“Civilization on Earth planet was equated with selfishness and greed; those people who lived in a
civilized state exploited those who did not. There were shortages of vital commodities on Earth
planet, and the people in the civilized nations were able to monopolize those commodities by reason
of their greater economic strength. This imbalance appeared to be at the root of the
disputes.”
— Christopher Priest “The Inverted World”
This one goes out to Shan. Who just left us. Who would’ve understood. Or at least have pretended to do so. To humor me. Which he would have done with respect to the following statement.
We live in an Inverted World. We order our activities in ways that outrages logic. It wasn’t always so (or didn’t seem to be), but however much we have done so, surely, we’re doing more of it now.
Thus, the wisdom of the time-honored idiom: “measure twice; cut once”, which has worked to such effective purpose — for lumberjacks, homebuilders, plastic surgeons, and, indeed, anyone in the “measure/cut” game, is turned inside out.
There is no economic realm more exemplary of this than inside the marble, columned halls of the United States Federal Reserve. Those paying attention are aware that our Central Bank has spent the better part of the past 15 years cutting that which is within its direct jurisdiction to cut – the Fed Funds Rate. Which it has cut not once, not twice, but, by my count, no less than twenty times over the last fifteen years.
Did they measure? Even once? The answer is less than clear.
Eventually, they were bound to produce a condition under which they had hacked away so dramatically at borrowing costs (to say nothing of the oceans worth of new money/liquidity they have manufactured over the same time period), that there would be shortages of vital commodities, which those with economic strength would seek to monopolize. And this, arguably, is where we’re at:
Bloomberg (Vital) Commodities Index:
One can justifiably wonder if this here index is a true measure of the price of vital commodities. And, relevant to the debate is the reality that its largest component (>12%) is Gold. And who, outside of Flavor Flav’s mouth, needs Gold?
The next three principal constituents are energy products, which I believe can still be described as vital. They are followed by the three grain staples (Corn, Wheat and Soy Beans). These also make my V-list, Mayor Mike’s (Bloomberg) unfortunate comments that they magically grow by throwing seeds in the ground notwithstanding.
The Index is surely illustrative of the inflation that now plagues us, and would be even more so if Gold, which is substantially flat over the last two years, was not at the top of the allocation list.
But who, other than the founding members of Public Enemy, needs Gold?
In any event, the Fed is now reversing course, is undertaking what promises to be an extensive series of anti-cuts – the immediate next of which on the docket (early May) is now expected to clock in at a whopping 50 basis points. There is even some talk – mostly by curmudgeonly St. Louis Fed President James Bullard — of going 75.
All, however, is not lost in the cut/measure universe, as our policy-setting bankers are also telegraphing the likelihood of a series of cuts to its bloated $9,000,000,000,000 Balance Sheet.
So, more cuts, albeit of a different flavor, are in the offing. But have they measured the potential impact upon economic activity? Not as clear.
One aspect of this – to which they may wish to attend – is the impact of all this on the lowlife debt instruments that comprise the junk bond market, particularly the runts of the litter – securities with a CCC rating – one notch above D. Which stands for Default:
Beware the Triple Hooks: The Most Menacing Cutters of All
Legit credit market types refer to CCC bonds as “Triple Hooks”, bringing about images of gruesome cutting destruction. Yes, you can cut (with) Triple Hooks, but typically not without making a bloody mess of everything in proximity.
And often, when portfolio managers seek to hack away at their juicy-yield-but-uber-risky CCC paper, the bleeding can seep upward on the credit quality ladder. Something akin to this happened back in ’08 — when the rate cutting began. Hemorrhaging of the riskiest securities migrated to instruments of purported better construction, and the next think you know…
There are also pertinent developments in the cutthroat universe of Subscription Streaming. And none of it is good. The headlines events were Netflix’s report of having, for the first time in a decade, lost subscribers (causing its stock to crater by more than 1/3rd), and the abrupt, ignominious shuttering of the recently launched CNN+ service.
These tidings speak, more than anything else, of a consumer who is still inclined to cut the cord but is measuring with more discernment the inventory of content that replaces it.
One may also care to cast an eye towards the housing market for such discrepancies. 30-Year Mortgage rates have cut through the ominous 5% level like a knife through butter:
This, of course, implies dramatic increases in the already-astronomic costs of purchasing a home. But did this deter our intrepid home builders from ordering up the measured, cut timber and commencing construction on new dwellings?
It did not:
It can be hoped this is all for the best and I reckon we’ll find out. But not gonna lie: I find myself confused to the brink of madness.
And this, my friends, is not good, because your risk manager and everyone else will need full command of our wits to navigate the next few trading sessions, which feature earnings drops from the Big Barking Tech Dogs, our first glimpse at Q1 GDP estimates, and God knows what else.
So, yes, I pine for the days when multiple measurements were precedents to solitary, calculated cuts. But in an Inverted World, this may not be on the cards. We take the consequences as they come, but if I were you, I’d do what I could to invert the inversion: I’d be carefully measuring my risks, and be prepared to cut them if matters spin out of control (as well they might).
If Shan were here, he’d agree with me. But he’s not. So, I’ll never know if those were his true sentiments. Or whether he would have been, as was his habit, merely humoring me.
But in this Inverted World of ours, that’s just the way it goes.
TIMSHEL