“Mr. Praline: Now that’s what I call a dead parrot.

Owner: No, no…..No, ‘e’s stunned!

Mr. Praline: STUNNED?!?

Owner: Yeah! You stunned him, just as he was wakin’ up! Norwegian Blues stun easily, major.

Mr. Praline: Um…now look…now look, mate, I’ve definitely ‘ad enough of this. That parrot is definitely
deceased, and when I purchased it not ‘alf an hour ago, you assured me that its total lack of
movement was due to it bein’ tired and shagged out following a prolonged squawk.

Owner: Well, he’s…he’s, ah…probably pining for the fjords.

Mr. Praline: PININ’ for the FJORDS?!?!?!? What kind of talk is that?, look, why did he fall flat on his
back the moment I got ‘im home?

Owner: The Norwegian Blue prefers keepin’ on it’s back! Remarkable bird, id’nit, squire? Lovely
plumage!

Mr. Praline: Look, I took the liberty of examining that parrot when I got it home, and I discovered the
only reason that it had been sitting on its perch in the first place was that it had been NAILED there.

(pause)

Owner: Well, o’course it was nailed there! If I hadn’t nailed that bird down, it would have nuzzled up
to those bars, bent ’em apart with its beak, and VOOM! Feeweeweewee!

Mr. Praline: “VOOM”?!? Mate, this bird wouldn’t “voom” if you put four million volts through it! ‘E’s
bleedin’ demised!

Owner: No no! ‘E’s pining!

Mr. Praline: ‘E’s not pinin’! ‘E’s passed on! This parrot is no more! He has ceased to be! ‘E’s expired
and gone to meet ‘is maker! ‘E’s a stiff! Bereft of life, ‘e rests in peace! If you hadn’t nailed ‘im to the
perch ‘e’d be pushing up the daisies! ‘Is metabolic processes are now ‘istory! ‘E’s off the twig! ‘E’s
kicked the bucket, ‘e’s shuffled off ‘is mortal coil, run down the curtain and joined the bleedin’ choir
invisible!! THIS IS AN EX-PARROT!”

Monty Python

I couldn’t resist the long opening quote here, and that’s not the totality of my transgressions. Because I lifted the reference to the iconic, Pythonic “Dead Parrot” sketch, I think, from a recent editorial in the WSJ.

It can be hoped, at any rate, that y’all get the gist of the interplay between the justifiably vexed Mr. Praline and the dissembling (unnamed) pet shop owner. The latter sells the former a dead parrot, and then, upon the former’s complaint, he heroically sticks to his story.

I admire him for this.

Among the alternative realities he lays before the misanthropic Mr. P is that the bird, exhausted after a prolonged squawk, is “pinin’ for the fjords”. But I think, with his rant at the end, Mr. P resolves the argument in his own favor.

The bird is dead. But it causes me to wonder whether, this reality firmly established, he could not also be both exhausted after a prolong squawk, and, in fact, engaged in some authentic fjord-pining.

Moreover, it seems to me to be a rather timely matter to consider, particularly as it pertains to this past week’s most salient event – the FOMC meeting/rate announcement, and Fed Chair Jay(bird) Powell’s comments during the presser that immediately ensued.

Our chief monetary policy orinth first disappointed his constituents by going the full smash 75, but then, in his written remarks, managed to bouy buoyancy-bereft spirits with the following statement: “As we come closer to that level and move further into restrictive territory, the question of speed becomes less important. … And that’s why I’ve said at the last two press conferences that at some point it will be important to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made.”

This was the “tell” that investors were seeking. Equities and Treasuries rallied in Pavlovian fashion.

Then came the presser, a decidedly avian affair, during which, however, there were neither doves nor parrots to be found. Only hawks. And my extensive research corroborates that this lastmentioned predatory bird will indeed feast on the two more docile species mentioned just before. So it went with the presser, during which Jay-Hawk Powell somehow managed to be loud and clear – lovely plumage extending from his beak notwithstanding.

Investors, reacting to his prolonged, beak-stuffed squawking and knowing they’re next, responded in pain and fright. He made it clear that: a) what he fears most is pausing too early; b) his objective is the time-honored (but perhaps highly aspirational) 2% Inflation target; and c) that the rest of us better buckle in for some unpleasantness, because we are galaxies away from achieving b).

In short, he took the opposite tack of that scamp pet shop owner. Channeling instead Mr. P, he informed us that the pausing parrot has, for now, joined the bleedin’ choir invisible.

This certainly clipped the wings of the buying crowd, which was flat on its back for the remainder of Wednesday and all Thursday, before being hoisted up and nailed to its perch during Friday’s session.

I was surprised as anyone at Parrot Powell’s Presser 180, feeling certain that he directly intended, in his formal statement, to calm the mournful warblings of beleaguered investors, and, by so calming, bestow some illusory life upon comatose capital markets. I was wrong.

I wonder what his game is and can only conjecture that politics is deeply in play with respect to his pet shop owner policy plays.

Specifically, he has now raised rates from zero to ~4% in eight short months and has made clear he ain’t done yet. From a political perspective (his presumed political perspective; he is, after all a Yellen acolyte) the timing is passing unfortunate. He has swooped in to ground the economy right up to the point of an important election, with (if the perfidious polls can be believed) his side feeling wicked gravitational pull. His friend and mentors must be quite angry with him.

But what’s done is done and cannot be undone. The elevated rates are upon us, and the economy will feel their presence. Here’s hoping these moves will help tame Inflation, and for all I know they probably will (or should).

But history instructs us that these levels of Inflation almost never dissipate without an accompanying Recession, which I believe is part of the Fed’s calculus. Better, or so I assume they think, to bring it about, in, say, the early innings of ’23 than a year later, when it might cause even greater partisan damage.

That’s my hypothesis, at any rate. And if it so plays out, we’d best strap ourselves in for (oxymoron warning) an immediate accelerated economic slowdown.

All of which offers a bleak prognosis for risk assets. As perhaps the most overworn of market platitudes admonishes us: “don’t fight the Fed”. I made the mistake of operating against this wisdom in the wake of the lockdowns. Even at the Q2/20 lows, I figure we had much further to drop. But then the Fed came in with its $4.5 Tril, and y’all know what happened next.

Well, if you don’t want to fight the Fed as it giveth, it certainly does not pay to do so as it taketh away.

It presents quite a quandary, no? Because there’s other menacing stuff out there that has nothing to do with Fed policy. We can feel the rumblings of economic deceleration from several sources, and I’ll offer a few visuals in support of these fears.

Q4 projected Earnings Growth is not only careening to terra firma, but has actually crashed through the zero boundary:

As we wearily turn towards Q4 economic estimates, Wall Street economists (who are paid to shade to the chipper in their chirping) are prognosticating an approximate goose egg:

Inflation figures drop over the next several days, and, rather than approaching 2 handles, they’re looking more like 7s and 8s. And, ever so quietly, this is reflected in commodity prices. Brent Crude is creeping back near 100, and the broader basket of Oils, Grains, Metals, and the like, is flapping its wings towards liftoff velocity:

If it all makes you pine for the fjords, know that you’re in good company (myself included).

Yes, our parrot is dead, off its twig. And our pet shop owner is only too prone to sell us another of similar status.

But we ourselves remain among the quick, and, as I conclude this prolonged squawk, I can only advise you to keep your feet firmly nailed to whatever perch you presently occupy. If you cannot do this for yourself, perhaps there’s a perfidious pet shop owner available to assist you.

If we can keep ourselves upright, perhaps, defying laws of logic, biology, physics, and economics, we will emerge to a day when we can rise again.

TIMSHEL

“Bis dat qui cito dat”

Miguel de Cervantes

“He gives twice that gives soon, i.e., he will soon be called to give again.”

Benjamin Franklin

Let’s work our brains a bit, shall we? Our title phrase offers significant food for thought but must be analyzed carefully, as it can be interpreted in multiple ways.

Understanding the first of these – indisputably the more hopeful of the two — compels us to brush off our Latin, which, I fear, for most of us, is probably a bit rusty. It comes from Cervantes’ magnificent “Don Quixote” and suggests that rapid largesse dispenses a double gift – precluding the need for multiple solicitations and placing the associated fruits immediately in the hands of the recipient.

In a more perfect world, I’d be able to resist the temptation to refer that most ubiquitous of DQ images: that of the title character tilting his lance at windmills. Moreover, as I am unable to ignore this glib parallel, I reserve the right to bring it forward again a bit further down the road.

“Don Quixote” was published in two volumes in the first part of the 17th Century. Over a hundred years later, that singular American statesmen, philosopher, inventor, and wit – Ben Franklin – put his own spin on the notion, pointing out that a too rapid giving leads to a near-certainty that the giver will be compelled to give again.

Both interpretations, so it occurs to me, appear to be valid.

Applying this to our long-time and current obsessions, investors have acclimated themselves to favors, given rapidly and repeatedly, for at least the last 15 years; arguably longer. It may have started about two decades ago, when politicians and bureaucrats in Washington decided to subsidize the mortgage markets – in a misguided quest (Impossible Dream?) to confer the blessings of home ownership on broader swaths of the electorate than had heretofore enjoyed the privilege. Lots of folks got their piece of the rock – albeit temporarily and, for many, at prohibitive cost. Wall Street turned these mortgages (and other forms of loans) into sparkly, fee-rich financial instruments, and everyone made a bundle.

Until they didn’t.

The packaged loans ultimately proved themselves to be about as flimsy as Don Quixote’s homespun armor – unable to withstand anything but the feeblest of assaults. When they shattered, the whole financial earth shook, placing at risk much of the core of the capital economy.

Cue the Fed and its magic money-printing machines. Hark the tinkling of the fiscal sleighbells.

Within months, we were the recipients of glittery, gravity-defying, green gravy, bestowed upon us, each month, for > 5 years. Moreover, these care packages grew as the decade of the 10s unfolded.

By the end of ‘13, the Gallant 500 and Captain Naz had tripled. All was good and quiet in the land.

Lots of stuff happened in the intervening years, including a global pandemic that crippled the world’s economy for quite a spell (and is still – truth be told – somewhat of a pain in the ass). Here’s where the Ben Frank side of the equation kicks in. The Government was compelled to give again. And boy oh boy did it come through. The Fed shelled out ~$4.5 Trillion of manufactured money, and used it to buy its own publicly traded securities. Its elected counterparts, determined to surpass the bureaubankers, managed to indeed excel them, but only by a measly $100 Billion ($4.6T). Of course, it would’ve been more had not meanies McConnell, Manchin and others not veered from script.

Be that as it may, the covid Christmas spirit extended for more than 18 months in Equity-land and more than two years in the realms of Fixed Income. The former more than doubled from its viral lows; and the latter saw benchmark yields plunge to deeply negative at the short end of the Treasury Curve, and < 1% at the longer end.

And then the giving, which had certainly been historic in its scope and proportions, stopped. The Fed switched off the Money Machine, began allowing the assets on its Balance Sheet to mature without replacement, and, in cruel coup de grace, started to jack up its own terms for lending.

The White House and Congress have tried to fill the breach, allocating another couple tril – earmarked to favored constituencies – Green Energy Purveyors, Scholar Borrowers, and Microchip Manufactures (FFS!). But these offerings are currently subject to the caprices of Congressional appropriation and the Courts, and their ultimately delivery is thus very much in doubt.

Investors, feelings and sensibilities injured, have shown their wroth. Been, until lately, putting stocks, bonds, crypto, crude oil, nat gas (?) on fire sale.

My own notion is that they were channeling their inner Ben Franklin, and figuring that if they moped around enough, they could force the re-ignition of the giving engines anew.

Who knows? It may even work, and we’ll find out more this week when the FOMC lays down its latest round of righteous wisdom on us. Official Fed Watch metrics indicate an 80% likelihood of another full-smash 75 bp hike – which would place Fed Funds on the threshold of 4%. Hard as it is to believe, as recently as this past February, the Fed Effective Rate was Zero:

All this Fed Giveth/Fed Taketh Away folderal has the yield curve tied up in knots. Never (I believe in anyone’s living experience) has the government been forced to pay a higher rate to issue 6-month bills than it does for thirty-year bonds:

And thus investors, as depicted in the following graph, can be forgiven if they are confused as to how best to position themselves in the Treasury markets:

What any of this means is anyone’s guess; yours is certainly as good as mine.

I do like the color scheme, though. So, there’s that.

But I hate to see our investment warriors so at odds with one another as to whether they wish to be long or short, and where, upon the Treasury Curve, they wish to be so.

I reckon it all boils down to whether the Fed, who certainly gave early anytime it was remotely compelled to do so, will find itself obligated to give again. The consensus is that it will; the main question is when.

Maybe, someday, we can address the larger, philosophical issue as to whether dual or multiple largesse cycles is a blessing or a curse, — to the giver or the recipient.

Cervantes and Franklin disagreed on this score, but both are dead, and the debate has thus never been resolved. Don Quixote and Poor Richard live on, though, and it may be well to conclude that an overabundance of the windmill tilting proclivities of the former, places us at risk of devolving into a condition of poverty, as indicated in the modifier of the latter.

Don’t do it is my advice, given quickly and with the hope that I am not obliged to give it twice.

TIMSHEL

“If I am occasionally a little over-dressed, I make up for it by being always immensely over-educated.”

Oscar Wilde, “The Importance of Being Ernest”

In a flush of admitted (if partial) desperation, we turn to Oscar Wilde. But we will not dwell on his works and will entirely bypass any reference to his private life. Further, while I am unable to comment on his sartorial standing, in terms of his claims of overeducation, either its true or, having attended both Trinity College (Dublin) and Magdalen College (Oxford), it wasn’t for lack of trying.

“The Importance of Being Ernest” is a fun little romp, but Wilde is perhaps better known for his dark, disturbing novel “The Picture of Dorian Grey”, which tells of a handsome young man who makes a Faustian bargain to transfer the aging of his person to his exquisitely rendered portrait, while he himself remains unblemished by the marks of time, debauchery, and hard experience.

One wonders if many investors wouldn’t accept this trade with respect to their portfolio summaries.

Meantime, the eternal debate – whether it is better to be overdressed or underdressed – has never been firmly settled. Across my monitoring of the subject, the consensus has generally tilted towards the former: one might be embarrassed about wearing a tux or formal gown to an event where everyone else was rocking biz cas but would be less so than by showing up in flip flops to a cotilion.

However, that was then. Before lockdowns. Before the Jeffery Toobin episode. And, in the interim, I’m not entirely convinced that the tide hasn’t turned in favor of insufficiently formal attire as being the preferable transgression.

Naturally, one can apply the question to the state of the markets. Are they overdressed or underdressed, and, either way, which is the favored configuration? I’ve reflected on this and believe that the answer varies by market and jurisdiction. An inventory of the breakdown follows.

We begin, in time-honored fashion (dating back to last week), in the U.K. I’m not enough of a clothes horse to judge whether Madame Truss was over or underdressed, but I suspect the former. Because she was on the receiving end of a nasty dressing down, having been summarily defrocked, so to speak, of her Prime Ministership — her double fortnight reign standing as the shortest of any in the more than a ten-century history of British Parliamentary Government. What comes next no one knows. But her program has been certainly withdrawn in boddice ripping fashion. In result, English cross asset class finances have improved a titch. Whether they can sustain their recaptured vigor remains to be seen.

Our query also applies to the first world’s other most prominent island nation – Japan — and particularly to its benchmark currency pair: USDJPY, which breached the astonishing threshold of 150 earlier this past week – highest level since 1990.

In response, the normally ceremonial Bank of Japan decided to let its hair down a bit – intervening in such a way as to cause a neckline plunge to 146.

What is perhaps noteworthy about this is that it comes against backdrop of significant financial duress, which, time immemorial, tends redound to the benefit of the JPY. During the Big Crash, USDJPY fell to barely half of the elevated levels experienced last week. But this time ‘round, with global indebtedness more than double its pre-crash levels, with Inflation, rising interest rates, with economic pressure points too numerous to enumerate, nobody loves, nobody wants, the JPY.

Except for the BOJ, which was forced to throw a coverlet over its exposed loins at the end of last week.

Not to be forgotten in our tour of the fashion globe is China. Where, in an election the results of which nobody bothered to contest, Xi was anointed for another term. We’ll hope for the best here, but I will take some comfort in the stylish, western suit he rocked at his People’s Congress acceptance speech. Say what you will about Xi, but his accoutrements are most certainly an improvement over that drab, grey tunic that Mao used to wear.

Stateside, we revert to our own Fed. Is it over or under dressed? Well, across the summer and into the autumn, its appointments suggested that it was girding itself for a Napoleonic, winter battle for Moscow. It donned its heavy armor and its thermal underthings and advised its investing minions to do the same. All of which put a serious drag on risk assets.

Rumblings at the end of the week suggested that the Fed might be rethinking its wardrobe selections, that it might want to shed its heavy boots – rammed so recently, so repeatedly, so rudely, on the accelerator of monetary hawkishness. Our next glimpse at its prevailing fashion choices will arrive with November, when the suits at the FOMC stride down the Washingtonian runway. Meantime, investors, breathing heavy under the weight of its Fed-mandated vestements, reacted with delight at the mere rumor of such relief, ginning up the first weekly rally in, well, in quite a while.

But we anticipate ourselves.

Because, oxymoronically, Energy markets have taken the opposite tack, attiring themselves for an Endless Summer. Nat Gas in particular – both stateside and in Europe — continues to plunge:

Domestic and European Natural Gas: Perhaps Excessively Au Naturale?

I reckon somebody knows something here that I don’t. Because I believe these markets to be scandalously over-exposed. So much so, in fact, that I feel I must turn my virgin eyes away from these here charts.

Winter’s a-coming, and I fear without a few more layers of protection, this showing may transcend pure embarrassment and devolve to physical discomfort.

Maybe the folks in Wisconsin and Bavaria simply plan to turn down their thermostats and throw on extra sets of woolies this winter. But I suspect that if they don’t, buyers of these commodities will be the ones that end up dressed to the nines over the coming months.

Meanwhile, in the realms of Crude Oil, we’re emptying our strategic closets of late – in advance of an election where everyone wishes to look their best (what could go wrong there?). They are now at their lowest levels since the 1970s. Here’s hoping that we don’t soon find ourselves in a perverse construct where we’re all dressed up, with important destinations on our itinerary, but with no affordable means to transport ourselves from here to there.

All of which brings us to Equities. We are now entering the period where those most Imperial Emperors of our global corporations sashay forward to proclaim recent results and future tidings. We will thusly learn whether they channel the Hans Christian Anderson Fairy Tale – wallowing in their spiffed-up splendor until some poor innocent points out what no one else will say. Namely, that they are standing there naked.

In which case, upon this we will all agree – they will have been disastrously underdressed.

And investors, if early earnings returns can be fairly extrapolated, are not likely to be in a forgiving mood no matter what they say (or wear):

It all makes for a tricky wardrobe selection conundrum, but I recommend that, let others think what they might, you dress for comfort as events unfold. It would be foolish at this juncture to over accessorize your portfolios. Simplicity equates to elegance during these times, as it does – so the fashionistas inform me – across most of the interludes of our existence.

I have every hope and expectation that you’ll look fabulous in basic black (or blue).

But whether you can generate satisfactory returns is another matter, and one entirely above my pay grade.

TIMSHEL

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

I am indeed a little ashamed of this week’s mash up theme. Truth is, well into the weekend, I was drawing a blank as to what (borderline unhinged) spin I would put on this note, particularly against the current/pending mad rush of data flows and attendant (potential) market impacts. Some weeks the thematic riff jumps out at me, and my madness leaps, of its own accord, off the keyboard. Others it’s a desperate struggle against the glib, the trite, and the flat out boring.

I am typically easy on myself when the latter construct is ascendant. I’ve been pumping out this tripe – week in and week out – for more than 16 years. Some notes were always destined to be better than others.

And so it goes this week. I’ll cut myself some slack and proceed accordingly. So here goes.

I am a child of FM Radio: a forum consigned during my early youth to the audio backwaters but which emerged as a commercial and cultural force some time in the early/mid 1970s. My own associated experiences emanate from the sonic streams over Chicago, which I like to believe was a pioneering jurisdiction. First, there was Triad Radio – almost too weird for even those of us determined to seek out the strange. Then came WXRT – a magnificent outlet which at the outset only broadcast for six hours a night, whose disc jockeys would often fill the dead air with internal silences, but which could be counted on to unearth untrammeled, unexpected delights – from Ornette Coleman to out-takes from the Abbey Road sessions. Such fare is now widely available, but – trust me here kids – back in the deuce, it was rare and magnificent. It made us feel like radio listening gods.

Inevitably, though, FM Radio expanded and commercialized. Cars (most of which, I kid you not, were typically limited to AM mono functionality) began to blare out deafening stereophonic acid rock. Advertisers soon caught on and the whole venue turned to algorithmic, commercialized garbage.

The shark-jumping moments were manifold, but my mind fixes on the programming gimmicks that emerged. Pretty soon, every station was featuring such programs as a Sunday Morning “Breakfast with the Beatles”. One October day, I knew it was over. It was a Tuesday, and I was driving my kids to school. The local FM station was in the midst of its “Rocktober” schtick, and it was a Two-Fer Tuesday (back-to-back songs by a single artist) to boot. Topping it all off was the scheduled, contemporaneous, smarmy, obligatory, Zep-inspired “Get the Led Out”. So, of course, we were treated to a sequence of “Whole Lotta Love” followed by “The Immigrant Song”.

Rocktober/Two-fer Tuesday/Get the Led Out – a triple whammy of the blindingly unsubtle. I pondered whether the moment to shoot myself hadn’t truly come

As should be apparent, I resisted the temptation, found Napster, then Sirius, then Spotify. I rocked steady with each; meanwhile, Standard FM Radio continued its downward spiral.

But it is now October, and, for investors, the month promises to be rocky. So, while the pokey Rocktober Radio orgy continues unimpeded,10/22 indeed looks to me, from a market perspective, like (R)Oc(ky)tober. The sequence began with the biggest rally/subsequent selloff since the onset of the lockdowns – much of it centered around anticipation and reaction to Friday’s Job’s Report.

The consensus in its aftermath was that it was good – perhaps too good – at least for those hoping to see a cooling of the Fed’s rate-raising jets, and everyone bailed. Except the Fed, which, its if published statements can be believed, has no intention of changing, slowing or reversing course.

But I personally didn’t see too much here to cause a pre-Halloween yield-boosting fright. The base rate dropped a titch, mostly owing to a reduction in Labor Force Participation. A few tens of thousands of folks voluntarily bounced from the workforce, and this, combined with a somewhat surprising > 1 Million reduction in Job Openings revealed on Tuesday, suggests to me some economic deceleration. But what do I know?

And this coming week, as almost pre-ordained by the Gods, we have an approximate Two-fer Tuesday, with a critical PPI release coming on the appropriate day, followed by CPI on Wednesday. Projections are sort of flattish, and, simply from a blood pressure management perspective, let’s hope that they come true. A surprise in either direction, but of course, particularly to the upside, is likely to cause a serious case of volatility overload.

We also must anticipate the formal commencement of the Q3 earnings season, the previews of which have been less than encouraging. Gallant 500 profit growth currently projects out to a meager 2.4%, lowest since the ’20 lockdowns. But there’s probably not much to fret about on that score. These numbers tend to drift up across the reporting sequence and will almost surely do so in this instance. I am more concerned about forward guidance, as there is always a seasonal Q3 incentive for Management to dump all bad news and dampen expectations in “3”, so as to engineer a “beat” in “4”, and, in the process, dazzle and delight their Compensation Committees.

More narrowly, it probably pays to be mindful of recent dreadful announcements issuing from key chip manufacturers Advanced Micro and Samsung. These entities are experiencing menacing decreases in orders for their silicon output, portending of weak demand for PCs, smart phones, cars, refrigerators and nearly every other product we actually use out here “in the field”.

It ought, one way or another, to be a high-drama, volatility inducing cycle, which won’t end until R)Oc(ky)tober winds down, and the fat part of the earnings season fades to blue.

As all the above unfolds, we also face a renewed, overwrought focus on Energy Prices, and rightfully so. As is widely known, OPEC delivered a major one finger salute – to the West in general and, maybe, to Biden in particular, by cutting production by 2 million bbl/day. The timing, from a political perspective, is unfortunate, but the Saudis probably understand this. In fact, they may still remember being called criminals by the occupant of the White House in the 2020 election, and, beyond this, may take a dim view of its “Green Energy” policy that features the crippling of domestic production, while cajoling, exhorting and begging foreign producers to pump away with abandon. They may wonder, as I do, how the planet is benefitted by simply shifting production to different portions of the globe.

My own view is that for political reasons, the Administration is desperate to keep a lid on energy prices – particularly during (R)Oc(ky)tober, as it justifiably perceives that it may impact their fortunes in the coming election. So, we toy with other imponderables: the full depletion of our Strategic Petroleum Reserve, cutting deals with bad actors in jurisdictions such as Iran and Venezuela, imposing export bans, raising taxes on energy companies, exhorting gas stations to patriotically cut prices. And so on and so on and scoobie doobie do.

I am especially concerned about “Hail Marys” here, and, while laying aside my frustration at the stupidity of it all, am fairly convinced that any aggressive move to create better energy optics in (R)Oc(ky)tober will only lead to Newtonian reactions of opposite impact once the month is behind us.

And this is to say nothing of what awaits us should the dreadful situation in Eastern Europe take a turn for the worse.

Thus, with huge interest rate agita, currency markets in disarray, never-ending Fed hand wringing, electoral outcome concerns reaching crescendo, menacing increases in Energy prices, and myriad geopolitical problems we have not even covered, it’s no wonder that cross-asset correlation financial market stress indicators (which I don’t even begin to understand) have surged to multi-year highs:

Not Sure What This Means But Most Likely It Ain’t Good News:

Whether or not all of this ends in a market tragedy of Hamlet-like proportions is in the hands of fate. But it certainly reinforces my assertion that this particular October stands to be one mother of a (R)Oc(ky)tober. And I suggest you gird yourselves for a continued wild ride. The current paradigm (hardly encouraging) could turn on a dime – for better or for worse. Portfolio flexibility, liquidity and fluidity, eternal heavenly virtues, will be of heightened importance.

It will, like all intervals, pass quickly, and we’ll be on to the next. Meanwhile, we’ll have to endure another 3+ weeks of Rocktober/Twofer Tuesday/Get the Led Out. All across the country.

I am happy to report, though, that ‘XRT – Chicago’s Fine Rock Station – still abides at 93.1 on your FM dial. It now features a 24-hour broadcasting cycle, and, while some of the original DJs remain on the air, the silent intervals are now gone, replaced by annoying, chirping, excess energy. They don’t (at least I don’t think) do Two Fer Tuesday. Or Get the Led Out. But they do have a nicely understated Breakfast with the Beatles. They retain a quirky playlist, which, if it’s not my particular jam, it will occasionally surprise. And delight.

It’s worth a listen. And if it helps you survive the recently commenced (R)Oc(ky)tober, well, all I can say is so much the better.

TIMSHEL

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

“The pen is in our hands. A happy ending is ours to write.”

Hilary Mantel

This one goes out to Hilary, Not Hillary but Hilary, who left us unexpectedly this past week. Not many of you know her, but she was the perhaps greatest writer of historical fiction of our time. She wrote of vast conspiracies that were real, not artifacts of political device. Rest well, Hilary. And thank you.

Meantime, something’s been bugging me: the obsessive market focus on short-term interest rates. We were treated to an example of this on Wednesday, when, Chair Pow, as expected, jacked up the overnight Federal Reserve borrowing rate by 75 bp, and (as less anticipated) indicated that he weren’t nowhere near done yet. Got another >1% of hikes in store for us, and that only takes us until year end.

But (laying aside that only a few hundred privileged financial institutions are even eligible to borrow from the Fed), the following question emerges:

Who borrows overnight? Goldman Sachs, yes. Citigroup, yes. Occidental Petroleum, maybe.

But not you. Or me. Our mortgages, if we’re smart, extend out more than a decade. Personal loans gotta run for at least a year. My best research suggests that corporations typically borrow for minimum periods of at least 5 years.

So, why all this bruhaha about the overnight rate?

To me, it’s not an idle question, preferring as I do to fixate on longer term borrowing costs. This may make me a bad person, but I firmly believe that the real action in the debt markets has less to do with overnight rates, repos, reverse repos and such, and is much more impacted by the vig imposed over much larger numbers of clock ticks.

All this is arguably timely, because a review of rates across maturities is not especially\ recommended for the faint of heart:

In the pointy-headed parlance of the markets, this configuration is called inversion. It is not the preferred construct; normally one expects that the farther out on the maturity curve one traverses, the higher the rate should be. There are several reasons for this – some even risk-related.

But I won’t get into them right now.

Suffice to say that the government is currently paying a higher rate to borrow for two years than it is for thirty. And something about that seems, at minimum, rather unholy to me.

But there are identifiable root causes. The Fed wants high rates — to cool the fires of demand, and, by doing so, taming the inflation beast. It explicitly sets its short-term levels, but much like us regular schmucks, must yield to the caprices of the market at the longer end of the curve.

The Fed has indeed begun the long trek towards reducing its subsidizing ownership of Treasury and Agency paper. But even this is oriented towards the short end. No, they’re not selling into the market; rather they are simply allowing securities they hold to mature without replacing them. And the shortest end of the short part of the curve is a maturing debt security.

The current pace is $100B/month of passive unwind, a rate which would place their holdings at previrus levels by early 2026. Reverting to longstanding, pre-financial crash thresholds (~$ 1 Trillion) will take a good bit longer, but, with diligence, they could reach this reverse milestone by the end of the decade (by whence all California engines will be forced to run on sun, wind and daisy droppings):

The Fed may indeed wish to see higher rates out beyond two years (again, where nearly All God’s Children borrow), but does not appear to have the stones to engage in some bona fide selling at the long end of the curve.

It can perhaps take some perverse comfort in the reality that others are doing the selling for them. This past (withering) week featured not only an equity market rout, but a fire sale of Govies by entities other than our own Central Bank. This placed Madame X’s (Ten Year Rates) yield skirts at levels last witnessed in 2010. One can have nothing but sympathy for this sexy but aging siren, who, with 3/4ths of Terrible ’22 in the books, is having the worst year of her long, stormy existence:

Similar sorrow has worked its way across the globe last week, as, in the immediate aftermath of the laying to rest of Liz II, not only did her own, stolid, Bank of England jack up terms, the Central Banks of colonial Canada, New Zealand, Australia, as well as Sweden, Norway and even Switzerland (Switzerland?) followed suit.

The lone global exception is Japan, which is stubbornly clinging to its subsidized interest rate policy. In response, and you can’t make this up, the JGB recorded zero trading volumes on multiple days this week.

Probably the other matter to which we must attend is the continued quagmire in Eastern Europe. As you are no doubt aware, having suffered some reversals in the field (Ras)Putin is making menacing threats about cranking up the nukes. Which is not a particularly promising prospect for global commerce. But, beyond this, we can perhaps take comfort that his contemplated plans only involve the use of shorties – missiles that have ranges of a mere few hundred kilometers.

If, by contrast, he was contemplating use of the long boys – Inter-Continental-Ballistic Missiles – we might really have something to worry about.

If all the above gives you a long face and renders you short-tempered, please know that you come by these conditions honestly. But it begs the following question:

Long or short?

Wish I had a better answer, but I find both market orientations depressing. There may be some bargains here and I’d venture so far to state that there probably are, but and one must seek them out carefully and at one’s own risk. Could be, the time has come to load in on the short side and gloriously capture an all-out market crash.

Which I don’t think will happen. And if you play for this, be prepared for the possibility of being squeezed into oblivion.

So, the answer to the long/short question is both. And neither. There’s nothing really for us to do but pick ‘em as we see ‘em. I think this will be an exercise of significant frustration, and I don’t anticipate that it will bear much fruit – at least in the short term.

Longer term, well, there is hope. Which springs eternal.

Over time, the pen may indeed be in our hands. However, with due respect to the brilliant Ms. Mantel, I’m not sure if this renders us fully empowered to compose a happy ending. All the protagonists in her magnificent Cromwell trilogy, as well as in her masterwork on the French Revolution, end with heads severed from necks, by rope or blade.

I fear we also need some help – from Above, from Providence, or maybe just a simple fortunate turn of the random die. But we can, in fact, we must, manage our risks along the way, lest we deny ourselves even the possibility of benefitting from positive happenstance.

And that, my friends, is the long and short of it.

TIMSHEL

“Which is it to-day,” I asked, “morphine or cocaine?”
He raised his eyes languidly from the old black-letter volume which he had opened.
“It is cocaine,” he said, “a seven-per-cent solution. Would you care to try it?”

The Sign of Four, Sir Arthur Conan Doyle, (1890)

No thanks, Mr. Holmes. Been there; done that.

Sir Conan Doyle’s Sherlock Holmes is perhaps literature’s most famous cocaine addict, showing, as indicated above, a decided preference for a 7% solution. Seeing as how the former was a physician himself, I’m assuming that this is an effective mixture. 5% would probably not do the job. 15% might kill a horse.

Key risk management lesson: gotta get the percentages right.

Percentages are always important but at this pass, they are particularly ascendant. They’ve been coming at us fast and furious, and the stream has not yet run its course. But it behooves (behoves?) us, nonetheless, to review a few of the figures.

We begin with the >8% ranges, which is where this past week’s Inflation statistics dropped. CPI 8.1%; PPI 8.7%.

Or do I have this backwards? I’m not convinced it matters much.

Because either way, these numbers were significantly higher than what everyone (myself included) expected. They catalyzed a wicked equity selloff, with much of the carnage transpiring on Tuesday, in the wake of the CPI surprise. This caused Gallant 500 to retreat 4.307% and Captain Naz to turn tail to the tune of 5.542%.

This was the worst daily showing in, well, in quite a spell.

And these markets, after meekly gathering themselves on Wednesday, continued their downward slide across the rest of the week.

Moving on, however, the next percentage figure we must consider is 6%, the level through which the average thirty-year fixed mortgage rate breached this past week. Last time mortgages were in these vicinities was late ‘08/early ’09.

As I recall, this wasn’t particularly accretive to the housing market, but hey, new day/new way, right?

All of which points toward the Percentage Grandaddy of ‘em All – the Fed’s decision on interest rates, scheduled to be revealed to a breathless financial world on Wednesday.

After the Inflation numbers, the prognostication graph has shifted ominously to the right, with the projected range now toggling not between 0.5% and 0.75%, but rather between 0.75% and 1.00%:

Trust me here and take the under. No way the Fed goes 1.00% — in an economy that is showing unmistakable signs of slowing and ~6 weeks before an election in which their political paymasters own any and all associated negative impacts:

Further signs of deterioration derive from the Private Sector, particularly the widely socialized, buzzkill comments of the new top dog at FedEx, in the midst of a rather dire negative pre-announcement.

To offer a blindingly obvious observation, when the guy that controls those Memphis-originating trucks and planes tells us he’s anticipating a significant worldwide recession, we should pay attention.

Because he oughta know.

Thus, as an investor, one is faced with the formidable challenge of allocating capital into a slowing economy, featuring stubbornly persistent inflation and skyrocketing (e.g. mortgages) interest rates.

It’s enough to cause a body to turn to drugs. Or return to them. Or if already a user, to amp up dosages – maybe well beyond the 7% threshold that Holmes worked to such advantage.

But as your risk manager, I can hardly countenance this.

Nope, we’re gonna have to find other means to navigate our myriad difficulties.

All of which brings us to our last percentage analysis, which is one that cannot be calculated, but only estimated. I checked my trusty Zippia.com dashboard and learned that the average age of a professionally employed portfolio manager in the United States is 45. This implies that at the time of the ’08 crash, our Mr. or Ms. Average was a tender 31. If they were, at the time, managing money (probably a minority of them) they caught the last third of a 40-year rally in Treasuries. Methuselah types like myself have navigated with the benefit of declining yields, and their attendant positive impact on equity valuations, for our entire careers:

Bond Yields and Equity Valuations: A Long Tale of a Long Tape

This implies that virtually all risk takers – call it, conservatively, >80%, have operated with a secular tailwind at their backs. But now, the winds may not have just died, but reversed themselves.

How prepared, therefore, are any of us for a market environment where the null hypothesis is not rising, but either flat, or perhaps declining, prices?

Not very, I suspect.

Perhaps these longer-term trends will reassert themselves, but – not gonna lie – I don’t see any support for this hypothesis, and we thus may very well be forced to accelerate our climb on the learning curve, however we choose to do so.

But it may be an expensive education, as, in the meanwhile, those inserting risk into the markets are almost unilaterally operating without an historical roadmap. Accidents may happen; we may get lost. It’s happened many times before when surveyors have travelled into uncharted territory.

Sometimes it works out. Chris Columbus wanted to travel East and instead headed West. Lots of good stuff happened in result over the subsequent > 5.25 Centuries (disgraceful attempts to refute this notwithstanding). In Doyle’s “The Sign of the Four” (Spoiler Alert), Holmes solves the case, and Watson gains a wife.

Other lessons from history, however, are not as uplifting.

Unpacking it all may be the case of our lifetimes, but, unlike Holmes, a 7% mixture of cocaine is unlikely to assist us in cracking it.

Meantime, it’s best, I believe, to play the percentages, which don’t for the moment, augur in our favor. Let’s remain alert, stay nimble and see what unfolds from here. Lacking a magic % solution to enhance our clarity of thought (yours and mine), it’s about the best risk management advice I can offer – for now.

TIMSHEL

I reviewed with interest the recently released CollegePulse rankings of free speech at ~200 American Institutions of Higher Learning. My undergraduate Alma Mater – the University of Wisconsin – clocked in at a pedestrian 98th. By contrast, the school that (somewhat dubiously) awarded my MBA – the University of Chicago – topped the list, while the one that (entirely irrationally) issued my master’s degree in Economics – Columbia University – came in rock bottom.

I can offer anecdotal support for the last of these, at any rate, having served as an instructor at Columbia for several semesters, and as recently as early in this young decade. Trust me – you gotta watch your back in Morningside Heights, and even then, you’re not safe. Them b!tches will cut you for just about anything.

I am, by contrast, proud of the U. of C. for copping high honors, and, as for Wiscy? Well, it cudda been worse, right? I do take some comfort, though, in the normality of my educational speech matrix, which not only features the top of the bell curve, but also each of its extreme points.

In case you care, here’s a link to the entire list:

https://rankings.thefire.org/rank

This here column, however, is shaded in the Maroon hues of unfettered communication (as opposed to the oppressive Columbia Blue or the non-committal Cardinal Red), and, since I can put pretty much anything I want into this file, I suppose I should offer up something about Liz. For whom, as documented in these very pages, I have always carried a torch.

I won’t overload your senses here; you have and will receive an assault on this topic in the coming days. Overall, though, you gotta give her some mad props. She strengthened her monarchy even as she presided over the (inevitable) demise of its associated empire. On balance, she did few favors for her former subjects in Northern Ireland, on the Subcontinent, and other colonies in the dying empire, but please. I mean, why go to the trouble of even having an empire (which she did not, after all, create) if you cannot engage in some parameterized economic exploitation?

No, you couldn’t get within 50 fathoms of her, and if you did, there was no guarantee she’d be nice to you. If she wanted you gone, you were vaporized in microseconds. But she seemed kinda approachable, nonetheless. All at once quintessentially regal and entirely common. I know of no public figure that took her status more seriously and herself less seriously – at the same time.

I will only add one thing. I will cop to being glad for Charles that he finally gets some swats with the Royal Polo Mallet. In some ways, he’s the opposite of his moms: not very regal but supremely unapproachable. But he’s waited a long time. And, really, how much harm can he do?

Strike that. Barely 72 hours into his reign and he’s already starting to annoy me. Threw an olive branch to that insufferable couple on the West Coast. Said he’s gonna hang around till they carry him out horizontally. Oh well, the Brits survived the Luftwaffe, so they can probably endure 2 decades – tops – of Chuckie Triple Sticks.

The markets failed to declare a holiday in the wake of Lucious Liz’s demise. Yup, not only are they trading ‘em but they’re buying ‘em. All week. Careful readers (and selected clients) are impelled to acknowledge that I anticipated this. My main reasoning, as previously articulated, is that an upside reversal was the pain trade. But there are others. A galaxy of cash remains unmoored in the capital markets universe and was always likely to find at least fleeting sanctuary in risk assets.

And the economy, which faces threats on every side of the global hexagon, is not in terrible shape. The jobs market is strong. Commodity prices have, at worst, normalized. Rumors abound that there was some renewed nut squeezing, some upside gamma hedging, that sort of thing.

All eyes this coming week (while not otherwise diverted by the Queen’s memorial ceremonies) will naturally be trained on the Inflation releases, and, if the surveys are to be believed, there is further moderation in these realms. August PPI, scheduled to be announced on Wednesday morning (CPI drops Tuesday), is projected to have actually declined last month, taking the year-over-year rate down a full percentage point (from 9.8% to 8.8%). That, my friends, would be a precipitous (and welcome) reversal. The USD has stopped its by-now-counterproductive upward climb – in part owing to the ECB’s Madame LaGarde – perhaps channeling her inner Catherine the Great — having hiked Euro rates by 75 basis points.

After which, with Elizabeth II planted in eternal repose at Windsor Castle, the focus will turn to the Fed. The Street is now expecting them to go the full smash 75 at their meeting on 9/21:

With apologies to the 10 percenters, I gotta believe that 75 is a lock. This past Thursday in remarks at the Cato Institute, and two short weeks after his J-hole excoriation, he reiterated his further diabolical plans for us.

Can he back off now? I hardly think so. Even if the Inflation statistics float down like goose feathers, they’re still: a) historically and uncomfortably high: and b) stratospheric compared to his recently reiterated target of 2%.

Plus, he’s on the hook to stop shopping for securities issued by the Treasury Department, which I don’t think will toe tag govies (too much cash in need of a home), but certainly won’t help them.

Unambiguously, Treasury yields reside on the other side of the volleyball net from risk assets – particularly, high-flying Tech. Which, in time-honored tradition, is likely to continue to influence, if not lead, the equity complex as a whole.

And yes, domestic energy rates have stabilized below their highs. But in Europe – where Central Bank rates were negative from 2014 until this past week – there is no solution in sight for an energy crisis the likes of which has not been experienced in our lifetimes. Prices have backed down dramatically since rising above €340 per Megawatt Hour last month. The Germans are telling the world that their energy cupboards are full. But winter is coming, and Putin, their monopolistic supplier (and who just suffered some military reversals), is one angry bear…

Thus, and for all these reasons, I wouldn’t get too emotionally attached to last week’s rally. It may continue ere it tests recent lows but test them it will.

It all likely turns on the Inflation statistics and subsequent Fed action. The largest probability outcome is no surprises and muted market reaction. But investors are in no mood for any nasty data accidents, so it’s best to remain on high alert.

I otherwise lack much visibility into what happens next.

Were I you (and let’s face it, I am) I’d prepare myself for some continued aggravation. Among other matters, it’s U.N. week in New York, where statesmen from rogue nations that don’t pay what they owe for the privilege, will lecture us on our moral failings and then head to the local watering holes and (unfortunately, it must be said) strip clubs for some self-congratulatory recreation.

It’s a fair bet that before the month ends, 45 will either announce his run for re-election, get slapped with an indictment, or both. And won’t that be fun?

On a related note, we’re also moving in execrably into a cycle where election politics will dominate the equation. As indicated last week, the market-impacting outcomes shade from neutral (Republicans pick up seats) to dire (Progressives run the table).

When the best you can do is lose or draw, the wise move is to fold. But we’re made of sterner (more fool hardy?) stuff. We’ll keep trading. And investing. And hoping for the best.

I am highly optimistic that we will endure and ultimately thrive. After all, our friends across the pond fought the Battle of Britain. They won but it cost them an empire. Elizabeth II assumed the throne seven years later and held that spot for fully seven decades. Within a generation, her country was bestowing upon the world the perpetual gifts of the Beatles, the Stones, Zep, Floyd and Bennie Hill.

Yup, they’s a lot of ways to get by – with a little help from your friends or by other means. At least that’s my opinion, and as a proud alumnus of the University of Chicago, I feel a unique agency to share it.

I’m also proud of the schools that round out the Top 5, which include, in ranked order, Kansas State University, Purdue University, Mississippi State University and Oklahoma State University. These are authentic institutions of learning and training, with which I’ll roll every time.

However, to keep matters in perspective, even Top Dog Chi-U clocks in at tepid 77.9 (presumably on a scale of 100), and only rates as “Good”. Presumably, there is a higher rating, but not one college in America has the juice to reach it. The schools at the bottom of the list, which include the University of Pennsylvania, Yale and Northwestern, all are characterized as “Poor” or “Very Poor”.

Columbia, in a class by itself (and featuring the only single digit score) ranks as “Abysmal”.

We can infer from all the above that American free speech is a relative concept, and that, despite having won that ’76 Revolution, the best of us don’t rate very highly on the spectrum.

If I said that this didn’t depress me, I’d be speaking with forked tongue. But when it comes to analyzing the topic of what passes for free speech in these realms, perhaps this is about the best that I can do.

TIMSHEL

So be careful when they’re kind to you
Don’t you end up in the dirt
Just remember what I’m saying to you
And you like-el-ly won’t get hurt

And when it rains the rain falls down, wash away the cattle town,
And she’s far away somewhere, in her eider down,
And she dreams of crystal streams, of days gone by when we would be,
Laughing, fit to burst, on each other

Bernie Taupin

I’m always kinda blue this time of year. And not in the Miles Davis sense. Labor Day is here (and gone). And, for several reasons, I hate Labor Day. Labor Day sucks. First, it marks the end of summer, meaning now we all must knuckle down and try to get some things done. The Little Fellers are back in school, and that makes me sad as well.

Also, however else one cares to describe me, I am not Labor but rather Management. I wouldn’t go so far as to state that these two economic classes are natural enemies, but they do differ in terms of style, objectives and modes of operation. This here holiday, for instance, is cast as a celebration of the former (there is, to the best of my knowledge, no Management Day) and here’s hoping all those strivers and toilers enjoy their government-sanctioned day off. But for Wicked Management, there is no rest, as evidenced in part by my slaving away at the keyboard while the rest of y’all are busting out the ‘Cue Sauce and Kingsford.

In my idyllic former haunt of the Hamptons – a Management Mecca that I now seldom visit, they call the day after Labor Day Tumbleweed Tuesday. All the renters have packed their bags, returned their keys, and bounced back to Manhattan (or Brooklyn). Business for the local shop keepers dwindles down to imperceptible levels. I don’t think there are actual tumbleweeds on the streets, but one can forgive the retailers on the streets for swearing they’re seeing them.

And I’m all about Tumbleweeds, particularly Elton John’s magnificent Tumbleweed Connection. My having placed it on my audio Mount Rushmore (along with, in no particular order, L.A. Woman, Blonde on Blonde and London Calling) has singled me out for criticism in certain quarters. To which I always reply that these things, to the best of my understanding, are matters of taste. I suggest, as such, that you give it a listen and decide for yourself.

Meantime, we celebrate Labor at an interesting pass. In a quirk of the calendar, the August Jobs Report dropped on the Friday before the three-day weekend. It came largely in line with expectations: ~300K new non-farm gigs, a modest uptick in the base rate. Not much else.

It’s a good labor market, save for the vexing and stubborn amount of unfilled Job Openings. But I will stop short of flat out scolding those who sit on their thumbs when > 11M legit gigs go begging:

And whether you are Labor, Management, or ignominiously out of the matrix, the next several weeks offer in interesting sequence. It’s one for which I strive – unsuccessfully – to equate to any previous paradigm through which I have traversed.

On the 83rd Anniversary of the onset of WWII, the Poles demanded 6.3 Trillion Zlotys (~ $1.3T but falling, as is virtually every other currency against the newly-almighty USD) in reparations from the Germans. Germany is Poland’s largest trading partner, and that by a wide margin. Both countries border/are threatened by Russia, from which they each import >50% of their Natural Gas. As such, both are subject to the POSSIBILITY of a devastating economic collapse this winter. Both are on the brink of (or perhaps in) Recession.

Let’s in any event wish the Poles God Speed in collecting their invoice. Maybe the Germans will fork over the 6 large Zlotys without complaint, and lord knows that the bill of attainder is probably legit. But I certainly would not be holding my breath.

On a related note, G7 ministers are pushing through a price cap on Russian Oil, to which the Russians responded by shutting down – full smash – the Nord Stream pipeline. Someone’s gotta help me with the math here. Russia is in a nasty war. The G7 has lined up against it. Yet the allied powers seem to somehow imagine that Putin will go along with this. Which brings to mind (albeit in extreme form) the following question: did Hitler import/impose an oil price cap on Stalin in 1944?

Didn’t think so.

And here on these shores, we enter the final third of the year with the markets way down, but no clear signal as to what happens next. I don’t see many upside catalysts, but, on the other hand, I doubt we’re looking at a full stop crash. The Gallant 500 closed Friday below its 50,100 and 200-day Moving Averages, as did Captain Naz. And all this in the first two trading days of September – historically and by a wide margin, the worst month for risk asset performance on the Julian Calendar.

Normally, this would be a dire configuration.

But Ima gonna hold onto my call that there’s a bid out there in these ranges. Not much of one, but a bid, nonetheless.

Why? Because it’s the pain trade. We’d all probably be better off with a market clearing crash. Which is why it almost certainly won’t happen.

The post-Labor Day sequence should unfold in slow, deliberate fashion. There’s almost no data this coming week. But after that, we’ll be confronted with yet another round of Inflation statistics, with the next FOMC meeting following quickly on the heels of this.

Though it wearies me to reiterate, much of what happens next depends upon Fed action and the market’s reaction to same. It’s currently a dice flip between 50 and 75 bp hike at the September meeting, and as for me I’ll take the over. After Powell’s J-Hole’s words of anger and admonition, I think he’s gotta back the rhetoric up with some fire and brimstone on the Fed Funds rate.

However, this is not the whole of the story. Accelerated Fed Balance Sheet reduction is also on the docket, and not, per se, arriving at an ideal time.

All of which should put upward pressure on rates of all types, which, irrespective of its impact on the actual economy, is not exactly constructive for the markets.

Overall, the Macro meter points to the negative, but not dramatically so. If one envisions it as the upper half of a clock, with the extremes being at 9 and 3, respectively, I’d place it at about 10:30.

Yes, the technicals and fundamentals are both flashing warnings, but in this muddle, I would caution against getting to jiggy on the short side. Stocks were squeezed hard earlier this summer, and, while that ran its course and ushered in double digit selloff in our favorite indices, these things, too, can reverse course. The tumbleweeds could roll up the street and it might be nut squeezing time again.

Mostly, I think we stay in ranges with the top marked by those giddy days after we absorbed the Ukie, and the bottom represented by the puke that ensued immediately thereafter. This is a pretty wide range of > 20% (+/-), so not much of a call there.

But I’d ease into the “business end” of September, allowing your portfolio risks to evolve with market conditions. If we make it through that month of aspirational memory (which, to the obtuse, I’m trying to remember), it’s on to October, which will usher in a new set of earnings and quarterly macro data – much of which will be overwrought and, yes, overthought.

Then there’s them midterms. Whatever your political persuasion, I can assure you that if the Progressives manage to run the table, it won’t be pleasant for investors. By contrast, if as expected, their ruling coalition weakens and they lose at least one chamber of Congress, it would preclude a lot of bad sh!t for the markets, but won’t, in and of itself, catalyze more accretive governmental policies. Because they will only have the juice to block stupid government initiatives, not to pass smarter ones/ Their success thus takes more the form of a risk mitigation dynamic than an investment opportunity.

I am anticipating some wicked bumps (and a few tumbles) ere we put a capper on ’22, and the action starts right now. Again, I feel the best approach will be reactive rather than proactive.

Meantime, Tumbleweed Tuesday is hard upon us, whether we like it or not. But, as for me, I’ll hold on tight to my dreams of the crystal streams, of days gone by, of private, fit-to-burst laughter.

However, these things, as indicated above, are matters of taste. Do what you will. But be careful when they’re kind to you; don’t you end up in the dirt.

Just remember what I’m saying to you, and you like-e-ly won’t get hurt.

TIMSHEL