It was, most certainly, a pearl-clutching week, in a pearl-clutching month, of a pearl-clutching quarter — in a pearl-clutching year.

We can only now hope it doesn’t morph into a bodice ripper.

A strong argument can be made that entering last week’s proceedings, all ingredients for a full-on Heathcliff/Wuthering Heights crash were in place, which only wanted a minor, bothering plot twist to tear the delicate fabric of the current market into shreds. The Gallant 500 had retreated to ~3750 – almost precisely at the levels where it ended 2020 and prior to the >30%, largely joyless runup of ’21.

Down > 10% over a span of a few short weeks, scenarios for authentic capitulation were ascendant. Several important data points loomed — none of which felt like they would serve to increase risk assumption vigor. PPI dropped Tuesday. The Fed spoke on Wednesday.

The increasingly cryptic Bank of Japan followed suit, in short duration, on Friday.

Though nobody much discusses Japan these days, its CB faces a vexing portfolio management problem:

The BOJ Asset Bulge:

The BOJ asset ledger includes $0.5T of domestic stock, including, improbably, 80% of the ETFs issued in the Land of the Rising Sun.

When these figures are added to its gargantuan holdings of its own government bonds, the tally easily exceeds the GDP of the country. We think of ourselves as being naughty here in the States, but the Fed’s Balance Sheet topped out at $9T, a (by comparison) modest, approximate half of the Gross Domestic Product of this great nation.

Plus, while we’re not selling down, stateside, this very week. we are beginning to shed assets by allowing maturing securities to roll off without replacing them.

The BOJ, meeting expectations that puzzle just about everyone, did nothing. Kuroda ain’t gonna use his powers to tame Nipo-inflation. So be it.

BOJ Chair Kuroda-san also reaffirmed the Japanese version of QE – a process known as rate targeting (currently 25 bp).

When the rate reached the usurious level of 0.265%, the BOJ, reflexively, bought paper – in the process wreaking havoc on the cash/futures spread:

Japan is widely admired for its pearl production, which is among the best in the world, so the good news is that the ladies of that country had high quality materials for their pearl clutching – as manifested in the wake of the blowout of the JGB basis trade.

But as near as I can determine, this did little to salve the wounds of those unfortunate souls who trade this spread.

Such are the fortunes of the monetary wars.

Japan and the U.S. also have the following commonality: the special Repo facilities put in place by both jurisdictions to backstop liquidity in the wake of lockdown are now at double the peak utilization manifested during the crisis. But this is where similarities end. On the policy side, the Fed came through with a whopping 75 bp blast – largest since ’94.

But even that wasn’t the biggest pearl clutching moment issuing forth from the world of Central Banking. The Swiss National Bank (SNB), in a move that surprised everyone, raised its policy rate from -0.75% to -0.25% — the first move of its kind in seven years.

And by the way, those minus signs are no typo; the 50bp jacking merely takes the Swiss rates into more benign negative territory. Not sure exactly what’s going on here; the boys and girls in Zurich are notorious for discouraging full-scale conversions into their precious unit of account, but now, with the alluring prospect of only paying a quarter of a percent per annum for the privilege of parking cash at the SNB (vs. 3/4% a few days ago), the temptation for investors may be too great for them not to succumb to it.

Nothing that the Fed was gonna do was likely to redound to the delight of capital allocators, but, for a few fleeting moments, the markets rallied on the 75 bp news. Risk takers thought better of it by Thursday, though, which featured an all-out rout.

In result, the Gallant 500 and Captain Naz reclaimed their ignominious place at the bottom of the Bloomberg Equity Index league tables:

U.S. Equity Indices – Send ‘Em to the Minors:

The ladies faced further moments of shock and awe on Friday – in the form of a gargantuan $3.4T Quadruple Witch/Quarterly Options Expiration.

Nobody’s dead husband materialized therein, bearing family secrets he had blessedly taken to the grave. But – particularly on this type of tape – accidents can happen on the Q4 Witch, which the clutching of all the pearls rendered from all the oysters in all the oceans of all the world won’t counteract.

But we managed, if somewhat worse for the wear, to survive all that. However, just when we thought we was in the clear, what few pearls there are on the Great Plains were no doubt held tight to rural breasts – when 2,000 Kansas cattle dropped dead in a heat wave.

I tried to do some research on my Commadore 64 about this, only to learn that Microsoft had decommissioned its iconic Internet Explorer program. Oh well…

I own no strings of pearls, and probably wouldn’t clutch them if I did, but I was compelled to wrack my brain looking for silver linings in the dark clouds of the investment horizon to bring a shred of hope to my forlorn clients.

I came up substantially short.

The equity complex is in the midst of wicked multiple contraction, to the tune of approximately 1/3rd, and P/Es are now nominally below their 10-year average. So long as the denominator (earnings) holds firm, we probably can take some comfort. But the vibe out there is that earnings are at risk, and the truth is that I don’t know.

I dunno; maybe Q2 earnings drop majestically, maybe guidance will be docile. If not, though, we could be subject to the double whammy of continued multiple contraction against the backdrop of a declining earnings profile.

Won’t that be fun?

But earnings don’t drop for another month or so – after the Independence Day celebration.

Meantime, everyone I encounter is clutching her pearls at the thought of the economy plunging into recession, while inflation continues to rage like the villain in a Barbara Cartland novel.

I don’t have much insight into either plague. My economics training suggests that inflation, once unleashed, is a tough cat to bag. The best hope I can see involves the widely discussed “Whipsaw Effect” which posits that due to all those maddening backlogs, retailers have ordered too much inventory for delivery for the back half of this year and will be forced to slash prices. Like some rogue destroying the upper part of the garment of a fair waif he has encountered and must now have as his own.

This may be deflationary. But even so, it’s hard for me to see the specific contours of a recession emerging in result. It may be looming, but I think those who confidently prognosticate one are mostly spit balling.

Notably, though, the good folks at the Atlanta Fed, who are paid to make these calls, just lowered their Q2 estimate — down to 0.0%:

We’ve seen them hit and we’ve seen them miss with these tallies, but they were right last quarter, which featured a drop of 1.5%. If they are overstating growth now, we will officially be in recession by the end of July.

And we cannot expect much help from our elected officials. There may be some perverse good news in VP Harris being placed in charge of the recently shelved Disinformation Governance Board, where she is likely to do little harm to the cause of free and open debate.

Other Administration initiatives offer less promise. A recent trial balloon featured a windfall profits tax on the Energy Sector, with proceeds to be allocated in the form of gas debit cards issued to the unwashed masses. What better way to deal with rampant inflation for a vital commodity than to disincentivize production while artificially boosting demand?

But they scrapped that initiative because – get this – they couldn’t source the chips to create the specialized cards themselves. Which should tell you all you need to know about the economic issues that we currently confront.

In any event, global and domestic growth are, at best, slowing – at a time when upward pricing pressure is everywhere one meets the eye, and showing no signs of fading from view.

One other thing I can state with some certainty: the market is ill-prepared for any unexpected, incremental negative news. Like a REAL resurgence of the public health crisis. Or the Chinese deciding that now is a good time to cop Taiwan — once and for all.

So, the downside risks remain acute, and everyone is impelled to play defense. Protect the core of your portfolios. De-risk everywhere else.

Presumably, you will also want to locate and secure your pearls, and, if any of you ladies can take even the smallest comfort from grabbing at them and holding them tightly to your person, you’ll get no complaint from me.

And one last bit of risk management advice: make sure that they are linked by a solid string, so that when the handsome cad comes for your bodice, they don’t spill out onto the floor.

TIMSHEL

“The past is never dead. It’s not even the past”

William Faulkner – “Requiem for a Nun”

No, the past isn’t dead, nor even the past. At least according to Faulkner. But then again, there is no nun in “Requiem for a Nun” and, for that matter, not much of a requiem either.

Moreover, “Requiem” while counting as one of Faulkner’s minor novels, it isn’t even a novel, really. It’s written in the form of a play. Which was turned into a full-on stage adaptation by none other than Albert friggin’ Camus.

And that, my friends, is the type of world in which we live in (no grammatical error there). So, I thought it would be appropriate to write a non-requiem for inflation. Which is not dead. And not even past.

But will get to all that. A word, first about Faulkner, whose works I’ve been obsessed with of late. I am not aware of a writer who converted the contemporaneous living experience of a story more elegantly into words than he. His characters, see, and feel, and hear, and think. And then think again. We are there with them, as they amend their first impressions, and then their second ones.

And so on and so on and shoobie doobie doo.

I would say, more broadly, that one of my life’s greatest irritations is the failure of the masses to understand our thematic reference. Especially when they assume that any concept, idea, or attitude upon which they stumble is somehow something new. That nobody ever thought of it before, or tried it, or endured the running of its course.

Something truly novel happens, authentically, maybe half a dozen times in a century, and when it does, oh boy. Look out. But in a bajillion other instances, it’s all just a rehash of what’s already been tried. This, I believe, is some (but not all) of what Faulkner is referring to.

The other, critical, part is that what happened before (i.e. in the past) has somehow played itself out. It hasn’t. We are, in this country for instance, still living in the reality of September 11th. And, for that matter, that of the Revolutionary War.

And of the Great Financial Crisis (remember that?). Which is when we first tried the experiment of drowning a passel of economic pain in the simple expedient of printing money. But even that wasn’t new. The Germans attempted this after WWI (to pay reparations among other objectives), and though memory fades, my recollection is that it didn’t work out so well. For them or for us.

Upon its heels came the Great Depression and then a larger, more resolving World War.

But God Oh Mighty, our neo-money printing cycle worked well — for quite a spell. For well-nigh fifteen years, we created money out of thin air. And not just in this country. The rest of the world has chimed in – enthusiastically:

A ReQuEim for QE — Around the World in 15 Years:

My cipherin’ skills diminish at these magnitudes, but I count >$30 Trillion in the tally of these two charts. Note that the Emerging Market graph on the right ends in 2020 (presumably due to a lack of recent data), but it’s a fair bet that while the rest of the country was being locked and hosed down with anti-virials, the People’s Bank of China was printing away. In addition, though not represented pictorially above, the Bank of Canada is known to have printed quite a few loonies, and the Bank of Mexico hat-danced its way to same. As did Egypt, Argentina, South Africa, South Korea and of course (though dubiously rendered through an ersatz prince) Nigeria.

So, let’s round the number up to $40 Tril. Which exceeds the combined GDP of the United States and the Peoples’ Republic of China.

That’s a lotta jack out there looking for a permanent home, Jack.

Now, feel me here. On balance, I think it was the right thing to do – both in the wake of the GFC and then as them covid buggers multiplied fruitfully over the last couple of years. Sure, there would be consequences, but compared to the counterfactual scenario of fatal financial insolvency, I think the tradeoff was understandable. And – trust me – had the Central Banks not stepped in – twice (’09 and ’20), we’d all be more busted up than Berlin in the Spring of ’45.

I feel extra pleased to invoke the spirit of Milton Friedman in support of my arguments. Last week, I called him out, but this time I need his help. His seminal 1963 book: “A Monetary History of the United States” – co-written by his colleague Anna Schwartz and widely viewed as the definitive document on the subject, lays the blame for the Great Depression at the feet of the Fed – specifically for not printing money, buying securities from beleaguered banks, and, instead, allowing thousands of them to fail.

So, I think that taking the opposite tack – as Bernanke, Yellen and Powell did, was probably the proper course.

Unfortunately, however, it is in our nature to take matters to the extreme, and, in this instance, the fleeting success of the policy fostered such whimsical notions as Modern Monetary Theory, which posits that a self-contained financial economy, blessed with its own Central Bank and currency, can spend all it wishes, and simply pay for it with manufactured money.

All of which sets up my own theory about the current inflation that plagues us. I believe that in the period leading up to and after the GFC, the U.S. economy featured a deficient money supply. If this weren’t the case, we would’ve experienced hyper-inflation well before it began to form on horizon.

But from 2009 through 2020, we absorbed this excess liquidity like a galactic financial sponge. The economy grew. We had full employment. We were innovating like Edison. And exporting energy products to the rest of the world. However, it was always on the cards that we might overshoot the monetary mark, and the early ’22 returns suggest that indeed we have.

There’s just too much money sloshing around the system right now, and this, my friends, is inflationary. Moreover, the discontinuance of QE doesn’t assuage the problem; it simply, at least in theory, keeps it from getting worse.

The markets didn’t get the memo this week about how worthless their cash holdings are. But then everyone saw the CPI print, which I won’t recount. I do feel duty-bound, however, to remind everyone that PPI drops on Tuesday, with consensus expectations placing it at 10.8%. CPI surprised to the upside (surprise!). If PPI follows suit (and I think it will), then it’s more of the same for the misbegotten investor class.

All of which has the smart money betting on an even more aggressive round of Fed tightening. In a slowing, impaired global economy. Not a great environment for incremental financial risk assumption. I reckon will find out more when Chair Pow steps up to the podium on Wednesday and lays his latest wisdom on us. Oh boy. I can’t wait.

And, from my vantage point, evaluating anecdotally what is transpiring at the pump and checkout counter, the early returns for June are less than encouraging. Of course, Food and Energy are somehow excluded from what is colloquially referred to as “core” inflation. But I tell you this – the problems appear to be more widespread. I tried to rent a car in Stamford CT this past week and there were no offers. I found this alarming because Stamford is certainly one of the most car rentingest places on the East Coast, and maybe in the whole country. I did source one in Bridgeport, but in addition to the indignities associated with slumming it in that skanky metropolis, the price they quoted was one that I am unwilling to share in what, after all, is a family publication.

Luckily, I was able to crank up the old jalopy. The one I bought long ago. In the past. 2010 to be exact. And she got me where I needed to be.

So, the past is not, indeed, the dead. Or even past.

And we should remember this – particularly as we approach the anniversary of the signing of the document that formed the government which, for better or worse, we all operate within. Or when we stand in an endless security line at the airport, to ensure that nobody is carrying a box-cutter with intent to slash the pilot’s throat, commandeer the plane, and ram it into a building.

Or when we find that there are insufficient goods and services with which to rid ourselves of our increasingly devalued fiat currency that I believe was recently characterized by scarcity, but now, due to over-aggressive creation, is now in excess supply.

Thus, in closing, I bid you a good yesterday. Because, like it or not, it will inform all your tomorrows.

TIMSHEL

If the good times are all gone, then I’m bound for movin’ on,
I’ll look for you if I’m ever back this way…

Ian Tyson

Though I cannot verify its accuracy, someone recently relayed the following quip to me.

Jack Nicholson (yes, that Jack Nicholson), was once asked, given the abundance of nubile virgins and other passionate females at his perpetual disposal, why he continued to show a preference for professionals — in the realms of L’Affaires du Coeur.

To which he replied “I pay to leave”.

I think he makes a good point, but I ain’t gonna spell it out for you. Either you pick up what he’s laying down or you don’t.

It’s that simple. At least when it comes to L’amour, toujours l’amour.

The domains of investments, markets, and the capital economy, are, in my judgment, more complex. Here, it is difficult to merely conduct your business, execute financial settlement, and be on your way.

Because if you could, I suspect that many among you would choose that very option. Right now.

Even I – a lonely risk manager from outta town – have been sorely tempted to figure out how, and for how many ever shekels, it might cost me, to purchase my exit from the sorry morass of conditions that currently confront us.

But for me (and I suspect, for others among you), the strategy begs the question: “what then”? Because, you see, I still got bills to pay, and no other means for doing so than by plying my trade.

Maybe I just need a break – to brighten my mood, so to speak.

Which was not improved by a recent visit to an otherwise authentic bagel joint on Broadway, whereupon I was compelled to fork out twenty big ones for a raisin bagel with cream cheese (otherwise known among us stone cold ballers as a schmear).

My crack econometric team informs me that part of this financial abomination is owing to (yes) a large increase in the price of bagels:

Bagel Prices (aka Wallet Schmears):

And, largely because I must, I will cop to having asked the gentleman behind the counter to throw some smoked salmon and tomatoes on top.

But prices for those commodities are stable to down. There is a shortage of cream cheese, which – not gonna lie – is quite concerning to me.

But a full Jackson for a schmear? I’m telling you right now, the American Consumer Economy is not likely to survive such an outrage.

And I wasn’t even done yet. Because a $20 schmear is bound to make a guy thirsty, right? So, to wash it down, I next went to the local Dunkin’ Donuts, where I was compelled to cough up $5.25 for a large lemonade. I figure the wholesale cost of the juice to be under 5 cents. Same for the cup. I am a big consumer of ice, but what can that set back the franchise owner?

Yup. I reckon somebody made out pretty good on that there trade. But not me. I got took. Twice. So, then there was nothin’ left for me to do but the obvious: get outta town.

You can probably guess what happened next. My fuel gage was huggin’ the E, so I had to fill ‘er up. Which set me back more’n 90 large.

Talk about paying to leave…

I am further annoyed about this whole Depp/Heard thing. Not that I paid any attention to the details, but the whole thing seems so representatively sordid, so exemplary of the type of nonsense upon which we put all our time and energies lately.

But beyond that, after winning his judgment, JD promptly went on tour with the magnificent Jeff Beck. One of my heroes. And this hacks me off. Johnny is what I would describe as a competent amateur guitarist. However, I’m thinking, I can out-shred him considerably. But am I on stage with Jeff Beck? No. I. Ain’t.

Meantime, I took no joy in being right about the rally in risk assets failing to sustain itself. I think we’re right in the middle of valuation ranges, which, albeit with wide bands, are likely to prevail for the period that is visible on the horizon.

And it’s nearly an impossible environment in which to either trade or invest. And I don’t see what ends it. We’re now nearly 15 years into a market construct under which we could be nearly certain that any time the pain reached certain levels of unpleasantness, the government would bail us out. But that was then. I don’t see any bureaucratic cavalry anywhere on the current horizon. And even if there was, there’s not much they could do to save us.

Strike that. There’s plenty they could do. Like take the handcuffs off the domestic Energy Sector. Incentivize R&D. Cut regulations — such as those that catalyzed the recent and continuing Baby Formula shortage. Unleash the astounding technological innovations that have manifested out of the lockdowns themselves. Particularly those in Telecommunications and Biotech.

But instead, we’re begging the Arabs to dribble out a few more drops of the Bubblin’ Crude, and we are hamstringing these other sectors. Witness the halving of the value of the Benchmark Biotech Index, which is chock full of new products and, for practical purposes, infinite demand:

Biotech Index: Heal Thyself!

Matters have devolved so thoroughly that the HF GOAT of Biotech – perhaps the GOAT of the whole HF industry, is now taking capital on quarterly liquidity.

His fund had been closed to new investments for much of the preceding decade. For my money, with his benchmark down 50% in barely six months, now wouldn’t be the worst time to take a look at his offering.

But I’m here to provide enlightenment and erudition; not to hawk hedge fund offerings.

And the last thing the Government apparently wants to do is to energize the bleeding edge sectors of the American Economy. Clearly, they believe to do so would run against their political interests, but I’m not sure they have the political calculus quite nailed here. Maybe they should get their heads out of Davos and pay a visit to Davenport.

But instead, our leadership will hide behind the Fed as the agent to reverse the reduced Buying Power of the Almighty American Consumer. On Thursday, we’ll be forced to endure yet another set of inflation statistics – with CPI expectations substantially unchanged at recent thresholds of >8%.

But don’t worry; the Fed has the President’s blessing to raise interest rates – and take the blame when: a) this takes yet another slug out of economic output; with b) negligible impact on the pricing pressure we all feel.

Higher interest rates, for instance, are not likely to provide me much relief at the schmear counter. Or, for that matter, at the pump.

Plus, if the Fed gets real aggressive and engages in sufficient hiking such that it takes rates, to, say, 4%, that’s still only half of the current rate of inflation. But the political narrative will be such that the Fed will be blamed, nonetheless.

Along with Russia, which appears to be closing the circle on key regions of the Ukraine. Or maybe L’il Kim, who has now launched more missiles in early June than he did all of last year.

And, in terms of the markets, I find risk assets to be neither cheap nor expensive; probably I’m right on both accounts. Not many catalysts out there for a rally, but so much recently manufactured liquidity that….

But we’ve been through that a thousand times before. And, if the good times are all gone, I’ll be bound for moving on.

There’s really nothing else for the rest of you to do but stay and fight it out; paying for your exit is probably too expensive.

Except with respect to this column, which has blessedly reached its denouement. They don’t charge me for resting my keyboard – yet.

So, I reckon I’ll bounce while the bouncing is good.

I’ll look for you if I’m ever back this way.

TIMSHEL

Operator, can you help me make this call?
See the number on the matchbook is old and faded,
She’s livin’ in LA, with my best old ex-friend Ray,
A guy she said she knew well and sometimes hated
Operator, let’s forget about this call,
There’s no one there I really wanna talk to,
Thank you for your time, you’ve been so much more than kind,
You can keep the dime…

Jim Croce

Yup, you can keep the dime. I was gonna use it to make a call, but now I reckon not.

Because I read this past week that whoever decides such matters had removed the last remaining NYC coin operated pay phone from its HQ – as it happens, in Times Square.

Here’s the evidence:

My additional investigations (conducted on the ubiquitous, impeccably accurate Snopes.com) suggest that this is, as ad nauseum designation deems such matters, Fake News. That there are, apparently, any number of these buggers still functioning on Manhattan streets, and even more when those ensconced inside bodegas and other such commercial enterprises are counted.

And it certainly would be inaccurate to suggest that the city features no more pay phones of any kind. They have these new-fangled machines that hook into them fancified cell phones on nearly every block. I’ve never used one of these contraptions, but then again, there’s lotsa things I never done. Like making a TikTok video or operating behind the wheel of a speed boat.

I reckon I’m just too old to change now. But I kinda wish that the folks at Snopes wouldn’t have saw fit to call BS on this here story, because it is about the best theme I can come up with on this holiday weekend. On the other hand (so I tell myself), there is ample precedent in this space for bending the facts just a tetch — in the name of poetical license and all. So that’s what I’m gonna do now.

Leastways, I got no other use for dimes, because even before they bounced that last Superman Receptacle one outta town, it cost a federally mandated 4.94 of them to effect a telephonic connection. And, beyond this, there ain’t much a fella can do with 0.8 of a bit. I do own quite a few of them round near-worthless cylinders, though, gathering dust in various receptacles across my multiple residences, and with which I can’t bear to part. Because I like to see them, even if the image of Franklin Delano Roosevelt embossed on every one of them looks, to me, more like his successor Harry S Truman.

Roosevelt or Truman: I Can’t Rightly Tell

So, I reckon I’ll hold on to the ones I got – dimes that is. Maybe even shine ‘em up now and again. It don’t much matter, after all, if the guy on the left is FDR or HST. Plus, in my research for this note, I learned that the S in Truman’s name is just an S. He don’t have no additional letters in his middle name. And, that being the case, putting a period after it is a typographical error. It ain’t Harry S. Truman; just Harry S Truman.

I could swap any dime I have for a few hundred British Thermal Units of Nat Gas, but hey, it’s the official start of summer this weekend, so why bother? The commodity crossed $9 per 10 Billion BTUs earlier last week, nearly 4x where it was trading a year ago, so it’s safe to say they’s pricey. I also recently learned, to my infinite horror, that Canada, which I once assumed to be the producer of 100% of the world’s NG, is now a net importer of the stuff. It’s like Wisconsin sourcing most of its cheese from Vermont, or Mexico outsourcing poncho production. And it just ain’t right.

News is not much better in other realms of the Energy Patch. Friday’s WTI close of >$115/barrel is itself a triple from even pre-lockdown days, and a level that eclipsed our post invasion panic session of a couple of months back.

And ten cents won’t purchase much of anything else – not even the fleshy stuff that you’re BBQing this weekend:

From what I gather, the folks in charge in Washington are just as likely as not to celebrate this here graph. Maybe slide it in alongside the one indicating record prices as the pump, and proclaim a new era of vegetarian, bicycling Nirvana.

I have some sympathy for them, though. Not too much, after all, that the House, Senate, President or even Supreme Court can do to turn longstanding food consumption patterns on (I must say it) a dime.

Economists are hopeful that these trends will run their course. That pricing pressure has peaked. And maybe it has. But inflation is a tough nut to crack. And, while we’re on the subject, the financial press has recently been bandying about a quote from the magnificent Milton Friedman, that inflation is always and everywhere a monetary phenomenon. I LOVE Friedman, but is he right here? Are, for instance, the price increases in Grains, Meats and Energy simply a matter of too much money chasing too few goods? Or does the hostile disruption of these products from major supply sources factor into the equation? Is, for instance, the bird flu that is destroying our poultry population and rendering wings, legs and thighs a delicacy beyond the economic reach of the masses truly and exclusively a monetary phenomenon?

Just wondering is all.

Meantime, the market was droppin’ dimes all week. Like it was Peyton Manning or John Stockton. The Gallant 500 recaptured >6% of recent losses; Captain Naz >9%. The value of corporate paper spiked. Crypto stabilized. I reckon we’ll take it.

But rather than take a victory lap on my repeated “oversold” call, I’ll simply state that I was relieved to have been let off the hook. However, I must point out the obvious: bear markets don’t typically end in the types of V-bottoms manifested last week, which are more typically driven by short squeezes and poorly informed re-allocations of capital than they are evidence that the selloff is over.

On balance, market prognosticators are calling this a Bear Market rally, and on balance, I am inclined to agree with them. Valuations may hang in there for a stretch – if for no other reason than selling fatigue, but the underpinnings of the economy feature some ominous signs. To wit, the Almighty Consumer has spent down her covid savings and is increasingly relying upon credit to finance her purchases:

Not gonna lie: all of this makes me a bit jumpy.

One way or another, though, my dimes are buying less, and the images on the coins themselves are looking less like Roosevelt or Truman, and more like FDR’s predecessor: Herbert Hoover.

In earlier, happier times, I’d probably trek down to the corner with some change in my pocket and call someone.

But the coins will no longer work in the machines, and even if they did, there’s no one there I really wanna talk to. Certainly not my best old ex-friend Ray, nor his roommate. Likely, the feeling will pass, but in the meanwhile, I intend to proceed with extreme caution.

I suggest you do the same.

TIMSHEL

Have I really been describing risk assets as oversold? I hope not, because if so, God Oh Mighty, have I been off.

Makes me feel like a Bull in the proverbial China Shop – stomping about, uncaring, and unawares, and breaking all the fragile, porcelain dainties within my vicinity.

Affairs have devolved so badly that the Gallant 500 spent most of Friday in full Bear configuration, before gathering itself in the last hour or so to escape – for now – this ignominy.

However, those looking for an extra portion of Humble Pie might wish to glance at the front page of Bloomberg’s Equity Index Dashboard (BBG Code WEI), which, to save you the trouble (along with the ~$2,500 Monthly Subscription Fee), I will offer here:

A review of the right-most column indicates that the two worst performing indices in the whole friggin’ ’22 configuration are the above-mentioned Gallant 500 and its pal: Captain Naz. Both of which are currently being crushed by spitball jurisdictions such as Mexico, Brazil, Spain, France and even Italy.

Though they don’t merit a front-page listing, I’m happy to report that we are running ahead of Sri Lanka, Poland (barely) and (yes) Russia, and, if you want additional positive karma, the Ukraine is kicking of our ass.

In general, though, don’t know when the last time was that American indexes were bringing up the rear of this race, but I suspect it’s been quite a while.

Even Tiger Woods is running ahead of us on the Leader Board, and he was forced to withdraw from the PGA tourney on Saturday.

But as matters stand, we have no alternative other than to wallow in our global shame, with the only offsetting news being that the ’22 contest ain’t yet over — yet. We might surge forward from the rear of the pack — like the (aptly named) Rich Strike did at the Derby — and grab an historic win. On the other hand, we could fade in the manner of Summer is Tomorrow, who actually came out hot and was leading for about 1/4th of a mile, before coming in dead last in the field of twenty.

Financial prognosticators are now in desperate competition to call the most wretched bottom they can muster, with some legit strategists even predicting another >25% down before the debacle ends.

Truth, of course, is that nobody knows. It was a lonely crowd that was predicting a collapse a few weeks back, but now, of course, they’s multiplying like hobgoblins.

And, in these sorts of environments, investors cast about for clues of any kind. After Wednesday’s somewhat historic rout, what passed for good news (and caused our markets to open strong on Friday – before collapsing and then recovering) was an announcement from the People’s Bank of China that it was reducing the rate on 5-year loans by a big fat 0.15%.

Well, OK, says some of us, “now we can play”. But then they thought better of it. China is still in 0.00-vid lockdown. It just announced a double-digit decline in April Retail Sales, a 2.9% drop in Industrial Production and an Unemployment Rate of 6.7% — nearly double that of the levels most recently registered in the United States.

In a Command-Control economy, where both activity and statistics are under the complete mastery of the Ruling Class, them’s pretty bad numbers.

And I’m kinda wondering if they’s sustainable. Because, you see, I have this theory. It’s not a particularly uplifting one, but I believe that two forces drive all socioeconomic matters on this here planet: military might and economics. As a corollary, I’m convinced that the latter controls the former. More specifically, finances rule the field, first and foremost, because they are the engine behind all matters martial.

So, why does this Xi character control China? Because he controls the Chinese Army. But behind the curtain are all those billionaires who fund the Army. Who I believe are the real playas here. Who are not likely to continue to roll over and get stiffed so that Xi doesn’t get blamed for more covid. They’s losing money by the bushel basket at the moment, and, I suspect, are not shy about expressing their displeasure in certain sections of Beijing.

Are they gonna bounce Xi? I doubt it. But I do suspect that they are placing enormous and increasing pressure on him to remove his boot-heel from the national economic throat.

And, if he has a change of heart, if he opens for business again (inevitably claiming full, historic victory over the virus), it might just be the catalyst to turn all those investment frowns I see upside down, to convert all those Wall Street Strategists’—currently outflanking each other in hysteria to call the lowest lows, from Bears into Bulls.

It would certainly do wonders for those Big Tech Dogs, which investors have followed, recently lemminglike, into whatever valuation fantasies prevail at any given point in time. It would also, presumably, offer aid and comfort to the most recent authors of our extended heartbreak: Walmart and Target. Which buy virtually all their wares from the People’s Republic.

If the Big Tech Dogs (to say nothing of WMT and TGT) do indeed recover, whither our misbegotten indices? You can decide for yourselves.

Something like this is bound to occur sooner or later, but who’s to say if it’s at SP3.8, SP4.0 or S.P3.0?

Meantime, though, it’s a tough point in the calendar to gin up much optimism. We’re headed straight into the Memorial Day holiday slowdown, and one doubts how much additional risk that investors will wish to absorb into that cycle. Data flows are traditionally slow this time of year. The mainstream news headlines, such as they are, are unilaterally depressing.

I still think risk assets are oversold and poised for at least a modest recovery, but I struggle in vain to identify plausible alternative catalysts.

Perhaps it’s this. Naz P/E’s have come crashing to earth, and are now, improbably hugging their two-decade averages:

I must state, though, that multiple contraction is not typically the stuff – at least on its own – of which sustained recovery rallies are made.

So, maybe you’ll join me in hoping for a China in a Bull Shop rally.

Because the alternatives are frightening to contemplate, boiling down to either China in a Bear Shop, Bear in a China Shop, or the time-honored:

Bull in a China Shop.

Of which (I’m sure you’ll agree), we’ve had far too much of late for anyone’s liking.

TIMSHEL

“C’mon, c’mon down, ya got it in ya, uh huh.. …Got to scrape the sh!t right off your shoes”

— Mick and Keith

I must begin with an apology to Mike Mayo – a well-traveled banking analyst who, ostensibly due to his penchant for undertaking bite-the-hand-that-feeds-you downgrades of Wall Street firms, managed to get himself bounced from several of them. I’ve interacted with him once or twice. He seems a nice enough fellow.

About ten years ago, he published a book called “Exile on Wall Street”, detailing the episodes briefly described above. Mike landed on his feet, though. He now heads up Financial Sector Research for (the often misanthropic) Wells Fargo Securities, where he still takes shots at banks.

Like Mike, I have borrowed, glibly and titularly, from the Stones. My justification is as follows: next week is the 50th anniversary of the release of their magnificent double disc: “Exile on Mainstreet”, which many consider to be their masterpiece. Having pondered this for decades, I find myself more in the “Let it Bleed” camp. But: a) I’ve already written about LIB; whose: b) 50th release anniversary was 2.5 years ago; and c) it’s a pretty close contest between EoM, LIB and Sticky Fingers.

I note, in passing, that Exile’s Golden Jubilee coincides almost to the day with Apple’s announcement of its intention to discontinue production of its once-iconic I-pod device – that new millennium technological marvel that could store dozens of MP3s on a device that (get this) fit into the palm of your hand. Much has changed since its release; much hasn’t.

“Exile” was first released on vinyl (natch). Then on the fabulous 8-track, cassette, CD, MP3, Napster (God I loved Napster), YouTube and other internet frameworks. It is now available, of course, on Spotify, Apple Music, etc. It was the second album (after Sticky Fingers) manufactured and distributed by Rolling Stone Records, remembered (by me, at any rate) primarily for its yellow vinyl affixed labels with the band’s newly created and unmistakable tongue logo in the middle. RSR folded, indecorously, into a big conglomerate that is now Virgin/Atlantic in the early ‘90s.

So, the Stones’ big double album (recorded in a drug-hazed rented villa ensconced on the French Riviera) pre-dated the I-pod by nearly three decades, and now, surely, will outlast it – presumably by eons. It has already outlived the band’s own record label by a similar length of time. That, my friends, is something, at any rate.

From a lyrical perspective, I’m not even sure the band could release the record, replete with its scatological, borderline racist and sexually explicit references, into the current atmosphere, featuring, as it does, hypersensitivity to microaggressions of every vintage.

If I’m somewhat ambivalent as to whether Exile is the Stones’ best album, I am entirely clear as to its top song. It’s “Sweet Virginia”, which, if there’s a better tune ever recorded, I’ve not heard it. From the twangy, finger-picking opening, bleeding into Mick’s breathtaking harp intro, to Bobby Keys’ extraordinary R&B sax break, for me, it comes as close divine as anything my ears have ere experienced.

And then, most importantly, comes the harmonious hook line:

“Got to scrape the sh!t right off your shoes”.

All of which brings my disjointed themes into harmony. Because, from a Wall Street perspective, it sure seems like somebody – perhaps more than one of us, stepped in it.

From any proximate position, it would be difficult to have missed the olfactory unpleasantness. Though it wearies me to do so, I reckon I must begin with inflation. April CPI and PPI clocked in at high single/low double-digit levels respectively, thresholds that would be truly terrifying if – get this – they weren’t nominal improvements from March figures.

“Core” statistics, which oxymoronically exclude Food and Energy, were a bit tamer, but it’s not as though that nicety is likely to create music to soothe the public’s savage breast. As one manifestation of this, and in addition to the maddening upward pressure on Crude Oil (which even draining our Strategic Petroleum Reserve and begging the Ayatollahs to pump more and send it over don’t seem to cure), the refined petrol that we pump out is pricier than ever before:

Gas, Gas, Gas – It’s Jumpin’ Jack Flash (Album Source: “Get Yer Ya Yas Out!”):

And, entirely skipping over other real-world vexations such as the Baby Formula shortage and the leak of a draft of the Supreme Court’s overturning of Roe (feel free to connect these dots as you will), we must, I suppose, migrate to the dubious, hypothetical world of crypto.

I really don’t wanna do this. But duty calls. A Stable Coin collapsed, and, in result, took a huge bite out of the entire digital currency complex. Because Stable Coins is s’posed to be just that: stable, bringing, as such, an element of sobriety to what is (whatever other views one takes on the proceedings) an entirely speculative concept.

The culprit – a handy little item called Terra (nice, earthy branding, Terra) sought to maintain its stability against fiat currency through algorithmic processes.

And what could possibly have gone wrong with that approach?

Well, something did. We can hope for better fortunes with respect to Terra’s bigger rival Stable Coin: Tether, which claims to be backed by honest to goodness verifiable collateral. However, to the best of my knowledge, no one has seen an audited Tether Balance Sheet for several years. Sooo…

None of this was particularly constructive to more traditional risk assets, which now (but perhaps not for all time) are nearly 100% correlated – tethered, if you will, to crypto. Equities continue to be a wild ride and were in full collapse until they staged a much-needed relief rally in the last 1.2 sessions of the week. Didn’t save them from recording their 6th straight weekly string of losses, though.

The microscopic V-bottom that began on Thursday afternoon did not take me by surprise; after all, I’ve been arguing that the markets were oversold for > two weeks. And how has that worked out?

But for those with sufficient grace to afford me the benefit of the doubt, I continue to believe that there are probably reasonable entry points here. This is true not only for equities (FactSet reports that for the first time in several years, forward-looking P/Es are now below their 5-year average), but probably, also for credit. Aggregate spreads are soaring in harmony with other turn-tail signs of risk aversion – but with scant visible rise in actual default risk:

OAS Credit Spreads Widening All Down the Line:

As is my habit, I will argue that pricing the Gallant 500 at a 38 handle (which happened last week), or bidding bonds down to a near doubling of credit spreads, is no less conjectural than where these instruments were trading a mere month and a half ago (SPX ~46; OAS < 1%). Only now it is much cheaper to add risk than it was a month at that time. So it seems like they’s worse points to take a shot.

I don’t reckon that loading in here will be a pleasant journey. Quite to the contrary – in order to make it work, it will be necessary to avoid a pant-load of steaming piles all along the path.

And if you happen to step in one, so what? You’ll know what to do – just follow Mick and Keith’s instructions – issued two generations ago. I won’t beg it of you, but yes (I believe), you got it in ya.

To scrape the sh!t right off your shoes.

The only question is whether you will rise to the occasion.

I think you will, but, in closing, please bear in mind that these comments are issued by one who is an Exile of Wall Street.

TIMSHEL

I’m writin this here note awaitin the arrival of my fourth grandson. And I wouldn’t a reckoned on that. Four grandsons! God oh mighty!

The still to be named little Feller (yup, his surname is indeed Feller – owing, so I’m told, to some of his forebears bein’ in the business of fellin’ trees) should be droppin in any time now; almost certainly before any of y’all receive this note. Henceupon, I reckon I’ll fill y’all in on the good news as soon as it come to me.

Grandson #4 is all I’m likely to git. No granddaughters; no more grands of any kind.

I’m not complainin, though.

Some (I hear tell) never git no grands at all.

Lord knows, he’ll be entering the proceedins at an interesting pass, with less visibility into the future than his two oldest brothers – born, respectively, in 2015 and 2017.

The one right before him come two years ago this past Friday – on Cinco di Mayo ’20. When we was all in lockdown, with no notion of when they’d turn us loose.

I reckon them last two got something of this nature in common.

Because there’s a passel of uncertainty at the moment. You might even call it LOCKDOWN level uncertainty. As one example (somewhat random and owing in part to a nasty round of Bird Flu makin’ its way across the land), the price of chickens is more than double the level that greeted any of his three older brothers:

Chicken: Finger Lickin’ Expensive?

I reckon it don’t matter much for now. He’ll be on his mama’s milk for a few months, and then subsisting on that mush (now in terrifying short supply) that passes for infant food.

On the other hand, if current trends continue, by the time he’s ready to dig into The Colonel’s Original Recipe, it might not be economicly feasible for him to do so.

His fokes, after all, have other expenses to consider, and may need to be a little parsimonious in dishing out them wings and thighs.

They could, of course, take out a secondary mortgage for these luxury victuals.

But I can’t hardly counsel that.

Mortgages – More Expensive than Chickens:

What I can’t figure is where this here chart tops out. The base case is that it goes higher, what, with the Fed not only not buying, but actually selling, this paper and all.

Leastways, he’s got a solid roof over his head, mostly paid for with the rest at monthly outlays his daddy can (trust me) afford.

Other little fellers enterin’ this world mayn’t be so lucky; even tumble-down shacks in Bigfoot County are trading at levels so’s which regular fokes can’t afford them:

And this is all afore the big jump in mortgage rates embedded in the rightmost portion of the precedin’ graph. Meantime, you’d think that this would take a bite out of housing prices, but it hasn’t – so far. I’d show you the most recent official housing data, but instead will just tell you that the benchmark index (Case-Shiller) is trading at 10x its ’19 lows.

So, generally speaking, my boy is entering into a hard slog of financial environment. Interest rates rising in a slowing, deteriorating economy, forcing those of us who, with picks and shovels in hand, toil in the market mine, to grind away in the dark – either without lamps, or, having lamps, lacking kerosene (the price of which, by the by, has more than doubled in the last year) to light them:

Kerosene – Now You See It; Now You Don’t…

All of which points to the real-life, as opposed to theoretical, impacts of inflation on the world’s activities. They’s a lot of chatter about inflation these days, including by the Fed, which, late risers thought they be, appear to be at last attendin’ to the problem.

But nobody – including the Fed theirselves – has much of a notion about what to do about it. Lots of them over-schooled-in-the-economics types says that rates must rise above the level of inflation in order to have a chance to tame it at all. And I reckon we’ll see what that looks like this coming week, when the next round of data drops (is it just me, or does it seem like there’s inflation numbers commin’ out these days most every day?).

CPI and PPI are expected to have backed off a titch in April, and I wouldn’t be surprised if they had, what, with commodity prices retreating from post-invasion shock levels.

But commodity prices is back on the rise in May. And not likely to be driven down in the short term by obtuse actions such as 50 bp hikes in the Fed Funds Rate and promises of Central Bank Balance Sheet reductions.

Nope, chickens don’t give much of a care about that. And, just to be sure, I went out back and aksed them. Whereupon they ignored me and kep on peckin at the dirt – jes like they was doin’ before I come.

And last week, while we was hooeying around with Chairman Pow, the Commerce Department, to little fanfare, announced a 7.5% decrease in Worker Productivity — comprised of 5.5% increase in wages, combined with a 2.4% drop in output (the math here don’t quite add up, but I was never none too good at cipherin’).

*****

All of the foregoin’ has got risk assets actin a bit peekid. I won’t recount the specific carnage, but the Naz is in full Bear Market config. So too is Investment Grade Credit (High Yield not fur behind). And jes for good measure, them new-fangled modes of swappin’ goods, which are supposed to replace them dirty bills the missus keeps in her coffee can (for the obtuse: Crypto), is down by half since Thanksgiving:

Crypto Carnage: Money that Ain’t Money

Now I’ll admit that all this is a bit beyond a fella what’s about to be a grandpappy for the fourth time to figure. I hear tell that these here money forms reside strictly on computers, which I don’t understand none too well.

I did notice that some dude from Nebraska who everyone seems to follow like a tent show preacher said, at the annual Omaha BBQ he throws for a buncha city slickers from New York, that he wouldn’t pay more’n twenty-five dollars (about a quarter of a tank on my John Deere) for the whole shootin’ match. And from what I can decipher, he may be right.

(I should also inform y’all that my tractor has four on the floor, which is more than can be said about them ‘lectric vehicles and other doodads on the road these days).

So, I reckon them dirty bills and coins in that there can that grandma has buried where she think I don’t know where it is might just be worth perservin’. Not only agin crypto, but also agin’ the that funny little currency they use in Japan, where I am informed the whole crypto thing got birthed:

Nope, them dollars ain’t worth a damn agin chickens, kerosene, or new dwellins’. But it do buy more Yen, stocks and bonds than it did jes a while back.

And all jes when I have to set up a new nest egg for grandbaby Number 4. I reckon they’s worse times to dive in, and, on the whole, I figure that these here stocks and bonds may fetch more sometime before he’s of age, and we take him out into the fields, with his daddy and grandpappy, to learn him some risk management.

But we’s a still waiting on him. And I reckon I’ll wait to build his book of stocks and bonds. I’ll keep y’all posted.

In the meantime, keep ‘er tight.

TIMSHEL

Somehow, we’re through the first trimester of the great campaign of ’22. From a grading perspective, it’s one that most of us are not particularly fired up to sprint home to show our parents.

What passes for good news here is that we still have 2/3rds of the year to go, that our calendarbased cups runneth under — to the tune of 67%.

Is that a measure of our capacity to drink deep? Or is it an indication that we are unlikely to slake our thirst to the point where we’ve had our fill? I reckon we’ll find out.

A current read is, of course, anything but encouraging. And, unfortunately, it devolves to me to inventory the carnage – a bleak exercise through which I will seek to pass as quickly as I am able.

On the economic side, the tidings are grim. The economy contracted by >1% in Q1 – an outcome that came as a surprise to everyone – including me. Notably, this is a measure of nominal, er, growth. Thus, when one overlays the associated measure of inflation, which, within the same release, clocked in at 8.0%, we’re looking, in real terms, at a significant contraction. I read some of the gibberish about how this ain’t so bad because it is driven by inventory adjustments, trade balance changes, and so on and so forth. But I know this:

It ain’t good.

Meantime, critical prices continue to surge. Heroic efforts notwithstanding, nothing – short of the (morally unthinkable) prospect of removing the shackles from our own production capacity – appears to beat back rising energy costs.

Other than perhaps filling our tanks with Corn. Which we are doing through E15 Ethanol, but which might not even work, as the latter is now at its highest price level in more than two generations:

Corn Prices: Higher than an Elephant’s Eye

In Europe, the divorce proceedings, by mutual consent and owing to irreconcilable differences, between the Russian Energy Industry and Continental consumers, ensue unimpeded.

China, of course, is in zero-covid lockdown, and feeling significant economic pain in result:

Now, I’ll stop short of busting out the tired cliché that when China sneezes, the rest of the world catches a cold. More accurate would be to state that the rest of the world takes their remedies, through the form of pharmaceutical exports, upon which we deeply rely.

We also import other sh!t from them. Like machinery and technology equipment. If they’re indeed slowing down, no matter how we otherwise may feel about their leadership, it’s something of a problem for us.

Transitioning to the markets, the (1/3rd) good news is that China is allowing its currency to devalue a significant amount relative to the USD, rendering the goods we import from them more than a smidge cheaper. But this also implies that our exports to them are more expensive. Which could be a problem – particularly for those Big Dog/Sell-Everything-to-China Tech companies, who, on balance, broke our hearts with their earnings releases this past week (more about this below).

The same can be said about Japan and the USDJPY exchange rate, which crossed the 130 mark (highest in about a generation) last week. Time was, we would buy virtually everything from the Japanese. But no more. We do purchase their cars and entertainment hardware, which is now cheaper, purely on a currency exchange basis, by more than 10% this year. Yes, their imports from us are pricier, but that doesn’t matter, because they never much liked buying our stuff anyway.

As mentioned above, earnings, while respectable on balance, are a dumpster fire across most of the Park Avenue section of the Equity Complex. Particularly problematic was Amazon. They reported a loss for the quarter – which itself is not much of an issue – owing to the creativity of the folks in the Office of the CFO that produce the numbers. However, FactSet is reporting that their massive whiff took three full percentage points off the earnings growth tally for Q1, which, had they simply reported “flat” (which I believe it was in their power to do), would reach a respectable double-digit threshold.

But we have lived with the earnings of these ruling class corporations since before I can remember, and so, with their earnings, do we die. Except for the now-fully-ensconced-in-an-alternative-universe Meta/Facebook, these names are down ~30% from their highs — registered just a few weeks ago.

And, in result, our beloved Equity Indices are all in free fall. You can read elsewhere about how this was the worst April for the Gallant 500, General Dow, and, most dramatically, Captain Naz (now officially in Bear Market territory), in several decades, about how our stock market is off to its worst start since WWII…

And so on, and so on, and shoobie doobie doo…

I also remain beyond worried about credit markets, who, in tail-wagging-dog fashion, are, for once, following the lead of their less erudite opposite numbers in equity-land. Both Investment Grade and High Yield instruments are approaching lockdown level valuation reboots.

And Credit Spreads are, of course, not the only source of worry in the Fixed Income Complex. I may not need to inform you that interest rates are going up, that the 5s/10s Treasury Curve is inverted, and that all of this comes to us in advance of Thursday’s FOMC wingding, which is setting up to be a rager. The Street is pretty locked in on a 50 bp increase in Fed Funds, and we’ll probably hear more saber rattling about Balance Sheet reduction. And, on a separate but related note, we learn this week how much paper the Treasury Department is fixing to dump on us thus quarter. It’s probably a lot, and just when the long-ravenous Fed is pushing away from the table.

So, our Central Bank is gonna get all in our grill one week after a surprise negative GDP print (here’s an early prediction – a couple of weeks from now, we’re likely to learn that the Commerce Department miscounted, and finds, miraculously, that GDP is revised upward into modest, positive territory), against pretty clear evidence of (at minimum) a slowing domestic and global economy. Contemporaneously, the Treasury Department is likely to announce a series of massive offerings to lay on a Fixed Income market that: a) is showing scant enthusiasm for these investments; and b) will feature the Fed not as buyers, but rather as sellers.

What could possibly go wrong?

Far be it from me to complain, though. We’ve been in a Bull Market for about 90% of my adult life, and Bull Markets don’t function effectively without an occasional culling of the herd. Now in particular would be a good time for a washout: a painful but finite-in-magnitude-and-time reboot down to more rational valuation levels, where a fella could look around and maybe find some good names to buy.

Problem is, I don’t think this will happen. There is (yawn) too much cash sloshing around and looking for a place to go. Big investment capital pools are flush with liquidity. As are corporate treasuries. With respect to the latter, seeing as how now does not appear to be an opportune time to invest in growth: plant, equipment, R&D, etc., what better way to serve their investors than seeking the best entry points for the repurchase/retirement of their own stock?

Those big capital pools are looking for buying opportunities here as well. And if you doubt this, just look online (if you haven’t already done so) at the highlights from Buffet’s just-completed annual “aw shucks” gathering in Omaha. Buffet (while not scolding the rest of us for our patent stupidity) is buying.

So, I reckon, as the second trimester of ’22 gets underway, we’re looking at more of the same, piled, as they say, higher and deeper. Lots of bouncing around at the index/factor level, significant downside pressure that never quite completely manifests, and unspeakable carnage with respect to specific, misanthropic individual names.

It makes for a helluva quagmire for the professional investors who comprise the lion’s share of my readership. I wish I had better advice for them, but I continue to counsel portfolio simplification, sober focus on key themes (based upon Socratic re-underwriting of same) and the intestinal fortitude to endure as difficult a set of investment conditions as ever I canrecall.

If it all makes you want to grab a drink, I’m with you. I’m reaching, in fact, for the one in front of me right now.

Naturally, my glass is only 1/3rd full and thus 2/3rds empty.

But for now, I reckon, I’ll take what I can get.

TIMSHEL

“Civilization on Earth planet was equated with selfishness and greed; those people who lived in a
civilized state exploited those who did not. There were shortages of vital commodities on Earth
planet, and the people in the civilized nations were able to monopolize those commodities by reason
of their greater economic strength. This imbalance appeared to be at the root of the
disputes.”

— Christopher Priest “The Inverted World”

This one goes out to Shan. Who just left us. Who would’ve understood. Or at least have pretended to do so. To humor me. Which he would have done with respect to the following statement.

We live in an Inverted World. We order our activities in ways that outrages logic. It wasn’t always so (or didn’t seem to be), but however much we have done so, surely, we’re doing more of it now.

Thus, the wisdom of the time-honored idiom: “measure twice; cut once”, which has worked to such effective purpose — for lumberjacks, homebuilders, plastic surgeons, and, indeed, anyone in the “measure/cut” game, is turned inside out.

There is no economic realm more exemplary of this than inside the marble, columned halls of the United States Federal Reserve. Those paying attention are aware that our Central Bank has spent the better part of the past 15 years cutting that which is within its direct jurisdiction to cut – the Fed Funds Rate. Which it has cut not once, not twice, but, by my count, no less than twenty times over the last fifteen years.

Did they measure? Even once? The answer is less than clear.

Eventually, they were bound to produce a condition under which they had hacked away so dramatically at borrowing costs (to say nothing of the oceans worth of new money/liquidity they have manufactured over the same time period), that there would be shortages of vital commodities, which those with economic strength would seek to monopolize. And this, arguably, is where we’re at:

Bloomberg (Vital) Commodities Index:

One can justifiably wonder if this here index is a true measure of the price of vital commodities. And, relevant to the debate is the reality that its largest component (>12%) is Gold. And who, outside of Flavor Flav’s mouth, needs Gold?

The next three principal constituents are energy products, which I believe can still be described as vital. They are followed by the three grain staples (Corn, Wheat and Soy Beans). These also make my V-list, Mayor Mike’s (Bloomberg) unfortunate comments that they magically grow by throwing seeds in the ground notwithstanding.

The Index is surely illustrative of the inflation that now plagues us, and would be even more so if Gold, which is substantially flat over the last two years, was not at the top of the allocation list.

But who, other than the founding members of Public Enemy, needs Gold?

In any event, the Fed is now reversing course, is undertaking what promises to be an extensive series of anti-cuts – the immediate next of which on the docket (early May) is now expected to clock in at a whopping 50 basis points. There is even some talk – mostly by curmudgeonly St. Louis Fed President James Bullard — of going 75.

All, however, is not lost in the cut/measure universe, as our policy-setting bankers are also telegraphing the likelihood of a series of cuts to its bloated $9,000,000,000,000 Balance Sheet.

So, more cuts, albeit of a different flavor, are in the offing. But have they measured the potential impact upon economic activity? Not as clear.

One aspect of this – to which they may wish to attend – is the impact of all this on the lowlife debt instruments that comprise the junk bond market, particularly the runts of the litter – securities with a CCC rating – one notch above D. Which stands for Default:

Beware the Triple Hooks: The Most Menacing Cutters of All

Legit credit market types refer to CCC bonds as “Triple Hooks”, bringing about images of gruesome cutting destruction. Yes, you can cut (with) Triple Hooks, but typically not without making a bloody mess of everything in proximity.

And often, when portfolio managers seek to hack away at their juicy-yield-but-uber-risky CCC paper, the bleeding can seep upward on the credit quality ladder. Something akin to this happened back in ’08 — when the rate cutting began. Hemorrhaging of the riskiest securities migrated to instruments of purported better construction, and the next think you know…

There are also pertinent developments in the cutthroat universe of Subscription Streaming. And none of it is good. The headlines events were Netflix’s report of having, for the first time in a decade, lost subscribers (causing its stock to crater by more than 1/3rd), and the abrupt, ignominious shuttering of the recently launched CNN+ service.

These tidings speak, more than anything else, of a consumer who is still inclined to cut the cord but is measuring with more discernment the inventory of content that replaces it.

One may also care to cast an eye towards the housing market for such discrepancies. 30-Year Mortgage rates have cut through the ominous 5% level like a knife through butter:

This, of course, implies dramatic increases in the already-astronomic costs of purchasing a home. But did this deter our intrepid home builders from ordering up the measured, cut timber and commencing construction on new dwellings?

It did not:

It can be hoped this is all for the best and I reckon we’ll find out. But not gonna lie: I find myself confused to the brink of madness.

And this, my friends, is not good, because your risk manager and everyone else will need full command of our wits to navigate the next few trading sessions, which feature earnings drops from the Big Barking Tech Dogs, our first glimpse at Q1 GDP estimates, and God knows what else.

So, yes, I pine for the days when multiple measurements were precedents to solitary, calculated cuts. But in an Inverted World, this may not be on the cards. We take the consequences as they come, but if I were you, I’d do what I could to invert the inversion: I’d be carefully measuring my risks, and be prepared to cut them if matters spin out of control (as well they might).

If Shan were here, he’d agree with me. But he’s not. So, I’ll never know if those were his true sentiments. Or whether he would have been, as was his habit, merely humoring me.

But in this Inverted World of ours, that’s just the way it goes.

TIMSHEL

“I’m. An. ORDinary. Guy”

— David Byrne

Yes (like the extraordinary David Byrne) I’m. An. ORDinary. Guy.

So ORDinary, in fact, that I have a lifelong affinity with ORD – known more expansively as Chicago’s O’Hare International Airport. Though I lived in that metropolis for (by my own estimate) for only 1/3rd of my interminable existence, I’d say that more than 50% of the airport hours I have logged have been at ORD – particularly during those boyhood days when my SoCal father and Chi-town mother would paddle me back and forth like a ping pong ball.

And I always took some partially perverse pride in ORD’s longtime status at the World’s Busiest Airport (which I thought was pretty cool). Until it wasn’t. Atlanta’s Hartsfield-Jackson (ATL) surpassed it about twenty years ago. And, just this past week, I find it has slid further – now also trailing Dallas-Fort Worth (DFW) and Denver International (DIA). ORD is now an ORDinary #4.

What in the blazes is going on here? I do wonder who among the airborne are passing in such great multitudes through Atlanta. Dallas, I sort of understand; at least it’s in the middle of the country. But Denver FFS? Way up in the mountains? With that terrifying blue horse out front?

DIA’s Mustang Menace:

Those iridescent red eyes ought to be enough to scare any god-fearing soul– not only away from\ DIA, but from the City of Denver, the State of Colorado, and maybe even the entire expanse of Lower 48.

And if that wasn’t bad enough, the whole complex– airport, horse, etc., is associated with a rather obtuse curse, the contours of which I struggle to understand. But I will say this: if a given civic landmark is to be subject to a hex, it would be better for all concerned if the venue wasn’t an airport.

Meantime, ORD lags behind, finishes, at least for the moment, out of the money. And it devolves to me to accept this with equanimity. But really, this is less of a hardship than I make it seem, because (I’ll let y’all in on a little secret), I have come to hate O’Hare.

This, I believe, reflects a maturity gifted to me late in life, because there’s not much to like (and a whole bunch to detest) about O’Hare. Impossibly long security lines. Nonsensical gate labelling — rendered even more maddening by incessant gate switching. Ridiculous drop off/pick up protocols. Bad food.

Nope. These days, I’ll take Milwaukee (MKE) every time. With its quirky used book shop in the central terminal, and Rent-a-Car facilities a pleasant, 20-meter walk from Baggage Claim.

Now, if only I had a reason to go to Milwaukee…

And as for O’Hare, passes into the realm of ORDinariness, leaving, for investors, only its handle as a redeeming feature. Because ORD is also the abbreviation assigned to ordinary stocks – foreign shares that price in indigenous currencies. By contrast, ADRs – American Depository Receipts – are securities domiciled abroad but priced in good ole USD.

ADRs are a handy little item, particularly, of late, for those investors with a bent towards, say, Japanese stocks. The JPY has taken a pounding against the sawbuck, and now commands < 0.8 of a penny – a twenty year low:

The good news here is that those with a yen for Nippy stocks who have gone the ADR route are down just over 6% — as compared to the > 14% pasting implied in the Japanese Ordinaries.

(If you’re thinking about a translation function involving outperformance using American ADRs, please discard this notion. Because: a) they don’t exist; and b) if they did, they’d be trading precisely where our ordinaries are currently positioned (Gallant 500 -7.8%; Captain Naz -14.7%)).

It’s small wonder that our Equity Complex is under pressure. Among other matters, PPI clocked in at an eye-popping 11.2%, year-over-year. Crude Oil prices, Washingtonian sleight of hand notwithstanding, are edging up back towards invasion shock levels. Natural Gas is now at a gravitydefying 7.3/10MMBtu – more than double the level registered when this fast-unfolding year began.

Corn (thanks in part to the cynical, temporary approval of E15: Gasoline featuring a robust 15% Ethanol contingent) is up by half in six months.

Inflation, alas, appears determined to hang around for a bit.

Meantime, The Street and the Atlanta (where else?) Fed have converged, pegging Q1 GDP at a tepid 1%. But we won’t obtain corroboration of these ever-infallible prognostications until the Commerce Department drops its first estimate on 4/28.

Interest rates have risen faster than at any point in several lifetimes, with 10-Year yields having doubled in just over four months. The Yield Curve has flirted with inversion for several weeks, and this, according to conventional thinking, evokes fears of a recession in the immediate offing.

I’m not sure this is on the cards, but a recent conversation with a client got me wondering. Recession is defined as two consecutive quarters of negative GDP growth. But if we take inflation into account, all things being equal, it should goose output by an equivalent amount. Thus, if a recession does indeed materialize, it means that the economic slowdown is of sufficient magnitude to offset the upward pressure of associated price increases.

This line of thinking also implies that at current inflation levels (no matter how one cares to measure them), GDP growth, in real terms, has been negative for several quarters — a concept too gruesome for further elaboration, I judge.

However, come what may, we must press ahead. The flow of earnings reports accelerates this week and will approach crescendo by the end of the month. The Bulge Bracket have mostly reported: a mixed bag at best. Their Investment Banking Divisions are sucking water, and deal flow is, at the moment, putrid.

The SPAC craze appears to have run its course.

Musk made his move on those tweeting birdies, who responded, on cue, by seeking to fling a Poison Pill down his gullet.

About all of which I have the following wisdom to share: _________________________.

And, overall, we are impelled to operate in an extraordinarily complex environment – with redlining risks, but (as I keep pointing out), entirely too much liquidity sloshing around the system to conjure any prospects of a rationalizing reset.

If it’s all too much for you, I empathize. I’ve been pushed to my limit as well. I took a week off but find, upon my return, that matters continue to be no less complex (and perhaps even more so) than when I buggered out.

I didn’t go nowhere during my absence, so maybe I should just jet off, and hope for the best when I (yet again) come back.

But no matter how I attempt to do so, all roads seem to lead back to ORD. My flight is delayed, and they’ve changed the gate on me four times – so far. Worse yet, my trip is now scheduled to re-route through Denver, where the Mustang Sally hex is certain to train its evil eye directly on my person.

Perhaps, on this holiday weekend, that’s what the Good Lord intended.

Because, after all, I’m. Just. An. ORDinary. Guy.

TIMSHEL