Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
— William Butler Yeats
This here note is a rerun. I wrote something nearly identical, in this very space, a couple of years ago. But hey, it’s the holidays, right? News anchors have abandoned their posts. Nobody’s answering their work phones. Everyone, in short, has bounced.
So, I’m busting out an old one – this time to honor the demise of the fabulous Joan Didion, whose first published book carries the same name as this week’s offering. I’ve read this (and two or three of her other books) and am able to enthusiastically recommend her to you. But more than that, “Bethlehem” is one of two titles, which, as a writer, make me truly jealous, wishing beyond hope that I’d come up with it myself. The other, on the odd chance you wish to know, is Ayn Rand’s “Atlas Shrugged”.
Didion’s passing is truly lamentable, God bless her for plucking out the best phrase from my fave poem – “The Second Coming” by William Butler Yeats, to grace her maiden publication. It can’t be held as her greatest literary achievement, but God oh mighty, it’s up there.
Meantime, Yeats’ poem runs less than twenty lines, rendering it ~129,980 rows shorter than John Fitchett’s “King Alfred” but (with all due respect to that eponymous 9th Century Saxon monarch) packing a much more substantial wallop. Offering as it does, a terrifying, alternative vision of, well, a second coming, it (among other things) has hauntingly fluid parallels to the present day.
Perhaps this is no accident. The poem was formally published exactly a century ago and is widely believed to be informed by the plague of the Spanish Influenza, a disease to which Yeats’ wife nearly succumbed, and one which, at the point of its publication, was entering its third year.
Yeats suggests that we are, each of us, falconer-controlled falcons, feeling ourselves to be strong, independent and (above all) free, but really under the opaque control of falconry forces. We fly about – in ever-expanding spirals, unaware that our hooded movements are guided by those who have trained us to do their bidding.
Things eventually fall apart, descend into anarchy. The center cannot hold. The best among us indeed lack all conviction, while the worst are surely full of a passionate intensity.
Nothing for nothing, but this sure sounds like the world we currently inhabit – perhaps nowhere more so than in the widening gyre of markets. Valuations continue to rise, as driven by a frenzied focus on a half-dozen names, while the rest languish or are pulled to terra firma by inexorable gravity.
It appears to me, more than anything else, that the falconers are letting the loops historically loose, as fueled by the well-documented, alarming expansion of every form of debt. So, in case you were wondering what a widening financial gyre looks like, I can offer the following images for your guide:
Two Beasts Slouching Towards Bethlehem: Aggregate Debt and the Gallant 500:
Dare we make the connection? Dare we not? Yes, our McMansions bring us great joy, but what about those floating rate mortgage payments in a rising rate economy? However, perhaps the more important question is whether the cycle continue into ’22. Gun to my head, I believe that it will. The over-valuation spirals may indeed widen as the new year unfolds. On the other hand, they may not. But either way, I see two continued indications of the drowning of the ceremony of innocence:
- Any upward movement in indices will be dominated by a handful of names, purchased by (the worst?) investors with a passionate intensity, while the core of the equity complex will continue to suffer from a lack of all conviction by (the best?) highly trained stock pickers.
- The risks of a major, unanticipated, and nasty correction are at the upper end of their ranges.
Let’s focus on Number 2, shall we? Lay aside the myriad anarchies loosed upon the capital markets world, including such plagues as runaway inflation, rising interest rates, virus-driven economic disruptions, the widening gyre of an historic credit bubble, and whatever evils are being cooked up by policymakers that may come to pass. The fact is, we’re due.
Because this sort of thing tends to happen every year or so, and it’s been more than that long since the last episode. On a cold, February morning in ’18, the VIX exploded unexpectedly, and created carnage nearly everywhere. Christmas that year brought about the China trade war selloff, which shaved 15% off the Gallant 500’s hide in the month of December.
2019 was, for the most part, a joyful ride on the up escalator, but we all know what happened when the calendar turned. Those Washingtonian falconers, spooked by the covid buggers, locked our asses down, sending stock prices careening into nether regions, and even, for a brief moment, submerging Crude Oil costs into deep negative territory.
’21 featured a series of mini-episodes, including those driven by Meme stock folderol, the collapse of
Archegos, the rejiggering of factors such as Momentum, an enigmatic crackdown in China, and, just in the last month or so, some fitful action tied to the combination of Omicron worries and the dreadful prospect that real interest rates might revert into positive territory.
Yet none of the above have manifested a demonic correction rising even to the dignity of 5%.
Yup, I’m thinking – particularly if the indexes come in hot early on, that it’ll be high time for the falconers to conduct themselves in such a way as to remind us of who’s really running this here show.
And I’m feeling good about this here prediction, because sooner or later it’s bound to come true.
Plus, think of how smart I’ll look if it happens this winter.
Please don’t mistake me; I’ve no reason to suspect that the Yeats’ rough beast’s hour has come round. It might have, but then again, we’ve been issuing worrying prophesies of this nature for at least one hundred years.
Only that we should keep a watchful eye for him, even as we obsess about smaller matters, such as microbes multiplying like hobgoblins and clogging up airports.
But far be it from me to harsh your mellow this holiday season. With markets resting at all-time highs. With investors striving heroically to cap of ’21 with as much vapor in their valuations as they are able to muster.
Not much should matter in the five trading sessions that remain, ere the ball drops, in Times Square, as witnessed by a falconer-diminished roster of watchful falcons. I expect, in the interim, not much more than modest widenings and narrowings of the gyre.
Then, Monday week, we begin it all again.
But this note is about the fabulous Joan Didion. Who left us this holiday weekend. Whose books are worth a gander.
However, as you do, as your risk manager I cannot help but advise you to keep a continued, watchful eye towards the desert sands of Bethlehem, for signs of the emergence of one whose hour may soon be upon us. No sign of him thus far, and (God willing) he may never emerge. But remembering that he might show up without notice will do none of us any harm.
TIMSHEL