Ain’t but one way out, babe, Lord I just can’t go out the door,
Ain’t but one way out babe, Lord I just can’t go out the door,
Cause there’s a man down there, might be your man, I don’t know

— Sonny Boy Williams and Elmore James

Ah yes, Egress. Mode of exit. So essential but so often, so tragically, overlooked. Restated: resourceful human beings occasionally find their way into (temporary) Paradise, but can they remove themselves? When, for instance, a serpent with ill designs is found to lurk within Eden itself? Not only is the answer typically “no”, but (even worse) we rarely give the matter anything but scant consideration.

So, frequently, we are cast out against our will. Just like Adam and Eve. Or tumble down. Just like Jack and Jill. Or get stuck where we don’t belong. Like that Suez Canal ship. In each case, there was only one way out.

I am reminded of the story of Triboulet: 17th Century Court Jester to French King Francis I. Always an envelope pusher, he once made the regrettable error of slapping the Royal Hindquarters. French Frank the First did not take kindly to this, and sentenced him to death, offering him, yes, one way out: an opportunity to immediately apologize — in a manner that was even more insulting than his original transgression. Mr. T’s reply? “Forgive me, Majesty, I mistook you for the Queen”.

I am unconvinced, in our current cultural paradigm, that the response would even give offence; it might in fact be taken for a compliment. In any event, King Frankie was either insufficiently insulted or inadequately amused, so the death sentence stood.

He did, though, allow Triboulet to choose his form of eternal egress. The latter’s response? “I wish to die of old age”. His request was granted. And, though banished from the court, he escaped the noose.

So, in that instance, Triboulet found not one, but two ways out, and, as it happens, he needed both.

And I can’t help thinking that we are, all of us, latter-day Triboulets – in need of an exit strategy for two scrapes – more or less of our own making — but lacking in the two-step Houdini game that is sorely needed if we are to rid ourselves of these nuisances. More specifically, my fear is that the fancy footwork that is leading us to salvation from one of these trouble-traps is entirely out of step with the moves we apparently intend to bust to eliminate the other.

Allow me to elaborate.

The first mess, quite obviously, is the pandemic. It is not known whether this a dilemma entirely of our own making, and I suspect that the associated debate will rage for decades, centuries to come.

We have applied a wide range of mitigants to shed those pesky covid buggers, some more effective than others, but the one that seems to have created an actual, comprehensive form of egress is the development, in minute time frames, of a vaccination framework. It is a miracle of human innovation, initiative and execution – all fueled by the increasingly demonized fires of free enterprise.

Yes, there were profit motives and government subsidies. Yes, the Pharma execs sniffed big paydays and went for them. But tens, hundreds of thousands of professionals worked day and night on this project; companies that were sworn enemies of one another collaborated to find a solution. As a result, not only did multiple vaccines materialize within about 1/10th the normal development time window, but: a) they appear to be working, with b) minimal side effects, and are set c) to be delivered to the entire population within the first half of the year.

And I ask: where would we be now without the vaccines? And where would the vaccines be if not for the astonishing efforts of private enterprise?

Which brings us to our second scrape: the absolute mess we’ve made of the capital, commercial and consumer economy along the way. When the pandemic first hit, I estimated that it would require approximately $10 Trillion to plug the economic hole. But then the capital economy began to recover; the market soared like (Jim?) eagle. And I thought, well, maybe I’d overstated the case.

But at present, we’re already in for nearly the entire $10T, and we’re not likely to stop there. The Fed has printed nearly $4T. Fiscal stimulus, already at an equivalent number, is now proposed to be topped off with another $2T, which represents only the first half of the next proposal. And it appears that even this is only a way station on the road to – well, I don’t really want to say.

But apparently, the time has come, at least in some eyes, to shoot off the legs of the private economy. The pending bill’s proposed tax increases, thus far only partially disclosed, are breathtaking in scope/magnitude. Higher corporate levies. Elimination of global structural tax plays (here Biden went so far as to call on America to lead the world to end the madness of finite taxation. Just think about that for a moment). Penalties on states seeking, for competitive reasons, to offer new tax breaks. Jacking up duties on capital gains (realized or not). Removal of caps on Payroll Taxes. If all of that isn’t enough, maybe we’ll bust out a wealth tax as well. The grab aggregates, in round numbers, to $3T.

So, the government that did such a swell job of anticipating, messaging about and managing the pandemic want to shove its big fat nose as deep as it can into our affairs. They will control what is built, who builds it, at what cost, and to who’s benefit. The rest of us have a role to play – an important one. We’re supposed to shut up/work our asses off to pay for it all, and serenely receive lectures from our betters about ending our greedy ways. It’s not that we’ll get nothing; we’ll get what they give us. And like it.

The Congressional math suggests that they may be able to pull this off, but only by the thinnest of reeds floating on the legislative swamp. Just as was the case on the most recent $2T, they can use the device of reconciliation to pass the $4T spend/$3T tax swap.

To borrow, yet again, from the fabulous Everett McKinley Dirksen (R, IL): $4,000,000,000,000 here, $3,000,000,000,000 there; pretty soon you’re talking about real money. And we should heed Dirksen, who, after all, had a 15-cent stamp enshrined in his honor — a picture of which I’d love to share were it not for the ubiquitous copywrite police who continue to hunt me down.

Bold as brass, right? And none of this is, on balance, politically popular, as the sponsors of this brilliance are clearly aware. Not wanting to take any chances, they’re making a big push to rejigger the election process in their favor – in the form of a terrifying bill that carries the bland moniker of HR-1. Its backers claim that it’s all being done in the name of fairness, to correct those transgressions that have accumulated over nearly 250 years of representative democracy. I reckon we should trust them as to the details and motivations, but based upon recent track records, you’ll pardon me if I fear that the fix is in.

The creators of the shakedown (I call them the man in honor of our theme song) have a lot riding on this, because without a re-writing of the election rules, the 2022 electoral blowback should be pretty severe.

It’s the political equivalent of drawing an inside straight, which does happen from time to time. But if the man pulls it off, then the folks in Washington will have a great deal more say over what you get and what you do than at any point in our lifetimes. Favored constituencies will exert more control than we’ve heretofore experienced, and will use it aggressively, for their own perceived benefit.

But the man’s plan is path dependent, with a lot of interlocking parts that must coordinate if it is to take hold. All of which is depicted in the following flow chart, which I ginned up – in part because I needed a visual and couldn’t risk using that Dirksen 15-cent stamp image:

If one wants a preview of how this all goes down, a look at the primary education system’s pandemic response might be instructive. Private schools marshalled resources, opened as soon as they were able, and have functioned, if not perfectly, with laudable efficiency, ever since. By contrast, many public schools – particularly in urban areas, opened slowly, partially, or not at all. That the teachers’ unions have controlled the timetable, the calendar and the operating agenda is a matter almost beyond dispute.

So, the question before us is how we want to roll, and who do we want to roll with. In stark terms, the choice may be between the Pharma crew – with all their faults – or the teachers unions.

I personally believe that the best way out is with the Pharma bros. I reckon y’all can decide, for yourselves. But I suspect that if the other side wins, at minimum it will result in a society with less innovation, lower initiative, higher paranoia, increased victimization and less freedom. It’ll be like being back in grade school, a phase of my life that I, personally, couldn’t wait to exit.

And I don’t think that the man’s plan will do much to reduce poverty, improve race relations or correct the sins we’ve committed over the last few centuries. These matters will continue to plague us, and I suspect, when the outcomes fail to match the articulated vision, that the man will resort to his timehonored playbook: he will recommend, as a cure, more of the same.

*****

All of the above is nothing more than a recap of a rant that I made, recently, to someone I love — who was kind enough to listen. But I do not kid myself that it even remotely passes for market commentary. Time was, not too long ago, that I could write about more fascinating and relevant topics, such as semiconductor production in the Far East, or whether a dry spell in the Midwest was serious enough to sustain a recent Soybean price increase.

But none of that matters now. At the present time (and likely for a significant spell into the future) all that counts in the markets is what is going down in Washington. Which, were it not so terrifying, would actually bore the stuffing out of me.

As it stands, though, the market advice I can offer is simple. You should own assets and then own more of them. Until they take them away. It looks like a bumpy ride, but like I stated above, the fix is in. The man views asset inflation as a core element of his plan for taking over the joint, and, if he has anything to say about it (and he does) he isn’t going to b!tch that part of it up – at least over the near term.

Valuations continue to lurch to new all-time highs, with the Gallant 500 on Thursday breaching (and holding) the exalted, previously unreached threshold of four thousand. That markets keep soaring to the heavens against the backdrop of everything described above ought to tell you something. Specifically, that it’s all part of the plan; that the fix is in.

Meanwhile, everything — from the weather to the economy to our own blood, is inflating, heating up. My own passions are fully aflame. I know that it’s all real, and must manifest, but sometimes it feels like it’s just all part of the plan. Party now; pay later. There’s a man down there, might be your man, I don’t know. But meanwhile, allow me to gaze, yet again, into your lovely bedroom. Eyes.

Is there even one way out? Truly, I’m not sure. But I won’t lie; I’m sorely tempted to follow the wise example of Triboulet, to slap a few asses of those who would presume to tell me what to do, and then rely on combinations of my own wits and God’s will to determine the appropriate means of disposing of me.

Yes, I would like to take a whack at the man.

I know I keep him amused, but I feel I’m being used — and even Jesters such as me and Triboulet run out of patience eventually.

TIMSHEL

Watch out, you might get what you’re after
Cool babies, strange but not a stranger
I’m an ord-in-ary guy
Burning down the house

— The Talking Heads

Can I get some love for the Heads? For a brief but important time (my college years) they were the best damned band in America (albeit a distant second in the world to THE CLASH). And not only the best, but maybe the most popular – at least on those college campuses of yore. If, for example, you found yourself at a party in 1980 in Madison, WI (as I often did), odds were that either the Heads or Springsteen were on the turntable.

Well, we all know what happened to the latter after that. From a popularity perspective at any rate, he immortalized himself. And, though he’s not my particular jam, mad props are owing to him for that.

The Heads were on similar trajectory at the time, and I always thought that they were one stadium tour away from taking over the joint entirely. But then the immensely-talented-but-always-difficult-to-dealwith David Byrne bounced. Left the band. Without telling them. It was kind of a Syd Barrett (who, though having created Pink Floyd, was never told he was fired; they just stopped picking him up for rehearsals and gigs) situation in reverse. Helluva shame in both cases, if you ask me.

In the meanwhile, their catalogue, including our title piece, holds up remarkably well. More than this, any number of their songs (“Stop Making Sense”, “Life During Wartime”, “All Night Long” come to mind) are in the pantheon of meriting pieces in this space on their own. And maybe we’ll get to them.

But let’s start with what we got, shall we? Dance with who brung us? “Burning Down the House”. Man, oh man, there are a lot of directions in which we can travel on this Chateau Flambeau Road. And, since I’ve just begun to write this note, is likely we’ll to get to several of them.

The hook first came to my mind when thinking (with incremental frustration) about national economic policy. It reminded me of several intervals in my historic run as an entrepreneur. If you’ve travelled this road, you are aware that when times of stress (inevitably) emerge, it sometimes becomes necessary to resort to minor league measures (say, pre-billing receivables) — to boost spirits and improve company optics. Then comes the moment when Sweet Temptation sweeps in and seeks to seduce you into doing something really stupid. Like borrowing money. But I’d always stop short of this (well, except for maybe one time) by telling myself that, yes, I’d already burned up all the furniture to stay warm, but I’ll be dipped in sh!t, before, in the name of the same objective, I will burn down the house.

And I do think that some of the genius ideas in Washington are spun in the same motifs. That they will come back to haunt us, that they could leave our progeny bereft of walls to keep out the wind and roofs to protect them from the rain. And I think that these risks must manifest in the market; perhaps soon.

But we’ll get to that in a bit. I feel first obliged to offer a few other timely analogues to our theme.

That whole Jan 6th experience fits almost a T. I mean, after all, the protesters did breach the HOUSE of Representatives. But unlike, say, those demonstrators acting up last summer, someone forgot to bring a match.

And on the topic of dwellings that were (almost) reduced to ashy rubble, I think we can all give thanks that this past week, yesterday’s “It” company: WeWork — that nerf gun/bean bag chair re-packager of overpriced urban commercial space, avoided the burning ignominy of complete collapse, through a financial rescue package which valued the Company at $9B. Note, this pricing is thin gruel compared to its peak valuation of $47B, but I reckon its holders are pleased, nonetheless. As am I. As should we all. Say what you will about WeWork; it busted the oligopoly of office leasing, breathing life into small tenant/firms everywhere. The pandemic changed the calculus here; landlords are now begging renters to move in. But it says here that we no less owe a debt of gratitude to WeWork. Long may it prosper.

Fittingly, the deal came in the form of the current “It” mode of financial structuring: the ubiquitous SPAC. We’ve covered this before, but the SPACers make their bones by first raising money, and then deciding what to do with it, with the only constraint being their obligation to purchase majority interest in a company within a designated period. Doesn’t matter which company, and who really cares? Looking at this sequence in the rearview mirror, it seems that the heavens had always destined WeWork to be SPACicized (SPACified?), and now they are. And I, for one, will wish Godspeed to all involved parties.

The SPAC market has felt some heat from investors of late; median valuations are down 20% over the last few weeks. One can smell the mahogany dining tables smoldering. Will the entire House of SPAC come down in flames? I hope not, because if it does, it’s likely to be at a time when a lot of other abodes are burning, and first responders put upon in ways with which they have not the resources to contend.

I try to avoid thinking too much about these contingencies. After all, what do you and I need? Not a house; not really. A snug little apartment (or two) on the Upper East Side, where we can dream our dreams and plan our plans, will suffice.

In addition, and by way of further diversion from what ails us, the next verse of our theme song helps:

Hold tight, wait ’til the party’s over,
Hold tight, we’re in for nasty weather,
There. Has. Got. To. Be A. Way
Burning down the house

But back to the markets, the unpacking of which is the solemn mission of this publication. I’m already on record in stating my belief that the entire show is being fueled — not by innovation, initiative, and hardwon execution, but rather by tactical device, delivered by Washingtonian policy makers, who are burning the furniture to generate a little bit of transient heat.

Endless money printing. Redistribution. Elected officials determining who merits the fruits of the labors of whoever chooses to work, rather than stay at home and use social media to inventory the on-going flaws of the system and our history. Up in flames goes the bed, the sofa, grandma’s armoire. I gotta admit — for the moment, it all feels toasty warm.

But I do fear that the bearing walls and floors joists are the next items to enter the ovens. Most of us probably can endure this; after all, Spring is in the air. But where does this leave our little darlings — once we (inexorably) pass into our dotage, and (shortly thereafter) into the Great Beyond? It’s worth pondering, if nothing else.

Markets don’t seem to be showing much care. In fact, if anything, flammable materials everywhere notwithstanding, some of our equity indices and other risk assets lumbered to yet another set of all-time highs this past week. It was a tough slog, but by late Friday afternoon, investors gathered together for a harmonious chorus of “Be it ever so humble…”. The strains of these notes were heard most directly in the palatial headquarters of General Dow and the state-of-the-art barracks of the Gallant 500. The lesser quarters of the lower ranking Captain Naz and Ensign Russ? Not so much. But I’m pleased to report that Madame X (the 10 Year Note) showed some welcome nesting instincts, as accompanied by the USD, which has demonstrated more domestic spirit over the last month than at any time since last Summer.

Meanwhile, we’re on the verge of April, with its promise of windy winds and widely varying temperatures. In terms of the markets, it ought to be an interesting ride. A major earnings cycle awaits, along with a critical sequence of macro reports, the content of which appear to be very difficult for our paid soothsayers to prognosticate:

The Atlanta Fed is, as Dick Vitale in this March Madness season might say, like a Dow Jones player: it’s up, it’s down, it’s up, it’s down, while the Street is feeling a bit more sporty about the whole thing.

Capitol Hill is likely to be Ground Zero for the emerging storm, as the clock is certainly ticking on key elements of the new regime’s policy agenda, featuring, as it does, another huge stimulus package, higher taxes, the federalization of the election process and other such sacred cows. They’ve got to move quickly, because they (of course) wanna take the summer off, and by fall, they will need to take the next voting cycle into full consideration. There’s major opposition on the other side, and it could get pretty nasty. I don’t know how any of this plays out, but I can encourage all my readers to pay close attention.

It’s probably not the best time to call for major portfolio renovations, and I’m gonna stop short of suggesting you do so. But some energetic spring cleaning, the ditching of some of those baubles and nic nacs in your book that hold some sentimental, but no practical value, might do you no harm. And in closing, I revert to where I started. With the Heads:

Here’s your ticket pack your bags, Time for jumpin’ overboard, Transportation isn’t here
Close enough but not too far, maybe you know where you are, Fightin’ fire with fire

Yes, Byrne is right. And not long after singing these words, he did indeed jump overboard. Without a word. Fighting fire with fire is indeed a time-honored practice in these parts. But as your risk manager, I do want you to know that I’m keeping a hose at the ready.

Just in case.

TIMSHEL

Our titular theme is so intuitively delicious that it surprised when an internet search of the phrase came up pretty much empty. There is a band out there called the Ice Cream Socialists, but even they only have like 267 Facebook followers, dating back to 2017.

Back before one of our two warring governance factions, in Caesar-like fashion captured a 5- seat majority in the House, a (Vernal?) Equinox in the Senate, and of course, the Presidency. Whereupon, subsequently, and armed with this resounding mandate, they urgently determined to change this nation’s evil ways, to cure 4 centuries of geo-cultural evils, to save the smoldering planet from heatstroke, and, most importantly, to instruct us as to how best to think/comport ourselves.

Carpe (as Caesar might say and probably did) Diem!

It was also before the virus, before the lockdowns, before that cockroach pressed his knee on Floyd’s carotid artery. Before the cities burned. And the Capitol was stormed.

And before that magic moment last April, when, as the rest of the country was choking on covid cells, Speaker Pelosi — Commander of that Majestic House Majority, decided to cheer us up with a high production video of her designer ice cream stash, elegantly ensconced in her even-more-designer matrix of customized freezers.

Now, I like ice cream. As much as the next guy. But not as much as I like Big Bird.

It’s the socialism part that frustrates and annoys me.

However, even as custard and gelato remain in frosty repose in the Pelosian cold storage units, the road towards socialism rises up to meet our feet. I really hate writing this, because, quite frankly, the implied ad homonym name-calling bores me.

But sometimes a man is just called to state what it is that he sees.

Most of our citizenry declares itself against socialism. Our politicians are aware of this and know that they must mix this medicine with an appropriate dose of sweet delight — if they are to impel us to choke it down at all. It may now be in the hands of God to determine whether or not a spoonful of sherbet helps the socialism go down.

To be fair, our first delicious tastes of it all came, in gulping heaps, from the most unlikely corners of the Washingtonian ice box: The United States Federal Reserve – an outfit clearly branded as being aligned with Free Enterprise. More than a decade ago, they got the clever idea that rather than managing the money supply (as their charter instructs them to do), they should manufacture their own galactic stash of it, and dish it out to the boys and girls of the investor class. Maybe it was needed at the time, to stave off depression — in the wake of what was, after all, a pretty nasty collapse of the financial system.

But no one can accuse them of launching into this enterprise with anything other than unmixed enthusiasm, as their balance sheet grew from what entering 2008 was the mini-cup sampler size of $800B to a double serving/waffle cone magnitude of ~$4.5T by 2014.

All things considered it went down pretty well. During this period, the Gallant 500 emerged from the critical care unit, put up a contemporaneous three-bagger, and one could certainly argue that the key contributing factor was that magnificent experiment in Quantitative Easing.

Allow me, now, for the purposes of this report, to fast forward to the fateful month of March 2020, when everything came apart. The Fed revved up its Frosty Freeze machine again, this time to full throttle, and topped us off with another few tril – all in the space of a few short weeks last Spring. Thus, as I bang this out, its inventory of cash and marketable securities is approaching (and will quickly exceed) $8T. Meanwhile, the Gallant 500 has rather gallantly kept pace, having also nearly doubled in the last year. Still and all, across the entire QE sequence, while assets at the Fed are up more than eight-fold, the G5 put up only about 600%, but Captain Naz posted a full 10x.

It is thus difficult to objectively view their activity over past 13 years, and particularly the most recent 12 months, as anything other than a takeover of the equity markets by the United Socialist Federal Reserve. And if my razor-sharp rhetoric doesn’t convince you, perhaps a look at the associated time series will:

ENTIRE QE ERA:

OUR LOCKDOWN YEAR:

It certainly looks to me like our intrepid equity indices are marching in lock step with their leaders: The Peoples’ Monetary Army at the Fed. Oh sure, we had some productivity gains for all of the above, got hooked on Uber, that sort of thing. But I say none of it happens without the Big Ice Cream Money Manufacturer leading the charge.

And what does it amount to? A transfer of resources – from one group (say, savers who don’t earn squat on the money they stow away) to another (investors), courtesy of the Fed, and based upon little else other than governmental agendas.

But if you gonna do the whole socialism thing, to do it right, it’s best to spread the love around – particularly to the unwashed masses. Who might otherwise get cranky. Which we can’t have. So, we start with the fiscal giveaways. $1.9T being spun up on spoons as I type these words. Likely another $2T (er, Infrastructure) about to be taken out of the freezer and delivered on our plates. The mouth waters at the very contemplation of these dainties.

Oh, by the way, though, our hosts hate to mention it, but this sweet, cold stuff is expensive, and must, after all, be paid for. So, ever so gently, they suggest that it’s time to turn up the tax collection apparatus. Nothing dramatic; perhaps a little extra extracted from those fat cats making over $400K. Or let’s make it $200K. Just a trifle; you understand.

Any way you spin it, it’s another version of the same game. Elected/appointed officials taking from one group and handing out to another, based upon their rules, their agendas. Marx, wherever he is, must be smiling.

I reckon I could live with all of the above if the sponsors weren’t so sanctimoniously mean about the whole thing. I’m probably not gonna get a hand-out, and will almost certainly, one way or another, get handed in. But it’s all so humorless, so joyless.

On the other hand, I’m not terribly sure where humor intersects with the road to socialism. I do know that paths of capitalism are chockful of jocularity, as, along these thoroughfares, if one looks, it is not difficult to encounter the likes of, say, Jerry Lewis.

However, to my way of thinking, all available roads — Avenue S and Avenue C, lead back to the Fed, which (as becomes clearer with each passing moment), no matter what else happens, will need to step up its paltry $120B-$150B money printing program. This is true if they don’t raise taxes and even more so if they do. The yield curve is steepening, and the riot squad of the investment community is restless. Every time that fickle Madam X (10 Year Note) lifts her yield skirt another notch, the market sells off.

This much is nearly certain: the pattern will continue.

It all, once again, brings to mind that unfortunate selloff at the end of ’18, driven (as it was) entirely by mere threats of higher rates. In that episode, the markets quickly brought the commissars at the Fed to heel and will do so again.

Meantime, the clearest call I can muster is that we’re entering an extremely volatile market interval. Particularly when March melts into April, everything will be in play: Earnings, Factor Rotations. Fiscal Policy. Monetary Policy. Macro Statistics. The emerging 17-year locust cycle. Not much visibility into any of the above.

I’d travel light here, folks. Because you never know what could get ya.

But I reckon it doesn’t matter what road you take, as long as you look fabulous along the way. And you do. Look fabulous, that is. I know this because I’ve seen the pictures.

We’re all headed somewhere these days, and it makes me hungry just thinking about it. Yes, I think I’ll have some ice cream. Maybe the kind with marshmallows and nuts buried in the chocolate.

But if it’s all the same to you, I’ll hold off on the socialism, which, in my view, destroys the vibe pretty much entirely.

So, in the unlikely event that Speaker Pelosi invites me over for some Rocky Road, I think I’ll pass and just head to the local Dairy Queen instead.

There’s a rumor going around that the Ice Cream Socialists are playing a gig there. But even if they don’t, I’ll take my chances.

Pelosi and her cronies are already dishing up enough Rocky Road to last a lifetime.

TIMSHEL

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