Juliet, when we made love, you used to cry,
Said “I love you like the stars above; I love you till I die”,
There’s a place for us, you know the movie song,
When you gonna realize, it’s just that the time was wrong? Juliet…
— Mark Knopfler
I know it’s a little early to be focus on this – particularly as we just went through a similar round for the not-so-dearly departed ’21.
But jeez, they’s dropping like flies.
Our early frontrunners emanate from the motion picture business: the matchless actor Sidney Portier and the uber-accomplished director Peter Bogdanovich. The former gave us timeless performances in “To Sir, With Love”, “Lilies of the Field”, and (my personal fave) “In the Heat of the Night”. The latter crafted “What’s Up, Doc” (and a bunch of other cool films) that features a San Francisco car chase scene which blows away anything in the “Fast and Furious” series (which I haven’t seen). He also crushed it with a cameo in “The Sopranos” as Tony’s shrink’s shrink.
They don’t make movies like they used to, but as they say, they never did. And when they do, we don’t attend. Spielberg, for instance, recently dropped (though God knows why) an updated version of “West Side Story”, which the critics loved, but which bombed at the box office.
It doesn’t take an MFA to know that “WSS” is a takeoff on “Romeo and Juliet”, but maybe fewer of my readers are aware that the Dire Straits song of the same name is a takeoff on WSS. As we are informed by both Sondheim (who died this past Thanksgiving and is therefore 22-ineligible) and Knopfler, there’s a place for us.
But it took the latter to suggest that maybe the time was wrong.
So it goes with the ’22 markets, thus far at any rate. After a couple of sessions of admirably seeking to extend the year-end rally, investors turned ignominious tail, and ended the week by selling off pretty much everything – stocks, bonds, commodities (OK; not ALL commodities), heck, even crypto (BTC down ~10% ytd and ~37% over a rolling two months).
We’re where we belong location-wise
But our timing sure seems off.
So, what gives? Well, for one thing, there’s a passel of risks out there – ones that I weary to yet again inventory. But more than anything else, it appears that the markets swooned – and not in a good way – at the release of Fed Minutes — which had a decided “Jets vs. Sharks” feel to it.
Everyone expected them to talk tough about tapering. And they did. But it also appears that investors were taken by surprise at indications of an intention to divest of at least a portion of their $9,000,000,000,000 Balance Sheet. Shudder the thought!
Rates, in result and perhaps justifiably, rose along the entire yield curve. Moreover, a big hike in wage inflation — enmeshed in an otherwise tepid December Jobs report – all in advance of next week’s CPI/PPI drop (the latter of which could easily clock in at > 10%) and the won’t-that-be-fun Congressional testimony from Chair Pow and his Trusty Tonto Brainard didn’t do much to becalm anyone’s mood.
Even the credit markets are feeling the heat:
Bond Rumbles: Investment Grade and Junk
The downward pressure in non-government debt instruments was almost certainly abetted by a pant load of new supply, as, just on the sober (left graph) Investment Grade side, issuers ushered in the new year by dropping $60B of new paper on the markets in its first week.
This week’s projected tally? A more modest $30B. But – trust me here – it could go higher.
Not to harsh your collective mellows, but if these markets collapse, we’s all in serious trouble; the 22 Corpse of the Year could be all of us.
But for now, the real pain has devolved to the Equity Complex, with all the indices down, and that most stalwart soldier – Captain Naz – particularly on its heels. Nominally, the Ol’ Cap is tethered, in star-crossed lover mode, to the fate of his Juliet – Madame X (U.S. 10 Year Note). As the latter falters in price and rises in yield, so the argument goes, the discount rate applied to cash flows expected to emanate from those Naz names increases — weakening/diminishing them accordingly.
OK; fair enough. But am I ready to declare the death of either the Captain or the Madame, in inadvertent suicide? I am not.
For one thing, I don’t believe the bid on longer term Treasuries has made its permanent exit; there’s just too much cash out there to place anywhere else. For another, I’m not convinced that the love match is permanent. At some point, the Naz can rally while Treasuries sell off, and vice versa.
It’s happened before, you know.
And FWIW, I think all that cash continues to boost credit markets, or, at minimum, keep them from collapsing, so, I’m not ready to toe tag them yet either.
Thus, one week into ’22, while there are certainly blood clots and stains anywhere one care to cast one’s eye, I’m not prepared to advance the candidacy of risk assets of any kind for ’22 Corpse of the Year honors.
But they may remain impaired here for a spell, or, taken to the extreme, sent to the Critical Care unit.
And this we’ll have to live with.
However, it’s just too early in the year to hand out honoraria, or even to write much of a narrative.
I reckon, in sum, it’s time to hunker down. I don’t see much in the way of easy pickings out there, but the play has just begun. Subsequent acts are bound to bring surprises aplenty.
And at some point, this here tape is bound to normalize itself. Consider, if you will, the case of the beleaguered Biotech Sector, the source of mournful and unmixed heartbreak for many months:
Now, you might think that this one area of the market, comprised of the companies we need to beat back this pandemic, whose products will remain in demand for as long as we humanoids are prowling about, would receive some kind of investor love. But one would be wrong. Its index is down >40% since before they locked all our asses down – nearly two years ago. Over the same period, the Gallant 500 is up around 35% and the lovesick Captain Naz has rallied a cool 60%.
It all seems to me to be so distressing, so avoidable. The Fed wreaks havoc by diluting the money supply. Investors, in result, misallocate capital. Virtually all assets are mispriced. Vital, well-run companies see their valuations crushed, while investment dollars flow endlessly into an oligarchy of equity names, as well as towards dreamy securities collateralized by images of rhinoceros tusks.
It’s not a good look for us and it can’t possibly continue into perpetuity.
But bear in mind, if you will, that “Romeo and Juliet” is a tragedy, which ends in the creation of not one, but two, beautiful corpses.
I prefer to take a more optimistic view of the proceedings.
Yes, there’s a place for us, even if the time is wrong.
However, with some intestinal fortitude and solid, self-generated karma, our time will come, thereby removing us from the nomination list for 2022 Corpse of the Year, and, hopefully, for any such award during subsequent cycles around the sun.
TIMSHEL