Yossarian: That’s some catch, that Catch 22.

Doc Daneeka: It’s the best there is.

The intent of this essay is an attempt to frame the argument as to whether or not the good doctor’s statement, set forth above, still holds. Certainly, though, we can all agree on this: Yossarian’s comment remains good to go. Catch 22 was quite a catch; still is.

For those unfamiliar with the source – Joseph Heller’s seminal, 1961 novel about the exploits and tribulations of an overworked, overflown WWII squadron, the premise of “Catch 22” is as follows. It most specifically follows the thoughts and actions of principal character Yossarian (whose first name is never revealed. Nobody in the entire book seems to have a first name): a bombardier in an Air Force unit that is asked, due to the misplaced ambitions of its commanding colonel, to fly an impossibly cruel number of combat missions. Yossarian perpetually seeks a way out, including repeated requests to be declared insane under Section 8 of the Air Force Code. Doc Deneeka (who must decide these matters) is always impelled to turn him down, because, according to the rules: 1) the applicant must first ask for said relief; but 2) by asking, proves himself not to be crazy in the first instance.

Like Yossarian said, that’s some catch.

And, for nearly 60 plus years, Doc Deneeka’s reply has never been called into question. But then came the coronavirus, Covid 19, and with it, a new catch: call it Catch 19. I really shouldn’t have to explain myself here, but I’ve got nothing better to do, so here goes.

A wildly contagious virus spreads across the globe. Economies, including this here one, are forced to shut down in order to slow its spread, which, left unchecked, could certainly overwhelm the health care system, and might, under certain circumstances, kill us all.

So, everybody checks out for a stretch. Business flows stop. Millions of jobs are lost. The economy goes into a tailspin. But the strategy, at least with respect to its stated objectives, is successful. The health care system is stressed but is not completely overwhelmed. The curve flattens, and then even declines. Thousands upon thousands of entities race for a vaccine/cure. I think, despite all of our finger pointing and hand wringing, we can look at our behavior here with a sense of pride.

But the virus, stubborn bastard that it is, remains a threat, an enormous one. Meantime, with everyone broke and going crazy, a consensus emerges that society must begin the arduous process of re-opening. It cannot do so without enormous risk: taking the form, in the extreme, of a combination of a resurgence of the medical menace and a disappointing economic relaunch: one that does little to mitigate the financial carnage created by the shutdown itself. Again, let’s call this Catch 19.

That’s some catch, that Catch 19.

But is it the best there is? Does it supplant Catch 22? The answer lies above my paygrade.

And yet this is the dilemma that we now face. At this point, pretty much everyone this side of the Governors of Maine and Michigan understands that we kinda/sorta gotta get rolling again. I certainly feel that way. But how? For the most part, I think we’re taking rational steps. Wyoming is good to go. Hudson Yards? Not so much. We still don’t know much about how it will all turn out on either front (economic or medical). Whether or not those nasty Covid cells regroup and stage a renewed assault on us, and/or if those millions of jobs and businesses dealt mortal wounds by the crisis can lift themselves, in Lazarus-like resurrection.

This is how matters stood at the end of April. Which was Thursday. And when the books closed for that cruelest of months, it showed the strongest gain for equity indices since 1987 (also April). It ended on a bit of a sour note, though, and there was follow-through selling on Friday, May 1st. Perhaps this was a show of sympathy, on International Workers Day, for the millions that have lost their jobs this year. How many? Well, we’ll get a better idea next Friday, when the April Employment numbers are released. Current consensus calls for Non-Farm Payroll losses of 21,500,000, and for the unemployment level itself to have risen to 16.0%. Think about that for a moment.

In general, this best month since I scored my MBA came across the backdrop of an economy that had been decommissioned in a manner never even contemplated over the last few centuries. We have barely yet seen data deriving from April, but whatever it is, it ain’t good. Still pending, in addition to the Jobs numbers, is information about what rents and loans were not paid to creditors, which, by the way, are gargantuan. And what impact these payment impairments will have on the overall capital market

However, anyone who believes that the burgeoning credit bubble is showing any since of impeded expansion did not fly with Yossarian in Colonel Cathcart’s squadron (asked to perform 80 raids when no other crew in the entire Air Force had done more than 25). Estimates suggest that those enterprises still fortunate enough to (temporarily?) carry an Investment Grade rating issued a new record of nearly $300B of fresh paper in April alone. The Fed Balance Sheet has increased approximately 50% — from ~$4T to $6T since we’ve all been cooling our heels at home.

There is a longtime adage ‘round these parts that takes the following form: Don’t fight the Fed. On balance, I am a strong adherent to this wisdom. But the current base of incremental borrowing, even if Team Pow snapped up every single bit of this new paper, would cover only about six months of our historically impressive, still-surging credit binge.

And then there’s earnings. Most of the big dogs have now clocked in. Many have lacked the intestinal fortitude to issue forward guidance, so the analysts do it for them, as depicted in the following chart:

As a risk manager, I’m trained to worry about the divergence between the broken line and the solid one. Feel free to ignore it if you so choose. But at your peril. Be aware, though, that while we were all enjoying that April laugh riot, Q2 P/E ratios surged by an impressive 30%.

And there’s really not much more to add at this point. I did hear of an Orange County barbershop flouting State law and opening back up this week, while a restaurant in Maine did the same. I am sorely tempted to patronize both establishments, but I have no practical way to transport myself to the OC. And as for the latter, well, according to a time-tested idiom from our Northeastern-most state, if anyone is asked how one can get to Bah Habah (Bar Harbor, ME), the only appropriate answer is as follows: you can’t get theyah from heeyah.

So I reckon I’ll bag it and come around to see you instead. I intend it to be a surprise, but I have forgotten your address, so don’t be alarmed if I call you from five minutes away and ask you for it. I hope and expect you’ll be glad to see me. I’m looking a little scruffy these days, but I know that you will nonetheless welcome me with open arms. It may be a tearful reunion, but it’s one that I anticipate with great joy.

And, with respect to the markets, it looks like we’re destined to fly our missions, amid heavy fire, come what may. That Section 8 is probably out of the realm of possibility, because: 1) we’re all asking for it; and 2) we’re all crazy at this point.

SPOILER ALERT. Yossarian managed to beat Catch 22 by following the example of his seemingly incompetent roommate, a pilot named Orr, whose planes crashed on every mission, in what turned out to simply be a successful cycle of practice runs for his effort to go AWOL. Since we have the space, I will relate one final Catch 22 sequence:

Yossarian: Orr?

Arfy: Sweden

Yossarian: Sweden?

Arfy: Orr

Yup, that’s right. Orr bailed to Sweden, which of course is a jurisdiction that is hot in the news due to its controversial, yet at least superficially successful, handling of the Covid crisis. Maybe we’d all like to follow Orr to Stockholm (lovely this time of year), but like Bah Habah, you can’t get theyah from heeyah.

And even if you could, at least for the moment, they’d probably just send you home anyway.

So, on the whole, and with great regret, I’m gonna throw it out there that Catch 19 Trumps Catch 22. And will proceed with attendant caution. However, you can make your own judgments, which, as always, I trust implicitly.

But know this: as you take to the air, myriad anti-aircraft missiles are loaded and trained towards your trajectory.

Even if you can’t see them.

So please take care of yourself, and, as ever….

TIMSHEL

For those of you driven to bored distraction by all of this shelter-in-place folderol, might I recommend something in the way of sublime diversion?

OK then. Dial up your preferred streaming service and check out the film celebrated in our titular theme: the 1964 Jerry Lewis classic “The Disorderly Orderly”. Trust me here; you won’t regret it.

It is, among other matters, the quintessential JL vehicle, unleashing his singular site gag brilliance in ways not seen before or since. Trust me again. Hilarity, indeed, ensues.

A brief synopsis of the plot is as follows. Lewis plays a med school dropout who takes a position as an orderly at an upscale (pre-Covid) nursing home. Due to a confluence of factors (DNA, academic failures, and, alas, unrequited love), he manifests a condition under which he inadvertently adopts the symptoms and mannerisms of his patients. Particularly those of the unforgettable Mrs. Fuzzibee, who prances, stutters, flails and the like. Jerry isn’t making fun of her but cannot stop himself from aping these traits.

Like I said, hilarity ensues.

But the sad part of all of this is that I too have fallen into this trap of late, a condition akin to that which the person whose opinion I value most calls folie a deux. Probably, it lay dormant in me these sixty years, and, if so, what no doubt triggered it was this week’s trading action. In particular, that transient but positively surreal interval on Monday, when Crude Oil traded at a negative $40 to the barrel.

In other words, for an (albeit) brief instant, , holders of petroleum were paying big bucks for anyone willing just to take the stuff off their hands, presumably, never to be seen again.

This. Cannot. Happen. But it did, and we’ll discuss the implications a little further down the page. In the meantime, something inside me went a bit bonkers, and I started to act out the most outlandish pathologies of those individuals and events I have recently encountered.

First, I grabbed my face mask, hose and funnel, hopped into my car, flagged a couple of passersby, and offered $100 for them to transfer the fuel in my tank into theirs (no takers). Then I signed up a couple of clients under terms involving me paying them for me providing them risk management advice.

Next, I bounced over to the local Kohl’s and bought out their entire supply of toilet paper, the fact that I have been in a condition of full on constipation for nearly two months notwithstanding. To be more specific (if less elegant), I haven’t dropped a deuce in more than a fortnight.

I then went home and realized that my financial portfolio did not have nearly enough risk for my liking. So I bought some stocks when Neiman Marcus declared bankruptcy. Bought some more when the Weekly Jobless claims number clocked in at 4.4M, bringing the 5-week tally to a tidy 26.2M. Really loaded the boat when I learned that the Mortgage Bankers Association announced that 3 million homeowners had applied for forbearance over the past week.

Why? Because Crude Oil cannot trade at a negative price. Any more than rain can fall upwards, or the Brandenburg Concertos can be played wearing boxing gloves. It cannot happen. But it did. So my inner Jerry-Lewis-Disorderly-Orderly syndrome kicked in, and I was unable to stop myself from, just like so many around me, from hoovering risk assets at a point which, in my judgment, is the riskiest interval in modern market history.

Being a nuanced observer of the markets and all, I began to examine root causes, and I would like to take this opportunity to inform you of my hypothesis as to what is really going on out there. Why not? Everyone else is doing it, and no one wants to hear their opinions. This, combined with my Disorderly Orderly/folie a deux condition, renders it entirely fitting and proper that I do so.

And what I really think is this. You can draw a straight line from this current mess all the way back to the mortgage bubble that transpired last decade. Before the (last) crash. And to everything that ensued from then on. So, stroll with me, if you will, back to the aughts (00’s), when, at some point, the last blind grandmother in Mississippi had been talked into signing on for the last million-dollar mortgage. When said mortgage got packaged into a complex security, which received a “money good” grade from the Ratings’ Agencies and was sold to institutions as a sound investment. We don’t know which one it was, but this mortgage was the straw that broke the capital market camel’s back. The securities defaulted. And the banks needed a baller of a federal bailout, lest they go under themselves.

But they didn’t. Go under that is. The Fed bailed them out, and then started to print money like it was going out of style (which it is). And it worked. The economy recovered, roared. Facebook went public. Tesla started cranking out electric cars. Our smartphones became true gateways to the world. Cannabis began its journey to legalization/normalization. Jobs were created and stayed available in abundance. Due to in large part to reduced price information costs, stuff got cheaper.

All of this was something of a miracle, but it couldn’t last forever. And there were unintended consequences, notably a veritable orgy of borrowing, as catalyzed by artificially suppressed interest rates. Recognizing the problem, the Fed tried to turn off the spigot in late 2018. That didn’t turn out so good. So, early in ’19, it unplugged the stopper and let it ride. Asset prices soared. As did our indebtedness.

As 2020, began to unfold, it looked like we could keep the party going for quite a spell. But then the virus came, causing an historic collapse in demand, and an attendant plunge in incomes and cash flows. And what has happened to the pace of borrowings in the wake of this mess? Of course, they are accelerating. According to the oracles at Morgan Stanley, Investment-Grade debt issuance is clocking in at a record-shattering >$700B through April, projecting out to an impressive $2T for 2020. All of which tempts my JL side to pollute my currently pristine balance sheet and float some IG debt of my own. Except for this: no one has ever accused me of being an Investment Grade rated cat. So I’ll give it a miss.

One way or another, there’s an indisputably problematic amount of debt out there. And I’m not sure how many times I have to explain this, but when an economic agent owes a lot of bread to The Man, and the money flows stop or slow to a trickle, said agent finds him/her/itself flat busted quicker than you can say “Bob’s your uncle”.

Maybe an analogy will work. Up here in sleepy, quarantined Fairfield County, there are a lot of houses on the market, some listed for what seems like eons. As I drive by them, I envision a narrative under which a guy (Joe), now in his forties, embarks on a Wall Street career with his newly minted Wharton degree in tow. He lands a nice gig, and each year, he makes more than he did the previous one. He expects this trajectory to last a lifetime and is somewhat justified in this thinking. Pretty soon he’s got a wife and a couple of kids, whom the missus is tired of toting around Gramercy Park. So, they decides to bail for the burbs. Joe can probably comfortably swing that Mississippi granny $1M mortgage, but the wife of his bosom, his partner in all things, has her dear heart set on a dream house that (in addition to the indignities he faces in the form of hitting up his parents and in-laws for that fat down payment) requires him to borrow $2M. As long as he keeps climbing the professional ladder, he’s OK. But then his job gets eliminated, and he is offered, in tribute to his supreme competence, a position in Salt Lake City at 40% his current comp. What’s my boy gonna do?

Whether he takes this gig or not, Joe’s got to dump his dream house. And he’s not alone in this predicament. There were dozens of such houses on fire sale in my hood – even before the virus hit.

And, writ large, I submit that the American economy is in this same fix. It cannot afford to meet its obligations, much less to sustain the lifestyle to which it has grown accustomed. This is where the unintended, unforeseen, unforeseeable consequences start to kick in. Joe’s wife divorced him, and his former in-laws are hitting him up for a return of their portion of the down payment.

The financial markets analogue is an improbable, impossible sequence of negatively priced Crude.

And I’m thinking that this might be just the beginning of our dubious adventure — involving market action that cannot happen but does. It’s anyone’s guess, but I personally doubt that hilarity will ensue.

But across it all, the Gallant 500 and their comrades in arms managed to gin up a modest rally for the week, and one has to admire their intestinal fortitude. The corporate bond market held in there nicely as well, above-mentioned issuance binge notwithstanding.

One set of investors has less celebration fodder: the holders of the Baltic Dry Index:

Unless my lying eyes deceive me, this benchmark of shipping costs is down ~75% in the space of less than six months. On the other hand, there’s nothing to ship anyway, but perhaps we can all take some perverse comfort in the reality that if we ever did want to send cargo across the Baltic Sea and into, say, the Atlantic, we can arrange to do so at a deep discount. Be that as it may, though, my understanding is that those Baltic shippers live and die on borrowed funds, so the question remains whether, when we indeed are ready to ship, there will be any ships to do the shipping.

For now, though our rather empty boats have many knots to travel over rough seas. The FOMC meets this week and what else can they do but bring us further delights? Another gargantuan stimulus package is visible on the watery horizon, this one intended to bail out states and cities. Like Illinois. Forgive me for descending into the madness of politics here, but you could transfer every penny ever created to the Land of Lincoln, and, within a single year, they’d be broker than they are even now.

So, what do you do about all of this? My best advice is as follows: slow your roll. You have done so before and lived to tell the tale. It’s not the easiest thing to pull off, but, as always, I have faith in you.

And if you slow your roll, I’m almost certain to slow mine. Because I have this nasty Jerry Lewis syndrome still plaguing me. Here, I’m pretty certain that hilarity will NOT ensue, but maybe we can strive for something better. Something more lasting. We can at least try. And, trying, we will prevail.

Case and point: Joe now works for me. His wife has returned and is expecting. They’re doing fine.

In this disorderly orderly world, I hope and expect a similar happy ending for us.

TIMSHEL

Oooh, I need a dirty woman, Oooh, I need a dirty girl

— Roger Waters/Young Lust

Y’all been ridin’ dirty before. But it doesn’t matter. Because we’re talking about now.

And, now, y’all dirty. ALL y’all.

Chinese wet markets and their customers. Those nasty little Covid buggers themselves. The willfully ignorant spring breakers. Public servants who ban the sale of tomato seeds and solo motorboat rides.

Lori Lightfoot: The Lady of the Lake.

Dirty. Dirty. Dirty.

However, seeing as how this is a financial publication and all, let’s turn our focus to matters pertaining to the capital economy. The Fed is certainly riding dirty, fueling its engine with noxious junk paper. As are the elected members of the Washington ruling class, inexorably politicizing everyone’s misery (alas, it was ever thus). Selectively withholding relief funds to those in need, while contemporaneously lighting up favored constituents who are not (in need, that is). The Russians and the Saudis (until recently) pumping oceans of Crude into an impossibly glutted energy universe (more about this below).

The algos, for playing games with their models at what may prove to be a tragic time to do so.

But dirtiest of all may be the body of investors bidding up risk assets at this most irrational moment.

I know y’all dirty, but what, in God’s name, are y’all thinking right now?

Equity market action started off slowly this week, but then bidders gathered themselves, heroically, to goose valuations by nearly 4% — most of it in the wake of Thursday’s Claims numbers that told the somber tale of an economy that has shed >22 million jobs in the space of four weeks. Nearly 15% of the nation’s Labor Force thrown out into the streets in the space of a single rolling month.

Let’s lay aside for the moment the shocking lack of decorum involved in jacking up stocks at a point when so many of our great, deplorable unwashed are being forced into the indignities of joblessness (didn’t they teach y’all better at Phillips/Exeter?).

Can anyone tell me that these numbers won’t continue to grow? That the applications are not understated due to backlogs? That many employers, hanging by a thread a couple of weeks ago, have not now gathered to the dust of their forebears and sent their payroll flocks out to fend for themselves?

And then there were those monthly numbers released last week. Retail Sales: -8.0%, Industrial Production: -5.4%, Empire Manufacturing: -78.2%. Please, I beg you, bear in mind that these figures reflect activity in the month of March. When the scope of the nightmare was just beginning to unfold before our eyes. Surely these metrics have devolved since the calendar rolled. Estimates for April are still rather opaque right now, but wherever they come in, put me down for a large bet on The Under.

I’ve tried, albeit with limited success, to explain to my clients the dire threat that the economic shutdown imposes on equity valuations and have done so in the following manner. As portfolio managers, you spend a great deal of your time analyzing financial statements, right? Well, let’s look at the Gallant 500 as a whole, starting with its debt obligations:

Unless one is willing to ignore one’s lying eyes, there’s been quite a jump in these figures over the past couple of years.

To complete the picture, compare this trend to consensus estimates of earnings (-27%) and cash flow (-46.6%). Is it just possible that the ability of the 500 to repay, under these conditions has been incrementally compromised?

And, at least according to the way that these things unfold as I was taught, when rising leverage meets impaired earnings and cash flow, Ground Zero of the economic explosion is something called Enterprise Value.

I’m here to tell you that the Enterprise Value of our economy has taken a massive downward boot of late. And publicly traded equities are just the tip of the iceberg. I truly shudder to contemplate the damage done (a little part of it in everyone) to privately held companies, their investors, states, municipalities, pension funds, insurance companies… …I could continue, but won’t.

Also riding in a dirty, counterintuitive direction are the government bond markets, which seem to have lost their mojo — even as their equity counterparts have managed to recapture theirs. Here, I must return to earlier arguments about deflation and real interest rates. The stalwart among you may recall my scenarios involving the price paths of Crude Oil, Equity Indices, and US 10 Year Notes. Four weeks ago, as both equities and crude were crashing, I enumerated an actual rise in the value of the former expressed in the latter. Between mid-Feb and mid-March, the SPX/WTI Crude ratio rose from about 66 to over 100.

Now, with the Gallant 500 climbing so valiantly to 2875, and Crude collapsing to lows seen only once since WWII (18.32), it takes 157 barrels of Texas Tea to purchase one unit of the SPX. Thus, if you bought stocks in Feb and used Crude Oil to do it, you’re looking at a 2.5-bagger over about 8 weeks. To press on this rather filthy point, so overstocked are the depositories with petroleum that, according to published reports, some of those ballers in Texas are offering up their inventories at $2 a barrel, taking the above-mentioned ratio to a tidy 1,437.5.

The smartest folks with whom I reason are pretty certain that the crude collapse will catalyze a rapid depletion of excess inventories, and that, within a handful of quarters, we’ll be looking at a price for the commodity in the 70s. And isn’t that pleasant to contemplate, when so many out there are struggling to make ends meet? A big jump in cost/push inflation to rub salt into our wounds?

But right now, that’s not our problem; deflation is. Prices are dropping everywhere but yields on the 10-year remain stoically around 65 basis points. How can Madame X not still be the bargain of a lifetime?

Because investors are riding dirty; that’s why.

I am finding myself increasingly weary of making this argument, but if anything is going to destroy us, it’s that dreaded credit leverage. We will learn a great deal more about this over the next week, when that adorable (if unkempt) couple — Fannie and Freddie — publish their monthly Remittance data. Again, however ugly these numbers are, they can only get worse in subsequent correspondences.

But investors continue to buy up stocks, corporate bonds and other financial instruments which, whatever one can state about their merits, are not likely to perform well if my unsanitary, unsavory economic fears prove out. Again, I think the Armageddon scenario is one that involves impairment of Money Center Banks, as cascading defaults burn through their reserves and threaten their capital bases. Their Q1 earnings are substantially in the books now, and, on the whole (in part due to trading), they could certainly have been worse. I think they will have a harder time in Q2, as this somewhat obtuse chart illustrates:

Not entirely sure what this line measures, but whatever it is, it’s worse, by orders of magnitude, than it was before the last crash.

And I only have one explanation for the unhygienic behavior of the investment community: they are expecting a massive, ritual cleansing from the agents of government. The Fed Balance Sheet has already blown out to over $6T, with its most recent components almost unilaterally taking the form of dubious, grimy, impaired debt. It is not enough and will certainly soon grow to a 10 handle. Congress dithers on an SBA program that ran out of funds in two weeks. Ratings agencies are bringing down their fearful hammers and the problematic payment triggers they portend.

And about the only hope I can see on the horizon takes the form of Modern Monetary Theory, an economic concept which I would have never dared to mention during my days at University of Chicago, lest my professors gather to forcibly wash my mouth out with soap. We’ve been through this before, but the premise of MMT is that a capital economy like ours has the ability to spend whatever it likes, extend credit, in whatever amount, and to whomever it chooses, and then paint over the problem through a simple retirement of our obligations through money printing. My guess is that we need our MMT sequence to climb to about a year’s worth of GDP (~$20T) to hope to climb our way out of this mess.

Conditions are hardly surgical for making this move; more, in fact like those in a back alley. In an economic sense, we can only pray that this will be the dirtiest ride we will ever have taken. But I don’t see any better alternative. And to my investor friends I say this: you were riding dirty anyway; way dirty. So, let’s not stand on hygienic ceremony at this troubled moment, OK?

Most importantly, I want you to ride with ME. I want to be YOUR ride. It won’t be a clean one, but you knew that, have experienced that, long before we came to this pass. Dirty is how I have always ridden.

But with you by my side, I feel sure we can joyfully reach our dream destination.

Wanna hope on board? Just give me a minute to clear off the passenger seat.

TIMSHEL

Here, I refer not to Cleveland, which is on Lake Erie. But rather to Chicago, nestled on Lake Michigan.

And not to the City itself, which I don’t consider a mistake. I lived there for 25 years, and, on balance, am quite fond of the place.

Particularly the waterfront. When I was just a little guy, I used to think that my maternal grandfather owned Lake Michigan. In my mind, he had a key for a cover that he’d place atop the water each winter and remove when weather conditions called for it. I remember accompanying him on these errands, so long, ago. Was it just a dream? It seemed so very real to me (stolen from John Lennon).

And when I got a bit older, I thought that the lake belonged to me. Lord knows I spent enough time there to claim, at any rate, squatter’s rights. All seasons. In blistering heat and subzero, blustery frost. I swam there, ran there. Got wasted there. Lots. Was arrested there. At least twice. Maybe more; can’t remember.

But my favorite times on Lake Michigan were late afternoons in the Summer (natch), when, each day, hundreds of percussionists would gather on the Fullerton Rocks, and knock out rhythms that would bounce off the water, kiss the skyscrapers, and sing to the heavens. The sun would beat down like it does on the Hudson River (near which I currently reside) and explode into a splash of sound – all against the backdrop of the best damned urban waterfront that I’ve ever encountered.

So, if I believed, in a long-gone, substance-induced era, that Lake Michigan was mine, I came to this honestly. But now I find that I was deeply mistake(n). It actually belongs to the City’s current mayor: The Honorable Lori Lightfoot. And if anyone doubted this, she settled the issue definitively when she shut down the waterfront for all recreational activities. Until. Further. Notice. This happened on March 26th, so I’m a little late to the pile-on party.

But here goes nothing. All hail Lori Lightfoot. LL. The Lady of the Lake. Like her forebear in Thomas Mallory’s “Le Morte D’Arthur”, she wields the power of the sword and, of course, the water. Wizards and Kings kneel at her feet.

I should also remind everyone that her predecessor, Rahm, was a childhood chum of mine. We spent many hours together up in the general vicinity of Foster Beach. He famously warned against letting a good crisis go to waste, but that was long after our carefree innings at the water’s edge had ended. To my knowledge, he has yet to weigh in on LL’s decision, and I’d like to think, if for no reason than auld lang syne, he’d have gone in a different direction.

So why did Lady Lori shut down one of my fave spots on the planet? Probably because she could.

And the same can perhaps be said of Lord Powell, Royal Executor of our National Bank, who astonished and delighted the masses by announcing his outfit’s intention of diving into the murky waters of ETFs, Junk Bonds and other financial instruments of dubious construction – up to >$2 Trillion of them.

I’m not sure how well this will turn out, but there’s an argument that the action will save more lives than, say, the lockdown of the Chicago lakefront. Thus far, the State of Illinois has registered just over 500 Covid deaths, as benchmarked against an average annual influenza mortality rate of approximately 3,500. On the other hand, the baller $2T Fed move should probably be measured in proportion to the $75T of private debt that American individuals and institutions are carrying. It’s bound to help, but will it cause enough of a dent to have justified the silencing of the conga players on the Fullerton Rocks? I reckon we’ll find out. And yes, I’m going to continue to beat my own, er, bongos to the tune that: a) there’s a galactic amount of risk out there; and b) that if it manifests as losses, they are most likely to materialize in and around the credit markets. You just can’t shut down a levered economy like we have (however necessary the step might have been) and expect the boys (and girls) to keep the beat.

Increasingly, there is a focus on the ratings agencies, and how the catastrophe will impact their scoring of credit worthiness. There are some early returns here, which, if not surprising, are nonetheless alarming:

Notably, over 80% of these downgrades apply to paper that is already below investment grade, much of it featuring payment triggers that kick in when the ratings agencies drop the hammer. What could possibly go wrong?

I’m glad you asked, because the answer is that many of these borrowers have either been shut down or forced into deep curtailment as a result of the crisis. They may not, probably don’t, have the means to fork over the required cash. So the banks get stiffed, call in the loans, call in others. Welcome back, 2008! Can’t say we’ve missed you, but what the heck? You’re back, you crazy knucklehead.

Now, though I’m not proud of this, I’ve got a bit of a soft spot for ratings agencies. They and I share the common burden of earning our keep by assessing risk. But know this: they are conflicted. The only reason anyone pays them is for the purposes of facilitating their desire to sell debt – ideally at favorable prices. It thus follows that the purchaser(s) of these services are likely to be happier camper(s) when they are treated kindly, or at minimum, Moody’s/S&P/Fitch Justice is tempered with Mercy.

And now they face quite a conundrum. By any objective measure, the default risk they are paid to assess has taken a quantum leap upward. But do they really want to bring out their ratings axes right now? Will they? How can they not? What happens when the do? Truly, I don’t wish to think on it.

And then there are those forlorn enterprises that have already reached the depths of pre-default ratings purgatory – the CCCs, or, as we in the biz affectionately refer to them: The Triple Hooks:

If you’re a 3-Hook, the only downward migration that exists is to the Dreaded D. Which stands for Default. In these realms, no one but the bravest and greediest will lend to you – even during good times. Which these ain’t. And you don’t join this club without having made your bones by already stiffing creditors.

This here chart tells the story of Captain Hook being entirely shut out of the credit markets. He’s got no cash but what he can borrow anyway. So it doesn’t take much imagery from Peter Pan to envision the unpleasant fate that awaits him – one which spills over to employees, investors, customers and the like.

But it does make one’s timbers shiver to contemplate the risks that hover over the entire capital market – debt, equity, the whole shebang. Meanwhile, the Gallant 500 and their fellows just clocked in with their best week since 1974. Remember ’74? Ignominious Vietnam retreat? Watergate? If so, kindly refresh me, because I spent most of that year chugging quarts of Miller on the banks of Lake Michigan.

Bear in mind that this rally transpired as Weekly Jobless Claims hit a horrific 6.6M, bringing the three-week total to a handy 16.8M: a number that is, once again, almost certainly understated due to the practical logistical problems of processing these applications in the era of social distancing.

So why are investors hoovering up stocks? (say it with me) Because they can. But you can color me skeptical about these actions. At ~2800, the Gallant 500 has recaptured nearly half of the ground it yielded during the brutal Month of March, and another couple of weeks like the (holiday-shortened) one just completed, and we’ll be in full Emily Litella “never mind” mode.

Well, maybe, but I am rather inclined to think that we’re more likely to test the lows than the highs over the next few weeks. On the other hand, I’ve logged into Bloomberg the last two Sunday nights expecting futures to open limit down. So, who’s the schmuck? It’s me, but I’ve been called worse, you know.

And this schmuck says that markets are as risky as he’s seen them. And he’s seen a lot of risky markets.

With that, I reckon I will begin my leave-taking ritual. Please know that I miss you terribly and would be with you if I only could. But we will be together soon, and then forever.

And if I had my way, this summer, I would take you with me to the Fullerton Rocks, to be serenaded by its indigenous tabla players. But first Lady Lori of the Lake will have to open the joint for business. And even then, if I’m not mistaken, the percussionists were long ago chased off of the premises, residing now, only in our memories. Local boy John Prine checked out this week as well, and, on the whole, it’s been a tough spell for my homies in the Windy City. But it’s been tough in NY as well; almost certainly worse.

So maybe, instead, we can take a stroll along the Hudson River. It’s still open for promenade, and I know a place we can walk. In fact, I know of two such spots. If it rains, we can talk in the car.

I bounced from Chi some time prior to the removal of the rhythm section, but, Lady Lori, I nonetheless implore you to do the right thing and open the gates to the Chi-town waterfront. It is an obligation passed down to you from civic leaders of the past, including Daniel Burnham, who once said: “The Lakefront by right belongs to the people. Not a foot of its shores should be appropriated to the exclusion of the people.”

I think you should heed his words, but if they don’t ring true to you, do it because you can. And I don’t want to insinuate anything here, but you should perhaps bear in mind that Mallory’s Lake Lady met with a rather nefarious end.

But if my entreaties fall on deaf ears, I can always recall the spirit of Irving Manaster, my maternal grandfather, who, as his one legacy to me, bequeathed the keys to the cover of Lake Michigan to my keeping. Now, if I can only just remember where I last set them down.

Happy Easter, and, as always…

TIMSHEL

Strike that last part. Make it NoBid 20.

Because, though memory fades after all these crazy weeks, I vaguely recall that there actually were bids in ’19; (as I remember it) lots of them.

At first, I thought that I’d originated the first of the handy phrases I use in my title, but of course, that couldn’t be. In fact, I now find that the term econovirus has entered that pantheon of pithy expressions otherwise known as The Urban Dictionary. The entry is dated March 30th: six days before this document went to press. I thus missed claiming my place in nomenclature immortality by less than a week.

However, amid other worries. I choose not to dwell on this lost opportunity.

On a brighter note, I’m pretty sure that I’m the first to bust out the phrase NoBid 19/20.

Funny thing is, though, there actually have been bids – even in (so far) Terrible 20. Even in March. Even in April (come she will. And has). To wit, from those dismal Middlemarch horrors to the end of what was one of the longest lunar cycles in recent memory, the Gallant 500 ginned up a nearly-double-digit rally. Custer-like Captain Naz and his forces recaptured nearly 15% ere that month was over. And our sea-faring hosts in both Investment Grade and High Yield, attempting, as they are, to navigate to safe port over an enormous, stormy ocean of credit, showed similar happy progress. Markets have since backed off a bit, but not by much, and not, in my judgment, sufficiently to reflect underlying economic conditions.

And even this past week, when the virtually inescapable reality of an unprecedented collapse in the jobs and broader capital economies became a statistical actuality, the 500 managed to retain all but 2% of the valuation it sported coming into the five-day cycle. To put these dynamics into further perspective, on Thursday, after the BLS corroborated that over the past two weeks, approximately 10 million new souls had been forced into the indignities of the unemployment lines (a number that is surely understated because the regional offices were overwhelmed with applicants), equities actually rallied — to the tune of >2%. The next day, when the March Monthly Jobs totals dropped, and the count told of the worst results since the teeth of the (last) crash (and these figures only covering the period through March 12th), investors mostly yawned, selling off (going into a weekend sure to be chockful of negative news) so benignly, that our indices are actually ~70 bp to the good across these two dismal sessions.

From whither these bids have derived, and based upon what investment hypothesis, is something I’ve been trying to puzzle out.

Who knows? Maybe they persist.

But I strongly believe that anyone who digs this sort of thing (bids, that is), should enjoy them while they last, because my hunch is that bids are going to be in rather short supply in the coming weeks.

And, returning to the first half of our titular theme, I myself have come to firmly embrace the viewpoint that the econovirus risks we now confront are greater than those associated with the dreaded Corona.

Now, I wanna be precise in my messaging here. First, I’m not referring to outcomes; only risks. I don’t know what’s gonna happen out there: when, how and to what extent we tame this King Tiger (no, I haven’t watched the show yet; probably won’t). And I can’t get a true handle on how devastating the economic impact we will have suffered in the effort.

Moreover, I point no fingers here at anyone. I am convinced, given the previously unimaginable level of contagion embedded in these little CV buggers, that the steps we have taken are necessary and unavoidable. Moreover, I believe that whoever was running this here show, we’d be doing pretty much the same things. We’d have isolated ourselves, shut down broad swaths of socioeconomic activity. Albeit with only partial effectiveness and a lot of sh!t slinging, we would’ve marshalled all the forces of the public and private sectors in a race to figure out who was sick, how to care for them, how to immunize the population, and the best way to cure the disease.

But as I have stated repeatedly, even if all of those nasty little viral cells were to beat an immediate, unilateral retreat, never to show their spores again, the economic damage will have been unprecedented. There’s simply no roadmap here. Quarantine aside, it’s eerily quiet out there. But we’re starring in the face of 1933-like unemployment, and maybe an even worse set of conditions from a GDP perspective.

So, let’s fess up; we have a raging econovirus on our hands. Like nothing we’ve ever experienced. From this perspective, it is indeed novel, and, it is viral. Maybe on the whole, maybe I’m due that phraseology victory lap after all.

Again, all of this would be so much more manageable if we weren’t so deeply in the pockets of The Man. But we owed him so much green that even before this here catastrophe hit, whether we could pay him back, or, alternatively, were destined to have our legs broke, was very much in question.

And now, because of deflation, we owe him more. A great deal more. Allow me to explain.

When you owe The Man, and your earnings just took a hit, your ability to cover the nut contracts considerably. You have more debt, without taking in an extra penny. With broken legs, it’s harder to put out, much less, collect upon, your Shy. And this puts the hurt not only on you, but on your Capo as well. Because he owes the vig to the big bosses, who don’t like getting stiffed. So, multipliers abound.

Yes, I’m a connected guy (though not a made one) but let me put this in Chevy Suburban terms. Let’s imagine you are a working stiff (say, a pharmacist with two beautiful daughters and a lovely wife), taking in $90K a year, and with $10K of credit card debt, a $1500 mortgage, etc. Before Covid, you were scraping by. Your boss is a nice woman, but she herself is getting crushed by this whole thing. She doesn’t want to lay you off but needs to put you on half time/half pay if she’s to survive at all.

Well, buster, your debt load, in terms of your ability to honor it, just doubled.

Now let’s extrapolate this to the entire economy. Which just took one baller of a pay cut – right at a point when its indebtedness had been hitting one new unthinkable peak after another:

Now, I’m not sure who this FRED character is, and maybe I don’t want to know. But whatever books he’s keeping show us into him for $75 Tril, and that’s only as of the end of (No) Bid 19. This was unfortunate, arguably unmanageable. But now we just took one whale of a compensation haircut, and, in real terms, we may actually be compelled to fork over something more on the order of >$100T.

But we can’t. Fork it over that is. And it’s not as though the collectors of our debt are just cashing our checks and spending them. They are using our scrips to pay their own debts – most likely to entities who themselves are in hock. Stopping this cycle of payments is akin to arresting the blood flow through the veins of the economy, which thus faces the threat of cardiac arrest. So what we gonna do?

A couple of steps come to mind. First, we gotta print money and hand it out. Yes, to individuals but also to corporate enterprises, in order to minimize the count of folks on their payrolls who otherwise will end up on the street. A few weeks back, I estimated that any effective policy response would be on the order of $10T. At the time, I thought I was being extremist, but now I think that the number may be on the low side. Of course, the combination of a Quantitative Easing that will make the magnitudes of that exercise a decade ago look like Chump Change, combined with what will ultimately be a fiscal stimulus >3x what was just enacted, and credit relief of similar magnitude, will only be a partial solution. It will be messy, sleezy and only of limited mitigation value. But it is needed. And it is coming.

The economic wages of these sins, at least according to the economic textbooks, take the form of hyper- inflation. But I’m here to tell you that hyper-inflation is off the table at the moment; it’s the least of our worries. What we have now is hyper-deflation, and, while there will be a toll to pay somewhere down the road, inflationary policy actions should: a) help reverse the slide; and b) do so at a cost that is astonishingly benign compared to the carnage we can expect if we fail to take these actions.

We’re also, I hope, gonna stop worrying about missing the next rally and reconsider our yearning to load up on some additional risk. Because we have not, cannot have seen the worst of this yet, marketwise.

And most assuredly, we’re going to be forced to defer our fondest hopes and dreams for a spell. Maybe not for long; but at least for a little while. This, to me, is the unkindest cut of all.

I do hold out hope that we will, reasonably soon, have parameterized and started the path towards containment of the novel coronavirus. But the novel econovirus is even more novel, more viral. And our work here has just begun. My fear is that in terms of our most cherished resource – the limited number of heartbeats that each and all of us are allocated – the EV may take a greater toll that the CV.

And my beating heart only beats for yours; you know that, I hope. I do think we can endure; maybe even thrive. Let’s just understand what we’re up against. Alright?

And do me this one favor. Let’s make NoBid 20 something of a reality, shall we? There will come a time when we can safely infer that risk assets are cheap and worth the risk of owning incrementally.

That time is not now.

Instead, let’s protect what’s precious to us, tuck in, and live to fight another day.

And with that, along with my best wishes for the upcoming Passover and Easter festivities, I once again wish everyone a heartfelt…

TIMSHEL

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