forward-looking macro data with something of a jaundiced eye. Because those offering these prognostications may have agendas not entirely in line with what will, or ought to, transpire. All of which brings about images of EJ’s haunting second border verse:
Holy Moses, I have been deceived,
Now the wind has changed direction, and I have to leave,
Won’t you please excuse my frankness, but it’s not my cup of tea,
Holy Moses, I have been deceived
Yes, my friends, it’s about time I did that. Take my leave, that is. I believe the risks to this improbable rally still tilt to the upside, but there’s something unholy, in my judgment, about the whole proceeding.
Yes, this whole rally is unholy, and if we’re not careful here, we are likely, at minimum, to be deceived. Eons ago, Moses led my people across the Egyptian border, and into twenty-five hundred years of the hardships of freedom. Along the way, he delivered us The Law. Which has remained constant. Adaptable, yet Stationary. It is us that wander from it. And we pay the price. Even in the Promised Land, whose borders have changed a half-dozen times since it was last formed into the State of Israel – just after WWII.
But that is a lesson for another day. Moses is long gone; Passover is months away. As is Easter, which celebrates an individual, who not only tried, but succeeded, in changing water to wine.
The rest of us are stuck inside the borders of human caprice. For investors, this means operating within the constraints of divinely rendered prudence. Because if we don’t, Holy Moses, we will be removed.
TIMSHEL