Probably, you’ve never heard of it, but we’re locked in on one of two films released in 1967 about idealistic teachers breaking barriers with difficult, disenfranchised high school students in lower class urban environments. UTDSC is set in New York, with Sandy Dennis as the pedagogic protagonist. The titular theme refers to the incorrect traversing of the unidirectional venue for vertical egress established by the school, as necessitated by overcrowding.
It’s thematic doppelganger: “To Sir, With Love”, features Sidney Portier and is set in London.
And that is all I have to say about that.
But it does strike me that in a broader sense, society, and more narrowly, the markets, have been travelling up a down staircase for several years now.
While not wishing to put too much grey matter into the topic, the wider the sequence may have begun on June 16, 2015, when carnival barking real estate man Donald J. Trump announced his improbable, and improbably successful, run for the presidency. In a moment now consigned to history, he did so with great optical flourish, descending the gilded escalator in his signature eponymous tower, lusciously accessorized by his arm candy wife, Melania.
We’ve been trying to climb those descending electronic stairs ever since, but, on the other hand, the markets lurched from one new high to the next in the ensuing quarters and years.
Until they didn’t.
One is thus tempted to turn to the lockdowns as an inflection point, and, for a short time, they were. Crude Oil flashed to negative prices in April of 2020, everything was going down, and nobody, including me, could visualize a bottom.
But then a gale force wind of Fed monetary stimulus blew in, and everything, and everyone, was blown upward. ‘Twas a strange interval indeed. For a while, we couldn’t go anywhere, and when we finally could, it was with tiny holes in our arms and flimsy, cotton germ blockers of dubious effectiveness affixed to our visages.
But by the time 2020 ended, everyone was rich. The Gallant 500 had more than doubled its hosts from the covid bugger lows. Captain Naz nearly tripled. More folks told me more times than I can count that they had cracked the stock market and had no more vexing problems than determining how to spend their fabulous retirements.
The upward momentum continued throughout ’21, but, clearly, market participants were getting winded by the climb. Our indices peaked out just after our most recently celebrated(?) New Year. It was like, well, school is out, and this here market staircase is now exclusively leading towards terra firma. The gravitationally aided stampede towards the exits was further catalyzed by Putin rolling his tanks where they didn’t belong (and facing a sustained rude welcome), and the attendant Inflation obsession which this evoked. Since that point, the Gall 5 is down >25%; the Nazzy Captain >30%.
I’m too lazy to research this, but suspect that any year, including the one we are currently in the midst, where market highs are registered on the first trading day, is bound to be one of significant frustration for investors.
Oh yeah, lest I forget, 10-year yields are nearly triple their late ’21 lows, as are mortgage rates, causing home buyers touring lovely colonials to abruptly reverse course and head downstairs.
(I can’t resist a personal anecdote here. When visiting what turned out to be the first home I ever purchased — in Oak Park, IL, a troublesome friend accompanying me insisted that I take a look at the attic. As she was pointing out something important feature, I stepped between the beams, onto the pink, flimsy Owens Corning insulation, and through the second-floor ceiling. My little daughter cried. A couple heading up the stairs and encountering my crashing sneaker – it was an open house – abruptly reversed course, descended the stairway and departed the premises. I broke the house, so I bought it and have no regrets. True story).
But let’s revert to our 1967 high school stories of deliverance. In 55-year role reversal, it looks like Ms. Dennis and Mr. Portier have switched roles, and that the upward traversing of down staircases is now mostly taking place in London. No sooner had Prime Minister Truss occupied her office at 10 Downing than she issued the blasphemous order to slash U.K taxes, thereby breaking the hearts of government revenue agents across the globe (none, presumably, more so than her sister in levies, our own Janet Yellen) — who are all conspiring to set a floor on what each nation gobbles up from the toils of our labor. Following upon the heels of the Bank of England’s dovish 50 bp hike and resuming of the purchases of their own paper, this sent the (once) mighty Sterling into a full-on swoon, and caused yields on the gilded (10-year) Gilt to more than double over just a couple of weeks:
The Guilty Gilt (BOE buys but everyone else sells):
More than one savvy macro fund with which I deal anticipated this, and – not gonna lie – it was the first time in more than a generation that I had even seen the once active but long-dormant Gilt futures contract on my risk sheets.
Those positioned in this market made a killing, which certainly lightened my step.
But I weep for Madame Truss, for whom, Tory that I am, I had such high hopes. Moreover, I think she’s on to something. Whatever ails the U.K., a tax cut is not likely to do much harm. But there is already talk that her coalition is fracturing, and that she may be bizounced in Usain Bolt record time. Let’s hope not; I’m (still rooting for her).
Across the pond, we enter Q4 with virtually every risk asset in the fundamental and technical subbasement – below, even, the room where that weird old guy who teaches shop sleeps. Nearly every investment instrument I can survey (even Crude Oil, FFS!) is trading below its 50, 100, 200 and 1,000,000-day Moving Averages. Growth is slowing. Inflation – including the just-released, Fed favorite PCE, is showing stubborn (if unsurprising) persistence. Credit markets, the biggest bugbear of ‘em all in my judgment, are beginning to crack.
However, since we appear to be fated, evermore, to traverse upward on the down staircase, our friends at the Atlanta Fed (who I tire to the extreme to reference) ginned up some surprising love for us last week:
Not often in my experience have Fed GDP estimates ever quintupled so quickly – much less in the final week of the quarter upon which they are reporting.
But these here folks is all trained economists, and therefore to be trusted unilaterally. Worst case, if they turn out to have misled us, perhaps we can send them back to school – to be trained by either Ms. Dennis or Mr. Portier.
And now, like it or not, the 4th Quarter commences, and, in result, our own, er, education continues. In trademark perversity unique to our species, our first sessions will be driven by attempting to understand the recent past. Monthly and quarterly economic data begin to roll off, and Q3 earnings are just around the corner. I’m not thinking either set of data flows will feel much like recess.
We’re also, dare I mention it, entering the final month of a gruesome election cycle, which will be beyond tedious to monitor but the results of which may be critical to the immediate subsequent fortunes of the capital economy. I have my hoped-for outcomes here, but so as not to offend anyone’s sensibilities, will keep my own counsel as to their precise nature.
September (always marking the sad end of summer break), as has so often been the case, was an unmixed market disaster, and October, given the forgoing, promises to be a wild ride.
The markets are migrating downward, and each of you must decide whether you wish to attempt to climb the steps that it is descending. My sense is that anyone attempting to do so might just get paid for their troubles somewhere down the road. But as for me, I’d wait a spell before heaving my ass upwards. Those hormonal high schoolers are still trampling down the stairs, and it might be best to wait them out. It also bears mention that we must take this journey without the divine guidance of the lovely Ms. Dennis or the perfectly formed Mr. Portier (both are now dead). Yup, we’re on our own.
But isn’t self-reliance the lesson they tried to impart to their students anyway? I think it’s enshrined somewhere — perhaps on a ‘67 blackboard, and, if we can either avoid or evade those trampling adolescent feet eager to embrace the freedoms of the urban underworld, perhaps we can still learn it.
It’ll do us no harm trying, at any rate, so grab them rails and head where you will.
TIMSHEL