It’s one of my favorite words in the English Language. And it’s not even English.

It’s Arabic. And it looks really cool using Arabic script. So much so that I feel compelled to share it:

It sounds cool too. And I think that we should all say it together. On three: INSHALLAH.

It translates into our native tongue as follows: “If God wills it”. Muslims everywhere use it at the end of statements of hope. And so, too, should the rest of us. I think.

It offers no assurance of outcomes; only a hope for same. Every language and culture features something of this nature, and often the way it is worded says a lot about those that speak in that particular tongue. In Spanish, the term “que sera, sera” comes to mind: “what will be, will be”. On these shores, we tend towards “it is what it is”.

Like I said, it tells you something. Because I’ve been thinking about this, and what I’ve determined is that America is like humanity on steroids. The good, the bad, you know, everything. So, when we say: “it IS what IS”, we really mean it. We live in the present and act accordingly.

Spain? Mexico? The French-speaking French or the Italian-speaking Italians? Not so much; prefer, in general to just roll with it. They kind of figure, well, “what will be, will be”.

But Muslims say “Inshallah” – if God wills it, which also reflects the life protocols of that religion. And the phrase, it strikes me, is particularly apt at the moment for all of us, because whatever happens next – good, bad or horrible, no one would be faulted for ascribing it to God’s Will.

At times in these pages, I have shared the sentiment that the period from the end of WWII to the present day, has, for the Western World, been one of unprecedented peace and prosperity. 75 years without a major war, famine, plague or depression. Yes, there have been hard times. I, for instance, in the 70s, myself suffered through the unspeakable indignities of wearing largely unbuttoned silk shirts and hitting the discos – because that’s where the girls were. But in general, we’ve had a pretty good run of it over the last 7.5 decades. An unprecedented one. Consider, for instance, the preceding three generations (1870 through 1945), or the three before that (1795 through 1870). I hope you get my point.

And my fear has always been that it’s unsustainable. And maybe, just maybe, now is the time that our magnificent innings in the sun have come to a close. The truth is, I just don’t know.

At the moment, we arguably face a stone-cold Hobson’s Choice. Shut down an entire economy to stop a virus or let both of them ride and hope for the best.

The answer, of course, lies somewhere in between. And the outcome, under any strategy, is anything but assured. Maybe we thread the needle. If not, well, I don’t even want to think about that.

As of now, all concerns in my mind are dwarfed by the need for clarity as to how broad, deep and menacing a path the virus itself blazes. I just can’t get a clear picture. And we need to know, because it is this reality that will determine how much damage awaits us. not only medically, but in the markets.

Can anyone enlighten me here? The news flow of course shades to the negative. But I will confess to feeling last weekend that the final days of March would tell an important tale. I couldn’t shake the fear that this past week and next, the numbers could go truly parabolic. So far, they haven’t, and I’m gonna choose to view this through a positive frame.

I’ve also, albeit with a jaundiced eye, been looking to the markets for clues, and have found this to be a mixed blessing at best. Presumably, the investment world is modelling the path of the disease in real-time and allocating its capital accordingly. Could these sage custodians of assets dare to load the boat without fairly strong conviction that this whole CV thing was contained, or, at minimum containable?

Well, we have our answer, now, don’t we? Our resilient indices registered their best week since 1931, one that featured the greatest single day rise in market history. But think about that. Nineteen friggin’-Thirty-One. The dawn of the Great Depression – one that would last, several false bottoms notwithstanding, until the, er, miracle of WWII snapped us out of our fog and set the stage for that magnificent 75-year run referenced above. Things could’ve turned out differently, you know. What if Hitler hadn’t invaded Russia, adding maybe the most badass army in the world to his foes and forcing him to fight on 2 fronts?

But I reckon that this ain’t 1931. Yet. The markets don’t think it is and have reacted with unilateral glee to the latest set of baller moves out of Washington. The Fed’s all in – INSHALLAH. The >$2T stimulus bill was certainly needed. I doubt it is sufficiently large to plug the economic Corona Corn Hole.

Meanwhile, we move along in our eerily and terrifyingly altered lives as best we can. I haven’t seen you in what seems like a lifetime and I doubt if I can carry on like that much longer.

Bob Dylan released his first original recording in eight years – a >17-minute dirge about the capping of JFK. It’s melody-light, but of course the lyrics cut deep. Fair warning: it won’t improve your mood much. But I’m certainly glad to get some new material out of my favorite artist of all time.

And as for the markets, I consider them a hot mess, and my best advice remains to give them a fairly wide berth at the moment. I was glad to see Friday’s selloff, if for no other reason than to bring some sobriety into the proceedings. In general, I think, and almost hope, that the next leg is down. Gun to my head, however, I wouldn’t mind if the descent was deferred until Wednesday, after the close of what was certainly an historic quarter. This would be beneficial from a couple of perspectives. First, at least this time ‘round, I am all for tape-painting of quarterly performance over a three-month span that is unlikely to gladden the hearts of even the most forgiving of capital allocators.

I also feel that a non-disastrous print on 3/31 will go a long way towards staving off a wave of default triggers. You’d think we would’ve learned something from that whole Enron fiasco, but it looks to me like a significant amount of corporate obligations are tied to the retention of certain equity valuations. And trust me on this – we do not want these levels to be triggered, because even worse financial disaster ensues in the wake of them.

All of which brings to mind images of what is likely to be one of the most surreal earnings reporting cycles of all time, set to commence in a handful of days. The numbers for Q1 won’t be the feature act; now more than ever, forward guidance will tell the tale. I see two perverse and diametrically opposed incentives coming into play. For companies sufficiently insolated from the carnage, there will be great temptation to “kitchen sink” the quarter, emphasizing all of the negative contingencies that loom for them, in the confident hope of looking like heroes when worst-case scenarios fail to materialize. Conversely, and particularly for highly levered enterprises, the incentives may involve some gilding of the lily, so as to avoid scaring off their creditors and bearing witness to the full-scale evaporation of their liquidity and funding sources.

All of this reduces the valuation-based signal to noise ratio to levels of statistical insignificance. And in the meantime, we don’t know what damage the virus will have caused. But we do know this: the galactic policy response is insufficient to counter the economic carnage it has created, even if it withers and dies right now (it won’t).

So, I ask: why by ‘em here? I do take some comfort in the fact that no fewer than two dozen of my investing-savvy comrades are begging me for the moral sanction to load up. Moreover, this is the attitude of most of my clients. I have shared my views with them. And the substance of them are that there is no edge at the moment, that risk levels remain beyond elevated, and that anyone inclined to step in there should, at minimum, do so with the full expectation that it is likely to be a bumpy ride.

Oh, and then there’s this. Yields on the long end of the U.S. Treasury Curve still must continue to plunge into the netherworld. I won’t rehash my arguments again, but will gently ask my readers, when the 10-year yield does go negative, to remember that I told them this would happen.

“They also serve, who only stand and wait”. So once wrote English poet John Milton. He was right, you know. I’ve used this before and I’m using it again now. The present moment is hardly the time to make any bold investment moves in any direction.

So that’s where I’ll leave matters off for now. I think investors best serve, on balance, by standing and waiting.

So much uncertainty; so much idle time to fret about it. So little time, on the other hand, to make important decisions regarding our future. It’s not what we envisioned or hoped for now is it, my love(s)?

But it is what it is, and what will be will be. Some of it is indeed only as God will’s it. That’s what the Muslims are conveying when they utter the phrase Inshallah. But I’m not Muslim; I’m a Jew, and we’ve been quarreling with them about trivial issues for many centuries. Maybe this is a good opportunity to set some of these squabbles aside.

Moreover, with the holy season just around the corner, it may bear mention that the Jewish religion takes a starker view of these weighty matters. We have our version of our titular theme – embodied the following phrase: TIMSHEL, which translates into “Thou Mayest”.

It’s the blessing that God gave to Cain after putting His mark on him. Like Inshallah, it offers no promises; only chances. As a gift from above, it is decidedly finite, but, in my judgment, no less divine.

For what seems like ages, I’ve used TIMSHEL as my tagline. And I have my reasons for doing so. But as I dwell in my own quarantine, hoping and praying for good outcomes, and wondering when oh when we can be together again, I think it shades a little too negative for our purposes.

So, I close with best wishes for health, safety and whatever, in these troubled times, passes for a little peace of mind. Plus, at least for this week, a heartfelt…

INSHALLAH

“What have they done to the earth? What have they done to our fair sister?

Ravaged and plundered and ripped her and bit her, Stuck her with knives in the side of the dawn,

And tied her with fences and dragged her down”

― James Douglas Morrison, dead and gone 50 years this July

I’ve got no probing insights at the moment; none whatsoever.

Y’all know what’s going down and y’all know why.

So, I’ll use this space to give a shout out to Lou.

God bless you, Lou.

In the event that any of you don’t know Lou, he’s a capitalist force: Owner/Operator of Blue Bus Music in Ridgefield, CT. You know, the one next to Dmitri’s Diner? Slinging those guitars and music lessons? I’d been giving him my custom for several years. And I’ve always worried about him. I mean how many Stratocaster knockoffs and hours spent seeking to hammer the nuances of the Pentatonic Scale into crowded brains of Fairfield County teenagers reside under his demand curve? Even when times are good?

And I’ve relied on him. Because (trust me on this) if you are ever in these parts and are in urgent need of a replacement for your F harmonica, Lou’s your guy. Otherwise (trust me on this as well) you can drive for hours in every direction and not find one.

So yesterday I took a ride over to The Blue Bus to see how Lou was doing; maybe pick up a set or two of Ernie Ball 9-gage strings: a) to try to help him out; and b) because I can use them (it may not surprise you that more than one of my guitars is in desperate need of restringing).

But he wasn’t there. And I’m afraid he’s not coming back.

And if you multiply Lou’s Blue Bus by several million, you have a pretty clear picture of what is unfolding for us. Perhaps it’s unavoidable, but it sure is one helluva shame.

Because what we’re witnessing, in contemporaneous time, is the shutting down of the many of the vital organs of the American Capital Economy – which had been humming along nicely for about 240 years.

Like I said, one helluva shame.

The most recent turn of the screw is the Shelter at Home orders issued by governors of several major states, including those (NY, IL, CT and CA) where I’ve spent virtually all of my life. As such, these actions hit home in more ways than one. More than this, while I have mixed feelings about all of these jurisdictions, on balance, I’m fond of each of them.

It’s all a level of drama that is a bit much for my delicate psyche, and I’m guessing that I’m not alone.

In fact, I’d almost go so far as to invite you to join me me in echoing a further sentiment expressed by Jim – albeit in a different song (When the Music’s Over):

“We’re getting tired of hanging around”.

But we don’t have nowhere else to go.

And even though Lou’s joint has gone dark, there is a Blue Bus out there, and we’re all riding on it, carrying (among others) the burdens of Risk, Jobs and Interest Rates, which are the main issues on my mind, and which I’ll cover (if only for Auld Lang Syne), in the remainder of this note.

Let’s start with Risk. Which pervades and abides in these troubled times. The world just became less valuable as measured in dollars. Everything just got marked down. By a lot. Another term for what has happened is deflation, which I covered at length in our last installment and do not wish to rehash at this particular moment, but will need to reference down the page, nonetheless.

Recycling a riff from last week’s tome, consider the performance of the Gallant 500, from its peak level of ~3400 on February 19th , in denominations other than cash. The drop of 1100 points translates into a dollar valuation haircut of approximately 1/3rd. On that date, lead month WTI Crude Oil futures closed at 53.40. It’s now at 22.43 (including a late week bounce from, unthinkably, under 20) – a one-month price drop of 58%. Thus, if we express the SPX in units of Crude, on 2/19, the price ratio was 66.7 (3400/53.4). But now, as of Friday’s close, the equity index fetches more than 100 barrels of the commodity (2300/22.43). In other words, the S&P 500 is actually up more than 50% over a month in terms of the amount of Crude Oil on requires to acquire it.

None of this is likely to make any of you feel much better, but hopefully it provides some perspective as to what happens when a deflationary bomb hits the global economy.

And partly for this reason, it is important to be philosophical about the losses you have suffered. Know this: for anyone save the clairvoyant and/or extremely lucky, they were unavoidable. No one could’ve reasonably anticipated what happened; to have done so (and acted upon it) would have arguably been irresponsible. So, what’s important is what you do now. Yes, your risk budget has shrunk, but so has the entire world’s. We must bear this in mind as we seek to pick through the rubble.

I believe the key to moving forward is to focus your portfolios as exclusively as possible on core themes, as measured on a going-forward basis. What do you truly want to own now? At this price? Forget about the glidepath that created this valuation level. And forget about the names in your book that are little more than portfolio window dressing. They won’t get you paid and in fact could cost you dearly.

My second point relates to the true risks faced by the economy. Glibly, I will state that they are, in order of importance: 1) Jobs, 2) Jobs and 3) Jobs. Millions of them are disappearing, millions more will be eliminated as the result of virus containment actions, and even more are at risk. Any effective policy response must be oriented towards those measures that will allow employers to retain their payrolls to the greatest feasible extent. I’ve gone over this already, but most businesses don’t have much runway (measured, in most cases, in a handful of weeks) before mass layoffs are unavoidable and might not even save the enterprise. In which case, presumably, the entire staff of the place will be rendered unemployed.

So, while I’m all in favor of the helicopter money set to rain down on those most impacted, I feel it will do little to solve underlying the problem. Tax and credit relief, geared towards keeping those increasingly scrawny payrolls as fat as possible, is the most important step we can take. Because once a worker is laid off – particularly given current conditions – the probability of that individual returning to their previous employment status is depressing, at best, to contemplate.

I’ve read recent estimates of job losses on the order of 10 million; my own numbers are higher: somewhere between 20 and 50 million. Steps taken to reduce this toll will be the Lord’s Work indeed.

Because you know what 50 million unemployed looks like? If not, just Google images of 1933.

Finally, and returning to my own Sacred Cow, interest rates MUST come down. In the current environment, no one can operate at these levels. And here, with (trust me again) with great reluctance, I am forced to again bust out my economic textbooks; specifically those sections that cover IS/LM analysis, which measures the impact of fiscal and monetary policy on Interest Rates and Output:

(Sigh) to keep this simple, the Y axis is Interest Rates, while the horizontal line is economic production (think GDP). IS, as reflected in the downward sloping lines, denotes output (including fiscal intervention). The heavenward-ascending Orange line reflects Monetary Policy.

The Virus you may have heard about has caused a migration from the blue IS line to the green one. The latter is probably even further contracted than the chart indicates, but (for illustrative purposes) we’ll go with it. And we can see that this inward shift has deeply reduced economic production, which has meekly retreated from Y2 to Y1 – and then some.

But Interest Rates have not responded as the textbooks have assured us that they would. They’ve declined, but at levels woefully insufficient to move us appropriately out on the Y axis. Why is this the case? Well, for one thing, for many days, there have been myriad technical problems in the institutional funding markets, which somehow, and arguably miraculously, catalyzed a shortage of dollars and an attendant selloff of our longer-term notes. The 10-Year (Madam X) is still, irrationally, yielding 0.85%, but won’t for long, because pricing and output of everything under the sun will fail to support this level. We must print money and a lot of it. And I say this is a miracle, because this is easiest thing in the world for us to do. Reducing carbon footprints? Solving the opioid crisis? Eliminating the gender pay gap? All demand an act of God. But printing money only requires a few mouse clicks from the right fingers.

We therefore will print, baby print. And use the new cash to buy our own Treasuries. And this will move out the LM curve. So, I believe that our long-dated paper is massively underpriced at the moment. And the worse things get in the equity markets, the higher Treasury prices, and the lower their associated yields, will migrate. Thus, I think owning U.S. debt out 5 years and beyond – at least as a hedge against further equity declines – is about the best trade I ever recall.

And unfortunately, I don’t see a bottom for equities here. It’s hard to imagine reaching one without more clarity as to the trajectory of the virus, and the policy response that it evokes. Our economic hit looks to me to be on the order of many trillions, and we haven’t even managed yet to deliver on the fiscal side on the first measly $1,000,000,000,000. I don’t think we see the lows until all of this plays out. If nothing else, the markets will demand such action and keep selling off till its demands are met.

Know that the clock is ticking, most prominently due to the credit bubble. Unless appropriate relief comes, in sufficient size and with appropriate timeliness, defaults will cascade down on the banking system, which may then require a bailout of its own. Superficially, the banks have done a creditable job of recapitalizing after the (last) crash. But if we don’t save the credit markets now, all that effort will go to rot. And let me ask you: post ’08, how much political will exists to bail out the banks? Again.

You don’t have to answer.

But counterintuitively, equity markets are, from certain perspectives, deeply oversold even now. They’re literally giving away many high-quality assets, but before this here thing runs its course, we may reach levels where they’re paying us to take them. If you’ve got really deep pockets and a wealth of intestinal fortitude, you’ve got a pretty compelling entry point right here. And I don’t object to some of you dipping your toes in at these levels. Just accept the strong possibility that you may need to take some serious incremental pain ere you get paid.

And I reckon that’s all I got – for now. I should, before taking my leave, mention that I recently went to the extremes of self-producing a couple of short videos that chronicle my current ponderings – which will hit many of your in-boxes, God-willing, within a day or two.

Please know that they were labors of love, and that I will be beyond glad to have taken this effort, no matter how they are received. But perhaps, in the spirit of the times, you might do me the honor of a) viewing them; and b) tempering Justice with Mercy in your evaluation of the content.

But now I’m outta here, because I’m getting tired of hangin’ around. I will continue to keep my ear down to the ground, but it’s getting harder to do so with each passing hour.

Because the Blue Bus… …is calling me, calling us. But Lou’s Blue Bus is closed. Maybe forever. And so, for that matter, is Dmitri’s Diner.

I hold out greater hope for the resurrection of the latter than I do the former (Lou could have, but did not in a timely fashion, analyze his debt and cash flow condition and put appropriate contingencies in place).

But hope, across the board, springs eternal. So, when Jim tells us: “it hurts to set you free, but you’ll never follow me”, I’m gonna part ways with him. Because: 1) I will not, cannot, set you free; 2) even if I did, I’d expect you to follow; and, most importantly, 3) it’s NOT The End.

Yes, hope springs eternal. But hope is a necessary, though not sufficient, condition of getting back the earth we somehow saw slipping through our hands over the last couple of weeks. Our fair sister. Who we’ve ravaged and plundered, ripped and bitten, stuck with knives in the side of the dawn, tied with fences and drug down.

That very gentle sound you hear is her resurrecting herself. With careful planning and execution, she will indeed rise again. And soon.

And so, God willing, will we.

TIMSHEL

“He allowed himself to be swayed by his conviction that human beings are not born once and for all on the day their mothers give birth to them, but that life obliges them over and over again to give birth to themselves”

― Gabriel García Márquez, Love in the Time of Cholera

No, I have not read this book.

I did manage to get through Nobel Laureate Garcia Marquez’s other acknowledged master work: “100 Years of Solitude”, and, while I recognized its literary excellence, on balance, it kind of annoyed me. For one thing, GGM wasn’t lying in the title: the story actually goes on for a full ten decades. Four generations in the lives of a single family. And they all have the same names.

It drove me crazy.

More importantly, it left me with no particular urge to read “Love in the Time of Cholera”, which (one has to admit) is a very catchy title. But I was able to get through the Wikipedia plot summary, and I can give that shorter piece, at any rate, a strong review. Both the book and the plot summary tell the tale of two star-crossed lovers, sworn to each other, but kept apart due to circumstance and familial constraints.

I freely admit that this narrative hit close to home for me. It moves me. In this troubled time, it almost makes me want to cry.

And that, for now, is all I have to say about that.

Other than this: I type out this note with the full knowledge that my thematic tactics here are a tad glib. Risk in the Time of Corona? Probably a little too catchy. Even for me.

But I’m going with it and will now move to what I believe are more pertinent observations. This above all: the virus-induced economic downturn we are likely to face is not by a longshot priced into the markets; certainly not after Friday’s monster rally, and even not, I believe, when we put our heads on our pillows Thursday night, with equity indices down >30% down from all-time highs we had enjoyed in those sweet, bygone days, just a month ago.

Because no matter what happens with the virus, even if it fails to wreak death and destruction on the masses, it will, will, in all probability, have taken a huge deflationary toll on the global and domestic capital economy. This, in my judgment, is unavoidable; it is only the magnitude of the hit that remains unknown. And none of us – even geriatrics such as myself – has ever experienced the carnage that is wrought by deflation.

But I did study this stuff in graduate school, and feel duty bound to share some of what I can remember.

Deflation sucks. Really sucks. Above all else, because it renders the cost of repaying debt prohibitive. It reverses the polarities of credit markets, which are founded on the notion that a dollar in one’s pocket is worth more than one promised at fixed points in the future. Upon this premise we have relied, built great societies, rendered, through the miracle of air conditioning, the City of New Orleans inhabitable in the summer, since we were sporting tails. Now, with the specter of deflation, the premise is in doubt.

And this at a time when global indebtedness is surging from one record level to the next.

But before I sink myself and all my readers into the depths of despair, allow me to reveal the solution to the problem, along with the hope and expectation that it comes to pass quickly: Massive Government Intervention: Fiscal Stimulus. Monetary Expansion. Credit Relief.

It’s all coming by the ocean-full, folks, and somebody’s gonna make a lot of money on this; maybe quickly. Maybe it’s us. I also wish to point out that my scenarios reflect, rather than certainties, the risks I see, and am therefore duty-bound, to describe.

So let’s get to the bad news.

Just take a peek at the time path of global financial obligations:

Bear with me as I provide a little context here. First, because it takes a good deal of time to tally these numbers, the chart above only takes us through June of last year. My guess, what with all of the cheap money out there and (at the time) no viruses menacing us, is that the number, at the end of 2019, might look a little more like $300 Tril. Which is a lot of bread to own The Man. More, in fact, and by a wide margin, than the IOUs that had accumulated in 2008. Remember ’08? When a credit collapse came this-close to unleashing a worldwide depression?

And with deflation, the hard road of repayment becomes nigh impassible. By way of example, let’s look at the journey of one company: Occidental Petroleum (Oxy Pete), whose fortunes I’ve been following particularly closely. This has not been a particular inconvenience to me, because Oxy Pete has been all over the news lately — among other reasons, because it lost approximately 2/3rds of its equity market cap over the last couple of weeks.

But I’m much more interested in the debt side of its balance sheet, and specifically its recent quadrupling of borrowings – from the relative pittance of $15B at the end of 2018, to its current level of $60B. Now, for the truly obtuse, let’s bear in mind that Oxy Pete is in the oil business, and, using a trick that us old economists cannot resist, let’s express its obligations in units of Crude Oil rather than dollars. I know some of you may find this wearisome, but please hang with me while I make this point.

Before last year’s borrowing binge, the bubbling crude was holding steady at around $50 per barrel, and here the math is easy: $15B of debt with Crude at $50/barrel implies that Oxy Pete’s obligations could be settled for a mere 300 million barrels – a considerable amount of the greasy stuff (the equivalent of about 10 days’ global production), but perhaps not a fatal one. With 4x the debt and Crude still holding steady at 50 (as it was until recently), the number explodes to 1.2 Billion casks.

But in case you missed it, Crude collapsed about a week ago. And now, if I slap a $30 price on the commodity, the liability expands to a rather alarming 1,680,000,000 barrels, or about 55 days of the world’s output. Which Oxy Pete may not have lying around. More importantly, in five quarters, the combination of excessive borrowing and the commodity price implosion has rendered its repayment burden 6x the levels it faced just 15 months ago.

So when its stock collapsed, it wasn’t just because the prospects of core operations took a turn for the worse. They borrowed $10B from Buffet alone last year – and he’s not a guy much accustomed to rolling over and getting stiffed. Thus, the sound you heard when Oxy Pete’s stock was crashing was its capital structure collapsing on top of itself; the handing of the keys over to the guy in Omaha and his pals. Poor Oxy. Poor Pete. Heck, the way things are going, maybe even poor Warren.

But enough about Oxy Pete, right? Let’s look at the whole Energy Sector, which accounts for approximately 10% of United States GDP. While this math won’t fly in an economics classroom, I think it would be fair to state that the ~40% decline in petroleum pricing power equates to approximately 4% in deflation terms.

And that’s just Energy. Virtually every sector of the economy will need to contract for us to tame this here Corona Tiger. Industrials, TMT, Housing, Transportation – you name it (maybe not Health Care) — all just went on fire sale. I beat it out of NYC on Thursday and do not plan to return until the coast is clear. Which could be weeks. Or months. I’m pretty sure that my spending during this time period is going to drop dramatically.

As is everyone else’s. And just until recently, we were basking in never-ending praise as to the resiliency of the U.S. Consumer, who accounts for approximately 70% of our GDP. How’s that looking now? Maybe ask a random sample of New York restaurateurs. Or any vendor in suburban New Rochelle.

Or consider the cancellation of March Madness: the two-week/15 city money spending binge which, since time immemorial has offered, for so many of us, an emotional bridge from Winter to Spring. The NCAA alone was fixing to bring in nearly $1B on the saga. Advertisers had allocated even a greater amount. Betting was projected at approximately $10B, but we’ll lay that aside because that money is mostly just a transfer of wealth from suckers to their enablers. But how about the hotels, restaurants, parking facilities, merch guys, etc.? My guess is that we’re looking at a loss of at least $5B to the overall economy.

They also – and unthinkably – just deep sixed the Houston Rodeo, and the $400M in revenues the rip snorting spectacle generates. And Houston is the Energy Capital of America. Home, incidentally, to Occidental Petroleum. Poor Houston. Poor us.

And that’s just two cancelled events. If you extrapolate the math… …Well. I. Just. Can’t.

Maybe things will look up by Cinco de Mayo; we can only hope. But fair warning: if this here menace extends to the start of NFL training camps, I won’t be responsible for my own actions.

More to the point, we’re looking at an economic contraction of epic proportions, and, unfortunately, this kind of thing feeds on itself. Prices of everything (other than maybe, and irrationally, toilet paper) will be on the down, and consumers will expect this to continue. So they will tuck their spending in even further, in anticipation of even greater bargains down the road. Money won’t sufficiently circulate. And banks won’t lend. Why would they? The amount they can expect to receive – if they get paid back at all – won’t be worth the risk of the service they provide. And while this is a well-kept secret among us econ types, it is bank lending that creates new money. I won’t go into the gory details here; suffice to say that most new currency does not come off of printing presses at registered mints. Instead, it appears, as if by magic, by the creation of new loans.

Thus, with the above-presented primer on deflation behind us, we can safely conclude that the government’s financial response to the crisis has thus far been woefully inadequate and will need to grow by many orders of magnitude to attack the financial issues that may await us.

That $50B Congress approved on Friday, which produced such a joyfully nostalgic rally at the close? It is little more than the equivalent of what it would take to return Oxy Pete’s debt down to levels where they resided a little over a year ago.

The $1.5B liquidity injection by the Fed? It equates to 0.0005% (0.05 basis points) of my above-mentioned estimate of global indebtedness.

So the government is going to have to do a sh!t ton more to even to begin to attack this problem.

And it will. In a world where uncertainty just took a quantum leap, you can count on this.

Let’s start with interest rates, which need to come dramatically down. Here, alas, I am compelled to revert to another faultily remembered grad school lesson – one involving the true economic costs of money. In the Dismal Science, there is a shady but important concept called the real interest rate, which is defined as the rate you see quoted on your screen, less an even shadier factor called inflationary expectations. The latter, of course, is unobservable, but one can, and arguably must, estimate it.

I’m going to be gentle here and set my inflationary expectations at negative 3% (i.e. my deflationary expectation is +3%). Now, let’s look at the forlorn path of equity valuations and yields on the 10-Year Note (Madame X) over the course of the troubled year of 2020:

Madame X Yields Drop as the Gallant 500 Retreats:

A close review of these misanthropic timelines reveals that just a month ago, when our equity indices were frolicking around all-time highs, the 10-year was throwing off about 1.6%. I’m gonna play with some math here, under the guise of poetic license, and set the rate of inflationary expectations at the time at about 1.5%. And, applying the formula presented above, we can fix the real interest rate, right around Valentines’ Day, at a meager 0.1% (1.6% – 1.5%). And this, again, with markets at all-time highs.

Fast forward to the present. Yes, as anticipated, 10-year yields have come down, but by an astonishingly tepid amount. In what I believe to be a moment of Fellini madness, Madame X sold off to a rising yield of nearly 1.0% this past week. Applying our time-tested formula, real interest rates, as measured in Madame X equivalents are now approximately 4.0% (Nominal Rate of 1.0% plus a deflation expectation of 3%) – forty times higher than where they were just a month ago. When the market was soaring. Before the global economy faced frightening contraction.

I was puzzled as to what fresh circle of financial hell had caused yields to actually rise this week, and I didn’t like the answer that came most prominently to mind. Our notes were selling off at least in part because investors needed liquidity. Now, if you follow the markets with any rigor, you should be aware that Madame X, in addition to her myriad other charms, is universally considered the most liquid financial instrument on the planet.

So, when her financial realms begin to dry up (as did those of her fetching sisters such as the Bund and the JGB), and are used as an ATM by investors, one can safely assume that our liquidity rivers, normally so deep and wide, are becoming narrower and shallower.

And rates must plunge here. Because no one, not even the U.S. Treasury, is gonna borrow right now at a real rate that high.

This means you can help yourself to as much of Madame X’s wares as you can afford, at what I believe to be bargain basement prices. If nothing else, it will help hedge your impaired equity exposure.

And whether or not you take this action, rest assured that the Fed will. The smart guys and gals with whom I reason believe that even last week’s massive monetary move just bridges the Central Bank to the next FOMC meeting – scheduled for St. Paddy’s Day (Did I mention the cancelling of the parades across the world? Even in Ireland? Apparently old Saint Pat can drive the snakes out of the Emerald Isle but is powerless against a mutating flu-like bug). The Fed is likely to go big on Wednesday. If, that, is, it can wait that long.

Beyond this, you can expect a much bigger fiscal package out of Washington. And soon. Everyone is staying home for the foreseeable future. No one is spending. In the commercial economy, orders are being cancelled, deals delayed, payables deferred/defaulted, etc.

And businesses will face a revenue and cash crunch. And, unless we are proactive with relief, massive layoffs could begin before you know it.

My guess is that the offices of all 435 members of the House of Representatives are being flooded with demands for said relief, and that this will continue and expand. It’s an election year. And it’s not about Trump vs. Biden (a Hobson’s Choice if ever there was one). When the layoffs start, everyone in Congress (even AOC) will be forced kick into action.

In light of all of the above, I don’t expect Friday’s rally to hold, and don’t believe we’ve seen a bottoming of equity valuations yet. I could be wrong, and I hope I am. But the math, right now, just doesn’t add up.

For all of this, and from certain perspectives, equity markets are likely oversold. The only answer to what plagues us, from a market perspective, is a massive fiscal/monetary/credit injection. We’ve got to reflate this economic balloon, losing air with each passing breath. And we have the tools to do it. It won’t be costless to deploy them, but the price of not doing so will be prohibitive. The deep pockets are aware of this and are biding their time/looking for spots to hoover everything up that they don’t already own. Our goal should be to place ourselves in a position to get in on the action.

So, what, in the meanwhile, should you do to relieve the suffering of your ailing portfolios? Well, first of all, unless you b!thched it up completely, do not blame yourselves for your losses. What has happened is an Act of God, and precisely the sort of risk we are all paid to take. All asset holders faced a downward value reset of their inventories, and it is likely to increase in magnitude. In all probability, it will pass. And those who have played it with calm, sobriety and sound judgment stand to make a fortune. Here’s hoping you are one of them.

Also, did I mention that you should buy the 10-year note? If not, forgive me. And if I did, let me repeat it: you should buy the 10-year note. Because it’s going to go up in price when everything else is plummeting.

And yes, I believe Garcia Marquez is on to something: periodic rebirth is part of the human condition. Now, arguably, is one of those periods. The lovers in “Cholera” had to endure a prolonged, painful wait before they could be joined as one, but (spoiler alert), through the power of persistence and love, they came together. Like a dream.

It’s a dream I dream. And I know you do to. If we rely on our considerable inner resources, we’ll get there.

Cholera last posed a major problem around 1920. It still exists but has spent the last hundred years in relative solitude. Love has abided. We now have Corona, and, with it, a passel of risk. There’s a way forward here, my darlings, but the path will be neither easy nor linear.

We can do nothing but call upon our efforts and judgments and apply them to the best of our abilities.

The rest we must commit to the hand of God.

Stay clean and safe out there, and, as always…

TIMSHEL

Forgive me, in this interval of Lenten Sacrifice for borrowing from the New Testament. Specifically, The Gospel According to Saint Luke, and most precisely Chapter 4; Verse 23, wherein Jesus is said to have rendered almost precisely the same advice to apothecaries. We’ll have to take Luke’s word for it, because everything we know about what Jesus actually said owes its source to the Gospels.

But that’s all I have to say about that. In the meanwhile, the imaginative among you already recognize that I can take this riff into several directions. And I will. Take this riff into several directions that is.

Mostly, the idea came to me because of my stone-cold baller call on the 10-Year, which I have been begging my clients to buy, well, for years now. I amped up the volume of my pleadings (preachings?) recently: socializing the notion that it offered a divine hedge against risk assets such as equities.

And I myself own a few stocks. And yes, I’m a Risk Manager. But did I buy the 10-Year Note to hedge my exposure? I did not. So, with reference to our title, feel free to view it as a pre-emptive recognition that: a) in the markets and in so many human endeavors – it is far easier to offer sound advice than it is to take sound action on one’s own behalf; and b) I myself am a bit of a putz.

Funny thing, though, I still think that long Treasuries is the best hedge against equities – even at these elevated prices and miniscule yields, but we will return to that topic anon.

This week’s thematic journey also allows me to segue effortlessly into a diatribe about the dreaded Corona. About which I have very little to say. Here’s hoping, at any rate, that if thou art a physician who has caught the bug, thou art indeed able to heal thyself. Because otherwise, we’re ALL in trouble.

And the virus does seem to be infecting the markets, now doesn’t it? In fact, it catalyzed one of the wildest weeks for the SPX that ever I can recollect. Somehow, though, amid all the drama, The Gallant 500 actually managed to gain ground this week – 61 big fat basis points to be exact. Which translates into 0.61% (I only offer the further explanation because some of the most brilliant and charming folks I’ve ever encountered remain – justifiably – confused as to exactly what a basis point actually is).

But basis points is as basis points does, and while we’re on the topic, perhaps the biggest news of the past week was the Fed’s surprise announcement, shortly after the markets opened on Tuesday, that it was trimming 50 of the little buggers from the eponymous Fed Funds Rate, in the process shocking anyone who knew, going in, what a basis point was, and even a few that didn’t.

And as for me (a fellow who wallows in basis points), it blew my socks off – quite a feat considering I seldom, if ever, wear any. Socks, that is. And I asks myself: why, with an FOMC meeting just a couple of weeks in the offing, would our central bank make such an aggressive move, and this in broad daylight.

Well, only the voting governors know for sure, but I have my own theories, which, of course, I am honor-bound to share with my readership. First, and in a blinding glimpse of the obvious, it’s pretty clear to me that the internal models run by all of those smart PhD’s they employ must be flashing red at the moment. I further suspect that a big focus of their agita is on the repo markets, which were lurching around in a state of impairment even as risk assets were prancing from one new high to the next. It was somewhat axiomatic that when the sushi (I LOVE sushi) hit the fan, they’d have to step up their support. And the sushi has certainly hit the fan, now, hasn’t it? And the Fed has indeed stepped up. This past week featured not one but two 12-figure, oversubscribed auctions hosted by Team Pow. There will be more.

Their socks-knocking shock did little to calm investor hyperventilation, however. Equities sold off for most of the rest of the session. And the long end of the Treasury Yield Curve? It continued to collapse. So, my second point is that our monetary policy nannies have yet again pushed their chips to the middle of the table, and will continue to do so, as needed. And it will be. Needed that is.

I also reiterate my belief that our Monetary Mother Hens are particularly worried about their little ducklings (so delicious when they grow to maturity, are slaughtered, stuffed, cooked and served up) in the Energy Patch. Again, I believe that this is due to credit concerns, as the tiny Energy Quackers live on borrowed money, and may go hungry if the Crude Oil market collapses. Last week was a putrid one from this perspective as well, as depicted in yet another chart I’d rather not show, but must:

While playing second fiddle to other tidings, the bubbling crude was on the receiving end of a double whammy: decreased demand tied to (you guessed it): Corona concerns, and a breakdown, catalyzed, according to published reports, by those pesky non-complying Ruskies, of discussions to cut production in the wake of the demand shock.

Not good. Banks aren’t gonna wanna lend to these cowboys at these price levels, and that was before Jamie went into emergency heart surgery. If their debt fails, it’s “look out below” on the credit markets.

So I kind of get where the Fed is coming from. And I expect them to ride their horses from Beaumont to El Paso to insure against such a breakdown. And this, in turn, reinforces my conviction that a triple-headed stimulus is galloping in our direction across the distant prairie. My guess is that the Relief Cavalry will be toting a short-term fiscal stimulus (Temporary tax cut? Please?), a 10-gallon hatful of corporate credit relief, and, of course, further monetary injections.

The worse matters get in the great beyond, the more certain that such a scenario becomes. So anyone who thinks that rates can’t go lower should think again. Because they can. And probably will. Particularly if the mad psychodramas currently unfolding across the globe continue to crescendo. Which they will. Continue to crescendo that is.

Thus, it a most perverse sense, I am leaning towards the serene side of the risk management hill. If the Corona doesn’t kill us all, and it won’t (kill us all, that is), I think the cures out there for whatever ails the markets will overwhelm the investment disease. Heck, even the crude selloff is strangely accretive, INSOFAR as it virtually ensures – particularly in an election year – a passel of manufactured credit support to those in debt with their bills coming due. Six months ago, WTI threatening to breach into a 3 handle might’ve been a default disaster in the making. Now, with CV and an election pending, it may virtually guarantee a mulligan to any borrowers that are thinking about cutting and running.

And did I mention that this was an election year? If I did, then I owe y’all an update from last week’s Bernie-gan’s Island note, because a great deal has happened in those tropical realms since we last reasoned together. Somehow, the Skipper, with the help of some old nautical buddies, managed to arrange the reluctant escape of virtually all of the castaways. With the exception of himself and Bernie-gan. Few, including yours truly, saw this coming, but the Millionaire and his (un-named) wife disembarked, as did Maryanne, offering, upon taking their leave, an undying pledge of loyalty to the old, misanthropic skip. Last to depart was the Professor, who is indeed gone, but has yet to choose sides in the final showdown (Ginger is still sauntering somewhere, but no one is casting her even a nominal glance). At the point of this correspondence, it appears that the Ship’s Captain will also dispatch Bernie-gan in short order, leaving the balmy field entirely to himself. But I’m not so sure, because Bernie-gan, whatever else his weaknesses may be, is a world class bitcher-upper of the best made plans of others.

And if this were not enough to report upon, we also were treated on Friday to a bonzo jobs report, showing remarkable strength across the board in the hiring sector, but failing to move markets in time-honored direction. Counterintuitively, Equities failed on the news and Bonds rallied. Go figure. Obviously, though, the March numbers will look very different. And likely not it a happy way.

Beyond this, the derivatives markets were a hot mess, and it is likely that within the next several says we will hear more casualty details – some of them terminal. But I’m going to be kind here and spare you further commentary on that shady subject.

For all of the above, my main takeaways from a risk management perspective (yes, I am a risk manager) are as follows. First, while they may descend further into the netherworld, I wouldn’t want to be short the equity markets for any extended periods of time. Not if the virus doesn’t kill us all. Not in an election year. And not, especially, with the Fed’s monetary cannons fully loaded and ready to roar.

I’d also avoid the options markets, and yes, I still believe that longer dated Treasuries offer the best hedge against further damage to your equity exposures.

However, and finally, I implore you to consider the source of these musings: a risk manager who failed to hedge himself.

It’s pretty clear that my reading of the bible has been imperfect and incomplete. So I’m gonna take another look. I’ll start with the Old Testament, and specifically the Book of Exodus. Of particular interest to me at the moment is trying to understand why the Good Lord chose to include Frogs among the 10 Plagues. Locusts? Check. Boils? Double Check. Pestilence? Natch. But Frogs? Not sure, because Frogs are actually kind of cool. Someone whose good opinion I value above all others asked me about this recently, and I didn’t have a good reply. Maybe it’s time I figured this one out.

I think I’ll then revert to the Gospel According to Saint Luke, but not without some trepidation. These musings are the longest of any section of the New Testament, accounting for >25% of the entire Gospel text. Moreover, nobody is quite certain who this Luke character even was. Biblical scholars believe he was a companion of Paul’s, but Paul wasn’t even Paul originally; he (perhaps justifiably) changed his name from Saul as a young cat.

Still and all, “Physician: Heal Thyself” offers some juicy food for thought in these troubled times. And it is certainly a catalyst for some major introspection on my part. Heck, it might even cause me to rethink my whole hedging strategy.

When the bond markets open Monday Morning, I might even step in and buy a few. On the other hand, given the reality that the clocks moved ahead early this morning, I just might be an hour late in pulling the trigger, which procures me an elegant pretext to do nothing at all. As a risk manager, I afford myself such allowances. Which begs my closing question: what’s your excuse?

TIMSHEL (Genesis 4: 6-7)

Just sit right back and you’ll hear a tale, a tale of a fateful trip,

That started out in Iowa, with an App vote-counting blip,

The mate was a stone cold socialist, the skipper old and pale,

The rest of them were also white, and also mostly male,

They set their course for Old Milwauk, but fought the whole way through,

They stomped their feet and shook their fists, and said some mean things too,

But most of all, they saved their hate, for the guy with the orange skin,

Wherever else they disagreed, they cannot let him win,

And now it’s Super Tuesday time, in the windy month of March,

It looks to me like Bernie-gan wears shirts that need some starch,

So lots of folks in 14 states, will cast their votes and smile,

But just like on the TV show, they’re stuck on Bernie-gan’s Isle,

— With apologies to Gilligan, the Skipper, and the rest of the U.S,S. Minnow crew…

Well, that pretty much sucked, now, didn’t it? I’m referring to ___________. Into which space you can feel free to insert just about any of the myriad recent buzz-kill incidents you choose. For example: the worst market week in living memory, my crude “Theme from Gilligan’s Island” re-lyric, or the rapidly spreading Coronavirus.

With respect to the last of these, I shared my clearest risk management thoughts on the topic on Wednesday. And now, four days (and several hundred basis points of incremental retreat by the Gallant 500) later, I find they still hold.

Feel free to view them, or, as appropriate, review them, at the following URL:

https://www.zerohedge.com/news/2020-02-26/coronavirus-risk-management-note

Because, while I doubt that I’ll be able to get through this note without further reference to the BIG C, I don’t want to use this precious space to rehash the whole thing in risk management perspective, yet again. It was a long week. For all of us. And I’m tired. Probably you are too.

So let’s revert to some harmless fun, in the spirit of the theme presented above, shall we? While NOT watching the second of the most recent debates (my time was much more sublimely engaged during those hours), it occurred to me that the current field of Democratic Presidential aspirants does indeed bear a striking resemblance to the characters of Gilligan’s Island, the iconic 1960s sitcom whose attention occupied thousands of hours of my youth which I cannot, under heaven, reclaim.

If I’m right on this score, then we know which one is Gilligan; it’s Bernie. Looks crazy, sounds crazy, but somehow, unthinkably, he’s perpetually running the show. Everyone around him expends inordinate energy either preventing or minimizing the impact of his misanthropy. But they always fail. The Skipper? Joe Biden. Oh sure, he’s way skinnier than Alan Hale, Jr., but he has the same, blustering, chest-puffing affability as the former, is equally geographically challenged, and one can literally visualize him taking off his cap in anger and frustration, and whopping Bernie/Gilligan over the head with it.

The Millionaire? Please. We know who fits this role. All he has to do is remove a few zeroes from his net worth and it’s a perfect match. Similarly, if Liz Warren wasn’t born to play the role of The Professor, well, then, I’ll be a Monkey’s Uncle. Erudite? Yes. But dour, humorless, and, ultimately, ineffectual. Professor W has a plan for everything (she can make a transistor radio run for years without electricity) but none of them work. Maryanne is also an easy call: Klobuchar, the wholesome Farm Girl. We need to cast our sights further afield for our Ginger, but once we do, we find our answer. It’s Tulsi, who a) is still in the race; and b) is certainly the easiest on the eyes of all of the 2020 wannabes. Including Trump.

I stop there, recognizing that I have omitted one key character and one of the contenders for the Big Prize. Feel free to connect the dots. But if you do, please note that it is you who is doing so. And not me.

And this crew seems stuck for all time on Bernie-gan’s Isle. They will make another attempt at escape this coming Tuesday, and while they may or may not succeed at long last, hilarity is sure to ensue. Ironically, the burgeoning panic arising from the Coronavirus may pump some perverse wind into their sails. Maybe, for example, they can hang the blame for CV on the Big Guy. We just don’t know. And I am hesitant to offer much risk insight beyond what I’ve already written. Which can also be found (sans those annoying adverts), at the following link:

Coronavirus Risk Management Note

From a market perspective, a review of the carnage is largely redundant, but alas necessary. I’d include some charts here, but I just can’t bring myself to do so. The socialized viral fears catalyzed the most rapidly unfolding SPX correction in market history. As gloriously and repeatedly prognosticated in this space, the Benjaminz that bailed out of riskier assets have flung themselves into the warm, loving embrace of the government bond complex.

Not only did the entire United States Treasury Curve reach historic lows in yield, pretty much the same thing happened all across the world. Vixen VIX nearly quadrupled – having, as recently as Valentines’ Day, offered her charms at a 75% discount to what her suitors must now pay for her attentions. And here, as I often do, I’m gonna break a solemn promise and throw a chart in your collective faces:

While this picture may indeed be worth a thousand words (a platitude often incorrectly attributed to Henrick Ibsen), I feel compelled to add a few of the latter to this haunting image. The Corona storm was already gathering a couple of weeks ago, like a beer truck caravan barreling into Racine, WI on the morning of Cinco De Mayo. And anyone paying attention could’ve acquired gallons of options protection for what now amounts to pennies on the dollar. But no one was. Paying attention that is. Until it got prohibitively expensive. Now, All God’s Children wish to own the VIX and its component options, with price being no object. Please resist this temptation, which is nothing less than reminiscent of Ginger, in that lame’ gown brushing her fingers against your chest in the hopes that you will give her your portion of the carton of chocolates that dropped miraculously from a helicopter in the sky.

You’re still better off hedging with long Treasuries, because if this here panic expands, we’re going much lower on yields. Some of my smartest clients are currently missioning out scenarios about the closing of the Port of San Francisco, and the associated obligation to hoard canned goods. Maybe they are right.

But my best guess is that we’re oversold here. And if I’m correct, it’s by a lot. This intuition solidified for me sometime midweek, when, just as investors were gathering themselves to do some buying, Gavin Newsome announced that the State of California was monitoring 8,400 potential cases of CV19, whereupon the feeble rally devolved into an immediate, ignominious rout. And I asks myself: how many hominids have travelled between China and the Golden State since the virus emerged? A million? More? Of course they’re keeping an eye out on a few thousand folks; them not doing so would, to my way of thinking, be more of a catalyst for an incremental selloff than the fact that they were.

But I offer these thoughts with some trepidation. This here menace could indeed be The Big One, and I wouldn’t, just yet, fade the fear. Either way, we’re looking at one of the biggest cycles of global stimulus (money printing, fiscal inducements, debt forgiveness) the world has ever seen. The end result will be a giveaway of already-scarce financial securities, and I hope you get in on the action. I’d just wait a bit before I took the plunge. Because there’s nothing I see that precludes us going lower first.

Mostly, though, I just dream of an island to which we can escape. Just you and me. Alone. And it’s not Bernie-gan’s Island. Or even Gilligan’s Island. Because on either of these land masses, we’d have to deal with unwanted company.

And with respect to the latter slice of tropical paradise, we should bear in mind that the castaways did eventually escape. And then returned. Once, in one of the finest pieces of cinema ever filmed, with the Harlem Globetrotters. They also, at some point and in animated form, became space travelers, floating around the solar system and beyond in a wooden boat fashioned by (you guessed it) The Professor.

I can’t offer as much hope for the current occupants of Bernie-gan’s Island, though. Some will be voted off the Island, maybe as early as this Tuesday. Most, in any event, will be forced to return, because one way or another, we’ve got to crush The Big Orange.

The rest of us will just be watching all of these doings from afar and hoping for the best. I think from an investment perspective, we’ll probably be OK.

That is, if we follow my published risk management advice, which can also be found, for a select but growing few, at the following URL:

https://www.linkedin.com/feed/update/urn:li:activity:6638495821023232000/

If this is your preferred venue, send me a request. If you promise not to shake your fist and say mean things, I just might grant you access to this heavenly atoll.

TIMSHEL

Before y’all get up in my grill, this note is not, per se, a political treatise. Some reference to the current, most prominent pig circus may be unavoidable, but we will seek (like the visit to the proverbial dentist) to render it as brief and painless as possible.

First, though, I want to give a shout out to biological lefties, whose number includes my own departed mama and her brother/my uncle. However, I’d be remiss if I didn’t also use the opportunity to pay similar tribute to Jimi Hendrix (a poor lad of authentic African and Native American decent, who was forced to restring right-handed guitars and play them upside down), Paul McCartney (who did not suffer this indignity), Sandy Koufax, Albert Einstein, Barack Obama, Bill Gates, Neil Armstrong, Beethoven/Mozart, Leonardo Da Vinci, Oprah Winfrey and Larry Bird just to name a few.

To these and other left-handed geniuses: I salute you.

Because we live in a decidedly right-handed world. Everyone knows this, but it came to life for me again this past week when I was attempting to zip up a hoodie of particular personal sentimental value (a hoodie, if you will, for the ages), and realized it had a left handed zipper, with the fat part (called the slider/pull tab) on the left side, as illustrated in the following diagram:

And I’m not gonna lie: as a righty, I have a helluva time connecting it to the bottom stop.

Though I’m not proud of this, I felt outraged at the inconvenience imposed upon me by the hoodie manufacturer. But then I thought again, and I realized that lefties go through this sort of hassle every minute of every day. And not just with zippers. Doors, electronic key boards, standard cutlery, automotive transmission devices, vacuum cleaners, and virtually every product used in daily activity is designed under the assumption that the operator favors his or her right hand. Heck this even applies to combs (which I never use).

OK: maybe not combs. My better half convinced me that combs are dexterity neutral. But hopefully, the point is taken nonetheless.

Expanding upon this particular theme, it occurred to me that pretty much every lefty under the sun has to train themselves to be somewhat ambidextrous, less unspeakable calamities such as getting stuck in elevators, being unable to effectively manipulate the heating coils on their showers, etc., befall them.

It thus becomes axiomatic: if you’re left-handed, the world is out to get you; it hates you. Try not to take this personally. True, you get a head start to first base when seeking to beat out a grounder, and your curve ball tails way from righty batters, but my gosh, the discrimination you face even pervades our lexicon. Have you ever, for instance, been on the receiving end of a left-handed compliment? If not – trust me – it’s not the most pleasant of experiences. Ostentatiously fancy-pants types are referred to by the legit playas as being gauche (the French word for left). Incompetent dancers (among whose numbers, despite the thousands of dollars my late mama spent to eradicate the problem, I count myself), are said to have two left feet.

All of which brings rise to wonderment (cue transition to political treatise) as to the dramatic and unmistakable leftward turn of certain elements of our domestic electorate. No, I didn’t watch The Debate, but I did read about it, and it is clear that the least rive gauche of the presenters is still in favor of huge tax increases, nationalization of key industries, massive entitlement expansion (free education and child care, etc.) and enfranchisement of undocumented immigrants and convicted felons.

And all of the presenters are highly successful Caucasians: disproportionate beneficiaries of a socioeconomic model they now seek to dismantle. They include a Trillionaire (but not his wife), some McKinsey dude, a Harvard Professor and a couple of career pols. Each would re-engineer our whole system, with highly uncertain results, and each is so passionate about this that the contest devolved to determining which among them could outflank the others in terms of left-leaning hysteria.

We can probably now spit, rinse and move out of this political dentist chair, leaving off with one final observation: the assembled debate crew looked more like the 1962/hundred-game-losing New York Mets than their Mickey Mantle/Roger Maris cross-town rivals.

I must disclose for anyone otherwise unaware that I by and large play for the other team. And it is only in the spirit of peace, love and understanding that I urge these lefties, for their own benefit, to induce an element of ambidexterity into the proceedings. Before they lose and lose big.

Certainly, the markets appear to be ignoring the political lurch into the oncoming lanes (which I hardly need to remind you are situated to the left of the right-handed favoring vehicles in which we travel in these realms). It was indeed a down week for the global equity markets, but one that looks to me like nothing so much as a buying opportunity.

And here, I cannot resist the temptation of taking a victory lap around the proverbial prognostication race track (a facility which features a series of perpetual left turns), because, as predicted for many moons in this space, even a modest amount of market/economic carnage has pushed buckets full of liquidity into government debt. As has been widely reported (but bears mention nonetheless), the U.S. Thirty Year Bond closed on Friday at record-low yields:

And again, this against the backdrop of a stable economy, with risk assets hovering at near-record valuations.

My main point here is that if anything really serious happens – in the markets or the broader economy – the pathetic double top at the right side of this graph will extend out to a full collapse. So whichever biological or political side you favor, I’m begging you, yet again, to consider my advice – that a long price/short yield position in Treasuries offers a delectable hedge against the “risk-based” assets you otherwise hold.

Unfortunately, here, we’ve got to get out the salt and lime and crack open yet another Corona (presumably using a Church Key that I will argue to the death discriminates against lefties). I don’t have a great deal of wisdom to lay you respecting this terrifying but increasingly wearying topic. Suffice to say that it looks to me like it is simultaneously the biggest viral threat since the Black Plague and the most over-reported story of at least this young century.

I’ll lean towards optimism here, though. I am happy for the enterprises that are making billions off of updating them masses on this — every microsecond, because I’m a righty and view it as capitalism and free enterprise at its finest. I’ll also go out on a limb and suggest that if, somehow, the monster is contained and dissipates, all other things being equal, were probably looking at a moonshot of >3500 on the Gallant 500 (each constituent of which, I’m happy to report, is, at the point of publication, virus-free).

But I wouldn’t be loading the boat just yet. Because. We. Just. Don’t. Know. I read this morning that they cancelled Carnival in Venice over this, and if so, sh!t may just have gotten serious.

You wouldn’t know it unless you were paying particular attention, but it was actually a quiet week otherwise around these parts. Probably the biggest headline grabber was Morgan Stanley’s bid for e-Trade, and I offer a note of appreciation to the Mother Morgan crew for what I think is a pretty sharp trade on their part. For eons, their Wealth Management Division was an overly exclusive club. In fact, when I sold my last company, I received a call from one of their reps, a very professional sounding lady, who I had to tell that (though it pained me more to inform her than it presumably did for her to receive the information), the proceeds from the transaction failed to place me at their minimum threshold for client acceptance. At which point the conversation ended abruptly. Politely, diplomatically, but abruptly.

And now, with the e-Trade, I think I qualify at long last. Now they want everyone’s money. I’m not gonna rush out to open an account, but it is comforting to know that if I want to, I now can.

And at least they want my cash to invest on my behalf, which is not what the lefties on the Debate Stage have in mind. Those southpaws want to control it for their own agendas, as they always have. If you doubt this, just ask the (albeit) late Chuck Berry – a right handed guitarist who invented rock and roll, but was hounded by the IRS for decades nonetheless. In fact, hounding Chuck Berry may be the government’s strongest suit. They excel at it, and it is my worry that under certain political outcomes, we all may become Chuck Berrys – minus those world changing riffs and signature duck walk.

I am aware, as indicated throughout, that it ain’t easy being a lefty. When you turn on the road in that direction, you must do so against traffic. Maybe you’d be better off with other modes of transportation, say, flying. Though I don’t have first-hand data on this, I’ve no doubt that cockpits also discriminate against this minority group. But that’s their problem; not ours.

If I’m right, though, then even left-handed pilots have to be a bit ambidextrous. And so should we all. It may be that the most urgent need in this regard applies to lefty politicians, but I can find no arguments against the holy notion that everybody should go both ways. At least a little bit.

Just don’t overdo it, OK? I think that each of us should follow the orientation that is dearest to our hearts. On the other hand, a slight move towards the middle, is, I think, the Lord’s Work. But that’s what it is: work. And we need to pace ourselves, because as the great left-handed poet Robert Frost famously reminded us: “we have promises to keep and miles to go before we sleep”.

OK; I’ll admit it: I don’t know that Frost was a righty or a lefty, but it hardly matters, right? But either way, we need to pace ourselves, use all of our extremities, and thus work as effectively as we can to reach those dreams that never leave our consciousness, come what may.

TIMSHEL

So where to now St. Peter? If it’s true I’m in your hands,

I may not be a Christian, but I’ve done all one man can,

I understand I’m on the road, where all that was has gone,

So where to now, St. Peter? Show me, which road, I’m on

— Elton John and Bernie Taupin

ST. PETERSBURG. Somehow, some way, I find myself at this particular dateline, and no, I don’t know which road I’m on. So how I got here, I can’t rightly say. Last thing I remember, I knew that I had to get away. Ideally to a remote location (at least from a provincial perspective). I’ve been bombing on Zero Hedge lately, and what, with all of this Putin intrigue, I may have thought that the ancient metropolis, founded in the early 18th Century by Peter the Great and nestled on the banks of the historic Neva River at the eastern shore of the Gulf of Finland, might have been the ideal destination. I also have a vague recollection, on Valentines’ Day, of looking the town up on the map, and finding that the city’s boundaries and immediate points of watery ingress form the image of an amorous fish:

Which is pretty cool, because I love fish – particularly amorous ones. So why not St. Pete, the northern capital of Russia, and a town that sports nearly 6 million inhabitants.

From there, all one has to do is hail a properly provisioned seafaring vessel, and boom, in a few hours, one is in Helsinki, which is also pretty cool. All of which begs the question: why go to St. Petersburg at all?

Well, among other reasons, the town has an interesting nomenclatural history, having, during World War 1, been renamed Petrograd, and in the wake of the ensuing Russian Revolution, adopting the murky, menacing handle of Leningrad, only to be renamed St. Petersburg when the Soviet Union collapsed.

But we live in an era where nomenclature is definitely a cause of vexing concern among the masses. Consider, if you will, the case of gender-based pronouns. On second thought, don’t consider the case of gender-based pronouns. Or if you do, please don’t tell me about it. In addition, beyond the recent shade thrown at me from the readers of Zero Hedge, the publication is actually chockful of references to hedges of every stripe.

Elsewhere in the nomenclature game, it’s NBA All-Star Weekend (transpiring on my home turf of Chicago), and if you went, I hope you enjoyed this horrifying spectacle, or at minimum endured it. But please bear in mind that from a nomenclature perspective, there are few Pelicans in New Orleans, certainly no Jazz in Utah (or less than any of the other 49 states), and no Lakes in LA. There is Heat in Miami (most of the time) Phoenix is full of Sun(s), but nobody has worn Knickerbockers in New York since the Wilson Administration. Depending upon how you define the term, there are Wizards in Washington, but ones that I do my best to avoid.

Grizzlies in Memphis? Please.

And the truth is I’m not in frigid St. Petersburg, Russia, but rather am warming my jets in its identically named municipality on Florida’s sunny Gulf Coast. And I must say, it bears scant resemblance to its Russian counterpart. No sweeping cathedrals. Not a river in sight. Finland is a galaxy away. And the weather, especially in February, is a whole lot better than that presumably being experienced by the denizens of the Northwest Province of the realms of Putin and Peter the Great.

I’m guessing most of y’all are on to me by now. I don’t really have much fodder for market commentary this week. Maybe that’s for the best; maybe you need a rest as much as I do.

So let’s revert briefly to the NBA theme, shall we? There are indeed Bulls in Chicago (including my home squad), but they are not, per se, exclusive to that jurisdiction. Fact is, bovine sentiments prevail everywhere across this fair land. Our equity indices, Corona notwithstanding, spent the last four days hovering in < 1% ranges at record valuation levels. The USD is rocking like it’s 2019:

So violent is this move that the 1/100th Benjamin unit rose even against the Swiss Franc, issued by a jurisdiction where no St. Pete exists. Also against the Russian Ruble – currency of the home country of the original St. Pete.

I’m not entirely sure why the greenie is as white hot as it is, but then again these FX markets have always puzzled me. I can only tell you that it makes me wish I had travelled abroad, which, as indicated above, was my original intent. I did read, over the last couple of days, that our trade deficit against the economically depleted Eurozone reached a recent all-time high, and if so, maybe we can blame the chart on the left.

Back stateside, we bore witness to yet another oversubscribed set of bids on bonds made available for repurchase by the highly accommodative United States Federal Reserve. Now, whether this is mere preventative medicine to stave off a liquidity crisis, or simply a gift of free funding to our much-maligned, malingered and generally put upon bulge bracket banks is a matter of debate above my pay grade. What is indisputable, though, is that the Fed Balance Sheet is ballooning. Again:

And this with market conditions being about as good as they get: equities at record levels, the USD on a rocket ride, and raising the question as to how big it would be on a weaker tape. But in the meantime, markets are certainly in fine form. Take Sugar, which at least until this past week, is exploding:

Sharp-eyed observers will indeed notice the recent sell-off, but no one above the age of nine should shrug off the moonshot from < twelve cents a pound before Halloween to nearly sixteen cents in the lead up to Valentines’ Day.

They say the stuff isn’t good for you, and of course they’re never wrong. But by my own estimate, I myself am more than 60% sweet stuff, and was happy that the market was starting to recognize my true value.

Until, that is, this past week. Because what Sugar giveth, Sugar taketh away.

Feel free to short me, if that’s what’s in your heart. But the part of me that is not sugar is mostly gas which has been a baller short since the first indications of a mild winter began to blow our way.

A big part of me weeps for NG investors these days. They just can’t seem to catch a break.

But on the other hand, this was, in my experience, the best market in which to specialize for a very long time. I had a very successful former PM/friend who played this game like a boss. When I departed my oversight role at his firm, I’d occasionally get an email from him with nothing but a chart of a big move in the commodity, and the picture told everything I needed to know.

God blast him. He’d nailed another big move. But those days are over, and I think he’s retired. Young. And rich. But out of the Natural Gas Market.

All of which leads to our quote and the question embedded therein: where to now, St. Peter? I don’t think the First Pope/Keeper of Heaven’s Gate can tell us much. I’ve asked him recently, and, instead of Northwest Russia, he directed me to the Southeastern Portion of the United States.

So we’ll have to figure this out for ourselves. But Uptown, Downtown, it really doesn’t matter what road we’re on. It may be helpful, at times, to remain aware of whether we are on the East Side or West side, if for no other reason so we can feed ourselves. But even if we get this wrong, I will love you no less. In fact, I will love you more. Particularly during Valentines week. Please know this. No matter what.

I do think that the markets will continue to rise, but if I knew for sure, I’d be St. Peter myself. And I’m not. I’m not even a Christian, but I am doing all one man can.

I hope and expect you are doing the same, because if so, whatever road you’re on, it stands every chance of rising to meet you.

TIMSHEL

And not in a particularly good way. Those among my readership with groupie-like traits (and/or in groupie-like states) are aware that I am something of a shredder myself. Well, at least I try. Which is more than can be said for most of y’all. And, given my efforts, I grant myself license: a) to know shredding when I see (hear) it; and b) to opine upon its quality/authenticity.

From my remote perch in the Greater NYC area, I’m here to tell you that this past week, there was a whole lot of shedding (or efforts at same) going on.

Let’s begin with the Ag markets, from which issues, across those windy fields, my tortured titular mash up theme. It hasn’t been a great year for Wheat investors, but I will allow my readers to make their own determination as to whether the price action rises to the dignity of the Shredded Wheat allegory which, in a state approaching desperation, I have tried to gin up:

Shredded Wheat? You Decide

I have very little to say about this chart, and really don’t care if you look at it or not. Let’s just say that this commodity has gone through periods of greater hardship without disrupting the business flows of those evil food conglomerates (Nabisco, Kellogg’s, and its current corporate paymaster: Kraft) that grind out those fibrous square nuggets and ship them to our groceries and shelves. This tells us something, I think, because Shredded Wheat is exactly as advertised: Wheat that is Shredded. It contains no other ingredients or byproducts. So I reckon the Corona-induced ~$0.40 price drop, is, on balance, an entirely survivable event.

So let’s move on, shall we? Last week, there were a couple of deals that were torn to shreds, in ways that (I’m not gonna lie) broke my heart. First, I regret to inform you that just as the rest of the squad is joining the Pitchers and Catchers at the Mets’ Spring Training HQ in Port St. Lucie, FL, my plans for playing 2nd base, have been, well, shredded. My old chieftain, Steve Cohen, apparently will not be acquiring the team after all. Published reports indicate that his purchase plans went awry when he realized that the terms of the arrangement did not contemplate him actually running the club’s operation; instead, he was called upon to allow the misanthropic Jeff Wilpon to continue calling the shots for the next five years. Had they asked me, I could’ve saved everybody a great deal of time and aggravation, because letting someone else call the shots is just not how Stevie rolls.

But it’s a helluva shame. Because I’d been practicing my double play pivot, and it was reaching levels of fluidity and grace not seen in those realms since Rogers Hornsby hung up his cleats.

I was also disappointed to learn of the torn-to-shreds breakdown in negotiations between the Intercontinental Exchange (ICE) and on-line auction platform eBay. Though I have a multi-decade affiliation with the (ICE nemesis) Chicago Mercantile Exchange, I really liked this trade. ICE is a gargantuan derivatives marketplace; eBay deals in actual physical products. I felt, perhaps, that it was time for the twain to meet. The general rap out there is that eBay mostly exists for Beanie Baby enthusiasts to swap inventories, but the record shows otherwise. Most of its top selling items have a technology motif: the transacting of used (and presumably wax bereft) ear buds, lithium batteries and such. And why not trade these on a proper exchange, maybe even in derivative form, for future delivery?

Besides, what under heaven is wrong with the concept of Beanie Baby futures? Or, for that matter, options (as long as they are not purchased in their last week and held all the way till expiration)? Well, we may never know, because the folks at eBay gave a one-finger salute to the ICE overtures.

And now we must turn, wearily and regrettably, to the topic of politics, where the shredding action was fast and furious. I’ll try to be brief and gentle here. That the Iowa Caucuses were an exercise in the ghastliest political shredding spectacle since the Federales sent the army into three southern states to reverse their electoral college results, and steal the 1876 election from Samuel Tilden in favor of the glitzy Rutherford B. Hayes. Everyone is blaming the app. Yup, it was the app’s fault. That’s what they are saying, and how could it possibly be anything other than the full truth? The Iowa Dems are said to be considering going back to (shreddable) paper, and it’s hard to fault them for these musings.

But depending upon how the next few weeks play out, under certain scenarios, the Bernie Bros may be compelled, for the second time in a quadrennial, to take out their long knives and shredding a few party regulars. I wouldn’t, and won’t, be surprised if this happens. Because if there was purposeful shredding in the Hawk-cauc, Bernie was most certainly the target. Extrapolating out, if Bloomy (or a proxy thereof) manages to pull a fast one here and buy his way in, the fur is really gonna fly. And he’s a tricky son of a gun. He’s already hoovered up a galactic proportion of the available media time, goosing the costs of advertising for his competitors (who are running out of money no matter how much they raise) to the tune of >100%. If this string plays out, and he cuts a deal with the party elders to lead the ticket, well, what then? The Bernie Bros are gonna go ape sh!t is what. They will ram the red agenda down his throat. And (this notwithstanding) they will stay at home in November. Hell will freeze over before they move their skinny asses to pull the lever for a septuagenarian white billionaire that thieved the prize from their boy.

It’s all a Gordian Knot through which the sharpest knife (Excalibur?) cannot cut. What is needed is a baller shedder of the proportions not witnessed since the days of the (British) Camelot.

All of which brings us to The Big Shred. You know the one I’m talking about. Nancy ostentatiously ripping up not one, but four separate copies of the State of the Union Address, in front of a worldwide audience, and while the Big Guy was still laying his magic verbiage on the masses. I have very little to say about this, but I did like the part where they caught her on camera making dainty little prelude rips into each of these documents, to ensure the fluidity of her shred. I reckon how anyone felt about this is tied to their predisposition concerning the current political calculus, and will leave off from there.

So what under heaven does any of this have to do with market risk conditions? Wish I knew. Nominally, investors have shrugged off the various above-mentioned shredding episodes – across the Kansas Wheat Fields, in the Manhattan Offices of MLB Central, in the back rooms of ICE and eBay, over the vast expanse of the Iowa Corn Fields, and on Capitol Hill – all with great equanimity. About the only thing that put a speed bump into the equity juggernaut was a blowout Jobs Report, featuring a gratifying number of new gigs, relatively robust wage gains and a significant uptick in the Labor Participation Rate.

Go Figure.

But it’s hard to quibble with the overall consensus. While the rest of us were busy observing the b!tching up of caucus reporting apps, not removing the President from office, nervously monitoring the Corona, or walking away from deals for which I personally was rooting, the rapidly-lurching-to-wind-down earnings season manifested a reversal of fortunes that was Lazarus-like in its unfolding:

Yes, my friends, I suggest you look at this one. In two short weeks, the trends are such that instead of yet another quarter of income contraction, we are, 2/3rd of the way through, actually looking at a positive interval of earnings growth.

It’s only one reporting cycle, it’s not in the bag yet, and the pundits inform us that it was, if not empowered, then at least enabled, but an unseasonably warm winter which had folks out shopping, dining and even building, sewing and hoeing. You are of course free to form your own judgments, but as for me, I’ll grant myself liberty to feel encouraged by these tidings.

And, in general, I think that this here market probably has some additional shredding to lay on us, of the Hendrix/Page vintage, ere it lays down its axe for the last time. No, it won’t last forever, and I don’t know how much higher our indices will climb, but my advice remains what it has been: a) don’t get too cute on the short side; and b) you have my permission to buy any dips that may ensue, in drive-by fashion, over the near term. But if you’re going to consider b) you must be prepared to act fast.

As a case and point, in late January, and as the Corona was germinating, one had the opportunity to purchase such fabulous names as Amazon, Apple and Microsoft at an approximate 10% discount to prevailing valuations. Next time such a prospect presents itself, you have my permission to lay in.

These trades will not be riskless, but if they were, where on earth would I be? There are tradeoffs involved, and at times, we must be prepared to be wrong. Even about something important. We’ve got to think a little longer term here if we are to realize our dreams. But God willing, we’ll get there. The Dem nomination is still anyone’s game. Though their saying otherwise, Stevie may yet cop the Wilponless Mets. There’s another State of the Union Address scheduled to take place in ~360 days, and the possibility exists that all official copies of this speech may remain intact and preserved for posterity.

So let’s keep at it, shall we? It may very well be the little things that matter here. If your furnace needs inspecting or refilling, don’t put this off, because: a) it’s still winter; and b) I don’t want you or your loved ones to freeze.

And I reckon that’s about it. For now. It was a tough week. A shredded week. I’m pretty worn down by all the action, and not entirely convicted about my mash up theme for this here note. What would probably be best for me is a bowl of Shredded Wheat, but with respect to that product, the cupboard is unfortunately bare. However, I do have a half-full (and thus optimistic) box of Wheaties staring at me, and a paper shredder stationed immediately to my left.

I will, therefore and as always, improvise with the materials at my disposal, and hope for the best. But here’s the thing: I don’t even like cereal. Of any kind. I won’t eat it except under the direst of circumstances. So please understand that my closing comments are entirely allegorical.

And if all of this is beyond your scope of understanding, well, then, my best advice is that you just forget the whole thing.

TIMSHEL

Happy Ground Hog Day, y’all. I reckon we can call this a special one (02/02/2020), with deuces wild and the Super Bowl set to commence. And, in the spirit of the iconic 1993 Bill Murray feature film of the same name, I find myself in what amounts to my own infinite, repetitive behavioral loop.

Specifically, and as happens nearly every time the sun rises, I found myself with a near-perfect angle for this piece, only to have its flaws pointed out to me, in ignominious fashion, by my allies. Apart from the reality that Pux Phil is fated to be upstaged by Mahomes and Jimmy G, I was thinking that today’s festivities: a) would mark Super Bowl XIV; and b) the game was transpiring on almost precisely the two-year anniversary of the brutal, fraudulent crash of the ETF of the same name. So fired up was I as to the rhetorical prospects involved that I gave a sneak peek to one of my clients, who diplomatically pointed out to me that according to Roman Numerology of about 25 centuries standing (and therefore a difficult protocol to violate), today’s game is actually Super Bowl LIV.

I thus have no alternative other than to render to Caesar the things that are Caesar’s (and – of course — unto God the things that are God’s). By all accounts when Jesus spoke of the former, he was referring to taxes, and, under certain potential electoral outcomes, we all may be rendering to Caesar like never before. But we won’t dwell on that – at least not right now.

In the meantime, my dilemma was to figure out how to fit what was still a pretty good, if logically inaccurate, hook into this here note. Having diligenced the matter, I find, much to my surprise, that the ticker symbol LIV remains unspoken for. So my first piece of risk management advice is that somebody should snap it up. Because it’s a pretty good ticker symbol to have, is it not?

And, in light of the discrepancy, I am giving myself a free pass to dive into a recounting of the whole XIV debacle, which transpired on February 5, 2018. A bit of schooling is in order at the outset. For the blissfully uninitiated, the XIV is (or was), as the letter sequence hints, a security, which, on a levered basis, tracks the inverse of the VIX volatility index. Those invested in it were therefore: speculating (not gambling) on a sustained decline in options volatility, while using substantially borrowed funds to do so.

On Super Bowl Sunday, think of it as laying 4 dimes on The Under, as financed by the Gambino Family.

It was all going fine for a while, in a volatility-suppressed tape, with everyone just minding their business, when, on afternoon in early February ’18, the VIX started to surge like an Aaron Rodgers bomb after he cleverly snapped the ball with 12 defenders (and yellow laundry) on the field. In the space of about two hours, it teleported itself from a 14 handle up to its previously unthinkable close of 37.83.

And as for those poor 4-dime owing XIV holders? Well, they were wiped out. And then-some.

For a variety of reasons, my phone was blowing up on that afternoon. Among those reaching out were stranger-XIV investors who didn’t understand how their trusty ETF had withered to nothing in the space of less than two hours. But that’s the way the levered inversion game works, in case you were interested.

But the story devolved from there. The XIV was somehow trading at about 99 (max value of 100) up to that ill-fated close. However, given the structure of the security, it had an economic value of 0.00000. This nonetheless failed to stop brokers (who knew the real value) from filling orders at prices like 80, 60, 35 and 20. I talked to one poor sum-b!tch who bought at all of these levels (we won’t shed many tears for him though; he had recently cashed out to the tune of fat nine figures on a family auto parts biz, and was spending his days spit-balling in the markets), and who wanted me to help him sue the XIV issuer and executing brokers. And I would like to have obliged him. Because that there stunt was Bullsh!t. But I never heard from him again. And he didn’t pay me; they never do.

It is at that point that the XIV gathered to the dust of its forebears. And it’s probably a good thing – particularly given the recent action in the underlying VIX index:

Sharp-eyed observers will notice the surge in VIX valuation over the last week, causing further consternation to the levered short-sellers, wherever they may be and however they may roll. We’re only up to approximately half of the thresholds breached during the XIV circus, but the spike is notable nonetheless. And we can all probably trace the root causes back to pesky matters like Corona, etc.

But other risk factors are on the move as well, and it is my obligation to point out that as foretold, ad nauseum, in these pages, the ill winds have blown a tidal wave of yield-reducing flows into the 10-year:

It seems like only a few weeks ago that these benchmark rates were rising, and on the verge of crossing 2% — maybe because that’s where we were a few weeks ago. And all it took was a Chinese virus – which may or may explode into a pandemic – to shave 40 basis points off of the tally.

I could, but won’t, claim vindication/victory here. My more important point is that — given the overall strength of the capital economy, the prospects of using long bonds as a hedge against equities remain solid. If incremental trouble ensues from here, well guess what kids? Yields will continue to come careening down.

But for the record, I am not over-much troubled at the moment by what I read into the equity tea leaves. We’re nearly half-time for Q4 earnings announcements, and (before I take my leave to avoid the stylings of J-Lo and Shakira) let’s just agree that while there were some misses (FB, CAT), the numbers issuing out of fat cat outfits like Amazon, Apple and Microsoft were nothing short of sensational. The first of these joined the $1 Trillion valuation club this week, and (as I told my client who pointed out my Roman Numeral error) it may still be a bargain here. Because if the Corona case becomes a full-on keg, we’re gonna need those drones more than ever before.

But if you think equities are rich here, I’m not in much of a position to quibble. Even with Friday’s selloff, forward-looking P/E ratios are at an 18-year high:

Does this look a little toppy to you? Well, OK; I see your point. But I’d like to use this opportunity to point out a couple of counterarguments to you. First, I just read that at the top of the dot.com bubble, the divergence of the equal weight versus capital weighted SPX was ~23%. Right now, we’re at ~6%. So on that basis alone we may have miles to go.

Perhaps more importantly, when we last visited the ~19 P/E realms, the 10-Year sported a spiffy yield of ~5.5%, as compared to 1.5% today. So the Fixed Income comps suggest that at least in comparison to, say, that previous deuces-wild moment of 02/02/2002, equities remain a relative bargain.

And therein lies my sustained message to you, my friends. For the time being at any rate, any hardships or even inconveniences we face will be met by Central-Bank-enabled flow floods into Fixed Income – in the process further reducing borrowing costs, and rendering the already putrid alternatives to equity market investments even more dismal than they are today. Either way, the equity bid, like The Dude, abides.

So I encourage everyone to keep on smiling. It is, after all, Super Bowl Sunday. Here’s hoping that Pux Phil fails to see his shadow, and that an early spring is indeed in store for us. One way or another, the sun will soon beat down the Hudson River, and explode into a splash of paint. All we’ve got to do is slog through, and wait for that divine moment.

For what it’s worth, my four dimes are on KC in Super Bowl LIV, but a couple of qualifications are in order. First, I didn’t borrow the dimes from the Gambinos; it’s my own to lose. Beyond this, I always root for the team that dwells in the less arrogant city, so the choice here is an easy one. At least for me.

A quick check of the history reveals that in Super Bowl XIV, the heavily favored, Bradshaw-led Steelers dismantled the rag-tag Rams. But there is more to the losing side of that story, as that Rams team became the first nine-win squad to make it to the Big Game. And they were playing in front of a home crowd in nearby Pasadena. 15 years later, they moved to St. Louis. And 20 years after that, they returned to Tinsel Town. But it would be inaccurate to call L.A. their original home. They started, in fact, in Cleveland, and actually first moved to La La Land about 30 days after winning the 1946 NFL Championship.

It’s all a maddening saga, and it will certainly continue. For those whose attitude on The Big Game matches mine for the Halftime Show, and will instead be focused on the markets, my advice is as follows. At present, I’d avoid levered, inverse ETFs, continue to tilt towards equities, and, if looking for a hedge, I would still recommend the 10-Year Note. More generally, let’s keep minding our business, attending to matters at hand, and finding a way to get to the places we really want to end up.

In closing, I have 4 more dimes on The Over, because, well, hope springs eternal.

TIMSHEL