I mean, after all, Big Bird is a canary. Right?

As I migrate back from solemn tribute to the more routine madness of this forum, it is my honor, this week, to deliver to you, for your consideration, what I think is a juicy mash-up.

The first component (the “Mash”, if you will), and at the risk of stating the obvious, is the reality that entire market is now keying almost exclusively on the fortunes of the long end of the Treasury Curve. Its steepness and associated trajectory are, from a risk management perspective, of paramount, pertinent importance.

This dynamic has risen to the dignity of an obsession for me, so much so that I’ve found myself, in recent conversations, describing yields on the Ten-Year Note (Madam X) in particular as being the canaries in the proverbial market coalmine.

I think it works pretty well, save one minor detail. It’s not like Madam X is some little yellow bird in a cage, whom no one chooses to notice until she turns, tits up on her perch and flat out expired, from carbon monoxide poisoning. Nay, my friends, it’s the largest liquid market under heaven.

So, if it’s a canary, it is an enormous one.

Like Big Bird. The Biggest Canary of all. Or at any rate, the biggest canary in my field of awareness.

And who doesn’t love Big Bird? Not me, that’s for sure. I don’t not love Big Bird, and no one can accuse me otherwise. More than that, I need Big Bird and am deeply invested in his longevity.

Moving, now, from “Mash” to “Up”, I’m pleased to report that Big Bird – the artiste, received a major shot (covid dose?) in the arm last week, with the ramming through, along party lines (and featuring the now-holy ritual of reconciliation), that $1.9 Tril stimulus package — out of which the Corporation for Public Broadcasting (CPB which is still the major underwriter of Sesame Street production) is due to receive a juicy $175M.

Please know that I love the oxymoronic (is it a Corporation or is it Public?) CPB as much as the next guy; almost (but not quite) as much as I love Big Bird his-self. We should just remain aware that while $175 large will buy a great deal of bird seed, this and other elements of the package come at a significant cost – to the Big Bird in the Market Coalmine, and to other elements of the capital economy.

The latter is in unambiguous recovery mode, lockdowns are winding down, vaccines appear to be working, and, certainly, we can all be grateful for these manifold blessings. But there’s so much cash floating around – Fed Funny Money, CARES Act Stimulus that has yet to be allocated, CARES Act stimulus that has been allocated but not spent – that there’s every likelihood of economic explosion over the next few months. The economic kettle is simmering to a boil and the lid may very well blow off.

And that is before the $2T handout to state governments, public sector unions, individuals already incentivized to remain out of the work force (so long as they follow the voting instructions of their paymasters) and other favored constituencies – all of which projects out to a 2021 budget deficit of at least $4T – its highest level since just after WWII.

The Federales have not issued a major tax call – yet. So, the only way to finance all of this love is through the issuance of more debt. Which should lower its price and increase the vig that the country, as borrowers, will need to shell out for securing these funds.

We can call this a Washington problem, and maybe it is, especially when you consider (in contrast to its political leaders) that the American citizenry has saved more of its income in 2020 than at any point since they started tracking these statistics in 1960:

United States Savings Rates:

Nobody should take a victory lap on this. Savings are piling mostly due to the government handing out oodles of cash to individuals, who, because they have been locked down, have had nowhere (heretofore) to spend it.

But as I suggested a couple of weeks ago (Sloppy Seconds) it looks like there’s a major party about to commence, with festival favors taking such forms as renewed freedom of movement, historic liquidity, burgeoning savings, and fiscal policy that wishes to reward us for, well, just for being us (as well as for our assistance in dispatching Big Orange).

When you put it all together, you’re looking at an economy with enormous pent-up demand, wallowing un unspent Benjaminz, and looking to bust out of shackles it has been compelled to wear for a year. The ruling class, worried that this wasn’t enough, just topped us off to the tune of $2T.

But they gotta borrow the money to do so, and this means that the Treasury Market will be flooded with supply. And the $30T question is as follows: who will be the takers? If any shred of economic theory remains intact in this current monkey circus, the usual buyers would be there, albeit, presumably, at lower prices and higher yields.

And, if the monkey circus had not built permanent structures rather than pitching tents, this wouldn’t be such a problem. Interest rates (or so they taught me in Grad School) should drift upwards in an economic environment of accelerating growth.

However, here’s where it gets a little bit tricky around Sesame Street. Higher rates imply lower valuations for debt securities; really, they’re one and the same. But that means that anyone holding this paper as an asset will take a P/L haircut, and many cannot afford to do so. And the entities set to take the biggest bath are our people, folks, good old American institutions. China? A pitiful $1T of U.S. Treasuries in their vaults. Saudi Arabia? A microscopic $180B.

Nay, Secretary Yell and her cronies at Treasury are mostly in hock to U.S. Insurance Companies, (underfunded) Pension Plans and other domestic fiduciary pools of capital, which are not in a position to roll over and get stiffed when the value of their Bonds and Notes drop. And this is to say nothing of the pounding that is in line for the holders of Corporate/Municipal Debt and Structured Securities, which: a) are owned by the same types of investors, who b) might be less inclined to lend or purchase debt in the wake of these losses.

All of this comes at an inopportune time, what, with millions of businesses either zombified or toe-tagged entirely, and a massive effort needed to repair the carnage wrought by both the virus and its associated mitigants.

So, while Secretary Yell is serenely teeing up all of those new IOUs, her successor at the Fed – Chair Pow – has a real problem on his hands. All of his policy manuals tell him to allow interest rates to drift upwards in an environment like this, but then again, his policy manuals don’t have to deal with $30T in outstanding obligations, and a debt to GDP ratio that is certain to hit the historic and improbable level of 150% sometime this year.

No wonder he looks like he’s aged about a decade over the last few months. I’d give you the Before/After images to prove this, but I’m already in enough trouble with the Copyright Police as it is.

And nothing for nothing, but Powell has shown his sinister interest rate raising predispositions before, and when he did, the markets imposed swift justice on his perfidious ass. Most memorably, at the end of 2018, his bare hint at yield curve normalization catalyzed a > 20% drop in equity valuations in the weeks leading up to the Christmas Holiday. At which point, he backed off, begged our forgiveness, and the benevolent markets rewarded him with an approximate 70% Gallant 500 gain over the next two years.

He knows this much: if he pulls that sh!t again, the market will initiate another whuppin’.

Thus, even as all signs point to upward pressure on interest rates, it is my view that the capital economy can’t sustain them, and that investors won’t abide them. At the end of the day, if supply exceeds demand for our paper (as is highly likely), Powell will be forced to step in and buy out the whole inventory.

But meanwhile, the psychodrama of upward rate pressure, on an economy that is drunk and addicted to free financing, will be a wonder to observe in its unfolding. So, I’m asking you to keep your eye on the action at the long end of the Treasury Curve: the ginormous, anthropomorphic canary, singing in the coal mine.

It will be a white knuckler, but I encourage everyone to retain some equanimity here. Big Bird, like Keith Richards himself, is by and large indestructible.

He takes his lumps but keeps rolling. However, and this is my main point: when the Big Treasury Bird sneezes, we all catch a cold. So, if you see his eyes a’puffing and his beak a’twitching, you might be best served to impose an extra measure of social distance from him, and this means cutting your risk.

Not gonna lie: all of it wears me down. But some of these days, and soon, I’m gonna take you far away from all of these monkey muffins. We’ll go somewhere private, and just talk all night long. Where nobody can hear us, about subjects that are nobody’s business but our own.

In the meanwhile, let’s keep our eyes open, our feet moving, and say a prayer that our angular, feathered ornithologically anthropomorphic friend remains upright and in his locked position.

TIMSHEL

Then as it was, then again it will be,
And though the course may change sometimes,
Rivers always reach the sea,
Blind stars of fortune, each have several rays,
On the wings of maybe, down in birds of prey,
Kind of makes me feel sometimes, didn’t have to grow,
But as the eagle leaves the nest, it’s got so far to go

Changes fill my time, baby, that’s alright with me,
In the midst I think of you, and how it used to be

TEN YEARS GONE, by Jimmy Page and Robert Plant
Dedicated to Alexander Maxwell Grant (November 26, 1991 – March 6, 2011)

This is for you, Pal, Ten Years Gone.

When you first went away, I promised that I would keep what is between us between us, that I would not use my crushing sorrow as rhetorical device. While part of you has (nonetheless) poured out from me in these lines from time to time, I like to think I’ve lived up to this pledge.

But now, somehow, as your heroes conveyed in our title song, you are Ten Years Gone. And it devolves to me to mark the sad anniversary.

I do remember, when the doctor handed you to me for the first time, promising you that I’d help you figure it all out. I know I tried my best. I don’t believe I failed entirely. But there are many things I have yet to figure out myself.

Like what happened that night, a decade ago, when you went away.

And never came back.

And I never even got to say goodbye.

You disappeared on a stormy Saturday night. I learned of this on Sunday. They tell me that they found you on Tuesday, but I looked, and you weren’t there.

The same day, I was awarded a patent for a process that I had little to do with creating. Three days later, the angry gods unleashed a combined hurricane/tsunami on the nation of Japan.

Twenty thousand died, but I barely noticed. A few weeks later, they got Bin Laden. But I remember little of that either.

But I do remember you. You were full of life, full of promise, full of the promise of life. The unluckiest lucky young man on earth. You had some plans; you were making others. For the most part, you never had the chance to execute on them.

Something snapped. You faded to black.

Though I begged and begged, no one could (or would) give me any reason, any explanation.

I have felt, rightly or wrongly, that because of this, no one has celebrated you, that nothing, really or properly, memorializes your existence.

Strike that; there is a plaque with your name on it in a forlorn village in Rwanda.

Also, there’s this, which we made together, at a birthday party you attended when you were two years old.

I’d like to think that once in a while, your friends hoist one in your honor – but I’ve got no indication that they do.

I have some people in my world who think of you often, they are of the select, the few. I love them for this. But they are my people; not yours.

We had to carry on, somehow, without you. You have nephews now. Three of them. They know about you; we talk of you often; they love you. They told me so themselves.

Much has changed; much remains the same, in your Ten Years Gone. I often wonder what among it you would recognize, and even more so what you would not.

There’s more I could write, but I think, instead and for once, I’ll give my keyboard a rest.

And say now, at last, “Goodbye”.

GOODBYE

First, I am delighted to report that I passed the week without suffering any new forms of vandalism, assaults on my sensibilities, or moral outrages. So, there’s that.

Now, please get your mind out of the gutter. I know what you’re thinking about our title, but you’re only partially right.

It’s true that over the last several weeks, as the Public Health situation has brightened a bit, I’ve been kicking around the notion that — whenever this here thing runs its course, the country owes itself a full immersion into “L’Affaires de Coeur”. In all of their delicious manifestations.

Some of us need this more than others, but ALL of us would benefit from the exercise. So, let’s say we get the “all clear” by, say, Memorial Day. Perhaps our leaders should designate the three (oh heck, let’s make it four) day weekend exclusively to the sweet, ancient art of love making.

And then, when it’s over, I say we do it again. Because, after all we’ve been through, we are most certainly entitled to some sloppy seconds.

As always, we can take our cues from the markets, which have jumped the gun and (I believe) entered, head-first into a Disheveled Subsequent Helping configuration.

Risk assets (as I have anticipated and further predict will continue) are pricing in a very sloppy manner at the moment. Lord knows they’ve come to this behavior honestly, because, what to make of the distinctly unkempt condition of the capital economy?

So, sloppy seconds abound across the economic and investment landscape, brought to you in large part by our Public Servants in Washington (and those of many other glittering capitals in the Western World). Depending upon your orientation, the original orgy of asset monetization began either 12 years or 11 months ago. During those cherry-popping innings, the sweet nothings issuing from the magic money machines created a near-perfect cycle of valuation bliss.

Of course, we wanted, want, need more, and god bless those D.C. Lotharios; they’re doing they’re level best to deliver it to us. But it takes a unique amount of vigor to match the passion of the first go-round, and there’s often less surety as to success of the enterprise.

Everyone is thus down for sloppy market seconds, but a little iffy as to: a) whether we can pull them off; and b) how closely we can soar to those original, ecstatic fires. At the nexus of it all is the crowd at the Fed and Treasury, who are plunging yet again — in unambiguously scruffy fashion, into the flames of asset inflationary passion. It will be a costly undertaking, funded by money we don’t have — as, based upon what we currently know (and including the soon-to-be-enacted $2T relief package) it looks like the Fed must paper in a $4T 2021 deficit.

This will take our National Debt well past $30T – approaching the value of two years of GDP,

And, for the first time in nearly three decades, the market is showing a slowness to pick up what Treasury is laying down.

Signs of trouble accelerated last week, during a $62B auction of 7-Year notes, which should have been a “wham-bam-thank-you-ma’am”/missionary position affair, but instead registered the limpest demand in recent history:

You have my apologies for what is an indisputable passel of fruit salad in the accompanying graph. It tells of an auction that failed, causing both 10-Year notes and equities to sell off pretty hard. Maybe you noticed this action on Thursday; if not, you weren’t paying attention.

And all of this took place in the direct aftermath of some rather melodious enticing by Chairman Powell in his recent remarks to Congress. “Let’s do it again” warbled Chair Pow, but the markets were not cooing in response to his wooing.

And now, rates across the world are soaring.

One cannot blame investors for their failure to swoon over the auction. They know an enormous amount of new supply is on its way, presumably at lower prices, so what’s the hurry?

But the flowers and candy keep coming. Another $1.9T in fiscal stimulus, and this after December’s $900B rendezvous. Hundreds of Billions from the CARES Act remain undistributed; hundreds more sit unspent. According to my main man Casey Mulligan (latest in a long line of baller U. of C. economists), across this great land, beneficiaries of the program can and will receive the tax-adjusted equivalent of a six-figure salary – doing whatever it is that strikes their fancy that doesn’t involve punching the clock.

Sloppy seconds anyone? Just sign right here.

A goodly portion of this amorous action has migrated to the Special Purpose Acquisition Company (SPAC) market, a previously obscure corner of the investment bordello which is now generating lines around the block. If you want sloppy portfolio seconds, this is as good a place as any to point your feet.

For the uninitiated, the SPAC process involves forming a public company to purchase a majority share of another company, and then getting out of Dodge. Once the SPAC is funded, its organizers pay themselves back whatever they shelled out to create the enterprise (the rest is pure profit) and work their little tails off to find some company, any company, to acquire within the time window specified in the offering memoranda.

There was a time, not long ago, when this tool was used primarily by industry experts to bring financial efficiency to a portion of that sector, and, by doing so, achieve the holy objective of improved capital deployment.

But those days appear to be gone. Now, the name of the game is SPACing for SPACing’s sake. It is the formation of the deal where all the returns are created. We’ve been through this before, and my view is that whenever the financial markets focus with tunnel vision on financial engineering as a means of creating value, it tends to end badly. The mortgage crisis of 2008? Samesies, and bad outcomes ensued.

And, if forming a company to buy another company (and getting paid a king’s ransom for doing so) isn’t sloppy seconds, then I have missed my mark indeed. I personally feel that many of these SPACers deserve to be spanked. But it won’t be by me, as my tastes run in a different direction.

Meantime, let’s SPAC away, shall we?

Pretty good ’21 showing, right? Particularly since it’s still only February? But I save the best for last. In perhaps the sloppiest of recent sloppy seconds episodes, the manipulators of Game Stop (GME) were at it again this past week, ginning up a three-and-a-half bagger – from ~50 to ~180 between Wednesday and Thursday, before the tizzy wore off and the name closed the week at (the still-absurd level) around 100/share. I think it’s a settled fact that this is pure price manipulation, but you’d think that at least with respect to GME, it’s long past time to withdraw for that blessed interval of cigarette and pillow talk.

But it all sort of indicates to me that investors have adapted to sloppy seconds. And thirds. And fourths.

And this is probably a good thing, because I believe that the sloppiness has just begun. I still think the rally has some juice left (what with those Washingtonian medicine cabinets so full of fiscal and monetary Viagra), but the aesthetics of the next cycles of investment erotica are likely to leave a good deal to be desired.

So, what to do about all of the above? Well, as your risk manager, it is my duty to advise you to use protection. If it’s raining, yes, you should wear a raincoat.

Moreover, from my vantage-point, the heavens appear to be clouding up pretty discernably.

Of course, just because it is sloppy seconds season doesn’t mean that we have to get all sloppy ourselves, right? After all, you and I, we’ve been through that, and this is not our fate. So, let’s not talk falsely now; the hour is getting late.

And all I can urge you to do is to remember we are in this for the long haul, and to act accordingly. There’s too much at stake for us not to bear this in mind.

Thus, while others may joyfully embrace the filthy fun, we should comport ourselves with greater dignity. In the end, this will suit both us and our dreams much better.

And now if you’ll excuse me, I’ll take my leave.

But know this: I intend to soon re-emerge, riding — both neat and clean, to wherever I may find you.

TIMSHEL

I’ve had better months in NYC than I have experienced in 2/21, a period where the hits just keep coming. It is my sad duty report yet another shocking personal incident, recognizing, in doing so (and particularly in the wake of my recently reported 7-Eleven travesty), that I might have finally managed to overwhelm my readers’ sensibilities. If so, know that I regret it. But they need to know.

So, there I was, early Thursday evening, hoofing my way back to my place, when, rounding the corner onto 93rd at Columbus (four short blocks from the very spot where the 7/11 outrage transpired) I heard my car alarm going off, and saw some dude running in a direction which any reliable compass designates “away from my car”. I discovered, upon further inspection, that my rear passenger car window had been smashed in – presumably by the gentleman whose fleet feet I saw hurrying away.

In the moment, I had three choices.: 1) I could’ve chased after him and beat his ass (nobody messes with the kid these days), 2) I certainly might’ve summoned the police (fat lot of good that would’ve done me), or 3) I could have simply done nothing.

I chose, with no regrets, Door Number Three. I checked around the inside of my ride; found, to my surprise, that nothing was missing – probably owing to my untimely arrival on the scene. Everything remained – I won’t say in good order – but at any rate, as I had left it.

So, I let it go.

Welcome to the world of Smash Not Grab.

I had it in mind to call this piece Smash and Grab – adding the angelic flourish of Part Deux. Because the Smash part has happened to me before. In the same hood. About eight and a half years ago. But that affair also involved some grabbing: specifically, the thefting of a gen-u-ine Eye-talian leather bag to which I had formed some attachment. However, this time, because nothing was taken, so the Grab part does not apply, and, as such, the Part Deux must also wait for a future incident.

I net out to preferring the earlier occurrence, because, to my way of thinking, why smash if you’re not gonna grab? I mean, that is the way things used to work, and on balance, that process makes more sense to me. But the duality no longer prevails. Oh, we still smash. Grabbing? Not so much.

And, as always, what is sauce for life’s goose is sauce for the market’s gander.

The Big Short (squeeze) of January was certainly a smash, but who grabbed what? Not clear.

What we do know is that the grand army of squeezer/smashers have been out there looking for new victims. By all accounts, it ain’t going so good for them, as they home in on names like the formally high-flying Beyond Meat and the decidedly earth-tethered Best Buy. Yes, they managed to squeeze into “wheels up” configurations, but in both of these cases and others, the nose has begun to point downward. We thus face a Smash Alert, with every prospect of debris flying all over the place.

But little grab to show for the efforts

We also probably should cover the Texas Power situation, though perhaps not with a fisted sledgehammer. It is, however, perhaps fair to state that of any jurisdiction in the Lower 48 or beyond, Texas was probably the one where a disruption in the power supply was least likely.

But yet it happened, is happening still.

The Lone Star Power Grid was certainly smashed – at least economically.

In a physical sense, perhaps it would be more accurate to describe it as having been iced.

One way or another, the country’s Energy Patch is dark and cold – currently operating at less than 50% production/distribution capacity. Perhaps there are some out there that feel these are the kind of growing pains we need to ween, or “will” ourselves off of fossil fuels, but I am guessing that very few of them are freezing in Texas right now. They suffer none but celebrate vicariously.

However, while they may experience some fleeting joy in these tidings, with no suitable alternatives to power heat, electricity or locomotion, it doesn’t look to me like they’ve grabbed anything to which they can hold on.

And, finally, it may bear mention that within the span of ten short months, Lone Star Energy Markets have experienced the dual smash of West Texas Intermediate Crude Oil trading at -$40/barrel and Dallas/Fort Worth Energy Prices spiking 200-fold – from < $50 to ~$10,000 per kilowatt hour. To put the latter in context, at some point mid-week, it would cost a Texan $100 to charge his or her I-phone.

We can move from there to the paper issued by the U.S. Government, whether in the form of legal tender, or debentures which it has promised to repay at some future date. The smashing of these assets is observable — at varying paces but is right in front of our noses if we care to look. Here, we may have identified the exception to our titular rule, because the exercise has caused a huge grab of every financial asset that is not issued by our Treasury Department.

So, the markets are smashing the USD, and taking some deeply destructive whacks at our Treasury Complex – all of which has catalyzed some grabbing by the investment community. But one wonders if what has been grabbed in these realms can be retained indefinitely.

For now, they’re holding on tight, and to me, the smash/grab bargain seems to be one that boils down to the following.

If the smashers keep smashing, then the grabbers will keep grabbing. I expect this to continue – until it doesn’t – a scenario under which, while I expect the smashing to extend, there will be nothing of value to grab, and no one to grab it in any event. This is the eventuality for which we must ultimately prepare, but I suspect it’s a good ways down the road. We could use the time wisely, preparing for the problems that could arise and sh!t. But let’s face it: if we were to do so, it would be a first.

And I reckon what’s sauce for the market goose is also sauce for economic gander. Lotta stuff smashed up with respect to the latter (what, with the virus and all), and lord knows that everyone is attempting to grab what they can.

On balance, though it looks like a loser to me on the grab side. But what do I know? Markets retain their impossibly high valuations, and the folks at the Atlanta Fed (even if their Wall Street opposite numbers incrementally disagree) are prognosticating a first quarter of what can only be described (if you’ll pardon the expression) as a smashing success.

Yes, a 9 handle on GDP would be a smash hit, while, if the banking forecasts are correct and we come in at the blue end of the estimates, it will be a gripping, grabbing dose of reality.

I reckon we’ll find out, but one way or the other, but carry on we have and carry on we will. My garage guys (who I treat very well) did a nice job of taping up my window, and I have the fabulous folks at SafeLite coming to my house with a replacement, as financed 100% by my fabulous insurance company – USAA.

The whole sequence seems rather pointless; nobody ends up much the better or worse for it. I had about 45 mins of inconvenience. Gave the garage guys a paid assignment. SafeLite got a small trade, and USAA had a small outlay. I don’t think the perpetrator of the crime gained anything for his efforts, but, on the other hand, I doubt he’s much worse off. Just a lot of energy wasted on all sides if you ask me. Lots of this kind of circumlocution going on these days, I think.

I do reckon that there’s more smashing in my future, and – who knows? I may just get into a mindset to do some smashing myself.

But there’s only one thing I wanna grab. And when I have executed this exercise, I won’t let go.

No smashing will set up this grabbing, but I guess that’s my point. Times are a changing, winds are ablowing, our roadmaps are misplaced, and the GPS is acting wonky. We can and should expect anything at this point.

My best advice is to remain on the ready.

For what?

Beats the daylight out of me.

TIMSHEL

Earlier this past week — unable to sleep and at the darkest part of the night, I found myself on a journey across the windswept landscape of Uptown Manhattan. It was snowing; the once-dazzling thoroughfare of Central Park West had transformed into a wintry, nocturnal version of Gary Cooper’s “High Noon”.

I won’t offer additional details; after all, some matters (even within this sacred circle of trust) must remain private. Right?

Save this. On the very last leg of this excursion, I committed to a quick (is there any other kind?) stop at the 7-Eleven on Columbus Ave. Not gonna lie: I was jonesing for a Big Gulp. And maybe one of those delicious enchiladas that rotate so enticingly at the front counter. While it was a sinful, deliciously sinful mission, I felt it to be my destiny, and was not of a mindset to consider other alternatives.

But when I arrived at the threshold of that paradise — recognized, universally by its magnificent red, green (and orange) signage, I encountered locked doors and a crudely written window note that read:

“Closed”.

Closed? How can that be? Is it even legal? For a 7-Eleven to be anything, at any time day or night, other than open for biz? I been around a long time, and hard-won experience had given me the impression that the only reason the joint even exists is because of its 24/7 operating status.

I consider the episode to be an enormous personal setback, an assault on everything I hold to be holy. Even days later, I am only beginning to recover.

And I was of an attitude to get some satisfaction, was gonna take my beefs directly to the Head Man at Parent Company – Southland Corporation (located in Big D). Only to discover that: a) Southland went bankrupt some thirty years ago; and b) those formerly reliable convenience stores are now majority owned by the Japanese – residing, as such, within in a jurisdiction where, due to geography, cultural differences and other factors, I was unlikely to exact my swift justice.

I was able to gather myself — sufficiently, at any rate, to return home. Whereupon I filled up a 7-Eleven Big Gulp cup – one of many in collection I am (or was, until the above-described outrage took place) proud to have accumulated — with ice water and took what comforts I could from the exercise.

But I was still hungry, nay, hangry. And the cupboard was bare. Plus, much as I love ice water, it wasn’t by any stretch the Mountain Dew that I craved. Something was missing; my taste buds wanted more, and the only thing I could think to do was open up my veins and bleed a little of my own plasma into the cup.

I know. I need help. But on the other hand, isn’t that a little bit like what we’re doing to our capital economy? Gorging on our vital parts to quench our insatiable thirst for immediate gratification?

How else to explain all of the money we’re printing – legal tender for all debts, public and private – and handing it out to recipients — a large portion of whom have no logical forums whereby to spend it?

And the government has no plans but to give away, and spend, more – without even engaging in pro forma discussions about fiscal balance sheet impacts. The Congressional Budget Office just dropped its formal 2020 deficit estimates a couple of days ago, and, in aggregate, they clock in at a cool $27.9 Tril. But that’s before we tack on the just-passed-by-reconciliation $1.9T relief package, which, along with other unfunded goodies, will surely take us to > $30T.

And all against a current GDP of just under $19T, buckling under the burden of carrying all that paper while still serving as the engine for supply of food, shelter and other forms of succor to the masses.

No f_cks given as to how we might pay this debt. But then again, no f_cks are needed. Because we know the answer: we will just paint our problems away with new money.

And, almost imperceptibly, it’s draining us; mostly as felt through the declining investment power of the dollar, which, as presented in the following table, no longer swaps so good against certain assets, as it did, say, 10 months ago:

Somehow, improbably, none of these trends (including the leap in the Baltic Dry Shipping Index) are reflected in our official inflation statistics. January PPI came in at 1.1% year-over-year, so all good, right? Well, the Commerce Department Producer Basket might be pretty stable, but hard assets that one might hold in the stead of Benjaminz, are, as indicated above, exploding to the upside.

Except Gold, which the book says should be rocketing here. Poor Gold, not even worth a buck twenty-five against those Bloviating Benjaminz! But Bravo Bitcoin! Which would’ve copped you more than an Eight Ball, had you been wise enough to engage in said copping, say, early last Spring.

And there was big news in BTC-land this week, tidings which went largely (and perhaps justifiably) unremarked (what, with Impeachment II and the prospect of Pitchers and Catchers reporting in ten short days otherwise hoovering up our bandwidth).

Specifically, the world’s largest custodian: BNY/Mellon, announced that it would accept the little crypto critters inside its hallowed, steel-reinforced vaults. Brothers and sisters: this is worth noting. Crypto investors now have a big-ass fiduciary watching over their bits/bytes stores of value. Which means that these assets can be rehypothecated, used as lending collateral. And (fluidly) sold short.

I can’t think of anything more bullish for the asset class (yes, even the bit about shorting), coming, even as it is, at a time when it has already annualized at about a ten-bagger over the course of the last year.

But it all comes back to gulping down our own plasma; it’s just another reason to bail out of Benjaminz as quickly as one can. I’m not concerned that we won’t. Quite to the contrary; I’m certain we will.

And this concerns me.

And, given all of the above, I feel I have no alternative other than to embrace the plasma-drinking crowd and encourage you to ditch whatever Benjaminz you may still have laying around.

No, the rally is not over and won’t be until it is. At which point, well, I don’t really want to think too much about that. In the meantime, while, yes, it’s a roll of the dice, but I’m here to tell you that it’s the policy makers who have caused them bones to tumble, and all we can do is to roll with them. They may land on Seven. Or Eleven. Or they could come up Snake Eyes.

But under no circumstances do I believe that we should end up in the “no dice” configuration, in which I found myself the other night. And, to add insult to indignity, the Valentine’s Day roses I ordered for a true love of mine on February 12th are still pending delivery. Perhaps this is why the University of Michigan Consumer Sentiment Index took a spill in January:

Consumer Confidence: I Guess I’m Not the Only Mofo Searching In Vain for a Big Gulp:

I reckon, on balance, I shouldn’t have taken that walk; should’ve stayed exactly where I was: warm, welcomed and wanted.

But noooooooo, I had to tramp out into the snow, and, among other things, have my blissful ignorance about my local convenience store– its flighty ownership status and its hours of operation – shattered into dust.

And to top it all off, I’m a little light on my plasma.

So, I reckon it’s time to take my leave, wishing everyone a happy Valentines/Presidents Day (the latter a day of rest that most everyone should enjoy, whatever their viewpoints may be about Birthday Boys George and Abe).

And, as we pause for a time, I hasten to remind you that there are still many miles for us to travel, and I myself pledge to you to try my best to choose my steps more wisely in the future.

TIMSHEL

A couple of years ago, I coined a term that I fully feel belongs as part of the permanent universal football lexicon.

Now, this intention has morphed into a demand. I demand that you use it, that everyone use it. More than this, I insist that you provide me attribution. I can, if necessary, document that it traces back to me, and, of course, I’d hate to sic those copyright lawyers on you, so just go with it, OK? It won’t cost you nothing.

Specifically, us football studs have long referred to an interception as a “pick”, and, when the recipient of the errant pass manages to return it into the end zone (in the process recording six points for his crew) we naturally call it a “pick six”.

Until, that is, I re-designated as a “six pack”, which I am now doing on a formal basis. In honor of Super Sunday, 2021. Without fanfare, but rather, with determination.

As in “Stafford serves up a six pack to Sherman”. Which I’m not sure has ever happened, but which is now > 2x more likely — given the former’s recent trade into the NFC West: the district in which Sheriff Sherman is on menacing patrol.

So that’s it. Your QB tosses a pick and it gets run back for a touchdown? Well, he’s served up a six pack. Got it? Good. No need to thank me; just remember where you first encountered it.

And, naturally, it is possible to serve up a six pack in realms other than that of the gridiron.

Take the markets, for instance, where (it strikes me) six packs get served up all the time.

While the memory is still fresh, the late January short squeeze comes to mind. It was one for the ages, reminiscent of certain plays from Madden 2000, of which, in days long past, innumerable copies were sold at a retail outlet routinely seen at (now windswept) malls – under the banner of Game Stop. Here, there is no room for argument: the short sellers served up a six pack of epic proportions.

But that episode, for the most part, has run its course, and no benefit can be derived from piling on in this space. Investors will now turn their attentions to other potential targets – most notably (in my opinion) The Fed, which, by virtue of having printed heretofore unimaginable sums of money to purchase galactic amounts of its own securities, is in a position to have the stuffing squeezed out of it.

It’s truly frightening to contemplate, and it sets up as follows. The country is awash in Roethslisbergers (our one-time substitute for Benjaminz) – all suited up for the big game and wild-eyed for the coach to call its number. When the health situation normalizes, they will get their chance. It will be game on. Everyone will go out and fling cash around in “Hail Mary” fashion. The price of everything should rise, and so too (according to the time-honored protocols of the playbook) should interest rates. Which, by the way, should be on tap to climb anyway – if for no other reason than all of the paper that the Treasury will have to issue to pay for all the free sh_t that the government is dying to give away.

But what if interest rates do rise? With the economy in a condition of impossibly unmanageable indebtedness, the escalating costs of debt rollover/reissuance, and the losses that will accrue to the holders of all those obligations, are disheartening to contemplate. Under these circumstances, buyers of Treasury securities are likely to become scarce, so rates could rise at a blistering pace. Which will exacerbate the cycle of losses and inability to find incremental sources of lending.

So, my guess is that inflation or not, the Fed’s gonna have to buy a pant load of its own debt simply to keep us in the game. Just like the dude short all that GameStop had to do a few days back. And, as such, the Fed is set up for a short squeeze/six pack that will be highly unpleasant in its unfolding.

In football terms, its O-Line is buckling, the defensive ends are rampaging, linebackers and safeties have blanketed the middle of the field, and the corners are edging up. Diagrammatically, it looks like this.

First, the pressure:

Fed Balance Sheet and Crude Oil as a Proxy for Inflationary Forces:

And here’s what passes for The Fed’s protection scheme:

It looks to me like the pocket is collapsing. Can the Fed really hold the line until 2023? If not, it’s hello: six pack – Monetary Policy edition.

And, while we’re at it, a few more emerging six packs – mostly emanating from Washington (a town with a proud but nameless football team) come to mind.

Executive orders disabling pipelines and drilling? Six pack in the making. Energy capacity is already constrained, crude oil is surging, no substantial and suitably sufficient alternative fuel sources are available, and all just at the point when the country is fixin’ for a bull goose road trip.

Nationwide $15 minimum wage? A half a dozen cold ones waiting to be opened. So many businesses hanging by a thread. Others delighted to operate with fewer staff, additional offshoring and more automation. No taking into account the massive differences in living costs/wage rates across regions of the country. But 15 big ones an hour for everybody. Politicians will, of course, celebrate their own noble generosity. But nobody here, I think, wins. However, there are plenty of losers. The suffering economic classes that will find that jobs previously available are now out of reach. Businesses which will be compelled to either enact mass layoffs or shut their doors altogether. Though no one will listen, I’m begging our Congressional QBs not to throw this pass – even if it means taking a sack.

Impeachment? Bring on the church keys and bust out the tall boys. Whatever other forms one’s views may assume, an exercise to remove someone from an office he no longer holds, through a sequence that has dispensed with any form of discovery, pre-trial hearings, and the presentation of exculpatory evidence, is all so farcical that even the very unmanageable Chief Justice of the Supreme Court gathered his wandering wits sufficiently to sit out the proceedings. Which are by and large nothing more than a wasteful sequence of theatrical, political retribution. It’s all unnecessary and avoidable, but it begins tomorrow. 45 goes on the docket one day after Superbowl 55.

Six Pack. Six Pack. Six Pack.

But here’s the good news, my friends. In the markets and elsewhere, serving up six packs does not necessarily equate to losing games. The Fed in particular will keep chucking and may very well connect with its investor/receivers more than once, recording, in the process, what is likely to be a transient, meaningless victory. After all, given these investment conditions, the game plan largely forsakes defense (i.e. risk management); it’s all about scoring enough points to outlast your opponents.

In this way, the Fed reminds me of my former nemesis: one Brett Favre, the record holder in terms of throwing interceptions, and, for what it’s worth, the serving up of six packs. But to Brett, it didn’t matter. Because the next time he got the ball (after the ensuing kickoff), you knew he’d be coming at you with everything he’s got. More often than not, his tenacity worked to his advantage, so, justifiably, he’s in the Hall of Fame.

And every once in a while, it all works to perfection. You’re a receiver, matched up against a bigger, stronger, younger opponent, itching to show you up. The ball is snapped. You zig. Then zag. The defender ends up on the ground, eating his own dust, and your athletically gifted QB throws a perfect spiral that lands gently in your soft hands, after which you waltz in for the TD.

I can’t help but thinking that these are the moments that make it all worthwhile. But they don’t happen routinely, and often, we need to grind it out for a spell to set them up. We stumble, we fall, we weep, we wail. We gather ourselves, dust ourselves off, and try again.

We save some energy and other resources, because we know that if we do what’s demanded of us, in the end, we can, we will, prevail.

It’s that kind of market, kids. It’s that kind of life.

If we remember all of the above, then I’d say that while we may find the serving of six packs unavoidable, all things considered, we got this.

TIMSHEL

I guess this comes from “Caddy Shack”, a movie I’ve of which (I’m ashamed to admit) I’ve seen only a part. I hope you don’t think worse of me for this omission.

Meantime, the entire world is a-buzz about the doings around GameStop (GME), and, though I must fight to be heard against the associated din, I feel no less duty-bound to weigh in on this topic.

Because it has significant implications from a risk management perspective.

Let’s start with the punchline – our title is aimed at you, my newly lauded army of micro investors. Though it brings me no joy to say so, I do indeed suspect that this fate may await you.

An unavoidable retelling of the narrative wants the following disclaimers. First, what has been reported may not match up with the facts, which I believe are deeply misrepresented – in the financial press, in the mainstream media, in the blogs and even in the latest edition of “Field and Stream” magazine.

I believe (but do not know for certain) that these sources have gotten it wrong, that this was anything but a redux of the biblical David/Goliath story – played out on the battlefields of electronic trading. Rather, I think it was a “Beyond Thunderdome”/Two Enter/One Leaves sequence — involving behemoth, battlehardened combatants, and rife with contours that have played out, in various iterations, since time immemorial (and certainly since before the bible was written down on stone or parchment).

Further, to the extent that we are able, we will refrain from naming names, because we’re too classy for that sh_t, right?

OK now, let’s begin.

At the epicenter of it all is a short squeeze in arguably overvalued, illiquid stocks — most notably GME – a buggy whip vendor of electronic entertainment, the owner of retail stores in malls that no one ever visits, where it seeks to sell products that the world now purchases almost exclusively on-line. Other than providing a pre-pandemic meeting-place for hormonal teenager males (not exactly a high margin business — even before covid), I’m not sure it has a raison d’etre of any kind.

So, the stock attracted short sellers like moths to a flame (or like me to you), and, as recently as a few weeks ago, they were comfortably poised to push the valuation of GME — from its prevailing levels below $1B — down to $0B. The shorts then began to concentrate, and the market saw an opportunity to do some squeezin’. Over the 2nd half of 2020, GME rose from ~4 to > 20, which, by my accounting, is a five bagger.

OK; fair enough. This sort of thing happens routinely in the short selling game, often-times with the short sellers emerging as winners. But then the squeeze itself started to take on an epic urgency, catapulting the stock, at one point on Friday, to a market capitalization of over $25B. To place this in context, a purveyor of obsolete Nintendo cartridges and Blue Ray copies of “Caddyshack” is at present worth more than companies such as State Street (world’s largest custodian) and Republic Banks, NASDAQ, Consolidated Edison and Tyson Foods (to name just a few).

Prominent short sellers were caught in the whirlwind, unable to buy back shares at any (fathomable) price and facing margin calls that they could not meet – issuing from the brokerage houses that had lent them the stock to sell. One fund in particular was thus forced to fold itself into the strong (but not always loving) arms of its competitors, with the only other likely alternative being ignominious bankruptcy.

All of the above caused perhaps the biggest market disruption since that bizarre-o day last spring when Crude Oil traded negative. It sparkplugged the Gallant 500’s worst week since October and spilled over into virtually every sector and asset class, as investors, quite sensibly, reduced risk across the board so as to find a quieter space to assess the sequence and its attendant consequences.

It was, if you’ll pardon me for so stating, the type of small black swan that was the theme of last week’s publication. So, maybe I was right when I suggested to y’all that black swans do matter?

But here’s the thing, my loves, I’m pretty convinced that the whole narrative about a bunch of Redditor day traders taking down the big, bad hedge fund dude(s) is not only wrong; it’s counterproductive.

To begin to understand this, we must revert to the truism first coined by Cicero, later purloined by Vladimir Lenin, and ultimately mis-quoted with great hilarity by Walter in “The Big Lebowski”.

Specifically, when trying to determine who was behind a certain sequence of events “Cui prodest \ cui bono (“To whose benefit?”) is as good a place, as any, to start. To which I will add: Et dictum (Who was informed?”).

Well, the fund in question had institutional Prime Brokers that were watching its book tick off in realtime. Its order flow was mapped to big market making institutions, many of which are themselves large hedge funds. These mega-capitalized institutions, who, by the way, are at the top of my pantheon of effective risk managers, were in a position to observe the trajectory of impairment of the misanthropic fund at the center of this morality tale, and were thus able to purchase the shares at geometrically rising prices from this fallen, forlorn fellow, and, by doing so, benefit from his losses.

And maybe, just maybe, they were able to lay off most of these shares to the teeming millions of proles trading their PPE money, on the platform named after the famous, good-hearted thief of Sherwood Forest. Albeit on an uniformed basis, I envision remote agents of these big institutions using social media to feed the buying frenzy.

As matters now stand, yes, a Goliath has been cut down to size. Yes, a bunch of day traders have booked windfall profits, but any of them that didn’t sell out and lock in their gains should know this. They own shares in a zombie company that will certainly soon see its stock price come crashing down, and may end up, in short order, nothing but a memory of Gameboy console days gone by.

If so, oh my riders of the Hooded Orinth, it’s sad but true: you’ll get nothing and like it.

And who benefits? The big institutions, of course. Through it all, the rich grow richer. But that again is a story that repeats itself time and time again, since the unit of investment account was not currency, but rocks.

And though you need not join me in these conceits, one parallel that comes prominently to mind is the demise of MF Global. MF was a trading shop taken over and speedily run into the ground by former Wall Street Titan/New Jersey Senator/Governor Jon Corzine, who, when bounced from the rolls of government, decided to try to regain his glory in the realms of investment and finance.

His is the only name I will name.

Soon after his arrival at MF, he bet the farm, making concentrated speculations that the yields of government bonds in Southern European jurisdictions – then in the high single to low double-digit ranges — would come careening down. His counterparties – some of whom who used to work for him — accommodated him — by taking the other side of these trades, noting all the while, that he had finite liquidity with which to sustain these positions.

So, they crushed him in the markets, traded in a way to keep these yields rising, issued endless margin calls which tapped out all of MF’s funding liquidity, until, ultimately, it was forced out of business.

But the colossal irony here is how right Corzine was about these original trades. Spanish and Portuguese bonds now yield not double digits, but rather fractions of 1%. Didn’t matter, though; Corzine failed the risk management test, the wages of which were the demise of the firm he’d just taken over, and all to the benefit of large institutions with deeper pockets and better risk management.

I could offer other examples but won’t. Instead, I’ll just state my belief that this whole GME saga is nothing but another scene from the same playbill.

*********

What remains, for us, is to take inventory of current risk conditions, with an eye towards deriving what lessons we can from what has just transpired.

So, here’s what I got:

• The GME short squeeze arguably catalyzed, and is at minimum at the epicenter, of a visible risk reduction cycle/rise in risk premium.

• While I do not believe that it will lead to a widespread, longstanding market reset, the disruption by all means could continue for an extended period of days or weeks.

• The characteristics of the new pricing patterns are highly idiosyncratic, implying:
  •  They are not particularly visible in most factor models.
  • Counter-intuitive pricing patterns are materializing in market segments bearing little or no relation to GME or other prominent names in the cycle.
  • They are also evident across a broad range of sectors and asset classes.

• I believe that the cycle will run its course, and, for those who have prudently managed their risk, its conclusion will present an appealing opportunity for incremental risk taking.

• Patience and discipline are the keys here. No need to catch the precise turn.
• If I am correct about the opportunity that is forming, it will extend for a significant period once it begins.

• In the meantime, my specific risk advice is as follows:
  • Shade towards the conservative in portfolio decision-making.
  • If risk reduction is appropriate or necessary, cut down on exposures (i.e. gross down).
  • In other words, as I am fond of stating, if you want to reduce risk, ‘tis better to remove items from your portfolio than it is to add to your holdings.
  • In other other words, hedges are not likely to be effective mitigants here.
  • Unless your investment hypotheses have changed, preserve core positions. This is a very bad time to liquidate well-vetted speculations that that have been indirectly, adversely and (in all likelihood) temporarily impacted by recent events.
  • As we always try to relate, the short side is considerably riskier than the long side. Current events both reinforce this and offer a warning for portfolio construction on a permanent basis.

And finally, let’s say a prayer for those who got nothing and liked it, as well as for them for whom this fate looms large on the horizon. Know, though, for the latter group, there’s a way out.

It’s called prudent risk management, which is the key takeaway from this morality tale.

In the saga described above, those who embrace this holiness not only avoid our titular fate, but routinely find themselves the beneficiaries of the misfortunes of those who don’t.

I can’t emphasize this enough – particularly in these troubled times. Lord knows we’ve been whacked around a good bit lately, and the hits seem to still be coming. But you, and I, together, are too many for even these. Because we know these lessons when we encounter them and have the ability to emerge stronger from their rendering.

And, to the rest, I can only offer that time-honored blessing (which God conveyed upon Cain after casting him out from civilization) which has long served as the salutation for this publication:

TIMSHEL

I know. I know.

Should be obvious — but needs to be said anyway.

I have no objections, in fact, if you choose to include this in your daily affirmations.

Because black swans do matter.

By way of full disclosure, I have, never, in my extensive and varied travels, encountered a black swan of the ornithological type. However, I come by this deficiency honestly, as they are indigenous to the Southwestern Regions of Australia. To which I’ve never been.

Heck, I’ve never set foot inside any part of Australia. Thus, even if one of those dusky, winged beauties took a notion to glide (or fly), North or East — from, say, Perth — to Melbourne, Sydney or the extreme wanderlust destination of Brisbane, it would have made no difference; our paths would not have crossed.

I am thus rendered unqualified to offer an informed opinion about those birdies. As such, this document makes reference to colloquial, and, more specifically, economic, usages of the term, which, for the uninitiated, are defined as unforeseen events that cause acute, unpleasant disruptions to flows in the capital economy. Discussions of the latter are ubiquitous in market circles; investors, quite literally never shut up about these black swans. They are seemingly always lurking around corners, ready to pounce on us unawares, to shove their menacing beaks in our faces, annoying us or perhaps worse.

Sometimes, even, they actually materialize. 2008 comes to mind. And perhaps April of 2020.

And I am somewhat a-feared that a baby cygnus atratus might be waiting to greet us over the next few weeks. Attentive readers will notice that this is a significant departure from my typically perpetual bovine vibe. But I have a hunch that that the intestinal fortitude of me and my fellow perma-bulls just might be tested – ere Q1 runs its course.

Bear with me, if you will, as I set the scene.

A high drama/contentious election just concluded, with one of the parties emerging in control of the Presidency and both Houses of Congress. Lots of folks unhappy about this. Some even threatening and acting in violence.

Markets ended the preceding year in full ascent, and the trajectory extended into January, with a big part of the rally owing to the continued support of the almighty Fed, and the anticipation of all form of accretive policy goodies emanating from the newly installed regime in Washington.

Yes, sometimes I pine for those simpler days of early 2017.

But hold the phone. Four years later, we find ourselves with the exact same set of conditions.

So, I thought it might be useful to look at what happened next, in that cycle of a quadrennial ago.

The Gallant 500 and its fellows were rolling along quite nicely, when, in early February (in cruel irony, less than a week before Valentine’s Day), Vixen VIX, with whom we are perpetually smitten, and to whom we always return no matter how badly she uses us, flashed her womanly fires, and exploded to more than three times her prevailing temperature — over the course of a single session:

Now, of course, as gentlemen, it falls to our lot to forgive her this outburst; she’s entitled to it, and we most certainly deserved it – if for no other reason than (as the chart shows) we had been ignoring her for much too long. In the end, we always make up, and are rendered better for the experience.

But that doesn’t mean it didn’t smart. A lot. We took a stone-cold pounding – to the tune of more than 10%, with no identifiable catalyst (was one needed?) other than the fiery wrath of Vixen VIX, who, when she so chooses, can transform herself from sultry siren to beautiful black swan. And after that, all is at least (temporarily) well. The episode I just described, for instance, caused an indecorous retreat of the Gallant 500 from nearly 2900 to under 2600. Where is it now? A spiffy 3841.

And I kind of have a hunch that something of this nature, something familiar, something peculiar, something for everyone, may be in the offing. Might or might not be caused by Vixen VIX, but if it does transpire, you can be certain that she will be present and active on the scene.

Of course, there’s a lot of fodder out there to catalyze a correction; too much fodder, in fact, to inventory in these pages. Let’s just state that if the market were to take a respite any time and even give up some ground in the next few weeks, we may not need to search far for root causes.

But what’s more interesting to me is the scenario where the black swan catches us off-guard. Maybe due to an unexpected event, or, maybe, because it is the will of the market gods.

And in addition to the unending onslaught of headline news flow (to say nothing of the impacts of the continued high mourning of the passage of New York Dolls guitarist Sylvain Sylvain), in terms of the more time-honored market-moving catalysts, we actually have a big week coming up.

We begin with earnings, which, particularly quarter over quarter, have been surprisingly strong thus far. But sh_t is about to get serious, as this week’s playbill features data drops and associated CEO utterings from many of our most important filers, including Apple, Microsoft and Facebook. These uber tech disclosure cycles have risen to thresholds sufficiently vital as to cause the schedulers to mercifully split the sequence across two weeks. We’ll thus have to wait an extra few days to hear from Alphabet and Amazon.

I reckon it’s OK, though, because we will have plenty of numbers to crunch in the meanwhile. I myself will be paying closest attention to the Thursday release of the first estimate of Q4 GDP, which ought to be interesting to say the least.

The folks in Atlanta (so recently the epicenter of our political psychodramas) have been busy with their tabulations, and here’s what they have to tell us at the point of this correspondence:

One can justifiably wonder if the denizens of that great metropolis might not benefit from a little arithmetic refresher course, as, since early November (!), their estimates have risen from a paltry < 2%, up to double digits, before falling to the perhaps more reasonable and certainly more civilized threshold of 7.5%.

One way or another, it bears watching. Particularly in advance of so much rapid-fire fiscal policy change looming on the horizon.

But I’m gonna step back into character here and state that even if the market takes a digger here, we’re looking, over the next several quarters, at a significant upward spike. The money drops that have already taken place are breathtaking. Those contemplated, on an incremental basis? Mind blowing.

And, come what may, the math suggests that much of this largesse will glide over the smooth, lagoon-like waters, into risk assets — taking valuations, and the very tide itself, to higher elevations. I see one of two scenarios emerging. Either the virus digs its heels in, and wider lockdowns ensue, in which case all sorts of unspent stimulus cash finds its way into stocks, bonds, real estate and bitcoin. Or the gates open up, as, for whatever reason, covid gets curtailed or is canceled altogether, which should lead to a spending/profits/valuation explosion.

We’ll pay for all of these sins someday, maybe soon, through the wages of inflation, but won’t clamp down on it until it’s raging out of control. Meantime, it’s game on.

But of course, there are those black swans to consider. As we’ve already established, they do matter. Maybe a lot. And though it’s just a hunch, I’m a little concerned that a flock of them may be following the trade winds, to alight, without advance warning, on these here shores. They’re dark, they fly at night, and there’s a good chance that, as such, we may not see them before they arrive.

So be forewarned.

Because unlike some ducks I’ve observed at certain watery locations in Central Park, they rarely, if ever, sleep till noon. Nay, they rise early, and it’s best – now and forever to fortify ourselves to address them on some early morning in the near, or not-to-distant future.

TIMSHEL

“If something cannot go on forever, it will stop”

— Herbert Stein

“But will continue till it does”

— kg

I had a different hook in mind for this one, but after this past week, I’ll think I’ll save it for another time.

Meantime, can I get some snaps for my man Herb Stein? Chairman of the Council for Economic Advisors under both Nixon AND Ford?

Admittedly, these credentials are not quite conducive to the materialization of swarms of groupies, but on the other hand, Herb stayed married to his wife Mildred for 61 years (until she passed) and is the father of delightfully quirky Renaissance Man Ben Stein. So there’s that.

He is also the author of the sublimely simple and entirely authentic first half of this week’s title, which has become one of the most bandied about phrases in the macroeconomic lexicon.

This is not Herbert Stein. It’s not even Ben Stein. I can’t take the risk of using their images and potentially violating copywrite protocols on the interwebs. Of which we should all be mindful. Because the interweb cops are out there, and you should be concerned that they may be coming for you (more about this below).

So, instead, I am sharing a photo of my cousin: Ben Finkelstein, which: a) I don’t think is copyright protected; and b) even if it is, I don’t think he’ll sue me. Because me and him are, you know, boys. Ben is Booking Manager at The Birchmere – a fantastic music club in Alexandria, VA, which has managed to survive the covid. They have an interesting set of shows coming up, and, beyond that, I am able to state that Ben is one classy dude. So, everyone, say hello to Ben. If you go to the Birch, he’ll light you up.

Meantime, Stein’s Law is largely indisputable, but I believe the coda that I’ve added is equally valid, and (if I may make so bold) particularly applicable to many aspects of our current, collective experience. Let’s, by way of elaboration, take a brief inventory of these, shall we?

Plainly, there’s no starting point more appropriate than this here virus situation. History (which, as Twain famously tells us, does not repeat but rather rhymes) suggests that it won’t go on forever – at least as a global pandemic. Plagues — from Bubonic to Black (let me assure those of you who did not live through these that that they were MUCH worse) tend to run their course. As, presumably, will the covid.

But like I been telling yas, it will, more likely than not, continue until it ends.

Which brings us to the Public Health mitigants. Will we be wearing masks forever? Will I, for all time, be forced to accept a corpse-length space between myself and any other unit of human flesh (except, of course, you, from whom I cannot, for any reason under heaven, comply with this distance protocol) I encounter? Will businesses and schools continue to either be idled, or to operate with the ball and chain of limited capacity?

Again, probably not. But until these conditions end, they will ensue. Of this I am (nearly) certain.

However, there are glimpses of illumination at the end of this underground passageway. Vaccine development and (imperfectly executed) rollout have been nothing short of a miracle. I find entirely too much of the attendant analysis to be filtered through the frame of personal and political agendas, but the reality is that a bunch of fabulous folks designed, tested, manufactured and effectively dosed millions of humans — in less than a year – a fraction of the time window historically required for such an exercise.

The rollout, of course, is accelerating, and (wouldn’t you know it?) many of our most Napoleonic mayors and governors (including those who shut down whole areas of recreational wilderness this past summer) are now taking a second look. Thinking that now (or soon) might be a good time to open things up a bit.

The lockdowns, of course, couldn’t last forever. Maybe now they are winding down. In the meantime (must I point out?) they continue.

And I believe one can be forgiven for pondering the timing of this new thinking, coinciding as it does with the regime change scheduled take place on Wednesday.

On a related note, I do (to a degree) understand the fears of many that, absent indecorous intervention, the Reign of 45, was never gonna end. I myself addressed this topic in last week’s note, and was met with some responses that (not gonna lie) flat out hurt my feelings.

Please know that I forgive you. But at the point of this correspondence, it appears that no such intervention is in the offing, and the odds are that we will survive until Wednesday’s scheduled power transfer — that big orange hand on the nuke button for three more days notwithstanding.

The Trump Era couldn’t last forever; is now ending. It does puzzle me that many of those most eager for this milestone are seeking to perpetuate his presence through an impeachment proceeding that is entirely irrelevant insofar as it is: a) a process designed to remove someone from an office; which, b) he no longer holds. But this is a rhetorical rabbit hole into which (for the time being at any rate) I refuse to dive.

I will also suggest that the victors in these great political battles are, in some sense, rolling up the score, bringing to mind another test of Herbert Stein’s wisdom. My read is that the Big Butchers of Big Tech are placing their thumbs on the scale in a way that favors the winning side. Conservatives of every stripe are being shown the door, told that their custom is not wanted, while the cabal is contemporaneously and cheerfully selling products, services and access to the Ayatollahs, the Cubans, the power players of the People’s Republic of China and other meanies. Every member of that elite no-names-needed, corporate club – representing more than 1/3rd of the capitalization of Captain Naz (NDX), is guilty of this, er, hypocrisy.

I say it can’t last forever, and therefore won’t. First, I don’t think that even the mighty, collective powers of Silicon Valley can silence for all time any form of thought, including conservatism. Perhaps more importantly, though, is the following. If progressive rhetoric can be taken at face value, it must aim its guns at the Titans of Tech – which operate with deep gender and racial imbalance, and through which an embarrassingly large amount of wealth and income inequality is manifested. The progs and uber-capitalists know that while they are currently operating under an WWII German/Soviet sort of alliance, they must ultimately do battle. This is, in my judgment, inevitable; the détente cannot go on indefinitely. So it will end. And, for what it’s worth, when the footsie game is concluded and the conflict begins, I will be rooting for Big Tech, because I prefer their products to progressive dogma.

But in the meanwhile, the footsie game, with legitimate ideologies under heal from each side, will, indeed, continue.

The firms in question are the main drivers of the Great Bull Market, and whether the latter has run its course is a matter unknowable. The Gallant 500 did yield nearly 2% of hard-won new territory last week, as catalyzed by factors such as tepid bank earnings and (perhaps) an awareness that it just can’t keep advancing — without respite — into eternity. It certainly cannot last forever, and so, like Herbie told us, it the rally will eventually end.

Until it does, though, kg says that it will continue, and when has kg ever been wrong? About anything?

I view last week’s quaint little pullback as entirely consistent with both Herbie’s hypothesis and kg’s corollary.

Because the policy makers are all in cahoots to keep the rally juices flowing – until they can’t. At which point they won’t. But until that happens, they will continue to do so. We got a peek last week at Joe’s economic agenda, and it’s full of goodies for all – but mostly for favored constituents. His incoming Treasury Secretary’s former deputy – now running the Fed – took to the Princeton podium on Thursday, to inform us that he ain’t worried about inflation and is therefore untroubled by the prospects of extending the era of dollar dilution and suppressed interest rates – until he can’t. At which point he will stop.

So, you tell me. We got an economy pumped up on helium with a seemingly never-ending supply of He cannisters on their way. All being shoved into a system which now cannot circulate this stimulus in any comprehensive manner. Much of this liquid matter flows naturally into the markets. And, if one dares to extrapolate to a point when the economy actually is released from its shackles, there is every potential for an explosion of pent up demand.

Sounds like a good plan, right? Well, it won’t last forever, and when it stops (likely because dollars are so worthless, no one will hold them and hyperinflation will set in), I reckon we’ll all have reasons to lament its cessation.

But I’m here to tell you that until this point, it will continue.

Because it has to.

Because we have to. Continue. And grow. Together.

I reckon that’s about all I got. For now. Because, particularly after the last few days, I’m too tired to continue and need a rest. I couldn’t go on forever, right? And you wouldn’t want me to.

But I won’t be gone for long. I will resume; maybe not forever, but for the human equivalent thereto.

Until that point, I will continue. Until I stop.

And so, too, should you.

TIMSHEL

************

ENDNOTE. It came to my attention (somewhat belatedly) as I was writing this note, that the world has lost the great Sylvain Mizrahi – known to his fans as Sylvain Sylvain. He was a founding member of the deeply under-appreciated New York Dolls, and yet another in the string of fat Jewish shredders that seem to be dropping like flies these days.

The Dolls were a bit of a flash in the pan. Exploded on the scene, made their mark, and then, inevitably, went up in flames of their own making. With Syl’s passing, only David Johansen remains. Original drummer Billy Murcia drowned in a bathtub, but was immortalized by the late David Bowie in the song “Time” (“Time, in Quaaludes and red wine, demanding Billy Dolls and other friends of mine”). Johnny Thunders died in New Orleans, with a needle in his arm, some thirty years ago. Arthur (Killer) Kane had a fatal heart attack in – of all places – a Los Angeles Mormon mission, where he worked as a librarian, but not till after David Jo, with the help of Morrissey, dragged him on stage for one last reunion gig.

Jo and Syl reformed The Dolls about 15 years ago, and I had the privilege of seeing them – twice. Even spoke to Syl. Most of all, I will remember him for having penned one of the greatest double entendre songs in the rock pantheon: “Funky But Chic”, of which I’d share a link if not for fear of the copyright cops. Anyway, check it out on your own. It’s not hard to find.

Like The Dolls and everything/everyone else, Syl was not meant to last forever. And he didn’t. But while he was here, he did more than continue.

And, in tribute, I offer him (and the rest of us) an unprecedented, second…

TIMSHEL

There was, of course, a catch: Catch 25. The Trump Catch.

I envision, as I embark on the journey of writing this essay, a series of frantic, closed door meetings, designed to arrange an expedited escort of 45 off the premises — before he blows us all to smithereens.

Because at this point, one could certainly envision an “if I’m going down,so are the rest of y’all” scenario. Which we should seek to avoid – through any and all available means.

There are any number of ways to delete his ass. With (a shred of microscopically retained dignity still intact) resignation being the most painless and logical option. But given what we know about him to whom we refer, it’s a tall order. And, meanwhile, the engine for Impeachment 2.0 – with its gnarly cast of characters, is revving up. Of course, this exercise is practically irrelevant and entirely political – particularly insofar as the proceedings cannot even commence until after Trump’s term is over.

Got what a spectacle. It’s still avoidable, but the clock is ticking. Late Friday afternoon, Senator Lisa Murkowski (R, AK) became the first Republican member of the Upper Chamber to call for The Big Guy’s early exit (stage right).

But there’s still hope. In happier tidings, able to report that the landmark case of Jagger/Murkowski v. Grant has been settled – through means that did not require a ruling by the (still 9-member) Supreme Court. There’s also another way around an impeachment Pig Circus. It takes the form of a Catch. Catch 25. The Trump Catch.

Specifically, I refer to the 25th Amendment, which bestows upon a president’s Senior Advisors the prerogative (or duty) to remove him (or her), if in their best judgment, he (or she) is unable to faithfully discharge his (or her) duties.

To back up a bit, our thematic motif derives, yet again, from Joseph Heller’s Catch 22, which specifies that a medical officer MUST ground any WWII flight crew member deemed to be crazy. But first the crew member must ask to be decommissioned on these grounds. However, by so asking, he proves himself not to be crazy at all, and is thereby rendered ineligible for grounding in the first instance.

I had planned to use this hook when the 25th Amendment concept first reared up, about a year ago. It wasn’t going anywhere at that time, so I reverted to Catch 21. And then Catch 23.

But we’re well past that now, and we’ll skip over 24. All the way to Catch 25. Which is now a go.

Here, the rules of engagement are less clear. Must Trump ask to be deep-sixed because he knows he’s crazy? And if he knows he’s crazy, is he really crazy at all? And if he’s not crazy, can he still be removed?

I reckon it won’t matter much, one way or another. His day is done. His actions and decisions — since the election and particularly last week, rank among the worst series of misjudgments in presidential history. I can’t think of anything that comes close. Neville Chamberlain at Munich? Probably, but that doesn’t count because he was British.

I will spare you a detailed rehashing of the events and their implications. I will, though, state that I take this episode as an affront — to myself and all like-minded individuals (of whom, presumably, there are at least a few). We are very skeptical, downright afraid, of progressive sacred cows such as identity politics, redistribution, and a full menu of rehashed “isms” that appear to us to have a common objective of diluting individual prerogatives, in favor of protocols determined not by the many, but rather by the few.

We managed to convince ourselves that Trump was a partial antidote to the foregoing. A deeply flawed antidote, but the only one available to us in a pinch. None of us really liked him; we all recognized his flaws, but at least he seemed (to us) to be invested in civil liberties, individual choice, and all of the magic that ensues from these life-enriching gifts.

Deep down, though, we were aware that he was all about himself – and nothing else. In this, he is not unique, but we hoped that he could show the infinitesimal amount of discipline necessary to allow us to preserve these virtues – for everyone’s benefit. In the end, our hopes were dashed; he could not do so.

And, in the end, there is Catch 25.

And now, those of us who showed any sympathy or support for him (including yours truly) can just shut the f_ck up. And we (I) will. Well before this latest farce, they were bringing the hammer down on us. People were losing jobs, friends and family for any deviation from woke consensus. After this week? Fuggedaboudit. As I have repeatedly told my soul mate, for conservatism to have prayer — in a world where the field is tilted against it, it must manifest through the virtues of civility, humility and grace. Now, to suggest that we retain this one thin read of advantage is to be scoffed at, derided, dismissed.

Because our guy stoked up a protest that turned into a violent breach of sacred public property, disrupting one of the most important (if designed to be mechanical) undertakings assigned to our elected officials. Happened on his watch; he arguably incited it. Took wholly inadequate steps to address the unfolding crisis.

And this is after pushing the duly elected GA Secretary of State to manufacture votes that simply weren’t there – a stunt that arguably contributed to the loss of both Senate seats — on what once was GOP home turf. And, by doing so, he giftwrapped the entire Washingtonian government apparatus to its opponents.

Through these and other actions, he threw every one of us who heretofore refused to demonize him (and supported portions of his agenda) under the bus.

So, now, there’s nothing for me to do but shut the f_ck up about this. But one last word to the wise. Our political, social and economic challenges are not solved by the fallout from this episode; arguably, they are rendered the worse. I and my ilk were not wrong about everything; a large measure of our concerns will still abide our society, and the challenges faced by those who are convinced that theirs is a “better way” are in their embryonic state – beasts slouching towards Bethlehem, waiting to be born.

I wish our new overseers Godspeed.

Meantime, seeing as how this is a market commentary publication and all, I present, for your consideration, a corollary to Catch 25 – call it Catch 25a: No matter what happens, the market goes up.

The following statement sums it up: you know you’re in a stone-cold bull market when violent protestors breach into the Capitol Building, and the market fails to record a single downtick. But that’s what went down. Bid ‘em up on Wednesday, when that dude from Arkansas had his boots on Nancy’s desk, rallied ‘em on Thursday and again on Friday, when the fallout began and then mushroomed.

So, just to be clear, all of our indices lurched to new record highs in a week where:

• The Republicans lost the Senate.
• There was a murderous attack inside Congressional chambers.
• The whole D.C. power hierarchy turned its focus to the removal of the President.
• For the first time since Spring, the Dec. Non-Farm Payrolls Report went negative (-140K).

It’s enough to make an old market jock weep with admiration and gratitude. And I believe it will continue.

Friday’s cherry top rally, most of which took place long after the dismal Jobs Report dropped, was certainly catalyzed, at least in part, by proclamations by the (now firmly established) President-Elect, that trillions in incremental stimulus will most certainly be needed this winter. And who is going to stand in the way of this wisdom and largesse? New universes of cash are forming, to be super-imposed upon the untold and growing number of monetary galaxies already created. We’re all dressed up, pockets full, but no place to spend. Lots of spare change, though, for everyone to buy speculative assets.

And they will continue to do so. Presumably at the expense of the besieged and beleaguered USD. The only thing that stops or even slows this wave is the threat of inflation, about which (like Charles Dudley Warner’s weather) everyone talks, no one does anything.

There is ample reason to be concerned. Consider, for instance, the Energy Patch, currently operating at ~60% capacity – before the new environmental czars have even taken formal control, weapons trained on the entire fossil fuels complex, and bent on its destruction. What happens when (if) the virus dies down and all those cabin feverish folks take to the road (and maybe even the air)?

Well, energy prices, could, ought to, skyrocket, maybe setting off that whole inflationary chain reaction about which everyone talks, but no one does anything, in response.

I think it has to happen eventually, but the timing is unclear. When it does, the only policy offset will be higher rates. Which will cripple a capita market and economy, drowning in debt, at the most in opportune time. Meantime, Biden and crew enter, stage left, with the Fed Chair’s former boss at the Treasury controls, and, presumably a (temporary) blank check to celebrate the new dawn that purportedly emerges when the Big Orange Blob bounces into oblivion.

There is, however, a catch. And if you don’t know what it is, you haven’t been paying attention.

So, I’ll quietly take my leave, with the sentiment that what goes ‘round comes ‘round. For all of us. No matter what. Be forewarned.

Let’s carry forward with our plans, anyway, shall we? We don’t need to say much about them, and (particularly after last week) nobody is likely to listen to us anyway, right?

But if you let me catch you, then I’ll get caught and stay caught. And that will be the best catch of all – so good, in fact, that it won’t even require a numerical suffix.

TIMSHEL