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

Dead cat, dead rat
Can’t you see what they were at?
Fat cat in a top hat
Thinks he’s an aristocrat
Thinks he can kill and slaughter
Thinks he can shoot my daughter
Yeah right! Oh yeah!

— Jim Morrison

Crazy cat peakin’, through a lace bandana,
Like a one-eyed Cheshire,
Like a diamond-eyed jack,
A leaf of all colors plays a golden string fiddle,
On a Double-E waterfall, Over my back

— Jerry Garcia and Robert Hunter

About that cat. Is it alive or dead? I really don’t know and will ask for your help in answering.

But before I do, we’ve got a couple of housekeeping items with which to attend.

First, there’s the demise of Meat. I really don’t have a great deal to convey here. He wrote one song about a girl extracting a “love me to the end of time” promise for him in exchange for her yielding her favors to him. Which he subsequently came to regret. It’s catchy but sticks in your brain — and not in a good way.

My own feeling is that he hit his peak with his role as Eddie, the fricasseed, leather-clad motorcycler, served up as the main course in the Rocky Horror feast scene.

I think Dr. Frank N Furter offered the best epitaph for him:

“It was a mercy killing. He had a certain naïve charm.

“But. No. Muscle.”

And we’ll leave it at that.

And now, I’ve got to return to Teddy. One last time. I promise.

I don’t blame you for tagging me as Teddy-obsessed.

But now he’s gone:

Before and After:

Heck, I don’t even like Teddy that much. He balled out like a boss in the Spanish-American War and created our fabulous National Parks system. But he was also a self-promoting loose cannon, and, back in 1904, his trust-busting shenanigans cost my family’s financial empire a pretty penny.

Still and all, it was sad to see him hoisted, in undignified fashion, by a crane, and onto a cargo vehicle adjacent on Central Park West.

Off he went. To the Dakota Badlands. But the charge up San Juan Hill it was not.

Now, back to the cat.

In case anyone is confused, I’m referring to Schrödinger’s Cat – an obtuse, theoretical feline who, according to certain theories of quantum energy, is alive and dead at the same time. Schrödinger and Einstein debated this, and never reached a proper conclusion.

Is the cat alive? Is it dead? Is it both?

The best answer I can produce is yes. And, presumably, Kierkegaard would agree.

And, again, so it goes with the markets. Which for the moment are under enormous pressure.

Are they alive? Are they dead? Both?

As of now, and after posting the worst week registered by risk assets since the onset of the pandemic, our equity indices are resting at multi-month lows.

Our beloved BTC is also on the ropes.

In addition, credit markets are in dangerous fall:

Are stocks preparing themselves for the proverbial dead cat bounce? Will the debt markets land on their furry little feet?

Will Bitcoin come roaring back in leonine fashion?

I reckon the answer will unfold at an accelerating pace over the next few weeks. That wily polecat Chair Pow will announce the latest FOMC wisdom on Wednesday. Surveys suggest he will stand pat on rates and taper timing, but I wouldn’t bet it all on this. He’s a shifty mofo, and if he makes an unexpected turn, it’s unlikely to be in a pleasing direction.

Earnings loll forward like an overfed tabby, with all the big jungle cat names – save Microsoft – holding their purring tongues till the calendar rolls into February.

We get our first glance at Q4 GDP on Thursday, with numbers looking like they’ll clock in at a low 5 handle.

It’s all so wretchedly confusing. By way of illustrating what a tangle of yarn we currently confront, consider that just days after Jamie Dimon heralded a huge surge for the capital economy, one that would compel the Fed to hike as many as six times this year, JPM’s own Fixed Income Strategist predicted a massive slowdown.

Does anybody over there talk to each other? What on earth are they advising their clients to do? Well, at least they’ve managed to convey the market equivalent of Schrödinger’s Cat – both alive and dead. Whether or no one chooses to put investment dollars behind such a fickle feline is another matter.

My own view, on balance, though, is that the cat is alive. Otherwise, why are we perpetually compelled to change an over-filled litterbox? It’s looking rather shabby and does not appear to be overly inclined to nuzzle up onto our laps.

But it is still huffing up hairballs and menacing mice. Its claws are still sharp. It is, beyond this, and whether dead or alive, prone to lay a bounce or two upon us.

So, much as I’d like to give y’all a rest, my best advice is to keep at the struggle. I have a hunch that this here cat, at least at these levels, may be working up some bovine sensibilities. And who knows? You may even have some of those allotted nine lives stored in your hopper.

But with that, I take my leave, offering the following, parting salutation:

Keep In Touch/Call A Ton.

Yup, please KITCAT. Like Einstein did with Schrödinger. Like Meat was forced to do with his dateturned- lifelong-partner.

I’ll cut you a break and cut off ties with Teddy, but other than that, it’s the only way to ride.

TIMSHEL

“Laugh at the world’s foolishness, you will regret it; weep over it, you will regret that too; laugh at the world’s foolishness or weep over it, you will regret both. Believe a woman, you will regret it; believe her not, you will also regret it… Hang yourself, you will regret it; do not hang yourself, and you will regret that too; hang yourself or don’t hang yourself, you’ll regret it either way; whether you hang yourself or do not hang yourself, you will regret both. This, gentlemen, is the essence of all philosophy.”

— Soren Kierkegaard

Today, we draw from yet another ubiquitous source – Danish philosopher Soren Kierkegaard, widely acknowledged to be the father of Existentialism.

While there may be some debate about this, I consider the matter to be settled, because any Danish philosopher, is, by definition, a walking oxymoron, and, therefore, Existentialist to the bone.

You may choose to call BS on this generalization, but on my immortal soul, I have a friend from Denmark. And he tells me that the big joke — out Copenhagen-way — is that summer lasts one day there.

Like I mentioned, if you’re gonna be a Danish philosopher, Existentialism as about your only option.

Kierkegaard’s point in the above-purloined passage should be self-evident. Our options are ever sub-optimal, and this is true no matter what path you take.

But he deliciously begs the question as to whether making any choice is worth the effort. I believe that he’s telling us it is. Just decide already, fer Chrissakes; you’re gonna be sorry anyway, so you may as well choose your own mournful poison.

And of course, so much of this applies to modern times that I just couldn’t help myself from adding to the deafening Kierkegaard chorus.

Let’s begin with politics (I know, I know). It seems to me that our passage was a direct message from SK to Biden. One gets to feeling sorry for him — because whatever he does: a) he’s gonna piss a bunch of people off, to such a degree that; b) he’s bound to regret whatever action he takes.

General consensus informs us that last week was pretty rough for him, and – not gonna lie — I could’ve lived without his hyperbolic claims about Democracy hanging by a thread, followed as it was by a tantrum suggesting that a refusal to support changing Senate rules for the purpose of nationalizing elections was tantamount to high treason. He got hisself all worked up, and it wasn’t a good look. On the other hand, when he goes all beta, staring out with those twinkly, doughy eyes and bleating about his hopes and dreams for us peons, it may be worse. For him and for us.

No matter what he does, he can’t win. For those who propped him up in 2020, he already served his purpose – ridding the premises of the scourge of Trump. And, having done so, no one’s got his back. His supporters have no need or desire to do his bidding; don’t, by all appearance, care, at this point, whether he lives or dies. All that remains is their lists of (incongruent) demands for him, backed by vague threats disappear him altogether if he doesn’t come through.

One wonders if he’s glad or sorry that he went down this cockamamie presidential path in the first place.

My guess is the answer is yes, and that Kierkegaard would understand.

Then there’s these confounded Kierkegaardian markets, within which, it truly seems, it doesn’t matter what you do (or don’t) do, you’re bound to regret it.

At least we come by this condition honestly — because this is one hot mess of an investment backdrop. This week brought confirmation (as if we didn’t know already) that Inflation is running rampant and is presenting itself in realms where everyone has a stake.

Crude Oil prices, for instance, are higher than they’ve been since 2014:

But that Retail Sales, Industrial Production, Business Confidence, Consumer Confidence, etc. are all on the wane.

Most of the banks reported this past week and that, too, was ugly. (However, we’ve yet to hear from Goldman, who probably did OK). The rest of the earnings cycle now follows, holding prospects that few this side of Kierkegaard himself are likely to relish.

Yet, in spite of it all, risk assets hold at near-record valuations, as supported by more liquidity than anyone has experienced in their lifetimes. The Fed is gonna taper, and Jamie says they gonna raise short-term rates, like, six times this year. But they’s still printing > $100B a month, their Balance Sheet remains at a bloated $9T, and the Fed Funds rate continues to rest at a microscopic 0.25%.

Real rates are deeply negative – more so, in fact, than they’ve been in seventy-five years:

Now, in case anyone is confused here, the red line is Inflation. The irrelevant black line is the nominal rate, and the blue line, being the difference between the two, is the real rate.

I know it’s a little hard to read, but Big Blue is clocking in at -6.5%. Meaning that borrowers pay, and clueless lenders receive, 93.5 cents for every dollar put out on the street.

No wonder, in consequence, that corporations are falling all over themselves to borrow all they can.

I reckon there’s some folks (aside from the obvious clique of well-heeled debt issuers) out there who benefit from all of this, maybe even some investors. But they are not among the circle of my acquaintance.

All of which leads us back to our theme: oh intrepid market participant? Watcha gonna do?

A strong argument can be put forward that it don’t much matter because you’ll regret whatever it is.

Load the boat and play for another leg up in the rally? Jamie seems to endorse this, and they didn’t pay him $100 large last year for spit-balling. But I am unable to support the underlying hypothesis.

Limit your action to the high-flying tech names? Ask Cathy Wood how that’s working out.

Play fundamental, long-oriented valuation mismatches? My inbox is chock full of horror stories and morality tales respecting this strategy.

Beef up your shorts and seek to monetize a crash? I’m gonna slap you. No one has EVER made a nickel attempting this; trust me: the stories you hear about short-selling riches are nothing more than urban myths. Besides, there’s too much cash floating around for this approach to play to your advantage.

How about crypto, NTFs and all that jazz? Yes, I know of several young persons who converted their bar mitzvah money into enough jack to purchase private jets and Italian seaside villas. But what’s your edge?

*******

All of which leads to the extreme option of liquidating everything and bagging your investment activities – full stop. But I don’t expect you to do this. Because you are made of sterner stuff.

And I think you’ll regret it if you do. Yes, you’re likely to also regret it if you don’t, but that, my friends, is beside the point.

And if you don’t understand this, well, then, you probably just don’t get Kierkegaard. If so, that’s a shame, because, I think, Kierkegaard gets you.

But don’t, no matter what Kierkegaard says, hang yourself. I promise that you’ll have reason to be glad for rejecting that.

If you feel you must check out, at least consider the path taken by one Jeffery Parker: former Director of the Metropolitan Atlanta Rapid Transit Authority (MARTA). Not sure what was bugging him, but he decided to off himself, in a manner that can only be described as going out in a blaze of panache.

On Friday, he threw himself in front of one of his own MARTA trains.

I can’t say whether he regrets his self-antihalation or not. But one certainly must award him his style points for his methods.

Somewhere in the cosmos, Kierkegaard must be smiling on him.

And that, my friends, is the essence of MY philosophy.

TIMSHEL

Juliet, when we made love, you used to cry,
Said “I love you like the stars above; I love you till I die”,
There’s a place for us, you know the movie song,
When you gonna realize, it’s just that the time was wrong? Juliet…

— Mark Knopfler

I know it’s a little early to be focus on this – particularly as we just went through a similar round for the not-so-dearly departed ’21.

But jeez, they’s dropping like flies.

Our early frontrunners emanate from the motion picture business: the matchless actor Sidney Portier and the uber-accomplished director Peter Bogdanovich. The former gave us timeless performances in “To Sir, With Love”, “Lilies of the Field”, and (my personal fave) “In the Heat of the Night”. The latter crafted “What’s Up, Doc” (and a bunch of other cool films) that features a San Francisco car chase scene which blows away anything in the “Fast and Furious” series (which I haven’t seen). He also crushed it with a cameo in “The Sopranos” as Tony’s shrink’s shrink.

They don’t make movies like they used to, but as they say, they never did. And when they do, we don’t attend. Spielberg, for instance, recently dropped (though God knows why) an updated version of “West Side Story”, which the critics loved, but which bombed at the box office.

It doesn’t take an MFA to know that “WSS” is a takeoff on “Romeo and Juliet”, but maybe fewer of my readers are aware that the Dire Straits song of the same name is a takeoff on WSS. As we are informed by both Sondheim (who died this past Thanksgiving and is therefore 22-ineligible) and Knopfler, there’s a place for us.

But it took the latter to suggest that maybe the time was wrong.

So it goes with the ’22 markets, thus far at any rate. After a couple of sessions of admirably seeking to extend the year-end rally, investors turned ignominious tail, and ended the week by selling off pretty much everything – stocks, bonds, commodities (OK; not ALL commodities), heck, even crypto (BTC down ~10% ytd and ~37% over a rolling two months).

We’re where we belong location-wise

But our timing sure seems off.

So, what gives? Well, for one thing, there’s a passel of risks out there – ones that I weary to yet again inventory. But more than anything else, it appears that the markets swooned – and not in a good way – at the release of Fed Minutes — which had a decided “Jets vs. Sharks” feel to it.

Everyone expected them to talk tough about tapering. And they did. But it also appears that investors were taken by surprise at indications of an intention to divest of at least a portion of their $9,000,000,000,000 Balance Sheet. Shudder the thought!

Rates, in result and perhaps justifiably, rose along the entire yield curve. Moreover, a big hike in wage inflation — enmeshed in an otherwise tepid December Jobs report – all in advance of next week’s CPI/PPI drop (the latter of which could easily clock in at > 10%) and the won’t-that-be-fun Congressional testimony from Chair Pow and his Trusty Tonto Brainard didn’t do much to becalm anyone’s mood.

Even the credit markets are feeling the heat:

Bond Rumbles: Investment Grade and Junk

The downward pressure in non-government debt instruments was almost certainly abetted by a pant load of new supply, as, just on the sober (left graph) Investment Grade side, issuers ushered in the new year by dropping $60B of new paper on the markets in its first week.

This week’s projected tally? A more modest $30B. But – trust me here – it could go higher.

Not to harsh your collective mellows, but if these markets collapse, we’s all in serious trouble; the 22 Corpse of the Year could be all of us.

But for now, the real pain has devolved to the Equity Complex, with all the indices down, and that most stalwart soldier – Captain Naz – particularly on its heels. Nominally, the Ol’ Cap is tethered, in star-crossed lover mode, to the fate of his Juliet – Madame X (U.S. 10 Year Note). As the latter falters in price and rises in yield, so the argument goes, the discount rate applied to cash flows expected to emanate from those Naz names increases — weakening/diminishing them accordingly.

OK; fair enough. But am I ready to declare the death of either the Captain or the Madame, in inadvertent suicide? I am not.

For one thing, I don’t believe the bid on longer term Treasuries has made its permanent exit; there’s just too much cash out there to place anywhere else. For another, I’m not convinced that the love match is permanent. At some point, the Naz can rally while Treasuries sell off, and vice versa.

It’s happened before, you know.

And FWIW, I think all that cash continues to boost credit markets, or, at minimum, keep them from collapsing, so, I’m not ready to toe tag them yet either.

Thus, one week into ’22, while there are certainly blood clots and stains anywhere one care to cast one’s eye, I’m not prepared to advance the candidacy of risk assets of any kind for ’22 Corpse of the Year honors.

But they may remain impaired here for a spell, or, taken to the extreme, sent to the Critical Care unit.

And this we’ll have to live with.

However, it’s just too early in the year to hand out honoraria, or even to write much of a narrative.

I reckon, in sum, it’s time to hunker down. I don’t see much in the way of easy pickings out there, but the play has just begun. Subsequent acts are bound to bring surprises aplenty.

And at some point, this here tape is bound to normalize itself. Consider, if you will, the case of the beleaguered Biotech Sector, the source of mournful and unmixed heartbreak for many months:

Now, you might think that this one area of the market, comprised of the companies we need to beat back this pandemic, whose products will remain in demand for as long as we humanoids are prowling about, would receive some kind of investor love. But one would be wrong. Its index is down >40% since before they locked all our asses down – nearly two years ago. Over the same period, the Gallant 500 is up around 35% and the lovesick Captain Naz has rallied a cool 60%.

It all seems to me to be so distressing, so avoidable. The Fed wreaks havoc by diluting the money supply. Investors, in result, misallocate capital. Virtually all assets are mispriced. Vital, well-run companies see their valuations crushed, while investment dollars flow endlessly into an oligarchy of equity names, as well as towards dreamy securities collateralized by images of rhinoceros tusks.

It’s not a good look for us and it can’t possibly continue into perpetuity.

But bear in mind, if you will, that “Romeo and Juliet” is a tragedy, which ends in the creation of not one, but two, beautiful corpses.

I prefer to take a more optimistic view of the proceedings.

Yes, there’s a place for us, even if the time is wrong.

However, with some intestinal fortitude and solid, self-generated karma, our time will come, thereby removing us from the nomination list for 2022 Corpse of the Year, and, hopefully, for any such award during subsequent cycles around the sun.

TIMSHEL

Well, my loves, we survived – even if 2021 didn’t. The latter departed, on schedule, in rolling hourly units across the globe this past weekend. Few in my field of vision are terribly busted up about this, and, FWIW, neither am I.

With seasonal consistency, we’ve just completed the annual “______ of the Year” cycle, and a  couple of days ago, I came across an authentic looking Time Magazine mockup, which named Charlie Watts as its Person of the Year. Charlie, of course, died this past summer, after having begged out of his band’s bajillionth Geritol tour, Moreover, he hadn’t recorded a particularly memorable percussion lick in several decades (maybe since that Honkey Tonk Women cowbell). But I’m thinking to myself: does this even matter? His biggest feat in ‘’21 was managing to die. Which was something; bought him a lot of press. More so, than, for instance, Keith Moon. Who bounced in 1978.

But one way or another, Charlie is now indisputably a corpse, begging the question as to whether he  would even cop “corpse of the year” honors. He’d certainly be in the running but would have had to fend off late surges by the recently departed John Madden and Betty White, as well as challenges by such notables as Mike Nesmith, Colin Powell and (a personal favorite of mine) the late, great New York Dolls’ guitarist Sylvain Sylvain.

More than this though, it would seem appropriate from some perspectives if Time had chosen to honor a corpse rather than a living being, because it was that kind of year. It would have been outside of its publishing comfort zone to do so, and their its would probably have objected. But anyway, as has been widely reported, they gave their annual award (with no complaints from me) to Elon Musk.

But that’s all so last year. It’s on to the new one, where, presumably, we can rely upon one near certainty:

Deuces are wild.

My (then-future) wife told me this on her 22nd birthday. And she was right. It was a crazy year. So, too, does this new one portend to be.

2022 certainly sets up in “deuces wild” configuration, ending, as it does, with two of them (which is to say nothing of the identical numeric marking the millennium). And, since we can put it off no longer (even if we would), it behooves us to review the singular set of conditions that await us as we commence annual proceedings.

There is an abundance of visible risks, almost an embarrassment of them. They include, in no particular order, inflation, public health disruptions, the gearing down of the Fed’s money printing machine (at least on a temporary basis; my guess is that they’ll keep it on idle – just, you know, in case), and great, associated uncertainty about interest rates and credit spreads.

Government, that heretofore omnipotent market Sugar Daddy, finds itself in a somewhat neutered position. The ruling elites, with their widely divergent interests and lack of requisite Sugar Daddy discipline, cannot seem to agree on anything. Their titular head is (predictably) showing himself to be increasingly a straw figure; whatever he’s doing, it bears no resemblance to leadership.

As such, among other issues, one can forgive our transcontinental, foreign frenemies (who have problems of their own), for thinking that they can do pretty much anything they choose without evoking a potent response from us, thereby enabling us to add Foreign Policy to our list of matters upon which to fret.

This isn’t exactly the best environment to look the the guy in the hat across the table and tell him that you’ll see him and raise him a buck.

And I think it would be wise for the investor class to give the gov its props, as it has had the market’s back for well-nigh a generation. Early last decade, it goosed the mortgage market, and everyone had a good time/made oodles of bank — until the consequences of that policy became apparent.

In the aftermath of the subsequent financial collapse, what did Washington do? Printed trillions of dollars of electronically rendered cash and used it to by its own securities. These are the preferred form of investor collateral, and, in result, for virtually the entire decade of the teens, it was game on.

The back half of the decade also brought tax cuts and deregulation – particularly in the Energy Patch, which, of course the market loved.

Then came ’20, with its wretched quarantines, which (and this I missed) were offset (at least from an investor sentiment perspective) by a huge doubling down on Fed money printing/securities buying. But what followed was (as was, in retrospect, inevitable) a nasty dose of inflation – one that if not checked at this pass, could cause all sorts of unpleasantness in the capital economy.

But tapering has barely begun. Real rates are still negative. The re-regulation — Committee for Public Safety Rendition, has not emerged in full force. For these reasons and others, the markets closed out ’21 just a titch below all-time highs. Fed funds are still barely above zero. Madame X/10- year yields are at a docile 1.5% — smack dab in the middle of the 1.2% — 1.7% range registered all year.

In addition (and though, for years I’ve ignored the short end of the curve), rising near-term rates may pose a problem for the markets – particularly for levered pools of investment capital that rely upon broker financing to build their portfolios. Heck, I am acquainted with several such platforms that utilize > 10x leverage in their books. A 1% increase in overnight rates implies a double-digit performance haircut for these cats. Some of them have crafty ways to evade this problem – most of which I can’t or won’t divulge — due to that endless inventory of Non-Disclosure Agreements I’ve been compelled to sign. But others, lacking these tools, will suffer, and won’t have the opportunity to cast their eyes towards Washington for any succor or assistance.

Are there any tricks left in the collective sombreros of the federales? It doesn’t seem to me to be so.

Crazy, no? Crazy deuces abound in every hand. Except the ones that we hold.

Thus, when the markets open today, it will be at peak valuations, against a hardscrabble backdrop where the myriad, government-sponsored bounties that have enriched us all these years appear, to be, at best, in short supply.

If I had even a basic understanding of the present-day capital economy, I’d say that risk assets are ripe to get slammed. But I don’t think this will happen, principally because (as has been the case for several years, and is even more evident as we begin our latest trip around the sun) there’s simply too much cash, chasing too few securities, to create the framework for a god-fearing selloff:

If I’m reading this chart correctly, the global inventory of fiat currency is now fixed at a tidy $100,000,000,000,000 – up from a more modest $65,000,000,000,000 just a few years ago. That’s a ~50% increase – over which period the global equity market capitalization is up by a similar amount (meantime, the Gallant 500 is nearly a double and Captain Naz is > a three bagger).

Could be just coincidence, but I’d not rush to that particular conclusion. Logic would dictate that a cessation of money printing projects out to a headwind for stocks, bonds and even commodities. But even if they don’t print another penny of newly minted cash, there’s still that $100T of currency and demand deposits sloshing around the globe, and therefore in my judgment, plenty of juice to absorb wayward risk assets that take a notion on themselves to go underground.

Of course, that’s not the whole story. Because plenty of solid equity names took the worst pasting in more than a decade last year – one where the equity road forked into two distinct paths. One was a gilded stairway to heaven, but only a small handful of names that retain investor favor were able to access this track. These are the stock group once called FANG, then unwieldy re-christened FAAMG. But now, by virtue of a recent name change by Facebook (now Meta), they at least sport a legit acronym: GAMMA (Google, Apple, Microsoft, Meta and Amazon).

But that’s about all we have to thank those fortunate few for. And it ain’t much. My hunch is that they will continue to draw investor inflows, while the valuation of other quality equity names languish with vexing persistency.

So, there you have it – a huge macro quagmire offset by an impossibly large liquidity base. Strong index performance disguising a great deal of carnage beneath its glossy surface.

However, that was the story of ’21, now toe tagged and preferably forgotten as soon as is possible. It is now nothing but a corpse, and, for my money, is its own Corpse of the Year. Not Betty. Not Madden.

The Corpse of the Year is the year itself: 2021.

But now it’s on to ’22, where deuces are bound to be wild.

Guard them, if you will, with care.

TIMSHEL

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,

And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

— William Butler Yeats

This here note is a rerun. I wrote something nearly identical, in this very space, a couple of years ago. But hey, it’s the holidays, right? News anchors have abandoned their posts. Nobody’s answering their work phones. Everyone, in short, has bounced.

So, I’m busting out an old one – this time to honor the demise of the fabulous Joan Didion, whose first published book carries the same name as this week’s offering. I’ve read this (and two or three of her other books) and am able to enthusiastically recommend her to you. But more than that, “Bethlehem” is one of two titles, which, as a writer, make me truly jealous, wishing beyond hope that I’d come up with it myself. The other, on the odd chance you wish to know, is Ayn Rand’s “Atlas Shrugged”.

Didion’s passing is truly lamentable, God bless her for plucking out the best phrase from my fave poem – “The Second Coming” by William Butler Yeats, to grace her maiden publication. It can’t be held as her greatest literary achievement, but God oh mighty, it’s up there.

Meantime, Yeats’ poem runs less than twenty lines, rendering it ~129,980 rows shorter than John Fitchett’s “King Alfred” but (with all due respect to that eponymous 9th Century Saxon monarch) packing a much more substantial wallop. Offering as it does, a terrifying, alternative vision of, well, a second coming, it (among other things) has hauntingly fluid parallels to the present day.

Perhaps this is no accident. The poem was formally published exactly a century ago and is widely believed to be informed by the plague of the Spanish Influenza, a disease to which Yeats’ wife nearly succumbed, and one which, at the point of its publication, was entering its third year.

Yeats suggests that we are, each of us, falconer-controlled falcons, feeling ourselves to be strong, independent and (above all) free, but really under the opaque control of falconry forces. We fly about – in ever-expanding spirals, unaware that our hooded movements are guided by those who have trained us to do their bidding.

Things eventually fall apart, descend into anarchy. The center cannot hold. The best among us indeed lack all conviction, while the worst are surely full of a passionate intensity.

Nothing for nothing, but this sure sounds like the world we currently inhabit – perhaps nowhere more so than in the widening gyre of markets. Valuations continue to rise, as driven by a frenzied focus on a half-dozen names, while the rest languish or are pulled to terra firma by inexorable gravity.

It appears to me, more than anything else, that the falconers are letting the loops historically loose, as fueled by the well-documented, alarming expansion of every form of debt. So, in case you were wondering what a widening financial gyre looks like, I can offer the following images for your guide:

Two Beasts Slouching Towards Bethlehem: Aggregate Debt and the Gallant 500:

Dare we make the connection? Dare we not? Yes, our McMansions bring us great joy, but what about those floating rate mortgage payments in a rising rate economy? However, perhaps the more important question is whether the cycle continue into ’22. Gun to my head, I believe that it will. The over-valuation spirals may indeed widen as the new year unfolds. On the other hand, they may not. But either way, I see two continued indications of the drowning of the ceremony of innocence:

1. Any upward movement in indices will be dominated by a handful of names, purchased by (the worst?) investors with a passionate intensity, while the core of the equity complex will continue to suffer from a lack of all conviction by (the best?) highly trained stock pickers.

2. The risks of a major, unanticipated, and nasty correction are at the upper end of their ranges.

Let’s focus on Number 2, shall we? Lay aside the myriad anarchies loosed upon the capital markets world, including such plagues as runaway inflation, rising interest rates, virus-driven economic disruptions, the widening gyre of an historic credit bubble, and whatever evils are being cooked up by policymakers that may come to pass. The fact is, we’re due.

Because this sort of thing tends to happen every year or so, and it’s been more than that long since the last episode. On a cold, February morning in ’18, the VIX exploded unexpectedly, and created carnage nearly everywhere. Christmas that year brought about the China trade war selloff, which shaved 15% off the Gallant 500’s hide in the month of December.

2019 was, for the most part, a joyful ride on the up escalator, but we all know what happened when the calendar turned. Those Washingtonian falconers, spooked by the covid buggers, locked our asses down, sending stock prices careening into nether regions, and even, for a brief moment, submerging Crude Oil costs into deep negative territory.

’21 featured a series of mini-episodes, including those driven by Meme stock folderol, the collapse of

Archegos, the rejiggering of factors such as Momentum, an enigmatic crackdown in China, and, just in the last month or so, some fitful action tied to the combination of Omicron worries and the dreadful prospect that real interest rates might revert into positive territory.

Yet none of the above have manifested a demonic correction rising even to the dignity of 5%.

Yup, I’m thinking – particularly if the indexes come in hot early on, that it’ll be high time for the falconers to conduct themselves in such a way as to remind us of who’s really running this here show.

And I’m feeling good about this here prediction, because sooner or later it’s bound to come true.

Plus, think of how smart I’ll look if it happens this winter.

Please don’t mistake me; I’ve no reason to suspect that the Yeats’ rough beast’s hour has come round. It might have, but then again, we’ve been issuing worrying prophesies of this nature for at least one hundred years.

Only that we should keep a watchful eye for him, even as we obsess about smaller matters, such as microbes multiplying like hobgoblins and clogging up airports.

But far be it from me to harsh your mellow this holiday season. With markets resting at all-time highs. With investors striving heroically to cap of ’21 with as much vapor in their valuations as they are able to muster.

Not much should matter in the five trading sessions that remain, ere the ball drops, in Times Square, as witnessed by a falconer-diminished roster of watchful falcons. I expect, in the interim, not much more than modest widenings and narrowings of the gyre.

Then, Monday week, we begin it all again.

But this note is about the fabulous Joan Didion. Who left us this holiday weekend. Whose books are worth a gander.

However, as you do, as your risk manager I cannot help but advise you to keep a continued, watchful eye towards the desert sands of Bethlehem, for signs of the emergence of one whose hour may soon be upon us. No sign of him thus far, and (God willing) he may never emerge. But remembering that he might show up without notice will do none of us any harm.

TIMSHEL