You Break It, You Buy It”
The Pottery Barn (wholly owned subsidiary of Williams-Sonoma, Inc.) Rule
As we approach Wednesday’s (scarcely lamented) 35th anniversary of the (quaint by current standards of market trauma) 1987 Crash, three questions come to mind: a) is the market broken? b) did we break it? and c) if the answer to a) and b) is yes, are we compelled to buy it?
Our titular colloquialism has been around for ages – perhaps because it seems like an entirely rational protocol. In recent times, Bob Woodward, quoting Colin Powell, described it as a warning to Bush II about his then-contemplated (but not yet executed) Iraqi invasion (turns out, after a fashion, he was right). That was ’03; a few years later, in a nod to the Company’s newly installed policy to this effect, it became known as the Pottery Barn Rule.
Which is fine. Except for this: Pottery Barn (now a wholly owned subsidiary of Williams-Sonoma, Inc.) does not, and never has had, such a policy. Instead, it writes off broken merch.
Kinda like the Fed. But I get ahead of myself.
As alert readers recall, I personally lived up to this standard, having purchased my first home after crashing my foot through its ceiling during an Open House. All good; we wanted the place anyway.
However, for our present purposes, in order to measure the applicability of our axiom we must determine whether (or not) the market is broken. So, is it, or isn’t it?
Well, yes.
Indications that it is are everywhere one chooses to look, with perhaps the most visible of these perhaps emanating from the U.K., where shards of market glass hurtle across grey skies, where economic engines groan, flutter, and sputter, where financial springs and wires pop out of their casings.
The sequence over there has been so rapid and multi-faceted that I suspect it’s beyond the reach of human description. But let’s try. Liz II died – immediately after putting her namesake (Liz III) in charge of the operation. The latter wasted no time in implementing a stone-cold Thatcher-style Supply Side Economics program. Brit markets went into free-fall, the most pressing consequence of which was outright panic in its once vaunted/now deeply impaired Pension System.
Whereupon Liz III and the Bank of England immediately turned tail, reversing course on both tax cuts and monetary policy. Whether or not this “fixes” the U.K. Pension System remains to be seen. Like their counterparts across the globe, the custodians of British retirement funds have been chasing yield in all the wrong places for eons. But this much is indisputable: their constituents now have a free hand to impose the Pottery Barn Rule on their own government.
Contemporaneously, Former Fed Chair Ben Bern copped 1/3rd of an Economics Nobel, prompting partially justifiable outrage from those who blame our current mess on his overly enthusiastic QE extravaganza. No matter, say the folks in Scandinavia; we gave him the award for an obscure paper he wrote in the 1980s.
In a touch of irony, his Nobel coronation came immediately in advance of last week’s Inflation reports, which was neither of them none too good. They didn’t rocket up, but neither, it is to be feared, did they come down — >2x increase in interest rates across the curve notwithstanding.
The initial reaction to these reports was anything but enthusiastic; particularly problematic was the rise in the oxymoronic “core” rate, which excludes the Food and Energy that would seem to be at the essential (core?) epicenter of the human pricing matrix.
The early returns suggest that the Fed’s aggressive Inflation busting moves have been effective, but only partially so. They seem to have cooled the economy (e.g. Retail Sales flat for September) without much denting Inflation itself. All of which raises the following question: are Central Banks in general broken? Well, I think we can draw appropriate conclusions about the Bank of England. Meanwhile, the Bank of Japan’s stubborn adherence to sub-basement rates has not only collapsed the JPY but has so paralyzed their country’s bond market that for the second straight week, days have passed with no trades in this once most liquid of financial instruments.
But the question remains: is the Fed broken? I won’t pass judgment just yet. However, for the record, given their $9T Balance Sheet and the carnage in the markets in which they invest, their mark-tomarket losses since the July highs most certainly approach $1T or more. This is against an historical annualized P/L of ~$25B, — implying a 4000% earnings reversal in one rolling quarter. And it could get worse. Were the Fed not a public utility, heads at the top of the structure would no doubt roll, and former chairperson(s), instead of preparing speeches for the top honor of its kind in the world, would be consulting attorneys and girding themselves for a mountain of lawsuits.
Equity indices fell nominally after Wednesday’s PPI drop, and positively collapsed in the wake of Thursday’s Consumer Price Report. But then, late morning, they aggressively reversed themselves. By close, the Gallant 500 surged nearly 6% above its bottom feeder lows; Captain Naz nearly 7%.
This fleeting V-bottom had all the trappings of a galactic short squeeze, and one could indeed hear the voices of traders across the spectrum rising an octave or two as the proceedings unfolded.
At the depths of Thursday morning despair, NAZ was knocking, from above, at the threshold of 10,000, and, on Friday, after yielding a good portion of the short-lived rally, is within visible distance of 10K again. And I couldn’t help recalling, a few years back when it breached this milestone to the upside. Bloomberg Radio held multi-day celebrations. They passed out hats on the floor of the Exchange (not that there actually is a floor).
And I couldn’t help but wonder whether somebody – maybe a MAGA haberdasher with an enthusiastically-rendered but now depressingly excessive inventory, might not want to convert them, in retro fashion, into reclaimed NAZ 10K head toppers.
So, are equity markets broken? They certainly are not functioning like well-oiled machines, but they have arguably experienced worse intervals and survived to tell the tale. We should know a great deal more over the next month — as the earnings cycle unfolds. To be redundant, I’ll be more interested in forward guidance than the actual income figures themselves.
I reckon the likely outcomes range from outright disaster to “meh”.
Moving along, we arrive, inevitably, at the Energy Complex. Is it broken? Well, oil trading whale Pierre Andurand not only thinks so, but has said so. And he may be right. WTI Crude has experienced an approximate 100% range over the last nine months. Our own government has kneecapped the domestic industry.
Long-standing Middle Eastern import outlets are pulling back. Russia is in an arguably existential military battle, its feelings are hurt by its main export clients, and, as such, it not likely to pitch in helpfully. We have depleted our strategic reserves and have, with mixed success, come hat in hand to Banana Republics for assistance.
For of the above, Crude is trading >30% below its early summer highs.
The price of American and European Natural Gas has plunged in recent weeks – all in advance of the inexorable, seasonal mercury drop, and I can observe no trade with better risk reward than getting long the Nat Gas market at current prices.
More generally, energy markets do indeed appear to have decoupled from physical fundamentals and seem to be trading on little else but a wicked recession hypothesis.
Well, maybe so, but it sure seems to me like gas may be in high demand this winter – both here and abroad, that supply is constrained, and that given this combination, the pricing dynamics are, to some extent, broken.
Finally, there are the credit markets. At the end of the week, and with little fanfare, the benchmark basket of Investment Grade Corporate Debt broke through even pandemic pricing levels:
Investment Grade Debt: Not Lately a Great Investment:
Meantime, and more prominently featured, mortgage rates have careened to thresholds last seen a couple of years after G.W.B.’s ill-advised “Mission Accomplished” photo op:
It all makes me nostalgic for 2006. When liar loans ruled, and banks were happily issuing no-moneydown mortgages, approaching and topping seven figures, to blind grandmothers, living on Social Security. When financial engineers packaged these debts, rating agencies sprinkled them with Aaa ratings, and investment banks sold them to (U.K.?) pension funds that still carry the burdens of there losses to this day.
Yes, I pine for ’06 and wish we could turn back time, because, after all, what was better than ’06? Everybody got rich; everybody got laid (er, paid).
Though there were some clairvoyant warnings about what would follow, markets seemed anything but broken in ’06.
Now, it’s all a bit different.
But far be it from me to engage in gratuitous hyperbole.
Let’s thus conclude that markets are kinda broken, but not completely so.
Who broke them? Well, that’s hard to say. But somewhere in there, we bear some responsibility, because there is no one else to do so.
And, in result, while we kinda gotta buy ‘em, we also kinda don’t.
And, in fact, right here (except for perhaps Nat Gas), I kinda wouldn’t.
Buy ‘em, that is.
After all, the capital markets, while difficult to define, aren’t the Pottery Barn, are not, for instance, a wholly owned subsidiary of Williams-Sonoma, Inc.
But whatever they are, let’s hope their made of sterner stuff than porcelain, clay and other materials that can be shattered by an inadvertent flick of the wrist or elbow, and no one under heaven to write them off or take them back.
TIMSHEL