In the second of a series of themes deriving from Presidential Experience, I draw your attention to an anecdote attributed to the singular Abraham Lincoln, telling of a man attempting to mount a horse so rambunctious that it threw its back hoof into the stirrup. Whereupon the man exclaims “well, if you’re gonna get on, I’m getting off”.
The context of the yarn was Lincoln’s inability to compel George B. McClellan — Commanding General of the Army of the Potomac — to adhere to the military chain of command. There are other examples of this in U.S. History – Patton in Sicily, MacArthur in Korea, come to mind.
As do some episodes in the experience of the newly indicted 45. There was, of course, the unfortunate, post-election saga of the Chairman of the Joint Chiefs of Staff establishing direct communication Chinese Leadership, to assure them that he’d give them a heads up if the Big Guy took a notion to lob a massive orange ICBM their way.
More recently, it seems that DJT cannot rally his MAGA army to generate even the semblance of a respectable protest – much less take to the streets with pitchforks and torches – as he compelled them to do in the lead up and immediate aftermath of a New York DA slapping 34 counts on his sorry ass. He has, to me, never looked like more of a Tin Foil Hat Commander, leading an army of wooden soldiers. And that, given his history, is saying a great deal indeed.
However, in each of the above-mentioned cases, the lesson is plainly this – in military and other affairs, if a horse is trying to ride itself, other riders must dismount and beg off.
All of this comes to mind as Q1 ’23 comes (from some perspectives mercifully) to a close. If you hung around the circles that I haunt you wouldn’t suspect this, but our equity indices (to which I have, for many years, assigned military handles) are all in significant rally configuration. General Dow crossed again into positive territory on Friday; the Gallant 500 gained a respectable if unspectacular 7%. All of which was upstaged by Captain Naz — up nearly 17% and annualizing at a spiffy 86%.
If this continues, I may just kick The Captain upstairs – to Major or even Colonel. Or at least send him a medal like the Distinguished Service Cross.
And all this in a three-month period that featured a banking crisis, a crypto crisis, nigh-massive layoffs in the tech sector, an unrelentingly severe and continuing set of rate hikes, and other assorted dainties. Throughout, the market has somehow surged forward, but it not been an easy steed to ride, and (again in my world) upside capture has been elusive.
As we enter Q2, the several questions confront us. Are equestrian investors riding these ponies? Are they, alternatively, riding themselves? And either way, is now a good time to climb on board and commence galloping?
I am reticent to sanction this action. And I encourage all those out there that monitor my opinion to take care.
We can take some perverse comfort the reality that the dreary, late-quarter information vacuum has come to an end, and that we will soon be on the receiving end of an onslaught of important data. For the most part, though, that’s a few days off, and in the interim, of course, we must divide our attentions to adhere to the solemn rituals of Passover and Easter. Each teaches lessons of Salvation and Resurrection, from which we can certainly benefit in these trying times.
The release of the latest Macro Statistics, Earnings Outlooks and other key information points won’t, indeed, commence for several days. In the meanwhile, we can perhaps be glad that the overwrought, over-analyzed “banking crisis” has, if not subsided, at least take a pause.
But it could certainly re-emerge – particularly with renewed Fixed Income volatility. Bank portfolios, mapped to a “Held to Maturity” designation, have grown at an alarming rate, and we have no visibility into the authentic value of these holdings:
Somebody please help me here. Can I possibly be reading this graph correctly?
Because what I see is a quintupling of the amount of assets on bank balance sheets which: a) they are not permitted to sell; and b) are therefore not obligated to mark to their true market value – all in three short years.
No doubt a good deal of this is driven by all that fabulous QE the Federales laid on us since the lockdowns (now, unthinkably, three years behind us). But – not gonna lie – this makes me somewhat apprehensive.
Bloomberg estimates the associated losses on these asserts at ~$620B – somehow down from even greater, more gruesome heights – with the recovery of Fixed Income assets caused by declining interest rates. Notably, this amount is > 25% of the industry’s entire capitalization, which, as is the case with so many other sectors, is dominated by a handful of institutions (JPM, BofA, Citi, Wells and the recently worrying Schwab). However, the infallible Nouriel Roubini estimates these losses at > 2.5x this figure. If he’s right, and the losses do indeed approach $2T, it implies that, for the most part, these HtM portfolios are worthless.
I doubt this is the case. But nobody knows.
It is perhaps fortunate that according to longstanding protocol, the banking sector is first in the reporting queue for Earnings and Forward Guidance. In the wake of SVB, Signature, Credit Suisse, etc., it should be a fascinating sequence.
But it is more than a week away.
A renewed rise in interest rates and/or a widening of credit spreads (perhaps catalyzed by a resumption of CS-like raids on troubled financial institutions) would certainly cause these depository institution losses to swell again.
In terms of the former, ubiquitous inflation trends remain at the center of the saga. Official government statistics releases are a couple of weeks off, but I wouldn’t expect any miracles here. Particularly, as was reported Sunday, OPEC has just announced a ~1.5M bbl cut in daily production. Even before this surprise move, I sensed that the Crude Oil was oversold, and this action certainly won’t detract from that viewpoint. Further, if the Energy Commodity Complex regains upward pricing momentum, it’s almost certain to goose Inflation trends, in which case Interest Rates could indeed rise anew.
This, in turn, would be dilutive to the assets swelling up inside depository institution balance sheets. But what you can take to the bank is that they will say nothing about losses in their Held-to-Maturity portfolios. Because they don’t have to. And among the certainties in this world is that banks don’t do anything they don’t have to. If you doubt this, just walk into a local branch try applying for a mortgage. Or a loan of any kind.
Still and all, it’s heartening to observe a rally in risk assets – if for no other reason than the opposite condition is so wearying and depressing.
And it may indeed continue. But if it does, I will attribute it to a decline in the risk premium – a realization, among other things, that the Developed World Banking Complex is not on the verge of collapse. This, of course, is a welcome development, but should not be mistaken for the kind of rally that is the stuff of our dreams. One that is driven by economic vigor, possibility, and opportunity.
Because that’s not where we’re at. I cannot think of a single sector where Senior Managements are making bold, assertive plans for future growth. Not Technology. Media. Telecommunications. Not Industrials. Not Financials. Not Health Sciences. Not Consumer (Staple or Discretionary). All, from my vantage point, are playing defense. Waiting until the massive, if undefinable mess that we’ve made for ourselves resolves itself, or, at minimum, dissipates.
Alas, my friends, we seemed to have stepped in it. And I’m not talking about a stirrup. It devolves to us to clean it up, and then to determine whether we choose to ride this mount or walk.
But wherever we’re going, we’ve got to get there somehow. And about the best advice I can offer is to take care that we are sure that we are in control of our conveyances – that we are riding them and not the other way around.
Trust me here my brothers and sisters — as an introductory risk management framework, one could do a lot worse than beginning from there.
TIMSHEL