“Evening, time to get away”
The Moody Blues: Days of Future Passed
File this week’s theme under the burgeoning, nigh-overflowing, low hanging fruit section. It is, of course, a titular inversion of the iconic 1985 film “Back to the Future”. The accompanying quote comes from a forgettable Moody Blues album (which nonetheless features the band’s two greatest hits) of a similar motif.
But there’s lots going on which I believe tethers what has already transpired to what has yet to come — a notion which occurred to me as I became aware of a couple of bittersweet but otherwise irrelevant developments that revealed themselves last week.
First, filmmakers from the History Channel apparently discovered a large portion of the fuselage of the ill-fated Space Shuttle Challenger – off the coast of Florida – where it blew to pieces minutes after liftoff, as well as approximately 6.5 months after the release of “Back to the Future”. Moreover, the ever-irrepressible Boulder, CO Police are re-opening the JonBenet case — the poor little seraphine, who, much to everyone’s horror, was found murdered in her basement on Boxing Day, 1996.
And I thought everyone had concluded that it was the brother that did her.
Meantime, the markets themselves served up some futuristic nostalgia for us this past week, with the lightening quick demise of crypto giant FTX, recalling such epic collapses as those of Enron, Lehman Brothers, Bear Stearns and MF Global.
The death throes of each of the above-mentioned financial ghosts could be heard for months, whereas FTX went from crypto colossus to computerized coinage corpse in just over ’72 short hours.
Isn’t technology development a wonder to contemplate?
Well, yes and no. Modern transaction processing and telecommunications protocols undoubtedly hastened the euthanizing of FTX, but the underlying story is as old as civilization itself. It is an Old School tale of excess leverage, hubris, mismanagement, and misappropriation of funds.
Specifically, FTX used the coins it sold to customers, which were believed by the latter to be held in sacred custody, to fund its own speculations. What could possibly go wrong there? Well, when the levered portfolios went sideways, the coins themselves became worthless, and with them, the value of the issuing enterprise.
Kinda like Enron, with the creepy, additional similarity that, shortly before they collapsed, each company bought the naming rights to high profile sport stadiums.
Enron imploded fifteen years ago – arguably a simpler time. But to me, the tightest parallel is to MF Global, the misanthropic derivatives trading firm that foundered in rapid fashion when levered speculations moved dramatically against its interests.
Like MF Global, FTX committed the additional unpardonable transgression of using client funds to collateralize its own risk-taking activities. In case you were unclear on the concept – this is a deadly sin. The derivatives markets rest on the principal of segregation of client funds – explicitly precluding their use for any commercial operation which would put them at speculative, proprietary risk.
But there is this difference. The fatal MF trades were generationally attractive investments. At the direction of their chieftain: former Goldman Sachs Chair/New Jersey Senator/New Jersey Governor Jon Corzine, the firm bet the ranch on the likelihood that sovereign debt rates in Southern Europe – which, at the time, approached and sometimes exceeded double digits, would come careening down.
Well, they did. All the way to near, or, in some cases, below zero. But not before Corzine’s former buddies at Goldman and elsewhere had squeezed the firm into oblivion. There were many object lessons in this, but the following is also clear. Had ‘Zine been able to hold onto them trades, he would’ve broke the bank. But what edge did FTX (or, more specifically, its sister company Alameda Research) have with respect to its levered crypto speculations? Beats the hell out of me.
The FTX death rattle and immediate aftermath also bring us forward to the past. Desperate, ultimately unsuccessful attempts to fall into the saving embrace of heretofore hated competitors. Postmortem fallout – yet to be fully revealed — featuring the crippling, if not all out demolition of proximate enterprises that had transacted with the recently departed organization. A legion of disenfranchised individual investors who can now only hope (and wait) for a return of a small portion of their capital. And, certainly on the horizon, some smart Wall Street guys who will swoop in, grab these claims at pennies on the dollar, and stand a fair chance of cashing in for years to come.
Certain markets wobbled on the demise of FTX, but others were untroubled. The Equity Complex experienced its best day in a couple of years on Thursday – ostensibly on a docile CPI report that told of a drop in the year-over-year rate to 7.7%. So, we’re ahead to the past Inflation-wise as well. Back to levels last seen this past January.
The late week, uber-aggressive rally has the look and feel of an old-school short squeeze.
But we must also remember this, my McFlys: short squeezes, like so many other elements of our existence, are only identifiable in the rear-view-mirror; we won’t know if this here rally is legit or fugazi unless (until?) the market sells off yet again.
Reticent though I am to bring up the subject, the recently (nearly) completed election cycle also brings us forward to days gone by. Whatever the final result, we’re looking at a government with elected officials and associated constituencies deeply at odds with one another. But here’s the good news: this configuration virtually ensures they won’t be able to do much incremental damage. And for this we can truly rejoice because Lord knows they’ve certainly done enough to vex us already.
I also must wearily join the chorus of complaint as to the inability of the system to deliver a vote count in a timely, accurate fashion. Which is particularly mortifying considering that backwater jurisdictions such as Brazil and Florida are able to complete the process in a matter of hours.
To my everlasting shame, I also find myself unable to resist the temptation to deliver my political synopsis of the (still-undetermined) outcome. First, I’m praying that the Republicans are able to recapture the House. Laying aside any party preferences, my hopes in this regard derive from my strong belief that the last thing we need during these troubled times is one party – either party – wielding explicit control over the action in Washington.
I also (here from a more partisan perspective) am pleased with the prospects for the next political cycle. It is now clear that Trump Derangement Syndrome has hit the Big Guy himself. He positioned himself to take credit for a GOP rout that he was sure would come to pass. But failed to fully consider the contingency that the rout would not be forthcoming. He’s absolving himself of all blame now, but not with any particular effectiveness. And his post-election rants against those who are supposed to be his political allies should have the whole country calling for the butterfly nets to be placed above his enormous neck.
With a little luck, we may be able to deem him gonzo. Meanwhile, on the other side of the ledger, the guy with the ‘70s style aviator glasses and leather jacket is strutting about like he owns the place. His bluish fellows clearly wish to banish him, but now will face some incremental difficulty in doing so.
None of them are particularly well-positioned. In the lead-up to the voting, they artificially suppressed energy prices and ginned up ~trillion-dollar giveaways to favored constituencies such as relatively affluent student loan obligors, microchip manufacturers, and Green Energy vendors. A judge just put the kibosh on the first of these. And if the GOP does indeed cop the ‘ouse, neither of the last two stand a snowball’s chance in Florida (or Rio) of obtaining funding.
And, as investors, we should be doing a rain dance for a GOP Congress. We need to control Ways and Means/Appropriations, or, I fear, all hell will break loose for risk assets. As I type this out, the Repubs need to win only 6 or 7 of the remaining 29 uncalled races to secure a majority. Should be doable, but with the Dems continuing to draw last minute inside straights, one has cause to wonder.
In any event, it looks like a hard slog for the capital markets. Inflation is still nearly 4x the Fed’s stated target. Our Central Bank remains on a warpath and seems intent upon ginning up a recession. They’re likely to succeed. Corporate earnings are on the down. The country and the world are awash in debt. War still rages in Eastern Europe. Our enemies in the Middle and Far East continue to menace.
But when was it ever easy? Never, is the answer. Except in the rear-view mirror. What lies ahead, from many perspectives, looks indeed like episodes from the recent and distant past.
But as I type this, it’s evening, and time to get away. I’m locked out of my FTX account, where I keep my vast fortune. I’ve got the Moody Blues on my re-modeled turntable, but “Days of Future Passed” is full of scratches (how did that happen?) – particularly on the smarmy “Knights in White Satin” track.
I think I’ll switch to a better Moody Blues record: “In Search of the Lost Chord”. And my fave Moody’s song: “Ride My See Saw”. Seems appropriate for these nostalgic, futuristic times.
Also got my VHS all teed up, and if you don’t know what I’m watching, you ain’t paying attention.
TIMSHEL