I ain’t missing you at all, since you been gone, away
I ain’t missing you at all, no matter what my friends say

— John Waite

Not sure if y’all noticed, but in an historic breach of protocol, I abandoned my post last week — failing to deliver my weekly note – upon which so many of you so deeply rely – for comfort, erudition, and, of course, as an infallible guide path towards investment riches.

It’s only happened once before — across more years than I count. And that on the worstest, most horriblest week ever, just over 11 years ago.

I’m able to offer neither plausible excuse nor suitable justification for this alarming betrayal of your trust. On the other hand, I’m not sure anyone even noticed.

Strike that, I did receive a note from my great pal and erstwhile book editor Pam, asking me if I was OK. And then there was Ben. Who inquired in person.

God Bless Ben.

Even though you don’t probably care, I can tell you that I spent a fair bit of my “week off” singing. Singing what, you may ask (even though you don’t care)? Well, before I tell you, please know that it wasn’t “a Capella”; I accompanied myself on guitar (which for me is sort of the whole point).

And, in terms of the set list, it tilted towards American Standards: “Over the Rainbow”, “Moon River”” (the fabulous Audrey Hepburn arrangement), “My Favorite Things”, “Raindrops Keep Falling on My Head”; and also selections from my more regular repertoire: Neil, The Stones, Bowie and Dylan.

Along with, of course, Paul Simon’s “April (Come She Will)”, which, in time-honored fashion, I’ll be playing all month.

Because A-a-pril is not only upon us, but is, somehow, nearly half over. From a market perspective, I anticipated that she would flutter in daintily upon us. And, while this in no way excuses my indecorous absence, I felt the markets would be in a state of Q2 pre-animation. Data flows were light, and it seemed like it would be a week that would serve little purpose other than teeing up the now-imminent bonanza of valuation-critical information.

I was wrong.

My most recent recorded sentiments indicated a preference to remain short the Treasury Curve and long Commodities (I’ve more or less given up trying to track the path of equities). In terms of accuracy, the results were a mixed bag. Treasuries continued their downward path, but Crude Oil — owing in large part to the brilliant decision to draw down a still-larger chunk of our dwindling strategic reserve (even as we aggressively restrain our own formidable production capacity) — retreated like a little bitch.

Like April herself, I expect she’ll be back.

However, the rest of the Energy Patch is a much different story – nowhere more so than in the realms of Natural Gas, the cost of which, if one dares to look, is now a 2.5 bagger in little over a year:

Jumpin’ Jack Gas:

Sugar is on a similar trajectory, and, channeling the Guess Who, if there’s very little of the sweet stuff tonight in your coffee, given current price trends, your java stash may also be light:

Sugar and Coffee: Lonely Feeling. Deep Inside….

If it’s any consolation, tea prices are pretty much where we found them a year ago and are in fact lower than where the reposed in 2018.

But one way or another, my sabbatical did not transpire against a market backdrop of calm serenity. But do they ever?

Things get interesting Right. About. Now. Banks report this week, contemporaneous to the release of March Inflation figures. And won’t that be fun?

We of course also have a hot mess of a domestic and foreign policy condition with which to contend, and my viewpoints (not that you care) are summarized below:

• The Eastern European War settles into a longer time frame conflict, drawing fewer headlines (in our ADD-laded world, even another Smith-like smackdown may wipe it from our awareness), but continuing to cause enormous disruptions to the global capital economy.

• Inflation plagues us well through the summer (and likely beyond). It may even accelerate.
• Having little other choice, the Fed amps up the heat on the Treasury Complex, jacking shortterm rates and beginning to sell down its balance sheet at the longer end of the curve.

• Credit markets, already feeling the pinch, will remain pressed, with heightened risk of default – particularly emanating from borrowers who rely on short-term paper that they must periodically roll.

• In a blinding glimpse of the obvious, it pays to keep an eye on the housing market here. Affordability – as measured in terms of percent of median pay required to cover; a) (skyrocketing) monthly mortgage payments (30-year fixed rates brushed up to 5% on Friday); against celestial (and still rising) home prices, is plunging by record amounts – just as we are entering peak selling season.

I therefore judge that upon my return, the market economy remains in a quagmire, with the irresistible forces of inflation, credit impairment, supply shocks, geopolitical uncertainty, and other risks, meets the immovable object of the still-galactic level of liquidity manufactured over the past several years.

I anticipate continued bi-directional volatility, accompanied, of course, by that vexing paradigm under which price fluctuations for individual securities are much more acute than what is registered at the index/factor levels. Capturing returns in this environment will remain as challenging as any construct that falls short of an all-out crash. I wish I could return with better prodigal gifts than this, but unfortunately, as I see it, fatted calves are in short supply.

Maybe I should just go away again. Nobody except Ben and Pam (and you) are likely to notice, and perhaps, upon my return, I’ll find some semblance of rationality has returned to the proceedings.

But: a) I doubt it; and b) I wouldn’t do that to you. At least not again.

So, you’re stuck with me, and, as long as you are, I hasten to advise you that the investment game is even riskier than it appears at the moment, and that the condition is not likely to dissipate any time in the foreseeable future.

Of course, if you banish me, I’ll offer up no resistance. And I wouldn’t blame you if you did. Because I have been bad.

But if you do so, know that no matter what my friends say, I will be missing you. More than I can express.

And that, so help me God, is the truth.

TIMSHEL

Before I begin in earnest, I must say that this Putin character is really starting to get on my nerves.

I hope I’m not the Lone Ranger here, but either way, I’m happy to have unburdened myself.

Meantime, and on a cheerier note, it looks and feels like Spring. Those eternally elusive “green shoots”, are swelling out in every direction. The air is warmer, and, on my home turf of Manhattan, the human flies and bees that populate the place are buzzing away. I got full corroboration of this while strolling down 6th Avenue midweek, and encountering the following image:

To me, this was the most authentic signal that NYC is back, as nothing says “Gotham” (OK; maybe Essa Bagels) more than an Inflatable Rat. I hadn’t seen one gracing the streets of the city since immediately prior to the lockdown, but now the old mixer is back in action.

I have written about this before, but if I hadn’t taken the dubious decision of a career in risk management, I might’ve enjoyed getting into the Inflatable Rat game. There’s sustained, unlimited demand, and quite unlike other “durable goods” industries, the value of the inventory actually increases with age, wear and tear.

I mean, nobody particularly wants to see a shiny, new Inflatable Rat. Quite to the contrary, the grimier, the gnarlier the condition of the mock murine monster, the better. To wit, if its rubbery skin features a gash that can requires a duct tape patch, it only adds to the meant-for menace of the messaging. They are easily stored, and only require jets of hot air to be rendered operational.

Yup, ya gotta love those Inflatable Rats. And even though I gain no direct benefit from their presence, seeing them gives me a warm, fuzzy feeling inside, and I hope it does for you too.

To me, their re-emergence is especially poignant at this particular pass, as exemplary of a capital and commercial economy that is none-too-tidy, and, arguably, full of hot air.

And our Feature Rat embodies these traits with uncanny precision, save for one omission: his owners failed to construct him with a proper tail. This runs in contrast to my thematic analogue because whatever else can be said about this here market, it certainly has a fat, nasty and potentially lethal tail.

The week’s action featured, perhaps most prominently, the continuation of the most abrupt selloff of longer dated Treasuries in history – taking Madam X’s yields — almost — to the shockingly salacious threshold of 2.5%. I hate to do this, but I am compelled to remind y’all that I implored everyone to hop on when her hems were dangling at ~1.7%. Her younger sister, that capricious Vixen VIX, has swooned down to a supine 20 handle – barely half of where she reposed as those Russian tanks were crossing the Ukrainian border.

In somewhat counterintuitive fashion, commodities across every asset class resumed their surge. Soybeans are now at a shocking >$17/bushel. Nat Gas is at an all-time high. As is Cotton. But I wouldn’t trouble myself on any of these scores, because, as I have asked before, who needs Soybeans, Nat Gas or Cotton?

We do, by contrast, occupy dwellings, and rents are surging – particularly in rat-infested NYC. And as for aspiring home purchasers? Well, take a look at this if you dare:

All the above projects out to an Inflatable Rat of a pricing picture. I don’t yet have a read on how bloviated March inflation numbers will be, but given what I am able to anecdotally discern, it looks like a blowout.

Maybe this is a good thing, though, because inflation is about the only expedient for what I believe to be the biggest menace facing the economy at the moment – the truly terrifying level of indebtedness we’ve managed to accumulate over the last several years:

What’s Owned to the Man: Consumer                                And Corporate

And this is to say nothing of what is owed by Washington, in the fifty state capitols, and by the nearly twenty thousand municipalities that dot our national landscape.

As I have repeatedly stated, I believe that this is what’s killing Powell by degrees. He needs to demonstrate the stones necessary to impose and sustain higher interest rates, and, meanwhile, we are in hock up to our noggins. If he hikes aggressively, it devalues of the paper held by The Man, who will not be particularly pleased with these outcomes. If he is more docile, inflation will surge, borrowings will accelerate…

…and so on and so on and shoobie doobie do.

Meantime, Friday marks the roll from Q1 to Q2, and raise your hand if you’re giddy about the prospect of reviewing and acting upon Q2 data flows.

And then there’s that whole Eastern European mess, about which I have little unique insight. I do, however, believe: a) that the situation is fluid (mostly to the downside); and that: b) even a tidy, unrat- like, negotiated solution will fail to offset the political reality that we’re gonna have to ice out that annoying (did I mention how annoying he is?) Putin for at least a couple of years.

In turn, this will cause sustained economic disruption and virtually ensure that inflation will continue to plague us all the while.

But God bless those equity investors, who have taken it all in with touching equanimity. General Dow (Ret.), The Gallant 500, Captain Naz, and even Ensign Russ have climbed back to levels last breached around Groundhog Day, when no one actually believed that rat bastard Putin would pull the sh!t he has since pulled.

Yes, he’s getting on my nerves.

But I deem it hardly helpful for the President to call for his removal, even if his staff scrambled to arrange a tortured walk back of the former’s clearly articulated statement to this effect. Spin away, my spin-meisters, and feel free, as you no doubt will, to operate as though the meaning of any statement and action can be re-engineered to suit domestic political agendas.

But know that Putin took the message in its original intent. The Commander in Chief of the United States has called for his removal, which can only be achieved by coup, assassination, or some combination thereof, and he will act accordingly. Not much constructive emanates from this sequence, I judge.

But what the heck. It’s Springtime. Baseball is back. And so are the Inflatable Rats.

In my giddiness to snap the above-supplied image of same, I failed to discern precisely what the beef was that summoned its presence. I do know that it was some sort of labor dust up. And though my heart and wallet reside with Management, I will wish the sponsors Godspeed on their efforts.

But I hope they have it in them to bear in mind that for us filthy, rodent-like management types, the effective allocation of capital and other scarce resources has seldom, if ever, been more challenging.

TIMSHEL

YYUR,YYUB,ICUR,YY4ME

— Time Honored Acronym of Unknown Origin

This here “poem” dates back to my childhood, and, perhaps, to an even more ancient era (if one exists). For all I know, its original author might’ve chiseled it into his or her cave dwelling.

Maybe you are familiar with it. If not, hopefully, your inner cryptographer can help you to decipher.

For those deficient in these skills, I offer the following hint. Convert the YY to “two Ys”, and then to “too wise”. The meaning of the rest of the string should then become apparent for even the most obtuse among you.

I landed on this path while following (what else?) the news out of the Ukraine, and its magnificent leader: Volodymyr Zelensky(y). One hears a great deal about him lately, and, those (like me) who obtain their news mostly from the printed (rather than the spoken) word, could hardly fail to notice that the numbers of “y”s at the end of his last name varies from publication to publication. The fabulous Wikipedia awards him two, while much of the mainstream press sticks to one. My crack research team informs me that there are as many as a half-dozen spellings available – including those that add an “i” in the middle of the last syllable, and various apostrophe-laden configurations.

The pedestrian reason for this is the less-than-fluid translation function between Cyrillic and English spelling protocols. But, in trademark fashion, I prefer my own narrative: he was born Zelensky and was awarded (by whoever is responsible for such matters) an extra “y” in result of his recent, undeniably heroic, leadership.

At the risk of stating the incrementally obvious, the “yy” tail might also be a nod to the masculinity (in a quaint, colloquial sense) of a leader who chose to stay home and fight rather than bounce — when a big ole army from the north and east rolled in — with a stated objective to annihilate him.

(If I’m right on this score, perhaps this is why (y?) his first name, a variant of Putin’s, also contains 2 y’s, while Putin’s doesn’t even have a single one).

And, in my judgement, no one should underestimate the degrees of difficulty associated with the attainment of the second “y” – to achieve “2Ys” configuration. Because wisdom, to say nothing of excessive wisdom, (not to mention the chromosomal benefits of the YY which I believe, on balance, to be beneficial to society — except in the NCAA Women’s Swimming Championship – and don’t get me started there), appears, at the moment, to be in particularly short supply.

All of which provides the jumping off point for the probing market analysis for which this publication is famous. “YY” investors judged last week a good time to muster sufficient intestinal fortitude to gin up the best Mon-Fri equities sequence in about 16 months. One which catapulting key indices to elevations last encountered when: a) the Russian Army was merely menacingly massing on the Ukrainian border and not blowing up maternity hospitals; b) the name of Zelensky(y) was only known in these parts as the recipient of a call for which Trump was impeached; and c) no one particularly cared about the spelling of b).

Was this wise? Was it too wise? I reckon we’ll see. We should, perhaps, remain mindful, though, that the rally comes against the backdrop of a shooting war that may represent the biggest threat to date of an always-unstable, post-WWII geopolitical equilibrium, a double-digit PPI print, the beginning of a likely extended era of higher interest rates, lingering and perhaps re-emerging pandemic threats, and sundry other annoyances.

Credit markets also rebounded a titch, and for that I judge we should be grateful. Because if they continue to wilt, we’ve got a big mess on our hands. Investors in these realms are, at best, a 1.5Y, and, over the last several weeks, have bailed out of the strategy class at a pace that might give Lia a 500-meter run for her money:

Nothing for nothing, but these funds are the cozy lair of innumerable pension programs, 401Ks, IRAs, annuities, insurance pools and even non-tax-sheltered retirement accounts (if there is such a thing).

When custodians of these capital pools hit the redemption button, fund managers themselves must sell their holdings, placing additional pressure on the entire asset class. Bankers begin to get happy feet. Paper is called in.

These trends feed on themselves, and what happens when they reach escape velocity is too gruesome to describe in this family publication (hint: 2008 redux).

Commodity markets were a bag of mixed nuts. Yes, the energy and metals sectors calmed down a bit, and Wheat is no longer a luxury only available to billionaires (centimillionaires can now plausibly afford a few bushels). But we’re far from out of the woods here.

To wit: Cotton is now priced at a multi-generational high:

The Land of Cotton: Look Away, Look Away, Look Away:

Not much cause for concern here, though. Because who, this side of a few Santa Monica hipsters, uses Cotton?

On the other hand, one could argue that the Fed is paying attention to these tidings.

Interest rates, as foretold in this space, rose acutely across the Treasury Curve last week, but rather than measuring the wisdom of this move, I will deem it a Pavlovian reaction to the FOMC Policy Statement, the attendant 25 bp hike in the Fed Funds rate, a d warnings of its resolve to jack up yields at every meeting until at least some time in 2024.

Near as I am able to determine, they also announced the immediate discontinuation of asset purchases (QE) and offered vague prognostications about reducing their ~$9 Trillion Balance Sheet. All of which should serve to maintain interest rates at still suppressed but elevated (by recent standard) levels, for the foreseeable future.

I cannot nominate, much less award, the Fed a YY for its policy judgments, as I adhere to a consensus that they should’ve taken these steps more than a year ago. Had they possessed the Ys to do so, markets might’ve absorbed the current traumas with more clarity and less uncertainty. The Housing Complex might’ve been more rationally valued. Stocks and bonds might’ve been trading at lower thresholds but would also have been less susceptible an all-out rout.

But as it stands, the Fed is raising interest rates into a deeply disrupted capital economy, which portends slower growth, and, perhaps, recession. Moreover, the new policy offers, at best, dubious prospects for effectively counteracting the increasing menace of runaway inflation. Its economists (the best, by credential, in the land) are maddeningly sanguine about it all. Their models show a downward trend to price increases, beginning in the back half of the year, with headline inflation numbers dropping daintily to a 2-handle in ’23 through ’26.

Not gonna lie: this gets my blood up. The inflation trends themselves hardly suggest organic correction, which, in any event, almost never happens. And this is to say nothing of the looming risks that prices will, in fact, spiral out of control.

These, in no particular order, include, but are not limited to, the following:

• Continued supply disruptions emanating from covid-land.
• An escalation of the current Eastern European hostilities, featuring additional sanctions, tariffs, etc.

• The prospects of renewed, redistributive fiscal stimulus, which may simultaneously hamper supply and boost demand.

• The possibility that hostile (Iran) or increasingly indifferent (Saudi Arabia) energy producing countries will fail to support our strategy of tapping their inventories while we continue – for political reason — to hamper our own production capabilities.

• Incremental strategic alliance between Russia and China (to say nothing of the disasters that await us if China takes this as an opportune time to expand its own control over Asia-Pacific economic affairs).

• Droughts, floods, continued worker shortages/wage pressures…

And so on and so on and shoobie doobie doo.

In result, on this Vernal Equinox, we are perhaps impelled to train our objectives somewhere short of the 2Ys threshold. It would, after all, behoove us to be wise rather than too wise.

I can state, in support of these more modest efforts, that I lack trust in virtually every price print I C. I certainly wouldn’t jump on the back of last week’s equity rally but playing for a pullback might just be 2Ys.

Interest rates are likely to continue to trend upward, but the timing, in my judgment, is highly uncertain.

Commodities are either wildly over-valued, criminally under-valued, or both.

The tactical answer is to operate nimbly, while, from a strategic perspective, preservation of your most beloved assets is essential.

It strikes me that our boy Zelensky(y) is doing precisely that. And he, after all, is rapidly working his way into history(y).

But neither you, nor I, am Zelensky(y). Nor should we wish to be. Because the migration from Zelensky to Zelenskyy must be driven as much by fate as anything else. If we seek to unilaterally grab that second Y, we stand a disproportionate chance of failing, and losing not only our first one, but all the other letters we possess.

But IC I may be overstaying my welcome, and ICUC it too.

And, if all of this is YY4U, I promise you I will understand.

TIMSHEL

First off, happy 2nd anniversary of “14 Days to End the Spread”, which transpires, I believe, on Tuesday. I was at a UWS Health Club (I like to live dangerously) when the alarms sounded, and I was summoned home. With a daughter in the third trimester of her third pregnancy, I didn’t leave the compound until August. The baby arrived, healthy and happy, on Cinco di Mayo. I have always believed that he will share a lifelong bound with those born during those early lockdown months — as “covid babies”. I very much hope this comes to pass.

I don’t wish to be premature here, but if the current trend of diminished corona-threat (or, at any rate, of our willingness to respond by disrupting all our activities, for dubious, and, at best, marginal, gain), we should plan a nation-wide mask-burning bonfire. From Spokane to St. Augustine. From Bangor to the border of Baja, CA. Omaha and Orlando.

Out with you, Omicron! With this light, we banish you! Bowie’s “Cat People” (putting out fires with gasoline) is blasting over enormous loudspeakers in the background. That, my friends, would be a sight to see, and, maybe, just maybe, would launch the end of an era of aggressive self-injury, of striving mightily to put up points against our own, er, squad.

British footballers, with trademark elan, refer to these episodes, where a player scores into their team’s net, as “own goals”.

And, as I was casting about for this week’s theme, I encountered a clip of a rare NHL “own goal”, wherein Detroit Red Wings goalie Alex Nedeljkovic tried to sweep away an approaching puck – which, inadvertently and unfortunately, found its way his own net. Whereupon he collapsed in a puddle of his own humiliation.

For the “read ‘em and weep” contingent among you, I offer the following link to the Detroit Free Press summary, replete with videos from several angles:

https://www.freep.com/story/sports/ftw/2022/03/10/alex-nedeljkovic-detroit-red-wings-goalie-owngoal/49919655/

I am less of a hockey fan than I am of baseball (i.e. I don’t care at all), so I Wiki’d this poor Nedeljovic guy, and find out that he’s: a) from Ohio; but b) is of Russian ethnic descent.

A Russian-American ginning up an “own goal” in Detroit. How very exemplary of our current vibe.

Because both countries are engaging in a veritable “own goal” orgy. Let’s start with the Russians. What in God’s name are they doing over there? I reckon the Ukraine is a nice piece of property, nestled as it is on the shores of the Black Sea, rich with agricultural and mining assets, and fought over since pre-historic times. It ranks 5th in grain exports, coming in behind, well, Russia, the United States, Canada, and France. Labor there is deliciously cheap; the poor souls who produce this natural bling, earn, on average, $500/week.

It is 27th in the World Hockey Standings but has never been known to give up an “own goal’. Russia and the United States, by contrast, rank 3rd and 4th, respectively. Team Canada is Number 1 and France clocks in at 15, leaving me to wonder whether there is a causal correlation between grain exports and success on the ice (probably not).

But Putin appears to have shot at his own net, at least insofar as: a) the Ukes have not, as yet, chosen to roll over and get stiffed; and b) the rest of the world is not only mad as a hatter at him, but is looking to extract mad retribution.

It is, however, conceivable that Vlad the Invader has his stick trained precisely where he wishes it to to be. He KNOWS that he can take down the Ukies, even if they are putting up pain-in-the-ass resistance. For all the bluster surrounding sanctions, the most cogent analyses I have uncovered suggest that he took them into his calculus, and that beyond this, he has multiple hacks around them.

And America (land that I love) may be playing right into his hands. The United States, after all, occupies the top 17 spots on the “own goal” league tables, and may just be living up to this impossibly high standard with respect to this here dustup.

Let’s consider our less than energetic responses in the realms of fossil fuels. We imposed heavy sanctions on Russian banks and financial institutions but have put those pertaining to energy finance “on ice” until June. We’re going hat in hand to the Iranians – sworn enemies of the U.S. – to replace the output. Moscow is brokering the deal for us, and those always-reasonable mullahs added some spice to the negotiations this past weekend – by blowing up a regional embassy of ours.

Meantime, we have not lifted a finger to spark up our own energy complex, which, until we decided to hog-tie it, was the most formidable in the world.

The Saudis have told us to pound sand, and, given the topography of that nation (the joint is NOTHING BUT sand), this tells us all we need to know about that.

And don’t even get me started on that whole MiG jet transfer fiasco with Poland (Hockey Rank 22).

Meanwhile, as was inevitable, inflation is beginning to run rampant. Y’all saw the Feb print of 7.9%. Government types are cheering the modest drop in recently hyper-charged used car prices, but doesn’t that just mean that everything else went up even more?

And, to offer a blinding glimpse of the obvious, these are February figures, deriving from a simpler time — before Russia was bombing maternity hospitals, before the world began to embargo this largest supplier of (yes) grains, but also industrial metals such as Nickel. Now, you don’t have to tell me how little a nickel is worth (7.9% less than it was a year ago).

But metallic Nickel (which comprises only 25% of the coinage accumulating on our children’s mason jars; the rest is copper) is a different matter. It’s used in a lotta important shit. Including the batteries that everyone is so spoony about.

It is now trading at about 8x where it was a little more than a year ago (by contrast, Copper is only up by around 10%), in part owing to a short squeeze last week that cost investors billions, and, beyond this, impelled the vaunted London Metals Exchange to do the once unthinkable – DK $4B of otherwise valid transactions in the commodity.

Beyond Nickel, Russia is also the leading exporter of Palladium, and makes the league tables in Platinum, Tin, Coal and Iron Ore – all of which are in the midst of a raging rally.

This is stuff that we use, that we need, people, so, obviously, inflation is destined to get worse before it stabilizes (much less gets better). Tuesday brings the PPI print, estimated at a round 10% — again before the impacts of the Russian Invasion and our Paper Tiger response.

All of which puts the Fed in one helluva bind. As the fates would have it, the FOMC meets this week and, on Wednesday, will drop the most-anticipated Policy Statement in quite a while. A 25 bp rate increase – the first in four years — is largely in the bag.

The drama, I suspect, will focus more intently on their thoughts on The Taper.

I can’t think that the Fed is looking forward with joyful anticipation to the removal of its click-a-mouse liquidity –from a financial system that is most characterized by an exceedingly elevated risk premium. But it would seem they have little choice in the matter. Following closely on the heels of the above-mentioned lockdown anniversary, comes the two-year mark of the Fed printing “own goals”– to the tune of $120B/mo, which they have used to purchase securities issued down the road at the Treasury.

Now, you can count me among the minority that is sort of down with all that monetary creation in the wake of The Big Crash, and even with their having revved up their engines anew to counteract the early menace of them little covid buggers. But they should’ve quit when they were ahead. About a year ago, when the economy was clearly in robust recovery, and might’ve economically (if not politically) weathered a rate normalization. Had they done so, inflation might be tamer as I type these words.

But instead, they kept printing, and, in an inflationary sense, running up the score of “own goals”. To the point where tighter money mitigants are not likely to achieve victory – defined here as the cooling of price pressure without causing a recession.

And a recession appears to me to be on the cards, virtually inevitable. Prices are going up, real wages are going down. Most of the free monetary cheese distributed by the government has been spent by the masses. Consumer, corporate and municipal credit amounts are surging from one record to another and will continue to do so while real rates remain in deep negative territory.

Obtuse investors may finally have caught on to the notion that all this money must be paid back, and that it might not be so easy for borrowers to do so:

Investment Grade, High Yield and Municipal Bond Prices: “Own Goals” Abound

These are big bites being taken out of what are euphemistically referred to as “Fixed Income” investments, and I think they are the cause of the deepest wrinkles in Chair Pow’s increasingly furrowed brow. Because these are the investments that power the portfolios of pension funds, endowments, insurance pools, annuities, and structured notes. A plurality (or more) of these capital pools feature mandatory sales triggers at certain levels of loss. Thus, the risk of these selloffs feeding on themselves.

For a variety of reasons, higher interest rates will also feed this fire (like truckloads of H-95s), and, by doing so, put additional political pressure on our always-political, currently hyper-politicized Central Bank. Voters will notice the negative marks on their IRAs, and Former Chair Yell is likely to come knocking on Current Chair Pow’s door, looking for explanations.

I don’t think he will have pleasing answers, so Yell will bring bad news to Paymasters Biden, Pelosi and Schumer, who will pass it on to the rank and file, who will then message as best they can to an increasingly frustrated electorate.

And so on and so on and shoobie doobie doo.

And even the always-slow-on-the-uptake equity markets have started to take notice of it all. But I don’t need to tell y’all about that. Because you read the papers.

It’s very difficult to assess the (multi) directionality or (undoubtedly elevated) magnitude of the risks — on the slick, frozen surface of the global capital markets. They’re out there, appear quite menacing, but are exceedingly difficult to track.

In result, believe we should channel as much empathy as we can for one Alex Nedeljkovic. Like him, we can see the puck coming at us, but don’t have clinical control as to how best we can divert it away from the cages we are paid to protect.

*******

With tragic but perhaps inevitable irony, the Red Wings lost that game to the Minnesota Wild. (Who shouldn’t even exist. Because the North Stars should have never relocated to Dallas).

The final score was 6-5, in an overtime/shootout.

If this doesn’t impel you to keep your eyes, at all times, on the puck, then I fear nothing will.

TIMSHEL

I’m an Ape Man, I’m an Ape Ape Man, Oh I’m an Ape Man,
I’m a King Kong Man, I’m a Voodoo Man, Oh I’m an Ape Man,
I don’t feel safe in this world no more, I don’t want to die in a nuclear war,
I wanna sail away to a distant shore,
And make like an Ape Man

– Ray Davies

To AMG: 11 years gone, with all my love…

As I am in the habit of sharing private (often disturbing) sentiments — and given the odd pass at which we find ourselves, I thought I’d lay one outlier on y’all.

Every now and then, I feel the presence of invisible, opposable thumb toes — extending out from both of my feet.

Perhaps this is a latent solidarity with our long-departed forbears, who, once, long ago, could grab items with their lower-most extremities. But whether through divine purpose or Darwinian dynamics, we can no longer do so. And part of me – id, ego, and other cranial components – is clearly jealous of that long-gone era.

This much is, at any rate, clear: I am envious of the Apes. Because Apes are cool. They’re stronger than us; faster too. They appear to have a better time. They lack the useless, unsightly tails that are prominent in most primates, but retain those magnificent opposable thumb toes, which ease their path as they swing from tree to tree.

Their diet staple is bananas, which are more expensive than in days gone by, but not alarmingly so:

I’m not over-fond of bananas, and instead subsist on a wider array of human fare, including, perhaps, more than my share of bread. Which I may be forced to do without considering the alarming increase in the cost of its core ingredient:

Not on Wheat Alone, but FFS….

The Bible (Deuteronomy 8:3) must be on to something (see modified chart caption) here, because I’ve never, my friends, seen anything like this. And I been around the grain markets my entire life.

If there’s any good news, it’s that this latest round of Ursine monkey shine has taken a bite out of what has been a raging rally in meat products. Bovine Live Cattle markets have backed off, as have\ porcine Lean Hogs. But that benefit only applies to us carnivores, which, as a matter of biological construction, excludes my Apes. My hunch is that they don’t really care.

Meanwhile pricing pressure for those of us who cannot drag our knuckles across the terra firma is acute wherever on cares to cast an eye. Hard assets of every variety have been en vogue, and this was before the dude in Moscow decided to ruin the winter of everyone in the Northern Hemisphere. Corn, Copper, Soy Beans, Fossil Fuels, Microchips, heck, even Macrochips are vexingly dear and getting dearer.

Aside from wheat and other edible commodities, our main problems center, of course, in the Energy Sector. But here our policy makers are working hard to deliver relief. They are on the verge of striking a deal with the oil rich Iranian Ayatollahs. Who have called our country The Great Satan. Who openly and proudly use their export revenues to fund terrorist organizations. The deal is being brokered by the Russians. Who we are seeking to freeze out of the global economy. Except for their oil exports, amounting to 200M barrels a year of our energy supply.

And all of this to secure incremental supply of a product which many folks believe is rapidly heating the earth into a piece of charred, crumbling dust. To which I (and the Kinks) reply:

In man’s evolution, he created the city and the traffic rumble,
But give me half a chance, I’ll be taking off my clothes and living in the jungle,
‘Cos the only time, that I feel at ease, is swinging from the top of a coconut tree,
Oh, what life of luxury, to make like an Ape Man

But that, my friends, is, for the moment, just a dream. And, since I must, I will weigh in on the big, buzz-killing force that is driving all this misery.

A few observations come to mind. First, Putin will take Ukraine. ALL of it. Why? Well, for one thing, he can. I mean, we’re only two weeks into this sad monkey circus. It took Hitler 35 days to subdue Poland – with tanks locking horns against cavalry, and no international coalition to assist the poor Poles. So, anyone who thinks that the Uke resistance is sustainable long term should think again.

Beyond this, the strong global response tilts Putin’s incentives toward finishing the job.

The rhetoric is currently quite nasty. But even if they come together in Kumbaya chorus on the shores of the Black Sea, the world will want to extract retribution for what he’s already done — on a scale not much diminished from what he will face if he just grabs the whole thing. So, why not just take it all?

Finally, if he backs down, he will think of himself as a loser. And this, my friends, he cannot abide. So, most of what we are observing is, in my judgment, a morality tale that won’t have a happy ending.

Come what may, what has already transpired is likely to have two sustained impacts: 1) it will add force to the inflation punch; and 2) it will further impair commercial and capital economy activity.

Oh yeah, and one more thing: it implies the near certainty of higher interest rates, coming, to a lending institution near you, and quicker than you may currently imagine.

In result, I envision portfolio managers facing a “triple whammy” of acute inflationary pressure, rising interest rates – all against the backdrop of an increasingly impaired global economy.

I don’t necessarily believe this necessarily sounds the death knell for risk assets. There’s still a bid out there, waiting to pounce. One sees it particularly in the frenzied grab for Treasuries, some of which is a flight to safety, but which is also an outgrowth of the galactic amount of cash looking for an investment tree to grab onto – for our purposes this week, with clutching feet.

I think the safest market havens reside in the realms of long commodities (though the grains may be due for a pullback), and, at some point, short positions across the Treasury Curve. I’m not sure of the timing or ideal entry points respecting the latter. But interest rates MUST rise. And if (when) they do, it will transpire at a point when your portfolio of stocks, bonds and crypto is under extreme pressure. Thus, among other matters, short Treasuries is a great hedge.

But one way another, we managed to survive a very difficult January and February. Spring is nearly here. The politicians are finally unmasking us. Rumors continue to circle respecting a Kinks reunion, which we all sorely need. The Faces are in the studio as I type this, and planning summer tour dates, which is even better news.

All of which brings out my inner primate. And, even as I type these final words, my feet are reaching out for that big, fat, yellow banana sitting on my kitchen table.

I’ll be your Tarzan; you’ll be my Jane. I’ll keep you warm and you’ll keep me sane.

Yes, we’ll do this. As soon as we are able. Until then, let’s keep it tight. The fruit will soon be ripening on the trees. Juicy, and waiting to be plucked by our opposable toes.

Which we no long possess. Instead, we have generational global conflict, bi-generational domestic conflict, scarcity, diminished affordability of the things upon which we rely, worldwide viral viruses, and myriad other annoyances. Thus, if we don’t feel safe in this world no more, and we don’t want to die in a nuclear war, and we want to sail away to a distant shore, and make like Ape Men, we come by these feelings honestly.

Let’s hope that Vlad the Invader channels similar sentiments, some of these days, and soon.

TIMSHEL

So, what do you want from me? Sometimes you gotta reach for the glibly obvious (or obviously glib).

I won’t recount the headlines in detail. Y’all know the score. Putin went in. Hard. Told everyone to huck off.

We responded with sanctions.

But one sanction we haven’t – yet – pulled off comprehensively — is to bounce the Big Bear off SWIFT: The Society for Worldwide Interbank Financial Transaction(s). Lots of talk about this, but some members of the Society have objected (unanimity is needed), and, later, Wall Street itself came out of its chilled hibernation to express its disapproval of the concept.

SWIFT has hovered around the periphery of my professional awareness for, well, a long time. But I’ve never had to use it; they could kick me out and I don’t think I’d care.

And I’m not even sure that SWIFT rises to the dignity of being a Society at all. I suspect that it only calls itself one to lend an element of panache to its acronym. And let’s give them this: SWIFT is a pretty cool acronym – particularly for a generic (if essential) financial communications portal.

While we’re on the subject of names, I’ve often wondered about the Sir-name of Vlad the Invader. Putin. As in RasPutin. I once asked my favorite Russian History expert if the two could be related, whether that current headline grabbing KGB meanie might not even be a direct descendant of the Mad Monk himself.

A little context is in order here. My own last name – Grant – was a gift to my grandaddy at Ellis Island. He arrived as a Granovsky, or some variant thereto (yes, my friends, I carry some Russian blood). So, if my own people were subject to a nomenclatural truncation, might not the same also apply to Supreme Leader of Moscow? Even without the Ellis Island bit?

My friend assured me that I was wrong on this score. OK, fair enough. Putin bears no relation to Rasputin, but they do share some characteristics. Both are hard to kill; they shot, stabbed, poisoned, and drowned the latter, and he still wouldn’t die. And as for the former, he continues to annoy us and probably doesn’t need the Ras handle. He’s creepy enough on his own.

Because instead of pulling that tired old trick of ordering military action to protect his across-theborder constituents (kind of like the Nazis shooting up a radio station full of their own people and blaming it on the Poles as a pretext for starting WWII), he went straight for the jugular. Announced the whole smash: his intention to take over, subsume, the entire Ukraine, as his own.

Well, I didn’t expect this. And, admit it, neither did you.

But now we’re stuck with this mess. A mess, as it happens, on top of a mess, which rests on top of another mess. And so on, and so on and shoobie doobie doo.

Sort of like covid in 2020, this well-telegraphed assault on an already precarious global equilibrium took everyone by surprise. So, what, other than worry, do we do now? Well, I don’t want to state anything that might shock y’all, but I believe extreme caution in order.

There’s nothing nuanced about that sentiment; risks to our peace of mind, clarity of thought and portfolio returns have taken a great leap forward — in every direction imaginable.

By way of transition, the Great Leap Forward was a program instituted by Mao to effect dictatorial increases in agricultural production in the People’s Republic of China. Wherein Mao decided that, rather than letting folks alone, he would force them into communes, shove shovels, rakes, and implements of destruction in their hands, and order them to produce.

The result? No, not an Alice’s Restaurant Mass-a-cree. Instead, widespread, historic famine. He claimed it never happened, then blamed the climate, then the people, then profiteers.

(Gratuitous aside) Sound familiar?

Back in them days, we were all nearly certain that either Russia or China was gonna blow us up, and about the only comfort we could take was that they hated each other more than they hated us.

Now, they’s apparently in cahoots, which may be the biggest problem of them all, because they are in ideal position to help each other. China can fund a Russia that is cut off from Western financing. They can import Ural Region fossil fuel products, which: a) they need; and b) are the economic engine behind Putin’s program (whatever that ultimately may be).

There also – perish the thought – might be a quid pro quo in place between these historic enemies, under which China would surreptitiously support this Uke riff, and Russia would then do the same when (as is probably inevitable) they march in and grab Taiwan.

And they will be glad for the help. Because, just as Putin is finding out that the Ukies are not overly\ inclined to roll over and get stiffed on this here deal, Xi may just learn that the Taiwanese are also inclined to fight, and that oil may be needed to put down these, er, counter-revolutionary notions.

And nothing for nothing, but as I mentioned, published reports suggested a promise from Putin that he wouldn’t send his tanks into the former Soviet satellite until those magnificent Beijing Olympics had concluded. They ended on Sunday. Russian tanks began to roll towards Kyiv on Monday.

None of these musings are original, and mostly it’s all just adding spit to the biggest spit-balling cycle yet to emerge in this spitball year of 2022. But the threat to semis is worth a closer look:

Semiconductor Source Breakdown:

Many of y’all already knew this, but Taiwan produces most of the semiconductors that bring to life our smart phones, video game consoles, automobiles, and respirators. No semis; no Alexa. And what in heaven’s name are we gonna do without Alexa?

Also bear in mind that one company alone – Taiwan Semiconductor (The big outer ring on the left), is responsible for half of those silicon wonders. We’d be hard-pressed to lay an embargo on them as a newly repatriated protectorate of the People’s Republic.

And while we ponder such niceties, we may want to consider the contours of our laying down a big fat embargo on products issuing from PRC itself. I would be particularly about pharmaceuticals and other medicines. Available literature places their market share of antibiotic production above 90%, but these figures are in dispute. What is known is that they make ALL our Ibuprofen (upon which I live) and fentanyl (which I, but not others, can live without).

Our problems at present have shifted from China to Russia, and, to my way of thinking, markets, which have a great deal riding on the doings just above the Black Sea (among other vexing matters), should pay particular attention to several imponderables.

For now, investors don’t seem to have a clue as to what to make of it all. As the rockets flared, “risk off” was on. Then, improbably, they seemed to settle in. Bought themselves some stock on Friday, and, for good measure, sold off some commodities and other asset classes impacted by the action.

I’m thinking, come what may, that we just experienced an upward jolt in inflationary expectations. Lots of stuff was in short supply when Putin was simply threatening nastiness, but not acting upon it, but now it seems to me as though the pricing pressure on economic goods and services is not only more acute but will likely extend further into the future.

This puts the Fed in a bind of epic dimensions. It wishes to fight an increasingly ominous inflation scourge and can only do so through liquidity-draining interest rate increases. Growth, already elusive and now under additional pressure, may disappear altogether. Prospects for a soft landing – the taming of P without causing a recession — are approaching the threshold of infeasibility.

My guess is that the Fed praying for some price relief from unlikely, unreliable sources such as OPEC. I reckon we’ll see. It’d be nice if they increased production to help us out. But one way or another, the boundary conditions of plausible price levels — for products ranging from energy commodities to wheat and (see above) microchips — place our Central Bank at a locus where it may need to choose between the risks of deep recession and hyperinflation. It may get both.

Meanwhile, we’re through the earnings and quarterly macro data seasons, so all portfolio management eyes are likely to remain fixed on the psychodrama unfolding in Eastern Europe.

It’s not a good look. The Fed is certainly capable of using the crisis to yet again put off the inevitable – moving funding costs within Hubble Telescope visibility of rationality. I don’t think they will do this, and, if they don’t, portfolio managers must do battle in an environment of rising rates, slowing economic expansion (or worse), and “Code Red” geopolitical tensions.

We also appear to be no closer to an end to the MLB lockout but won’t cry no tears about this.

Meantime, what I can offer, by way of risk management guidance, is as follows. Strip your portfolio down to the basics. Focus with laser clarity on your best vetted themes. And nothing else. Expect heightened, bi-directional volatility regimes to continue. Don’t get cute on the short side, because this is a trap that has been set for you, and one you should seek to avoid. The short squeezers are out there, inviting you into their lair, whereupon, if you allow it, they will crush you.

Instead, if you’ve got access, send out a few SWIFT messages. It’ll do you no harm and may be good for the soul. Being 1/4th Russian, I’m not sure if I’m locked out or not, but expect to be soon.

And look on the bright side. Risks have taken a great leap forward, but at least it’s not The Great Leap Forward, which caused the death of > 50 million, due to starvation. Let us rejoice in this.

And now, if you’ll excuse me, I’m going to take some Ibuprofen. While I still can.

TIMSHEL

You wore out your welcome, with random precision, rode off the steel breeze…

— Roger Waters

Let’s throw one off to Syd (Barrett): enigmatic founder of Pink Floyd, memorialized, in song after song, by the brilliant but tiresome Roger Waters (don’t get me started).

Fair warning: I’m not moving in a straight line, here, people. Bear with me if you can.

Welcome, my friends, to the dead, dead deadliest part of winter (and not just from a temperature perspective): Presidents Day Weekend.

If you’re a like-minded sports fan, you are particularly feeling the chill.

The NFL season is over: a grim passage that kills me, by degrees, each year. Nothing now happens until the draft, which, for my team (The Chicago Bears) is their Super Bowl. Or would be if they weren’t perpetually trading away their top picks (including, of course, this year’s).

But that’s not until April, a month which also ushers in the maiden season of a newly constituted United States Football League (USFL). Which will play all its games in Birmingham, AL. At a venue named Protective Stadium. Which tells you all you need to know.

This three-day weekend: a shared celebration of Washington and Lincoln, coincides with the NBA All-Star Extravaganza – perhaps the most embarrassing, self-serving spectacle every conceived by mankind. It was Cleveland this year. At a venue named Rocket Mortgage Fieldhouse.

Which tells you all you need to know.

All of which leads us – in twisted path – to this week’s theme.

Because we just passed the scheduled (if pro forma) ritual of pitchers and catchers reporting for Spring Training duties. For reasons never adequately explained by anyone, “position players” arrive a few days later.

The battery squads of the thirty MLB teams were supposed to begin stretching exercises last Wednesday. But didn’t. Because there’s a lockout. The leagues’ Collective Bargaining Agreement expired ninety odd days ago, and, thus far, the billionaire owners and centimillionaire players have yet to agree to a framework to divvy up the ~$10B of revenue they extract from us each year.

Additional Disclaimer: they don’t get any of my cash. I used to like baseball but have found it unwatchable for more than a generation. Since lockout of 94/95, which extended so long that it cancelled the ’94 World Series.

As Ernest Lawyer Thayer informs us (“Casey at the Bat” you dolts), in the sport of baseball, “hope springs eternal”, so maybe they work it out. But I ask you, given the current vibe of distrust, animosity, fear, and greed, is it likely? Truly, I can’t think of a period in my lifetime where compromise and conciliation, in virtually all realms, were more difficult to envision.

So, I have a sneaking hunch that this here lockout extends well into the regular season, and, absent some divine intervention, that there may be no baseball season at all.

Since I wouldn’t have been paying attention anyway, I anticipate no personal hardship on this score. But I will cop to a happy vibe around this time of year, featuring mental images of fungo bats cracking, and, few weeks hence, stands full of the beer-swilling, hot dog munching proletariat, anticipating the action on the diamond(s).

But for now (and who knows how long), the diamond(s) will be empty.

And, therefore, unlikely to shine.

Perhaps for this reason (but probably for others) the markets are decidedly on their heels. Lots of “risk off” action out there – enough to take the glisten off any investment return-generating strategy.

It is impossible to miss the valuation threats out there – geopolitics, inflation, rising interest rates, and, in general, zero visibility as to how, in which far off galaxy, the capital economy can once again sparkle and shine.

I could go on all day about this, and others certainly have, but I’ll spare you the full range of my wretched thoughts and focus on what concerns me most for the moment.

The United States Government is now officially on record as anticipating a Russian invasion of the Ukraine. My guess is that if there were any doubts about this, Biden removed them at the podium on Friday. He talked tough; told Putin he better watch his ass. Putin’s gonna then back down? To a non-specific threat — issuing from a country that couldn’t, last summer, support an ally for even a fortnight after it withdrew its troops that had been there for twenty years? Not in this world.

No, we’re not gonna involve ourselves in a war over this, but the markets should continue to pay special attention, nonetheless. Particularly to the impact of the incursion on the Energy Complex (which, perversely, was flat to down this past week). The action is likely to push up Crude and Nat Gas prices, which will put enormous upward pressure – not only at the pump and through heating vents — but on inflation itself. And (by doing so) further force the Fed’s hand with respect to interest rate hikes.

The obvious kneejerk response is for the Fed to raise rates more aggressively than originally planned, and, in a gallant effort to outflank its competitors in hysteria, some of the strategists at JP Morgan are now predicting 9 (nine) consecutive monthly Fed Funds hikes – beginning in March and extending, by my count, about three months past Tisha B’av.

Other JPM prognosticators are predicting a recession for the back half of ’22. And, in aggregate, they’re probably right. Because history shows the near impossibility of counteracting inflation without setting off a recession.

It’s kinda like stealing First Base. Which is more unlikely now than in the recent past. Because MLB is locked down.

So, I’m keeping my most watchful eye on the Energy and Interest Rate Complexes – both of which are acting somewhat perversely in recent sessions. In the wake of the pending Russian adventure, and on the back of dismal, across-the-board Inflation data, Crude Oil sold off a bit, and longer-term Treasury Yields gave up important ground.

Plainly, investors are somewhat confused here, and their inability to cut through the conflicting signals is showing itself in heightened interest rate volatility:

I am among the flummoxed. So, I turned to my trusty Bloomberg and pulled up this here graph. I don’t understand what it is tracking; the closest I can come is that it depicts the time path of the volatility of one year forward swaptions on long-term Treasury instruments (See? I told you).

But it doesn’t take an expertise in macroeconomics or Differential Equations to infer that interest rate vol is on the rise, hovering at levels not seen since the Big Crash.

I suspect this confusion will continue and wish my rate trading droogies the best of fortune in unpacking this mess.

My gut tells me it ain’t good news, though, and that the great unwashed are beginning to catch on. Bloomberg also informs us that the put/call ratio is highest since the onset of the lockdowns:

Well, OK, but I don’t expect these puts to pay off. They never do. And, beyond this, I feel we are at the bottom of a range that is supported by the oceans of liquidity sloshing around the system, and resisted by, well if you don’t know by now, it’s pointless for me to explain it to you.

Yes, I’ve worn out my welcome with random precision, and will now ride off the steel breeze.

But I feel compelled to offer a more uplifting note of departure. Washington and Lincoln have drawn much shade lately, but still merit a national holiday. In San Francisco (home of the purloined from New York Giants), the School Board tried to remove the names of them guys from certain education facilities. They failed, and instead got themselves removed.

The 94/95 baseball lockdown ended in time for a full season the following year, and, shortly thereafter, Bonds, McGwire and Sosa were cracking out homers at a rate well beyond what had ever been evidenced in more than a century of preceding league play. All of them guys got busted for steroid usage, but, I ask you, isn’t that beside the point? The markets have been living off financial steroids for about 15 years now, after all, to the enrichment of most of my readership.

Baseball now rides clean (or portends to). The diamonds are dusky at the moment, but with hope that springs eternal, will someday shine again.

TIMSHEL

I have never done this and hate to bust it out on Valentine’s Day, but fact is, I could use some help.

So many Risks, so few Resources (some of you will get this) with which to address them. I can’t remember ever scanning the landscape and feeling so overwhelmed. And I’m officially asking for reinforcements.

Meantime duty calls, and it devolves to me to inventory what hazards appear in within my field of vision. I state upfront that this is likely less than complete rendering.

In perhaps the most telegraphed military action since Queen Anne’s time (and that nasty War of Spanish Succession) Russia is about to attack the Ukraine. Published reports suggest that the only thing that is (temporarily) holding Putin back is a promise to his buddy Xi (and, presumably, to NBCUniversal) to delay deployment until the grim spectacle of the XXIV Winter Olympiad has run its course. Other sources suggest that Vlad the Invader won’t hold out until its dénouement on the 20th. The (episodically reliable) Germans say that the invasion begins Wednesday.

Elsewhere, Canadian Roads are said to be shut down in protest of, well, I’m not precisely sure. Trudeau has sent in the Mounties to end the spat. As others have pointed out, much of the U.S./Canadian border, has been closed for the better part of two years, and now Trudeau is using the military to open it up… …for, why? And, if as is probable, the unrest border expand southward, it will do so with an excess that only we Americans are able to gin up.

Truly spooky CPI figures dropped on Thursday, causing a rout in risk assets, which took our equity indices down to the proximate vicinity of where they were trading last July – now underwater between 4.5 and > 11% for the year.

Credit benchmarks are at multi-year lows.

What financial instruments, you might ask, are at multi-year highs? Well, to name a few – with no economic impact on anyone: Crude Oil, Corn and (if you dare to look) Soybeans:

Beans in the Teens? Well, Yes (Until They Hit Their 20s):

In the wake of the above-mentioned Inflation Tape Bomb, market jaws were flapping in frenzied fashion about an emergency rate hike. Perhaps in result, Madame X 10 Year Yields breached the karmic level of 2%. But then, as predicted in this space, they backed off like a little bitch to a demurer 1.94%. Still and all, and in shocking assault to all that is holy, the Italian Government now pays more than we do to service its long-term debt. I mean, c’mon. America is now viewed as a more reliable obligor than good ole Italy? Since when?

The University of Michigan Consumer Sentiment Index came in at a ten-year low, registering at barely half the level recorded immediately prior to the lockdowns:

A little disclaimer is in order here. As a proud Badger, I carry a combination of anger, distrust and (yes) grudging admiration for anything emanating out of Ann Arbor.

But I think it behooves us to take this product of Wolverine statistical analysis seriously. It is based upon 500 calls they make to individuals who (presumably at any rate) are consumers. To check, well, on their sentiment.

It also bears mention that the index is benchmarked against how surveyed folks was feeling in Q1/66. Just when we was escalating in Vietnam. Right as the Beatles were embarking on what would be their final tour. One month before “The Flintstones” aired its final episode.

Life was pretty sweet back then, in fact, according to the chart, it barely has ever registered better.

But everyone should understand that as of last week, it ain’t even 2/3rds good.

And if that weren’t enough, SEC Chair Gensler recently dropped a > 600-page proposal for incremental regulation of virtually every aspect of human endeavor but saving the sharpest point of his spear for the investment markets. He wants those toiling in these realms to disclose all expenses, all compensation. Wants to put a big fat target on the back of short sellers — by revealing their identities as well as what they are short and how much.

I ask you, ladies and gentlemen, is a wholesale gift to the Reddit/GameStop crowd Good Government?

Now, I certainly ain’t looking to lock horns with the Commandant of the Securities and Exchange Commission (lord knows I learned that lesson when he was Chair of the Commodity Futures Trading Commission), but guys like him really get under my skin. As a matter of public record, he banked nine figures as a partner at – you guessed it – Goldman Sachs, where, before setting out to make the world safe from the evils of Wall Street, he gorged himself on the benefits offered in those realms.

Very nice to have booked transgenerational wealth before embarking on a 15-year odyssey of biting the hand that has fed you.

I have not read where the good Chairman has weighed as to whether members of Congress should sustain the privilege of trading stocks, so perhaps he has held his tongue on this matter. If so, good on him.

I myself am somewhat ambivalent on the topic. And will say no more about it. Or about Gensler. Or the SEC. Or Goldman Sachs.

But gosh oh mighty, they’s sure making it tough on the investment world and I urge everyone to proceed with caution. Even before the new proposed SEC regs, which, after all, are subject to 60 days of public comment before the Commish renders its final judgment.

In the meanwhile, investors have weighed in on the above-mentioned drekage, by selling off pretty hard these last few sessions. My reckoning is that these tidings notwithstanding, their hissy fit will soon dissipate. The world that is awash in liquidity, a significant portion of which must find its permanent home in the capital economy.

To wit: the money supply (M2) has nearly doubled since the lockdowns and has tripled over the last decade:

And the Fed itself is likely to demonstrate happy feet, to reverse course at the first signs of trouble. If you doubt this, turn your mind back to late ’18, when Chair Pow’s hint at rate normalization caused a Christmas market rout so deep that by the following January, he was on his knees begging investors to forgive him. All of which ought to hold up valuations for a spell, at least relative to the specter of a crash.

Which I don’t believe will happen. But it’s gonna be a rocky, volatile ride. Maybe with no letup – at least for a while.

In the short term, I will be keeping a close eye on next week’s PPI figures, whether 10 year yields yet again surge through 2.0% (and hold their higher ground), and (of course) whether and when those pesky Russians breach the Ukrainian border.

And, for anyone who cares, tomorrow marks the (increasingly) dreaded 45-day window for quarterly hedge fund redemptions. If hedgie CFOs are currently avoiding their phones/inboxes, given the putrid performance emanating from their shops, they come by this inclination honestly.

It’s all making me tired. And I could use some help with all this infernal risk management I’m compelled to do. If you’re interested, you know where to find me.

But fair warning.

There are easier ways to make a living.

TIMSHEL

God grant me the serenity to accept the things I cannot change.. …yada, yada, yada

— Reinhold Niebuhr

Yes, it’s come to this. I wish I could tell you we’ve hit rock bottom, but the way things are trending, but … Over the last several weeks, I’ve grasped at random literary device — emanating from sources ranging from William Butler Yeats to Voltaire to Kierkegaard to anonymous Irish folklore.

And now, we’re down to Reinhold Niebuhr.

Now, feel me here – I’ve got nothing against Niebuhr: a nice enough fellow it would seem, even if not a household name. And what kind of name is Reinhold Niebuhr, anyway? Kinda suspiciously foreign if you ask me. His bio says he’s from Missouri, but someone surely ought to check it out.

Further, I am a bit ashamed to have copped his most famous bit, enshrined, though it is, in Grannie’s needlepoint — framed above the kitchen table, on lockets sold in novelty stores, and yes, on enough Hallmark Greeting Cards to fill the Superdome.

Hear me out, though. Because, as a risk manager, Reinhold’s Riff, depressingly, but impressively, describes how I roll.

Well, sort of, anyway. I do spend a great deal of time seeking to separate what cannot be changed from what can — and hoping like hell I got it right.

But where Niebuhr and I part ways is in terms of the human attributes required to meet these challenges. Serenity, Courage and Wisdom seldom, if ever, enter the equation for me. Mostly it’s just brute force, sprinkled with a heaping dose of wishful thinking.

I’ve always found it interesting that Niebuhr begins his little prayer with the negative – not introduced with call for the courage to arise to meet the trials of the day, but, instead and first, a wish to accept the inevitable with a dabble of divine equanimity.

It’s certainly one way to attack the problems we face – across many fields of endeavor, including (most pertinently for our purpose) those associated with the capital economy.

But there are other methods available to those that operate in these realms. Consider, if you will, the tactics applied in Turkey, a well-visited jurisdiction in these pages, and now a land of runaway inflation. The full-year 2021 numbers just dropped – at an eye-popping 36%. And what did that polecat Erdogan do?

He fired his Head of Statistics – a role that by recent longevity trends recalls the truncated tenures (if not the final fates) of Spinal Tap drummers or English Queens during the reign of King Henry VIII.

It can be said that on these shores our methods are more civilized. Presumably, y’all saw that boffo January jobs number – released on Friday morning. Not only was the Non-Farm Payrolls figure an absolute blowout, but the Bureau of Labor Statistics threw in, for good measure, upward revisions (to the tune of ~700K) of the November/December tallies.

Published reports suggest the possibility of a little book cooking — within the murky seasonal adjustment component of the calculation. Now, I don’t have any clue as to the validity of these claims, but then again, did that little cockroach really tag Kennedy, in both the head and the neck, within six seconds, while the latter was in a moving car — from, like, 90 meters away?

Pending CPI and PPI reports in this country might offer hints, but I doubt that even buzz kill prints will lead to the termination of William W. Beach – the ubiquitous Commissioner of our Bureau of Labor Statistics. More likely, he’ll just tweak the numbers a bit, and carry on.

Let’s hope he’s up to the task because the underlying data are far from encouraging:

Soy Beans:

Crude Oil:

Affairs in world of corporate finance assume a similar look and feel. As everyone knows, it’s been a tough week in Zuck-land. The CNN Czar Zuck took the Woke Perp Walk – not for presiding over the absolute collapse of the pioneering cable news network’s viewership, but rather for some frowned upon after hours activities with a subordinate. And the other Zuck — once (but no longer) the richest man in the land — was compelled to disclose to investment world of some newly discovered Face wrinkles, and a bunch of extra dog ears in the Book.

Not much he could have done to stave off these inevitabilities. The public can only consume a finite number of cat lunch pics, and advertisers can only pay an appropriately limited amount to underwrite them.

And, in result, his company suffered a record setting, one-day valuation drop that exceeded its entire enterprise value — registered as recently as the beginning of the lockdown, or (if one wishes to mulligan that one out) those difficult days at the end of 2018.

These are things that Zuck cannot alter. But, with Serenity, Courage and Wisdom, he instead changed the name of his outfit, and launched his company, headlong, into an alternative environment called the metaverse.

Niebuhr, presumably, would be proud. And Kierkegaard (who would have advised him that he would regret it either way) would have understood.

*****

And, in terms of risk management, there are a couple of Niebuhr-esque clues to guide our way.

First, as the economist wife of an economist friend of mine is fond of stating, market prices will tend to fluctuate. As an economist/risk manager myself, I can accept this with Serenity, because if they didn’t, I’d be out of a job.

Next, when we filter out the noise, we’re looking at the near certainty of a higher rate environment, against a likely backdrop of a slowing economy, and there isn’t much we can do about it.

But such is not the stuff upon which raging, extended rallies are made. On the other hand, there’s so much cash floating around out there that a sustained, respectable correction seems virtually out of the question.

I thus believe that this is indeed one of those times when prices (which tend to fluctuate), will, indeed, fluctuate.

But within finite bands. Probably those established by our indices over much of the past rolling year: Gallant 500 between 43 and 48 handles; Captain Naz 14 – 16.5.

10 Year Yields are testing highs not seen since before any normal person would ever marry the letter M with the number 95, but, at 1.90%, I suspect that (for reasons repeatedly stated in these pages) they hit a wall at ~2.0%. On the other hand, rates in jurisdictions such as Germany (where I suspect that this shifty Niebuhr is actually from) – sub-zero for the last three years, have rocket launched to a usurious 0.2% — putting upward yield pressure on the entire global bond complex.

So, the truth is, though, I don’t really know. And this is something I cannot change.

But unfortunately, I lack the Serenity to accept this limitation. There are some matters I can influence, but hardly feel the Courage to do so. And as for possessing the Wisdom to know the difference, well, I have my views on the subject, but on balance, am inclined to let you decide.

Still and all, I’m glad I’ve got Grannie’s needlepoint version of Reinhold’s Riff on my kitchen wall, and only fear that it may offer enough inspiration to carry me through.

So, I’ll take my leave. I’m off to the Hallmark store and ask you to join me in hoping for the best – in terms of my own journey, and yours as well.

TIMSHEL

You thought the leaden winter, would bring you down forever,
But you road upon a steamer, to the sirens of the sun,
And the colors of the sea, find your eyes with trembling mermaids,
And you touched the distant beaches, with tales of brave Ulysses,
How his naked ears were tortured, by the sirens sweetly singing,
And the sparkling waves were calling you, to kiss the white laced lips

– Clapton and Sharp

May the road rise to meet you, May the wind be always at your back.
May the sun shine warm upon your face, The rains fall soft upon your fields.
And until we meet again, May God hold you in the palm of his hand.
— The Irish Blessing

No. I wouldn’t start from here.

By way of context, our title is a punchline to an old Irish joke: the response of a Dubliner to a visitor’s request for directions.

It strikes me as being so perfectly Irish, replete with every bit of that country’s whimsical, selfeffacing stoicism. Their humorous acceptance – of their fate and their surroundings.

And, on this last day of January, I’d like to dedicate this column and theme to two personally impactful sources – both tied, albeit indirectly, to the Emerald Isle.

The first is to my friend Robert McHale, with whom I worked THE BIG HEDGE FUND more than twenty years ago. I bailed too early on the joint, but Rob and I had kept in routine touch ever since. He died unexpectedly a couple of weeks ago, and I wanted, in my small way, to honor him:

Rob was an Ops guy, with a great deal of that humble self-knowledge that characterizes the country of his forbears. He was Irish, through and through.

He never aspired to be a titan; simply did his work with humility and extreme competence. He liked to trade, and, for the entire course of our acquaintance, we would swap market hypotheses. Eventually (and paradoxically) I hung the nickname “Rabbi” on him.

We were the Rabbi and the General. It was our private joke. And now I’ve got to remove him from my weekly distribution list. Fare the well, Rob.

And as the other Irish blessing goes “may you be in heaven an hour before the devil knows you’re dead”.

The second shout out goes to the epic James Joyce novel, “Ulysses”, which celebrates the centennial of its existence as a published work this week. It all takes place in Dublin, on a single day: June 4, 1904 – a date, each year, that pointy-headed literary dilletantes such as me referred to as “Bloomsday”.

Its protagonist is a misanthropic cat named Leopold Bloom. He’s a Jew — turned Catholic (by peer pressure) and living in one of the most Catholic metropolises this side of Rome. Nobody really likes him. He is perpetually thrown shade by his peers. He spends Bloomsday trying to take his mind off his adulterous wife’s pending tryst with a local playa – scheduled for that very night. He wanders Dublin trying to fit in, and seeking answers to questions, which, by all accounts, only he is asking.

Ulysses is a tough read, and I’ll throw out a brag to y’all: not only did I slog through it but enjoyed it immensely. One hack, for those who wish to travel this road, is to use “Sparks Notes” or some other literary supplement. Otherwise, you might not know what the hell is going on.

But my main takeaway from the book, which follows the rough outline of Homer’s “Odyssey”, is that a single day’s voyage, for any of us (even a poor schmuck like Bloom), can be viewed, through the appropriate lens, as being an epic journey.

It sure feels that way in the market (with all that intraday vol), as well as the capital and political economies – all of which are a tangled mess. How is one, anyone, to manage through it?

Well, like I’m telling yas. If I were you, I wouldn’t start from here.

And this is true no matter where your bearings currently place you. Not gonna lie – this is about as muddled a set of conditions I’ve ever encountered.

Take, for instance the view from macro-land. The week began with putrid PMIs – particularly on the Service side. We move on to a big build of Retail Inventories and a miss on Durable Goods Orders.

Think about that for a minute. In an environment where no one can shut up about supply chain bottlenecks and empty shelves, retailers are overstocked, and no one is ordering the big stuff.

Oh, and in case anyone cares, our Retail Trade Deficit just hit a new high, surpassing, for the first time and with little notice, the quaint threshold of $100B:

On a happier note, our first look at Q4 GDP came in at a boffo 6.9%. But the associated inflation index – a fave of economists known by the obtuse moniker of GDP Price Deflator, dropped, eerily at the same 6-9 level. Kinda sleezy, no?

And on Friday, almost out of nowhere Q1 GDP estimates – from the Atlanta Fed and others, plunged to 0.1%. Which by my number crunching is a ten basis points above the threshold of Recession.

Credit markets also continue to feel the strain, particularly those in the junk bucket, now registering the widest non-lockdown spreads since late 2018.

Finally (not because there is nothing else to report but rather because I’m tired), with Russian Troops massing on the Ukraine border and brutal winter weather bearing down across the nation, Nat Gas prices increased by a solid third over the past few sessions.

All this enabled some tough talk out of Chair Pow at Wednesday’s FOMC presser, but one could read the stress on every line of his face. If I were him, I wouldn’t want to start rate hikes from here, and I think he knows this. On the other hand, he probably doesn’t have much of a choice.

And, reviewing all this from an investor perspective, we’re looking at a slowing, inflationary economy, still impaired by pandemic pressure, but forced, nonetheless, to contend with the need for higher interest rates.

So, how do you want to build your portfolio? Well, if I were you, I wouldn’t start from here.

Admittedly, it’s probably too late to offer this painfully obvious risk management advice. Most of you began long ago, and cannot, by definition, start again.

Nor do I believe you can end your journey now.

The path remains twisty, as evidenced by Friday’s baller rally, which enabled our misbegotten equity indices to register their first weekly gains in several fortnights. FWIW, I don’t take this as ushering in a (Irishman) Van Morrison “Glad Tidings from New York” vibe. Better, I believe, would be an extended selloff which might clear the decks and enable some of us more rational playas to play.

But that doesn’t appear to be what the fates have in store for us. My data suggests that there are plenty of large capital pools eager to pounce on any respectable dip. They and the retail masses are likely to ensure that stock prices remain in the opaque range of overvaluation for the visible future.

I therefore predict incremental frustration, but also surprises – some of them even pleasant – along the way.

And if you doubt this, ask yourself the following question: what, at any point, would be probability of entering a year, as we did in 2022, with the Cincinnati Bearcats and the Cincinnati Bengals reaching the semifinals of their respective football tournaments?

No, it’s not a straight line we travel. It wasn’t for Rob, nor for Bloom. Nor for Joyce. The first editions of “Ulysses” contained thousands of errors. It was subject to decades of censorship. It didn’t rise to its appropriate place in the literary pantheon for several decades. Even now, lots of critics consider it to be nothing more than literary word-salad.

It seems that no one ever finds a good place to start. But we begin our journeys, nonetheless. Stoic, self-deprecating persistence remains the key. Sometimes, it even works. And, when it does, as the Irish Blessing offers, the road, indeed, rises up to meet us.

TIMSHEL