“In another time’s, forgotten space, your eyes looked, at your mother’s face,

Wildflower seed, through sand and stone, May The Four Winds take you safely home”

— Franklin’s Tower: Lyrics by Robert Hunter (Music by Jerry Garcia)

Well, we’re now a full 3/4ths of the way through this crazy year, and the obvious question is as follow: are we having fun yet?

My best guess is that for most of us, we won’t know the answer until the end, until yet another of those endless series of ball drops in Times Square is hard upon us. It is, after all, only at that point that we will understand, with the divine benefit of retrospect, whether or not the rewards we will have reaped across 2019 will have justified the madness we have endured.

In turn, this implies that the tidings wrought by Q4 will be crucial to the overall narrative. And in this edition, we will attempt to take a measure of what’s on tap. For what it’s worth, matters appear very opaque to me at the moment, but when did that ever stop me from offering confidently-rendered opinion?

However, before we get to all of that, we must first pause to pay tribute to the recently departed Robert Hunter: the elusive-yet-somehow-ubiquitous lyricist for the Grateful Dead. At the point of his passing, his life and times evoke images of a gentile, heterosexual version of Alan Ginsberg. Like Ginsberg, Hunter was everywhere, but always, it would seem, hovering in the background, commanding little attention and seeking even less.

And it should surprise to no one that I have a measure of frustration with Hunter. And it’s not his fault. To be sure, he wrote some solid lyrics in his time. Think Uncle John’s Band. China Cat Sunflower. Sugar Magnolia. I could go on, but why?

But I will admit to tiring of all of those cowboy figures, all of the bootleg whiskey references, of lighting off to Chino, babe, trailed by 20 hounds, of boxes of rain, and of watchmen shot right outside fences.

And mostly this. I always wondered why Jerry never wrote any of his own lyrics. I mean, it’s not like he wasn’t enormously articulate, like he had nothing to say. Heck, his was the face and voice that shaped the consciousness of an entire generation, myself included. Moreover, being something of a hack songwriter myself, I have always felt that the real challenge, the elusive prize, is the writing of a good hook. Chords and melody. They need to grab the listener, and when they do, all is right in this godforsaken world.

And he (or she) who writes the tunes, has, in my judgment, won the right to pen the lyric. Say what you want, oh sublime hook-writer, as this is the sweet payoff for creating something that is musically valuable and sharing it with us. You’ve earned our obligation to listen to what you have to say. And I, for one, would’ve loved to hear what was on Jerry’s mind, which I’m sure it would have been fascinating.

But he subcontracted this privilege to Hunter, and it would be unfair to state that Hunter let him down. He didn’t. But Bob Dylan (with whom he in later years collaborated) he most certainly was not. Hunter, has now left us, though, presumably for that Happy Hunting Ground in the sky. And as we honor his efforts, at a point when the Q4 hunt for investment returns is about to begin in earnest, I am reminded of one of his better lyrics: the lines purloined for this modest tribute, which I believe merit our attention.

Because, among other matters, hunters of every stripe must be guided by these winds, The Four Winds, and perhaps, for those who seek investment outperformance as their prey, the glide path of The Four Winds might be as important as they’ve been for quite a while.

Will The Four Winds blow you safely home? Truth is, I don’t know for certain, but perhaps we can review them for the insights they may portend.

The First Wind is Domestic Politics, a topic of which I’d rather dispense sooner than later because they are now in depressing crescendo. They were already a chart topper before House Leadership chose “Now” over “Never” in terms of their Impeach 45 obsession, and at present, there’s no turning back. Now, I don’t know anything more than anyone else about this latest episode, and therefore will seek to keep my musings somewhat balanced. There appears to be solid momentum building at the moment, but the strategy risks backfire in spectacular fashion. Because in the words of Ralph Waldo Emerson: if you strike at a king, you must kill him. Do the current allegations rise to the level of 67 Senators voting Trump’s fat ass out of office? Well, maybe; maybe not. In the meantime, Team Pelosi is gonna have to hustle. They need 218 votes, and (again unless there’s more here than meets the eye), they must all come from the left side of the aisle. Simple math suggests that at least 20 of them need to be sourced from House Members representing districts that Trump won in 2016; maybe more.

The preparations for trial will kneecap the entire Progressive Agenda, probably up until the election. And the trial will be a Pig Circus. In the meantime, Pelosi herself has already yielded once and for all her podium and gavel to those cheerful ladies otherwise known as The Squad. Moreover, the episode virtually ensures that Biden is toast. Trump’s intervention into a foreign investigation was about a company on whose behalf Biden himself intervened in similar fashion, to the great benefit of his own son. And Biden is out of office, so he can’t be impeached. But his campaign can be fish-gutted in the higher cause of bagging the progressive hunters’ bigger game: The Big Guy himself. Somewhere in Minnesota, Al Franken must be enjoying a good chuckle over this. But the rest of us have scant cause for mirth.

Thus far, the market has chosen to by and large ignore the preliminaries. Unless there’s more, this trend will probably continue. But I reckon we’ll have to wait and see.

Wind Number 2 is a familiar one to this readership: the extraordinarily accommodative monetary policy (delivered to us (no doubt) from heaven — through the earthly devices of Central Banks), and the likelihood that it will continue on for the foreseeable future. This is an enormous tailwind for market participants, of such great force that, I’d be continue to designate it Wind Number 1, had it not been upstaged in spectacular fashion by the latest Washingtonian shenanigans.

I think that the continued assertive monetary policy support across the globe will, at minimum, provide support to financial valuations, and am therefore encouraging my clients to retain sufficient bovine sensibility to the dips. And I’ll throw another one in here, just out of love. Owning longer-dated US Treasuries offers, at the moment, one heck of a hedge against other longs, because if “riskier” assets start to fall out of favor, the incremental bid on domestic govies should be something spectacular to witness. But I suggest you do more than witness. I think you should participate.

The Third Wind, a big, yawning, impenetrable gust, is our trade negotiations with China. But we’re not going to waste much space on this squall. Because that’s just what it would be: wasted space. Nobody knows anything about anything about this really. And I will only add a couple of minor additional points here. First, the markets are likely to continue to be whipsawed by every associated (mis)information blip about that comes its way. And they wouldn’t mean anything if not for my second and final minor point on China trade: The Impeachment Wind at the top of our charts probably greatly increases the likelihood of the world’s two superpowers striking some sort of deal – perhaps even before year end.

The Final Wind (Number 4 if you’re keeping score) is the inevitable, inexorable flow of data that we must endure in the first half of each quarter; Q4 included. In normal times, #4 would also be higher on our Hit Parade, but as should have been made clear in preceding paragraphs, it also has been rudely upstaged.

But trust me on this: these data flows are coming, and from our current temporal points of observation, they offer a mixed bag of tricks and treats. Macro numbers are yawningly tepid, likely, in the month leading up to All Hollow’s Eve, to offer up neither fright nor delight. Our first insights will come our way on Friday, with a September Jobs Report which, if the prognosticators’ prognostications hold true, will offer no insight at all. Steady but uninspiring jobs growth, high employment levels. Very modest and on balance insufficient wage inflation.

Adhering to the macro side of the equation, the GDP estimates of the federales are perking up – to an acceptable >2%. But we won’t get our first glimpse of these estimates till the last part of October.

Before that, of course, the earnings season will be in full swing, and the signals we’ve received this far don’t offer much cause for jubilation. Q3 earnings are expected to feature the third straight quarterly cycle of negative profit growth. There have been an exceptional number of pre-announcements; most of them to the downside. To wit, Factset indicates that out of 113 tech companies who saw fit to leak their performance ahead of schedule, a record 82 have telegraphed incremental bad news.

But I’d encourage my hunters not to lose heart. At least not yet. For one thing, Q3 is typically the Kitchen Sink Quarter, where CEOs ram all the negative news they can into their messaging — in the hopes of looking like conquering heroes — at year end, when, just as a matter of coincidence, their compensation levels are determined. I further have a hunch that some of these tech darlings will exceed the low bars they have unilaterally fixed, when their turns at the podium come upon them.

And I encourage you to look, at least for an instant, at the bright side. Winds 1, 3 and 4 tell us we’re facing a domestic constitutional crisis, are on the brink of an all-out, crippling trade war, and in the midst of a pretty nasty earnings recession. But financial instrument valuations are at or near all-time highs. Of course, if you ask me, we have little else but Wind 2 to than for this largesse.

Will The Second Wind blow us safely home? Perhaps, but asking the man who gave us these lines is no longer an option. Robert Hunter has by now entered his happy hunting ground, while the rest of us must seek our prey across this more wretched veil of tears. I myself remain optimistic that we won’t return to our caves empty-handed, because hunting under difficult conditions is our forte.

And let me tell you, it beats trying to generate returns by planting yourself at the MGM Grand in Las Vegas: a place where you can walk out a winner, but only if you can spit madder game than you probably got. Most don’t, and should thus proceed with caution. So, rather than chasing Q4, let’s allow it to wander into our traps. Meantime, we can cool our heels in the comfortable realms of Franklin’s Tower.

It ought to be a pretty wild ride, one way or another. So don’t try to laugh your past away, but do try to make it, just one more day. By watching the wildflower seeds, through sand and wind, The Four Winds just might blow you home again. And with that I can only add the coda:

Roll away the dew.

TIMSHEL

“We’re all Keynesians now”

— Milton Friedman, quoted out of context, in a line incorrectly attributed to Richard M. Nixon.

I recognize that the entire world has worked itself up into a frenzy of debate over the whole Keynesian Liquidity Trap kerfuffle, but before we get to that, I have something on my mind that I wish to share.

Isn’t it time that water beds made a comeback?

I mean, water beds were pretty cool. At one point, Joe Namath-in-the-Hollywood Hills-circa-1974 cool. But not long after Joe ended his always-celebrated-but-eternally stylish career (and before he creepily tried to kiss that on-air reporter on the lips), they disappeared off the face of the earth. Water beds that is.

And I’m guessing that some of you don’t even know where they are.

I’m not going to waste much time schooling that younger, less erudite portion of my readership on the topic. Think of a water bed as a somnolent onomatopoeia: a thing that sounds like it is. A bed made of water, or more, specifically a mattress made of water. But the truth is that I never had enough bling to own one. Or even sleep in one. My brother had a water bed when we lived together in the ‘80s, and for the briefest interval, this was a sign that he was spitting madder game than me. But all of that changed. He ditched his liquid lounger, and now, I’ll match my game against his any day of the week.

Being the diligent, game-rich guy that I am, I did some research here, and have found in addition to the fact that they fell out of fashion around the same time as did big hair and acid-washed jeans, the contraptions were something of a headache to deal with. As one can only imagine, they are heavy as sh!t, require constant maintenance, and suck up a lot of resources — the utilization of which the woke world of 2019 won’t tolerate. No, the gaseous issuances from bovine backsides do not enter into the equation, nor, as far as I am aware, is much fossil fuel consumption required.

But these virtues notwithstanding (and though I have no direct knowledge one way or another), I think it’s a fair bet that neither Bernie nor AOC owns one in any of their multiple dwellings.

Biden, on the other hand, may have an H20 recliner stashed in his one of secret Delaware batch pads, and Bill Clinton must still own at least a half-dozen of these bad boys. And as for 45, well who’s to say? Probably not, because if a single water bed existed in the Trump portfolio, it’s a near-certainty that evidence of same would’ve made its way into the Steele Dossier, leaked to the media, and perhaps even merited a third section of the Mueller Report.

But one way or another, I think that the time for une couch de l’eau renassiance has arrived. The good news is that there are indications that this dynamic is indeed emerging. Nowhere is this more evident than in the recent surge in the valuations of utility companies, which just this week hit all-time highs.

I won’t lie: I didn’t see this coming. In a capital markets universe dominated by technology, biotech, cannabis and crypto, who knew that the sleepy likes of Consolidated Edison and New Jersey Power could surge to the heavens, valuation-wise? But I’m here to show you that the unthinkable has indeed become the actual:

Thus, and particularly adhering to the lower portion of the graphic, it seems to be the case that investors would have fared better these last three years by owning Grandma’s favorite preferred stock names than they would have holding (Insert favorite social media darling).

And I can only deduce one possible explanation here: the markets are anticipating one whale of a redux of the whole water bed thing. Bear in mind, here, that unless you are plan is to either freeze or sleep on the under-frame, the use of a water bed is going to require a significant amount of electric heat, and, well, water. And these, my loves, are the stock and trade of our new darlings in the Utility Complex.

It’s all starting to come together, right? Investors know that the water bed craze is on the verge of re-emergence, and, given the reality that (to the best of my knowledge at any rate) there are no publicly traded water bed concerns, they (investors) are reverting to the part of the playbook that involves owning companies that produce input components.

So we’re clear on the whole water bed thing now, right? At least I hope so. And my transient obsession with the topic has caused me to focus on a more germane element of fluidity: market liquidity. As was widely reported, the Repo market, the lion’s share of which involves overnight, interbank loans of cash, as collateralized by Treasury Securities, seized up earlier this week. Their associated yields jumped five-fold, and might’ve stayed there had not our Fabulous Fed stepped in with divine normalization relief. It’s still a bit wobbly, and the Fed has not yet exited the scene. The technical cause was a drain on reserves held at the Central Bank, which elicited a cash funding shortage in the overnight markets. But no one (I’ve talked to some really smart folks about it) can tell me why this drain occurred. Or what caused it.

But I’m not going to let a technical glitch knock me off my pillar of obsession with water beds, because if I did, you’d be disappointed in me, and rightfully so. However, with all of these fluids flowing through my cranium, it was perhaps inevitable that my focus would turn to liquidity traps. Most specifically Keynesian Liquidity traps. And here the mind races.

Like the weather (as attributed to Twain collaborator Charles Dudley Warner), everyone is talking about Keynesian Liquidity Traps, but no one is doing anything about them. Maybe this is owing to the reality that the entire premise has been inverted in grotesque fashion. As even my two-year-old grandson knows, the classic KLT features a conundrum under which a Central Bank is unable to lower longer term rates, no matter how much liquidity (i.e. funding) it injects into the system. This was a sound concern for most of the history of the global capital economy, but the problem has now turned itself right on its head.

Because for the time being, albeit with the same inputs, a similarly vexing monetary quagmire emerges. Specifically, now, no matter how much liquidity the CBs create, it seems that there’s nothing they can do to lift rates at the long end of the curve. And as a result, the U.S. yield curve remains depressingly inverted. As everyone is aware, Powell did come through with yet another short-end rate cut this past week, and, if we hold all other points constant, the logical outcome of this would be that the current, unpleasant pattern of inversion would disappear.

But It is my sad duty to report scant progress in this respect. The US Treasury Curve remains inverted out to points beyond 15 year maturities:

All of this is as unsettling to us economists as those first images of Joe Namath in panty hose back in the mid-70s. But there’s not much we can do about it. I am on aggressive record as being a perpetual bond bull, and the enticement of all the water beds in the world isn’t going to change my viewpoint.

We’ve been over this before, but the hard facts are as follows. The weakening global capital economy simply cannot abide higher longer-term rates. These securities are the beneficiaries of a perpetual, galactic bid, and the quantitative easing engines of major economies are just now revving up.

Even the estimable Chairman Powell blandly suggested that his outfit might yet again be expanding its still-gargantuan balance sheet again ere long, and we know what his peers at least in Europe have teed up.

I can’t help but wonder what good old JMK, who presumably never slept in a water bed (the reality that they first emerged about a thousand years BC notwithstanding), would make of all of this. It seems that instead of, as he prophesied, conditions where no amount of liquidity could lower longer term rates, it now seems that nothing of that nature can serve to raise them.

All of this speaks in my mind to a duality I’ve written about before. The value of financial assets, due to scarcity, is immense and rising, while the relative price of real economy components continues to fall. Anyone who doubts the veracity of the latter condition should consult with my friends in commodity land, or review a few of the charts over which they obsess. Heck, last week, when some Iranian drones took out major portions of the Saudi Oil Fields, Crude spiked, but couldn’t even hold its lordly position for more than a handful of sessions. West Texas Intermediate, after soaring to the heights of over $63/bbl, now resides at a docile 58 and change.

So the signals are clear. On balance, the 21st Century analogue to the Keynesian Liquidity Trap will continue to increase financial security scarcity, and calls for investors to hoover up financial securities at every strategic opportunity to do so. And this remains the case even if the signs of pending recession begin to emerge in sharper contours. If GDP continues to slip, if the mighty consumer begins to amp up despair and close its wallets, it will only serve to push financing costs lower, induce more buying of financial assets, and the rendering the scarcity of the latter that much more acute.

But I don’t think the consumer is ready to roll. Yet. And if I’m right about the water bed resurgence, that right there would be a welcome boost to this most critical component of the domestic economy. Consider, in closing, the multiplier effects. The future purchasers of acquatic sleeping devices must also treat themselves to new bedding. And please, whatever you do, don’t skimp here. Because the bedding is critical. For your water bed to be all you wish it to be, you must accessorize it with the best sheets, blankies, pillows and pillow cases you can find. Don’t go all tacky here (nothing made of silk), but pure cotton sheets, for instance, are a must. Otherwise, you ruin the whole experience.

In the interest of full disclosure, I myself won’t be buying a water bed. I feel I own too many beds as it is, and, having survived nearly six decades of less soggy, I think I can muddle through my remaining allotment of days without one. I am told that for the right price, though, the Pierre Hotel on 5th Avenue will set you up with a sweet one. And that, my friends, is a temptation I’ll be hard-pressed to resist.

TIMSHEL

Apologies in advance but we’re not going to waste much space on the passing of Eddie Money. Or time. I personally won’t be sitting Shiva, because my calendar won’t allow for allotting seven days to the ritual. I won’t even be saying a mass, as, among other excuses I might offer, I’m not authorized to do so. Heck, I’m not even not baptized.

Beyond this, I’m not a big fan; never was. I don’t wish to be over harsh here. I did like the Geico commercial where he played a travel agent, creeping out his customers by incessantly singing, in sotto voce, his smarmy, ubiquitous hit: “Two Tickets to Paradise”, as I feel it demonstrated self-awareness that is becoming an increasingly rare commodity in this world of accelerating self-involvement.

But the hard fact is that his music annoyed me, and, to be fair, this wasn’t entirely his fault. The songs weren’t that bad, but his emergence in the latter half of the ‘70s (along with the likes of such mediocrities as Huey Lewis) offered stark confirmation of the biggest fear of those of my ilk. That a Golden Age of music was indeed over, that what would follow would be of unilaterally inferior quality, and that we’d never (in contemporaneous time at any rate) recapture the magic of what had just ended. In other words, I blame him (and others) for not living up to the impossibly high standards established by his musical forebears. And if that is the worst that can be said of him, perhaps we owe him some small debt of gratitude after all.

So we will bid a casual farewell to E. Money, and move to the more timely, relevant topic of ∉ Money, or more specifically, Euros. This past week, as was widely expected, ECB Chairman Mario Draghi used the occasion of his penultimate turn at the podium to throw some stone cold ∉-Love at his constituents. Cut the deposit rate. Announced a new round of Quantitative Easing — to the tune of ∉20B per month. Pulled a few other obtuse rabbits out of his hat – including a further sojourn into negative overnight rates, the tiering of same, and an expansion of the hideously acronymed LTLRO: a concept that no one under heaven, including anyone at the ECB, can explain or even understands.

But who cares, right? Suffice to know that all of this was intended to prime the Continental Monetary Pump, and early returns suggest that it worked. Global equities rallied unilaterally. Bond yields backed up in fairly dramatic fashion (more about this below). And for my, er, Money, this is all prelude to the main event, when Madame Lagarde takes over the helm and gets the ∉QE action rolling in earnest.

So I reckon ∉ Money will be on the charts with a bullet for a good while into the future. Probably, there’s no choice here, but one has to wonder about the need to turn up the volume dials on money printing, a full decade into the improbable recovery of the global capital economy. My own strong belief is that (the reality that all economic text books would deem the whole escapade a rather unholy action notwithstanding) the doubling down on inhaling monetary helium is probably the only alternative to bearing witness to this whole decade-long rager of a party coming to an abrupt and unpleasant end.

But no one should deceive themselves. This is not an offer of a Ticket to Paradise – much less two of these vouchers. The global capital economy is under significant pressure, world-wide indebtedness, as we have covered extensively in this space, is at all-time highs and growing rapidly, and, given the fragile political conditions, both domestically and abroad, now is certainly not the time to sober up – at least in a monetary sense of the term.

Super Mario said the right things at his presser. Begged for some fiscal relief. Admonished the custodians of the European financial system to get their sh!t together. But as he knows perhaps better than anyone, these were empty words, uttered to a constituency that will nod in agreement and do nothing of the kind. And I don’t mind stating that I’m gonna miss Mario. He did what he had to, under near-impossible conditions, and did so with a certain savior faire.

But to reinforce just what a strange, Felliniesque turn of events this is, consider the above-mentioned fact that in the wake of an announcement that the world’s second largest/most important Central Bank is about to purchase a pant-load of member debt, the targeted bonds actually sold off (implying higher yields). And the selling spilled, in dramatic fashion, onto these shores:

US 10 Year Note Yields:

You have to go pretty far back in time (and I’m not gonna do it for you) to find a half month where these here benchmarks manifested a 40 basis point increase in rates. But perhaps more importantly, the ECB announcement: a) came in the midst of this yield upswing already in full swing; and b) did nothing to slow its momentum.

So, let me get this straight. Our notes are selling off hard just when the big monetary dogs in Europe are announcing that they are bulk-buying their own jurisdictional equivalents? At the risk of committing, yet again, the horrible transgression of mixing metaphors, this indeed is tantamount to the tail wagging the dog

But I’m going to retain my bullish stance on govies nonetheless. Yes, they are on offer, and the offer might sustain itself for a spell. But it says here that any economic headwinds, any selloff in the equity markets, and those yields will come careening down – across the globe.

Anyone among you believe that these headwinds are improbable? Well, I’ll take the over on that one. And I’m going to go y’all one further and predict that we haven’t seen the peak of pricing or trough of yields – in any major jurisdiction in the world.

All eyes will now turn to next week’s FOMC meeting, where nothing unexpected will happen. The Fed will cut the overnight rate by 25 bp. Further, any deviation therefrom will catalyze a redux of what transpired last week in Brussels: if the Fed cuts by more than 25, yields at the long end of the curve will accelerate their heavenward ascent. If they adopt a more hawkish stance, said yields will come careening down.

It’s just that kind of world we live in at the moment.

It’s been more of a mixed picture in Equity-land, as, earlier in the week, the hand-wringing from a rather annoying shift of risk flows out of Momentum names and into Value plays caused my phone to blow up more than once. In response, I have tried to reassure my minions that it’s all just so much noise. We are now in the last innings of a very complex and non-intuitive quarter. But at this point in the three-month cycle, information flow is at a low ebb. So why did that capital shift away from our darling tech companies and into such wallflowers as Proctor and Johnny John? Well, probably because it could.

And I will not hesitate to blame the algos, because I love to blame the algos. Everyone loves to blame the algos. So as far as I’m concerned, it’s case closed. It was those damned algos. My hypothesis is that they were just stirring the pot, perhaps out of sheer boredom.

They do that from time-to-time, you know.

So I’m advising anyone who asks/will listen, as follows. I don’t, from a fundamental perspective, presume to opine on what you should own, but if you like names that have a strong Momentum motif, you should not sell them down here. In fact, if they dip again (late in the week, they recovered some of their equanimity), and you have the wallet, you should probably buy more.

And yes, rates are coming down, if not over the next several sessions, then soon thereafter, so you have not only my permission to buy bonds, you have my full sanction.

Because this here rager rally will continue to sustain itself on monetary helium – at least for the foreseeable future. I’m not sure how much higher this lifts our balloons, but it should, at minimum, keep them aloft at current elevations. If they dip, I say buy ‘em. And that construct is almost certainly more in play in the bond market than it is in equities.

To repeat my oft-documented soothsaying, none of this will end well. Eventually, the party will wind down, and you don’t want to be the last guy partially snoring on the couch as your hostess (or host) frustratingly lifts your legs off of the coffee table to run the vacuum. Believe me, because I’ve been that guy. It’s not pleasant, and the reputational after-effects are often lingering. Among other consequences, you may find your invitations dwindling, or disappearing altogether.

Yes, all parties must, by definition, come to an end. I’m just here to tell you that this one has a little bit of juice left in it. Any increase in risk or financial/economic impairment will push down rates, which, in turn, will provide the catalysts to resume the equity soiree.

Thus, in closing, I’ll give a shout out to E. Money’s other passable mega-hit and just say to you “Baby Hold On”. There may be justifiable reasons for you to bail on your names, but macro risk is not for the moment among them. So baby hold on to them.

But Poor E. has left us, as they all do, now with depressingly accelerating frequency. Others will take his place, because that’s the way of the world. Hopefully, they will pump out better hooks than he did.

In the meantime, we can look forward to a whole passel of new ∉s floating down from the European heavens, and onward we go.

Paradise, it ain’t. In truth, it isn’t even a ticket to the Promised Land. But wasn’t there (to borrow from Thackeray) a serpent in Paradise itself? Instead, it’s the real world, and we must comport ourselves to it’s idiosyncracies.

So my advice is to keep your wits about you. Don’t drive past your own house. Don’t get on the wrong subway train. We’re all distracted, but focus is what’s needed most. Otherwise, we’ll either miss the last, joyous strains of this seemingly endless party, or overstay our welcomes.

And, for the life of me, I am unsure at the moment as to which would be the more unpardonable sin.

TIMSHEL

“If there’s something you’d like to try, if there’s something you’d like to try,

Ask me I won’t say no, how could I?”

— Morrissey

And allow me to be (among) the first offer a warm, embracing, “welcome” home to one of our erstwhile heroes: Raj Rajaratnam: founder of high flying hedge fund vessel Galleon Capital Management, and, for the last eight or so years, jailbird in a Federal Medical Correctional facility near Boston. He’s home now, at his tony apartment overlooking the East River on Sutton Place. And though his activities remain constrained by the terms of his sentence/release, his stretch is, for all intents and purposes, over.

It’s so good to have you back, Raj. And if you feel up to throwing one of your legendary parties, please feel free to count me in. Back in the day I came close, but never quite qualified, for inclusion on the guest list. But time and events, while taking the bite out of us both, have in consequence narrowed the spread of our social status. So if you’re so inclined, please refer to our purloined quote, and

“Ask me I won’t say no how, could I?”

For better or worse, we’ve managed to make our way through the ‘10s without Captain Raj’s steady hand on the helm of the mothership. So much so (and given the widely acknowledged but nonetheless astonishing and growing ADD that plagues our industry) many of you don’t even know who he is.

So let’s inform, update and refresh, shall we? Raj put together Galleon: one stone cold baller of a long/short equity hedge fund, in the early ‘90s, long before such a move was considered passé. He put up one heck of a run, generating superior returns for his investors and placing himself in the early Pantheon of alternative investment billionaires.

But somewhere along the way (and it may have been earlier than is widely understood), he became (shall we say?) a bit sloppy with his compliance. During business hours, he became ravenous for any edge he could acquire. He put dozens of folks on his payroll to hoover up any useful information they could find, some of which would have been better for him and his crew not to know. Or, knowing, not to invest upon.

And after hours? Well, given that we strive to keep this a family publication, the less said about the topic the better. However, those wishing to learn more might want to give a listen to the following Raj-commissioned rap song, which, beyond informative, has the distinction of being unambiguously the worst rap song ever laid down on a recording device:

https://www.huffpost.com/entry/galleon-rap-song_n_4789970

It all came crashing down on Captain R one very early morning in October, 2009, when the dudes in the hoodies came rudely barging into his crib near Turtle Bay, and escorted him on one of the most shocking perp walks that these aging eyes have ere witnessed. News spread across the hedge fund ionosphere like wildfire. Raj had been arrested. And charged. And it didn’t take long for sordid details, too numerous to describe in this space, began to emerge.

Perhaps the most e-gregarious of them all was the revelation that the big man had infiltrated the Goldman Sachs Board of Directors, through the person of one Anil Kumar, a globally respected Senior Partner at the venerable consulting firm McKinsey and Company. Immediately at the conclusion of a meeting during which the Goldman Board had approved a much-needed but overpriced financing deal with Warren Buffet (who, in trademark fashion, took them to the cleaners, but, in fairness to my friends at Goldman, this was in the midst of the crash and the firm was about to go down – perhaps taking the whole global financial system with it), Kumar lobbed a call into the Galleon trading desk, letting them know that the deal went down. The call came right at the close, but with enough time for the Galleon team to purchase like 100,000 calls on Goldman stock.

This was hardly the finest moment in hedge fund history, and, upon its revelation, many paid the price. Others of course were busted in the Insider Trading sting, some with justification; others not so much. But to see one of the stone cold whales of hedge fund waters, along with (among others) a buttoned down McKinsey elder statesman caught with their pants down in such shocking fashion, was disconcerting, and, unfortunately, an image nearly impossible to un-see.

And Raj was a billionaire. And didn’t need to do this. There’s a lesson somewhere in here for us all.

But now he has done his time and is (or shortly will be) free to mix in with the general population, including those that ply their trade in the alternative investment universe he helped create.

But Raj, upon your return, you will find market conditions almost unrecognizable. For one thing, valuations have tripled since your early morning East Side perp walk. Yields on the 10-year note are about 40% of where they were when the Federales arrived, and, in much of the world, negative. I’m guessing you’re not looking to jump back with both feet into the money management game, but to whatever extent you are considering such a move, please know that the terrain is much more treacherous than it was before your Icarus-like rise and subsequent fall.

And now, with the post Labor Day resumption of meaningful investment activity upon us, even you might find the action beyond perplexing. Global equities and bonds have been bouncing around like sub-atomic particles, tethered to the combined forces of historically accommodative monetary policy, and a great deal of hoo ha speculation as to the resolution (or lack thereof) of trade tensions. In terms of the latter, whither this dynamic is heading, and where it stabilizes, is anyone’s guess. However, with respect to the former, we might be in a position to offer some relative clarity.

For one thing, another Fed rate cut, week-after-next, appears to be in the bag. Further, by all accounts the Europeans are teeing up some big monetary love (likely to be announced this week during Super Mario’s penultimate turn at the ECB podium). Equities, while not exactly burning up the field over the last several quarters, are currently on bid, due to constructive signals emanating from these two big force fields: trade and interest rates.

I am beyond weary of anything to do with trade. We are being played by both sides, plagued by rhetoric from the U.S. and China that I suspect has little to do with where we stand in terms of a deal, much less the final resolution of same.

However, with respect to interest rates and financing trends, the messaging is clear. Expect more accommodation from the custodians of global monetary policy. From this perspective, we were the recipients of a couple of perhaps unearned rewards this past week. The August Jobs report clocked in at disappointing levels, and the numbers would’ve looked worse absent the fleeting contribution of some new census gigs.

Moreover, and while drawing scant attention, domestic manufacturing PMI is now below 50, historically a sign of ill winds in that critical economic realm. Globally, the numbers are worse, and if anyone thinks that this is something that will be neutral to interest rates, I suggest they think again:

To us unreformed, unrepentant statisticians, this is about as elegant, voluptuous of a dual curve fit as our frail minds and bodies can handle. And anyone who thinks that the blue line is poised for a 180 should contact me. Happy to lay side action with you. On generous terms.

But I don’t see how one can look at this graph and find a path towards higher interest rates. Anywhere on the horizon. Anywhere in the world. Quite to the contrary, and particularly given entirely feasible negative trade outcomes, the blue and orange lines are as likely to continue their descent into the netherworld.

Raj, my Raj, I expect that even you would find this situation puzzling to say the least. But in the spirit of justice-tempered-with-mercy (you have, after all, completed your payment of your debt to society), I’d suggest that you want to avoid the short side of equities as long as this condition persists. And it most certainly will ensue for a period that extends past the point when your rehabilitation and integration into the ebbs and flows of daily civilian life has run its successful course.

Also know I’m giving my non-felonious clients the same advice. Don’t be short stocks here. Or bonds.

I’m not sure about the specifics of your parole terms, but I wouldn’t be the one to discourage you from any inclination you might be forming about re-entering the realms of money management. That is, if your fires of this nature still burn. Maybe I could even help you on the risk management side. After all, I’ve dealt with shadier characters than you.

But my advice to you, first, last and always, would be to keep it down Broadway, OK? No more burner phones, no more clandestine payments to un-named associates spanning the globe. No more post-meeting electronic communications with Board Members from any publicly traded company under the sun.

I offer this all up, free of charge, in the spirit of rekindling what was a very remote connection between us back in the day. One that amounted to about a once-a-year “Hi Raj” “Hi Ken” pleasantry when I happened to encounter you.

Heck, as a public service, I’ll even write and record you a proper song, which won’t eradicate the wretched after-tones of that “Good Ship Galleon” atrocity, but will do little harm in any event.

If you want more, you know where to find me. But you’ll probably have to pay me.

And of course, there’s one other condition I feel compelled to impose. You MUST invite me to your parties.

I have no intention of missing out on the ritualistic ceremonies a second time.

TIMSHEL

“Now was Milton trying to tell us that being bad was more fun than being good?

[no response]

OK, don’t write this down, but I find Milton probably as boring as you find Milton. Mrs. Milton found him boring too.”

— Professor Dave Jennings, Faber College (Animal House)

Can I get some love for my boy John Milton? Didn’t think so. And, failing that, I’m at least going to ask y’all to get off of his nut. Please. I mean, this November, it’ll be 345 years since he went tits up for the last time. And, for the ensuing 14 generations, he’s been taking an inordinate amount of grief – even from the folks at National Lampoon, who gave us “Animal House”. Let’s face it, when if you’re a 17th Century man who is still receiving pot shots from that crew, several centuries after your demise, you can safely consider that your street cred has been utterly shattered.

On the other hand, I will cop to being among the legions who have cracked open a copy of Paradise Lost, only to give up before slogging through it in its entirety. Well, at least I tried.

Have you?

But our titular quote doesn’t derive from “P/L”; instead, it forms the last line of a sonnet he called “On His Blindness”, presumably written because he himself had recently gone lost the divine gift of vision.

He continued to write, of course, but what of it? Beethoven composed his magnificent 9th Symphony while stone cold deaf. So there’s that.

And JM himself has been on my mind lately, for a couple of reasons.

First, he created a roadmap of sorts for the form of modern-day “wokeness”. Specifically, the element of it in which a young, wealthy Caucasian male renounces his “white privilege”. He was born into the British aristocracy – at a time when they pretty owned everything and did as they wished. He went to Cambridge, and was able to produce his sightless scribbles — mostly due to the largesse of his family.

But in that raucous year of 1649, after the execution of King Charles I and the subsequent establishment of the British Commonwealth, Milton backed that upstart Oliver Cromwell and all of his ill-fated reforms. This move did not please his former paymasters, the possessors of all land and titles in the United Kingdom.

In this way, he kind of set the stage for Beto O’Rourke.

But perhaps more pertinently, I believe our purloined quote is consistent with the risk management advice I would offer to those who seek such guidance. Entering into the critical last trimester of this crazy year, I would go so far to suggest to the professional money management class, the following words of wisdom:

They also serve, who only stand and wait.

Because from my point of observation, the markets are in somewhat of a jump ball configuration. I’m near-convinced that there’s a lot of wild and wooly action that awaits us over the next four months, but: a) it’s not likely to take any observable form for at least a couple of weeks; b) whatever the first direction se it takes is subject to dramatic, un-anticipatable reversal; and c) as has been the case with Hurricane Dorian, I’m not sure course the winds will blow come Tuesday.

So my best advice is to wait a bit – ideally in standing position – before you decide whether it behooves you to load the boat or bail water.

Because each calendar interval takes a life of its own in the markets, and looks very different in the middle, and especially at the end, than it does at the beginning.

And I submit to all of you that a new such interval begins on Tuesday.

We managed to survive the pre-Labor Day sessions not much worse for the wear. Equity indices recovered last week, but not sufficiently to change the index motifs from red to green for the now-concluded month of August.

The bid on debt instruments remained astonishingly unabated.

And in case you doubt this, please reference the following couple of charts:

First, and as has been noted elsewhere. The aggregate value of debt outstanding that is throwing of negative yields has now reached an impressive-by-anyone’s-standards $17 Trillion:

Sharp-eyed observers might notice that its value has more than doubled in a period covering less than the last year. My best guess is that due to both technical and fundamental reasons, this line will continue to ascend into the heavens, ere it comes crashing down. Solicitous global monetary policy is likely to continue, if not accelerate in the coming months, and there aren’t enough investible securities available to demand the outrage of positive yields.

Also, remember all of that hand wringing about the 2s/10s inversion? Well, not to be outdone, the US Treasury Curve is now inverted at maturities from 3 months out to 30 years:

Now, it should be noted that substantially all of this perverse configuration is owing to a frantic bid on Treasuries at the long end of the maturity spectrum. Yields on the 30-year bond crossed below 2% this past week, and there they reside.

The more practical than philosophical among us have suggested that our Treasury take the opportunity to issue 100-year bonds. And they may have a point. Because if Uncle Sam can borrow out 30 years at a lower vig than 30 days, it should absolutely consider it.

But anyone who buys these century babies, which will mature around the year 2120, is on their own. I would expect some serious volatility for the owners, before they are wheeled up to the tellers’ window to retrieve their principal, four generations from now.

I’m guessing, though, that there’s still a tail wind on both stocks and bonds. It just may not manifest right away. If either asset class dips, though, you have my full sanction to go and do some shopping.

But if you want to serve your investors, one way or another, you may want to wait a bit. Because Milton was right about that. And he ought to have known.

A few years after the restoration of the monarchy in 1660, King Charles II got around to forgiving the blind poet everyone still loves to hate. From this perspective, his patience paid off.

Cromwell, of course, was not so fortunate. He died of an unspecified illness, 361 years ago this Wednesday, but in what can only describe as a somewhat squicky move, Charles II, who hadn’t had even a chance to warm the throne much yet, ordered Cromwell’s body exhumed, re-executed, and subject to public display. His head famously rested on one of the pikes outside Westminster Hall for about 15 years, proving perhaps, that standing and waiting is a more effective stratagem, than is, say, regicide and revolution.

So, as the action heats up to what is likely to be a fever pitch over the next few weeks, let’s follow Milton’s example over Cromwell’s, OK? Stand and wait for a bit, and then look for a sign to make your move. The only downside to this strategy that I can envision is that somewhere around the year 2400, some snarky young bloods may see fit to poke fun at you.

But at least your skull won’t be placed on indecorous display from the years 2022 to 2037.

And this, my friends, from a risk management perspective, is what the Good Lord had in mind for us.

TIMSHEL

I’m referring to this past Friday. His worst day on the job.

By my reckoning, it wasn’t even close.

The action came in so hot and heavy that the exact chronology of missteps eludes me. But as I recall, the stage was set with a move by China, which, it must be remembered, and according to standard measures of timekeeping, is approximately 12 hours ahead of us. What did they do? They jacked tariffs on another $75B of our stuff.

Then, if memory serves, the big guy responded by ordering American corporations to seek commercial alternatives away from that ancient jurisdiction of such current collective, obsessive focus.

A President, ordering domestic enterprise to conduct themselves in a specific manner, absent the authority to do so? Did I miss something? Has Liz Warren already taken occupancy of the Oval Office? One could be justifiably forgiven for making that assumption. But we’ll return to this topic anon.

The markets sold off on the dictat — in Pavlovian fashion. But as the fates would have it, these events transpired at a point contemporaneous to the annual yuck fest sponsored by the Federal Reserve Bank of Kansas City, referred to in the financial cirles as Jackson Hole (presumably because that’s where the event is held). The key speaker, as was entirely fitting and proper, was Fed Chair Jerome Powell, who did his best to reassure the markets that he intended to support growth, and that trade issues were front and center in his mind.

Grateful investors showed their appreciation by buying stocks back up a bit, going into the European close.

But the Leader of the Free World wasn’t done yet. In fact, he was just getting started.

His next stunt may have been as bad as his first (but we’ll get to that anon). Using his favorite social media forum, he posed the rhetorical question as to which individual represented the bigger threat to American interests: The Chairman of the Federal Reserve Bank of the United States or The Chairman of the People’s Republic of China.

He didn’t offer his specific views on the question, but he made his point nonetheless.

And investors went back to their selling ways. And 45 was only half way done with his shenanigans.

The afternoon, a sultry Friday in late August (and a point when the populous arguably deserved a respite from this infantile psychodrama) featured two separate announcements of retaliatory tariffs emanating from our side of the Pacific. Perhaps in a fitting coupe de grace, the second of these was announced after the closing bell, virtually ensuring an extension of the selloff when trading resumes on Sunday night.

Having thus put in a full day’s work, he went wheels up on Air Force One to attend the G7 summit in Saint-Jean-de-Luz, France. Barely taking a breath, he began to mix it up with his opposite numbers: Macron on Climate Change, Boris Johnson on Trade. Heaven only knows what else.

And that’s where we leave off. And perhaps it wouldn’t be amiss of us to take a brief opportunity to evaluate which of these moves was the most imbecilic.

For my money, I’d have to split the award between the nonsensical order for American companies to point their business activities away from China, and his conflating of the threats posed to us by the chief custodian of our monetary policy and the supreme dictator of the world’s largest nation. You know, the one that unambiguously poses the greatest threat to our global interests.

Both make my blood boil, and bear in mind that I am on record as being someone who, if never actually able to pull the voting lever for the Trumpster, was at least wishing him well and nominally supporting him.

I’m particularly annoyed because both of these statements give aid and comfort to his myriad domestic enemies. The statements sing to their narrative like Pavarotti at La Scala. “He wants to be a dictator; he’s unhinged” they bleat. And this time, they are probably right. And if he’s not careful, if doesn’t cool his heels a bit, he’ll giftwrap the next election to the other side, who will gleefully redistribute our wealth until the whole nation is bankrupt, while scolding us for our evil ways in doing so.

All of the above is reflected in a market selloff that: a) is now likely to extend itself; and b) like John Heyward’s ill wind, blows nobody good. Particularly heartbreaking in my judgment is the havoc wreaked on the Commodity Complex, with benchmark indices now residing at their lowest level since early 2016:

Maybe it’s time we put to rest those crocodile tears our politicians have been shedding for our farmers, miners and other wretches who toil in the production of materials vital to our existence.

Yup, on the whole I’d say we should just save our sappy sops to these folks. They are getting crushed, and are likely to feel further compression.

But I’m not sure our rhetorical simpatico is what they seek.

In a similar motif, and perhaps equally concerning, the Baltic Dry Shipping Index, which measures the costs of logistics across the globe, has catapulted itself to its highest levels since the start of 2014:

Well, maybe at least the shippers have something to celebrate. The rest of us do not.

But like 45 himself, I’m a stubborn so and so, and I’m sticking to my judgment that the equity rally, at any rate, has not run its course, and this is to say nothing of bonds, which should continue to draw unlimited amounts of capital for the foreseeable future.

In fact, one can only gaze at wonderment at the insatiable bid for corporate bonds in these increasingly troubled times. The LQD Index of Investment Grade Debt actually rallied on Friday, is resting at material ALL TIME highs, and has returned in excess of an astonishing 14.5% this crazy year:

Not bad for a basket of securities designed for low return and safety, right? These are the kinds of investments that our grandmothers used to make, once our dads convinced them that keeping all that cash that poor old granddad had squirreled away for their widowhoods under the mattress wasn’t such a hot idea.

But for investors everywhere, of every stripe, there’s simply nowhere else to deploy their funds that is consistent with the generation of even miniscule returns.

And the turbo-charged rally in government debt almost certainly must continue, as aided by what is likely to be incrementally accommodative monetary policy across the globe. The Fed will have our back, because they have no alternative. The ECB will be even more assertive, particularly when Madame Lagarde takes the helm in October. China, Japan, the rest, will follow suit.

All of this should re-energize a bid in equities once the dust has settled from this most recent sequence of unfortunate episodes emanating from the White House. I won’t advise my clients and followers to dive in Sunday night/Monday morning, but somewhere in here, and certainly at lower valuation thresholds, flows into the stock market will re-emerge.

There’s one last factor to consider: if recent history is any guide, Trump is likely to back off like a little bitch on this whole China thing, only, as a matter of near-certainty, to get bitchy again when his mood suits him to do so. My call is that eventually we paper something with them, but in the meantime, equities are scarce, mes amigos, scarce.

And so, for that matter, is land. So in keeping this week’s color motif, and to temper justice with mercy, I’m gonna go ahead and give 45 a shout out for floating the trial balloon of buying Greenland. In addition to being green, Greenland is cool. That vast square mileage of uncharted wilderness would almost certainly bear fruit some of these days. I believe that we can harvest them better than the (mad) Danes.

But if our Chief Executive doubles down on the moves made on his worst day at the office, Orange Friday: The Sequel, will be coming to a theater near you. It may or may not be worse than Black Friday, but it could be close.

And, after all, Orange is the New Black.

Isn’t it?

TIMSHEL

Ah, yes, Deuces and Dimes, Twos and Tens: inextricably linked, like… …well, like what? Ham and Eggs? Bert and Ernie? Lennon and McCartney (my personal fave)? Simon and Garfunkel?

Well, maybe II and X don’t actually go together as well as any of these, but consider a couple of contexts where they act in divine combination. First they used to teach us in driving school (back when us old codgers were learning behind the wheel of the good old Model T) to keep our left hands on the 10 O’clock position on the steering wheel, with the right hand on the 2:

Apparently, this is no longer di reguer, but nobody ever informed me. So I still rock the 2/10 in my ride, and I count this as something of a pity. I like to practice safe driving for the most part, and I hate to think that I’ve put myself, my family and other roadsters at risk for the better part of 4.5 decades.

But here, as elsewhere, I will yield to the infallible judgment of the experts.

Also (and as is less widely recognized than suits my tastes), about 90% of watch images featured in adverts have the face situated in such a way that the hour hand is always set at 10, and the minute hand at 2. I offer, as Exhibit A, the following extract from the Cartier web page:

Discerning buyers of means should be made aware that the lovely number above is the Ronde Louis model, and can be had at the positively sacrificial price of $13,600.

I’ve done some research into the 10:10 configuration thing, and apparently it’s a combination of maximizing the visibility of watch logos, along with some sort of feng shui vibe that suggests buyers are in a happier, more acquisition-oriented mood when they look at images with upward angles.

Of course, all of this is nothing but mere prelude to the main Deuces and Dimes event: Wednesday’s brief inversion of the 2s/10s spread: a construct under which, for a brief, shining instant, two-year government bonds were actually trading at a higher yield than their ten-year equivalents:

If you blinked, you probably missed it. But no one did. Blink that is. Everyone noticed the inversion, panicked, and sold off their equity stakes to beat the band. By the time the dust had settled on Wednesday’s close, the Gallant 500 and its comrades had shed a shameful and ignominious 3% from their hard won valuation terrain.

I’m not gonna lie. All of this disappointed me greatly. I’m disappointed in the markets, in the investment community, pretty much in everyone except myself.

Because in all my days banging around these here markets (dating back to my participation in the buttonwood tree sessions about six generations ago) I’ve seldom seen such a breakdown in valor, decorum, mission execution and protocol. Our troops looked terrified out there, falling just short of the infamy exhibited by the Iranian Imperial Guard in surrendering to CNN cameramen during Gulf War 1.

I expected better, in particular given that we have gone over this, ad nauseum, in these very pages. Haven’t I been borderline obsessive about describing the astonishing force of the global bid for longer dated treasury instruments: one that shows absolutely no sign of abating anytime soon? Have we not gone over the fact that what happened at the short end of the curve (more explicitly controlled by central banks) was immaterial by comparison? Hadn’t the financial web-o-sphere been tracking this march towards a negative spread for days and days, to no ill consequence, until Wednesday?

Is a 2-year yield a few basis points higher than the 10-year equivalent a materially different economic paradigm than one in which there the reverse condition (spread the other way but at minimal levels) prevails: a paradigm that has persisted through the repeated piercing of all-time equity market highs, all year long?

In case anyone has any doubts, these are all rhetorical questions, posed on my part to reinforce the notion that the selloff was beyond silly. There are many reasons to fear this market, and I won’t go into them, but a blink-if-you-missed-it inversion of 2s/10s is decidedly not one of them.

OK; I’ll discontinue my bitch slapping now, mostly out of love. Because you know I love you. Historically, the inversion of the 2s/10s has indeed been a marginally effective indicator of a pending recession, but I’m here to tell you to rip up those history books. We may be headed into recession, and of course, over the longer term, such an outcome is virtually unavoidable. But the selloff on the negative flash of the Deuce/Dime spread means absolutely nothing at the moment.

Except this. Treasury yields are likely to continue to plunge at the long end of the curve for a significant spell into the future. Published reports indicate that Europe is teeing up something big on this score next month, and that’s before Quantitative Easing Queen Christine Lagarde takes over the helm of the ECB in October.

I also hasten to remind my minions (especially Phil) that everything in the markets for the next 5 quarters will take on an increasingly political tenor. And, from this perspective, the ironically-timed WSJ revelation that United States Mortgage Debt has now reached a level that tops even the pre-crash heyday offers further insight into the likely yield trajectory of debt instruments featuring extended maturities:

I would have bet a lot of money against this even a couple of years ago, but here we are nonetheless. No doubt that this cool $9.4 tril of residential borrowings is better collateralized, has issued from more stable financial institutions, to more credit-worthy borrowers, than was the case during the last go round. But to borrow yet again from the phrase made famous by Everett McKinley Dirksen: “$9.4 Trillion here, $9.4 Trillion there, and it starts to add up to a lot of money”.

Wherever else we may differ, we may perhaps all agree that any jump in interest rates here that might render refinancing expensive and inconvenient would be politically problematic.

And it wouldn’t just be 45 that had to deal with this during the election cycle. I pity any of our 435 members of Congress who, returning to their districts, arrived to find a plurality of their constituents under water on their mortgages and unable, without great difficulty, to refinance. The easiest way to insure against such unthinkable unpleasantness is to keep them longer-term interest rates down. Of course, this will cut into the microscopic profit margins that banks will secure — with the (shorter term) rates at which they finance at levels equal to or higher than the benchmarks against which they lend (longer term). But honestly: who under the heavens gives a rat’s @ss about the banks?

So get ready for further negative 2s/10s – coming to a theater near you. The long bond bid is globally insatiable, whereas at shorter maturities, which indeed are are more explicitly controlled by Central Banks, bear in mind that: a) these institutions don’t typically do knee-jerk cuts (except in an emergency); and b) due to the differences in financial construction, it takes a much bigger price move on a relative basis to impact rates at shorter durations.

Yes, we are in for a redux of the Deuce/Dime yield configuration. But in the name of God, when the moment comes, don’t react with a fire sale of your stock portfolios. I don’t want you to find yourselves disappointing me yet again. Because I know you would hate to do so.

In the meantime, I’m going to pass off the midweek episode to factors such as these being the dog days of August, the attendant lack of liquidity, and of course to the algos, which, if they perform no other public service, are always a convenient target for blame when markets go sideways.

If anything, right now and any point of incremental selling caused by inversion, these tidings should be taken as a buying opportunity. Because there’s nowhere to put your money given current extended microscopic yield conditions.

And in closing, I want to remind you that Deuces over Dimes is not always a bad hand to hold. Blackjack players, for instance, love it, because they know what to do when the cards are dealt in that fashion. They tell the dealer to hit them. Every godforsaken time. Nobody in that position ever sticks.

If you doubt this, just examine the example set by the Leader of the Free World, who also happens to be the owner of numerous casinos across the globe. Nobody doubts his high roller bona fides, whatever other opinions they may hold of him.

But I would caution against over-emulation of his lead, because, as we witness every day, he has a tendency to ask for another card even when he’s carrying nothing but paint.

He can arguably afford to do so; we cannot. But we’re not holding paint right now; we’ve got a deuce and a dime.

So if you press the hit button, you’ll get no complaints from me.

TIMSHEL

“To get back to the warning that I’ve received, you might take it with however many grains of salt you wish, that the brown acid that is circulating around us is not specifically too good. It’s suggested that you do stay away from that. Of course it’s your own trip, so be my guest. But be advised that there is a warning on that, okay?”

— Chip Monck – August 16, 1969, Yasgur’s Farm, Bethel, NY

My adamant risk management advice to everyone is to listen to Monck. The brown acid? Stay away from it. After all, Chip was the Master of Ceremonies of the Event, right? And as such, he ought to have known.

This has to rank among the most magnificent Public Service Announcements of all time.

Of course, my reference derives from the Woodstock Music and Arts Festival, which kicked off 50 years ago this coming Thursday. A few weeks ago, I warned my readers that I would draw heavily from references to the Golden Anniversary of that crazy, unfathomable, in-some-ways-horrible-but-on-balance-magnificent, summer of ’69. And the truth is that I haven’t done much to follow through on this admonition, because, well, there’s been a great deal deriving from the realms of current affairs to distract me from this intent.

But Woodstock is different. Ah yes, I remember it well. And I wasn’t even there. I was only nine years old at the time, and I couldn’t cop a ride from my mom (to be fair: she was a Bobbie-soxer) who didn’t even own a car at the time). I’d like to think that I would’ve otherwise gone. However, I have seen the full length feature film a number of times, and I reckon that this counts me as an expert of sorts.

It all began as the dream of a Trustafarian Miami Head Shop owner, who wanted to recreate the magic of 1967’s Monterrey Pop Festival, this time on the East Coast. The lineup, of course, was unrivaled, bookended by the fabulous, (at the time) toothless Richie Havens (who had to be pushed onto the stage and ended with his African robes drenched in sweat), and Jimi Hendrix’s iconic set, climaxing with his one and only version of The Star Spangled Banner (which almost no one heard because by then everyone was frantic to get out of there). Less than a year later, he was dead.

If the event took place in today’s era, the whole country would be patting itself on the back for the reality that the proceedings were opened and closed by African Americans. But that is now; back then it was all about the music, as well it should have been.

In between Havens and Hendrix, the half million in attendance were treated to the likes of the Airplane, the Dead, the Who, Janis, Canned Heat, Country Joe, Santana (who arguably stole the show) and countless other acts from the Golden Age of Rock and Roll. A pregnant Joan Baez, husband in jail, performed a haunting acapella version of “Swing Low Sweet Chariot” as only she could pull off.

Artistically, and culturally, it was a one-of-a-kind success. But as later revealed, the event was pure chaos, beginning to end. They had to close the New York State Thruway due to traffic. Militant Reactionary New York Governor Nelson Rockefeller called in the National Guard, only to think better of it at the 11th hour. I won’t name names here, but one of my former closest business associates, the long-time General Counsel from one of the world’s most successful hedge funds (till he retired), attended at age 16 with his 14-year-old brother. They got separated, and my friend went home. Alone. I never asked him, but presumably, his brother also emerged from the episode unscathed.

And then there was the whole brown acid thing. I’m not sure how accurate Monck’s warnings were, or what effect they had, but that is beside the point, don’t you think?

Because, fast forwarding the calendar five decades, it’s pretty clear that: a) the brown acid is still floating around; and b) a significant portion of our numbers are dosing on it and feeling it’s questionable events.

Market activity offers a stark case and point. The week began with an upping of the ante on the preceding psychodrama of U.S/Sino trade negotiations deterioration drama. Monday was the worst performance day of the year for the Gallant 500 and its fellows, and mid-day Tuesday, after the Chinese started goosed the yuan downward towards 7.0, 45 took the rather aggressive step of formally labelling our frenemies from Asia currency manipulators. Contemporaneously (though less remarked than what was merited), global bonds, already at impossibly stratospheric levels, catapulted into the ionosphere. Our 10-year note yield plunged an almost unprecedented 20 bp by mid-week, to a miniscule 1.63%, and the rest of the world’s paper followed suit.

My read of the situation was and remains that with bond bids at these magnitudes, any equity selloff would be transient, and, if anything, a buying opportunity. And midweek, equities began showing some renewed vigor, mostly as a reaction to any tweet/snippet associated with the trade negotiations.

That brown acid can really do a number on you.

The week ended on a modest down note, but by all appearance, the bid remains there, ready to pounce, like an iguana picking flies of a wildebeest or lion. And I am sticking with my call that you folks ought to remain long at this point, or, at minimum, avoid positioning yourself in short configuration. I figure that even if the September 1 tariffs do go into effect, our 10-year is likely to trade through 1%, and if this socializes an all-out trade war, we’re probably heading to a Woodstockian cycle of Peace, Love, Music — and Negative Rates.

And then let me ask you: under that scenario, whatchoo gonna wanna own? Yes, stocks are expensive by historical standards, but let’s take the example of Proctor and Gamble, that iconic maker of disposable diapers, laundry soap, feminine hygiene products and so many other of life’s essentials:

Now, given that it may be the most boring, least Woodstockian company in the galaxy, that it is currently trading at 27x forward earnings, and that it’s stock has been on what passes at its Cincinnati HQ as a major tear, the obvious question is why own it, much less buy it here?

Well, if I’m right about interest rates, some answers do indeed emerge.

Using the inverse P/E methodology, one is purchasing nearly 4% of earning per year.

And these earnings themselves are projected to grow at >3% over the next couple of years. It pays an annual dividend of 2%, and does so with the regularity that babies and women use some of its signature profits.

It also is one of only a handful of companies that sport an Aa rating by Moody’s Investor Services. So investors in P&G, buying in – even at 116 and change 00 can own ~4% earnings and a 2% dividend from a company that – let’s face it folks – isn’t going anywhere. Heck, even Woodstock produced a couple of babies, and I bet someone had some Pampers handy for the happy mother.

Now, under normal financial conditions, this might be one of the least appealing trades of which my brain could conceive. However, in the brown acid world of near-zero interest rates, it all kind of looks like a beautiful psychedelic image dancing in front of our eyes, now doesn’t it?

Again, again, again, investible securities are disappearing in front of our eyes like the come-down from our brown dose. Just a couple of days ago, telecom giant Broadcom announced the acquisition of technology security titan Symantec, for a cool $10B. We can thus strike another name off of the list of interesting companies investors can own in a differentiated fashion. In the future, anyone looking to capture upside in the cyber security game will either have to look elsewhere, or take on a gnarly conflagration of Broadcom cable assets for the privilege of doing so.

And as long as the brown acid peak hallucination period of impossibly low interest rates remains upon us, this sort of thing will continue.

But now we are entering the last legs of the summer. Earnings are pretty much in the bag, and they came in at -0.7% on a year-over-year basis, which was better than the highest expectations, but still places the market in a position where, for the first time in three years, Corporate America has generated back-to-back quarters of negative earnings growth. I reckon we can withstand the blow.

And there’s really not much left on the calendar between now and Labor Day upon which to focus — other than whether Trump and Xi are embracing or issuing menacing glares at one another. All of this could move the markets, but I encourage everyone to avoid paying too much close attention to these shenanigans.

Because I’m going to ignore them, keep the faith, and, of course, focus on Woodstock, which, at the end of the day, was a capitalistic initiative. The one and only Wavy Gravy even encouraged those “who aren’t too creeped out by the whole capitalism thing” to patronize a hamburger stand that some enterprising hipster had established on the premises. The rich kids whose parents financed the event took a bath at first (in part by letting everyone in free by Day 2), but eventually turned a profit. And the cash keeps rolling in. Especially this year: it’s Golden Anniversary.

I say “right on, brothers”. Because from my vantage-point, they earned every penny.

Yes, Woodstock abides, but so too does the brown acid. My advice remains to steer clear of it, because the rumor around us is that it’s not specifically too good. But like Monck said, it’s your own trip, so be my guest.

And this, my wonderful fellow Woodstockians, is what makes the world go ‘round.

TIMSHEL

Lord knows I hate bringing mathematics into our little weekend rendezvous, but sometimes duty calls. I don’t want to be overly blunt here, but some (though certainly not all) of you, lack what is called mathematical maturity, a characteristic that can only be obtained through either DNA or a gargantuan amount of sweat equity. For me it was a bit of both, but that’s another story.

So we’ll go math light, OK? Instead I draw your attention to one of the greatest comedy routines of all time: the Mel Brooks/Carl Reiner “2000 Year Old Man” sketch, which first emerged in Village clubs around 1960. Therein, perpetual straight man Reiner interviews Brooks, playing a 2000-year-old man with a decidedly Borscht Belt sensibility. He describes dating Joan of Arc, and his parents forbidding him to marry her because she was a gentile. He tells Reiner he has 4,096 children, none of whom ever come to visit him.

But most importantly for our purposes, when asked about history’s greatest inventor, he immediately names someone named Onin: a guy who fell from a tree, “discovered” himself and then fell in love with himself. This, according to Brooks’ account, was highly controversial at the time, because our forebears of the time considered the discovery a great sin. “The Lord told us to be Fruitful and Multiply” Brooks’ character points out, while Onin’s breakthrough falls under the heading of “Fruitless and Subtracting”.

And in so many ways, Onin’s sin plagues us through modern times. And we’re starting to feel the, er, unintended consequences. As this is a family publication, we will focus exclusively on recent Fruitless and Subtracting activity that has a bearing on the markets. Because that’s what we’re here for, right? To cover pertinent market trends?

This past week was particularly fruit-bereft and aggregation reducing. In rough chronological order, the first F/S episode occurred at the FOMC presser on Wednesday, where the Fed, as expected, announced a 25 bp cut to the overnight rate it charges banks, thereby unambiguously covering the subtracting element of the Onin ballet. It was viewed as a disappointment, as publicly proclaimed, among other forums, by the Leader of the Free World, who, had been using his inestimable tweeting powers to angle for a 50 bp subtraction. To add to the agita, Chair Powell disabused the masses of the notion that this was merely the first step towards a reversion to those carefree days in the first half of the decade, when the overnight rate was tethered to zero. Oh for a return to 2011 (NOT)!

Market participants expressed their disappointment in time-honored fashion: by selling stocks and buying bonds, the latter action (due in part to other Fruitless and Subtracting episodes described below) undertaken with gratifying rigor:

Now, even the mathematically immature among us are perhaps able to recognize that U.S. 10- year government yields reside at the lowest levels since early 2016. The yield curve, if anything, has become more inverted, which presumably was the opposite of what the policy move was designed to accomplish. In fact, rates across the entire global government bond complex plunged to levels not seen since, well, since back before the birth of the 2000- year-old man. Onin would indeed be proud of us.

And of course, equities dropped in sympathy with government yields; all of which was pre-ordained by the gods. However, as prophesied in this space, the selloff soon abated – temporarily. By mid-morning on Thursday, the Gallant 500 had recovered virtually all of the territory it had yielded in the wake of Powell’s latest trip to the podium. All of this strictly adhered to the script; equities were not likely to suffer much because the Fed had only cut 25 bp — against a backdrop of a gratifyingly robust economic landscape, and record valuations for financial instruments.

But then came an inevitable Fruitless and Subtracting episode, delivered courtesy of 45 himself, via his magic tweet machine. As everyone knows, on Thursday, the big guy announced that gosh all mighty, it looks like he is going to be forced to lay that next round of tariffs on the Chinese after all, perhaps with more to come after that. This fruitless statement subtracted another percent or so off of equity valuations.

I’ve long since given up trying to read the big guy’s mind, particularly with respect to topics such as China. But this one also seems to have been written into the script long ago. Probably, it is in part due to his self-perceived inability to piss off a sufficient amount of his constituents with his aggressive comments about the city of Baltimore. The story was beginning to wane, and his tweeter trigger was justifiably itchy. Further, this prolonged dance with Chairman Xi was always going to involve some stepping on toes before the banns are set and the betrothal takes place in earnest. I’m guessing that Trump now wants to wait a bit before inking a deal with the Chinese. Perhaps all the way to a point contemporaneous with the Democratic National Convention, scheduled to transpire, in a year minus a fortnight, in the great city of Milwaukee.

Now wouldn’t that be a kick in the head.

In the meantime, why not have some fun and stir up some sh!t?

But clearly, from a capital markets perspective, the market viewed the prospect of renewed trade hostilities as a fruitless action, which not only took a bite out of equities, but also subtracted critical price magnitudes from the Commodity Complex. As a case and point, I offer a glimpse at the glide path of both the Bloomberg Commodity Index and its most important component: Crude Oil:

BCOM Index:                                                                  WTI Crude Futures:

My relatives in the great heartland tell me that the crops are looking weak, and that the harvest may indeed be in jeopardy, while my Energy crew assures me that there is an oversupply of the much-derided raw ingredient to gasoline and other products. But these commodity guys and gals have been suffering for so many years, that one wonders whether the subtraction of their pricing power can bear any fruit for them at all. And I don’t want to beat a dead horse here, but I promise you that a reversion to anything that looks like kind of crude oil selloff experienced in the second half off 2018 would be disastrous for a credit bubble — already at galactic levels, and growing in alarming fashion.

But in terms of F/S, I must draw our final attention to the Democratic presidential debates, held over two consecutive nights last week in Detroit. I do so partly in honor of Phil, who gets very disappointed if I don’t through some political monkey shine into this publication. So here’s to you, Phil. And please don’t worry. These pages will be rich with political content in the coming weeks and months, among other reasons because with each passing day, market action will be drawn increasingly into a political vortex.

As for the debates themselves, they also followed the script. As expected, it was a monkey circus of (at least partially deserved) ad-hominem attacks on the President. OK; fair enough. The rest of the sessions were spent with aspirants seeking to outflank on another in the hysteria of punitive redistribution, social warfare, and other ethereal objectives which, if manifested, will of course lead us directly to the Promised Land.

I found the whole thing entirely Fruitless, I must state. So much so that I didn’t watch even one single minute of it. Didn’t need to.

But in all likelihood, the exercise will lead to the Subtraction of a few back benchers dreaming of somehow breaking through. So let’s remove a few names right now, shall we? Bye Bye Beto. Kiss goodnight, Kirsten. Disappear, Di Blasio, (with some regret) Good to know you, Gabbard… …I could go on but I reckon you catch my drift.

In the meantime, I encourage investors to keep a stiff upper lip. The selloff over the last three days was, on balance, a pretty weak showing. Had the news flow that catalyzed it transpired at any point other than where we are now, it would’ve been much uglier, and more painful. But with bonds rallying to astonishing-even-by-modern standards thresholds, I just don’t see how equities can suffer much. In fact, tariffs or otherwise, either at current levels or much below, this looks to me like the buying opportunity we’ve all been seeking for many months now.

So hang in there everybody. Mel Brooks and Carl Reiner are still alive and kicking up a storm well into their ‘90s. The 2000-year-old-man even makes an appearance now and then, and will be, if my math is correct, celebrating his 2059th birthday this coming October.

And as for Onin, nobody has spotted him in quite some time. But I wouldn’t let my soul be troubled by this over much. My sources tell me that: a) he prefers his own company these days (has for a long time); and b) he’s only now getting a full, er, grip on enhancements that modern technology brings to his magnificent invention.

One way or another, his spirit lives on.

And one last word to the wise for market participants. While I have no objection to your channeling Onin in a measured fashion, please don’t get carried away.

Otherwise, you’re likely to miss some heavy action in the coming days, weeks and months.

TIMSHEL

From what I read, it’s been a tough month for the Bernie Bros. Our favorite scraggly socialist seems increasingly to be yesterday’s news. He seemed so fresh and sparkly in ’16. But time and tide appear to have taken their toll. His message remains constant: tag every economic enterprise that possesses the means to be tagged, and give the bounty to the more deserving. But it’s sort of assumed by everyone now that this is the proper thing to do, and if so, why not allow someone else, say, the entirely more fetching Kamala Harris to lead the effort?

But Les Brers Bernie were offered a lifeline of sorts this past week, from the most unlikely of sources, and one who shares the same first name as our lovable curmudgeon. Presumably, many of you read with the same level of interest as did I the news that earlier this past week, lawyers for the infamous Wall Street Legend/former NASDAQ Chairman Bernard L. Madoff applied to the Justice Department for the commutation of his sentence.

Now, one can accuse the latter Bernie of many things, but lack of cheek is clearly not one of them. He probably figures that 45 is something of a rogue himself, and what’s the point of being a lifelong scamster if you can’t call upon a fellow scamster to do you a solid now and then?

Moreover, published reports indicate that the man who was able to pass off fictitious investment returns for the better part of three decades stands a sportsman’s chance of obtaining said commutation.

And if so, he’d be a perfect partner for the Gentleman from Vermont on the 2020 ticket. Sanders (Bernie 1) could promise to give away the entire private economy, and Madoff (Bernie 2) would (trust me on this) find a way to pay for it. Further, I am indifferent as to who heads the ticket and who holds the coat-tails, as, if one reverses the polarity of responsibility, Bernie 2 could lead by just creating an ocean full of new money to spend, and you can certainly count on Bernie 1 to spend it like a sailor.

Now, before you dismiss this notion out of hand, might wish to consider the reality that this would simply manifest – perhaps in more honest fashion – the current economic policy trends transpiring on a global basis. In advance of an FOMC meeting where the Committee is expected to cut rates (reasonably robust growth, record employment and hyper-charged investment valuations notwithstanding), we now encounter a situation where for the first time in 15 years, not a single Central Bank is hiking rates, and the percentage that are actually cutting is the highest since the early days of the recovery:

What could go wrong? I’m not sure if the grey/neutral contingent includes the ECB, which did not move at its midweek presser, but which promised a multitude of goodies (including a new €QE) come September, but the consensus among empowered monetary economists is nonetheless compelling.

And, though thinly reported, we Americans have now also been treated to what amounts to a fiscal stimulus. embodied in a gargantuan, two-year budget deal.

Among other matters, the deal expands those annoying spending caps to the tune of $320B, and this must have Congressional agents in both parties positively drooling in anticipation. But there are other reasons for rejoicing. Most notably, (at least from my perspective), it ushers in the coming Bernie-squared era in grand style. After all, what says Double Bernie more forcefully than a bi-partisan budget blowout?

I will cop to be somewhat surprised by these tidings. But clearly, the political winds are shifting, and politicians must pay obeisance to these changes. Most of you caught, at minimum, a glimpse of the Mueller testimony on Capitol Hill. I won’t opine much here, but in addition to the blindingly obvious reality that it put a toe tag on current impeachment efforts, I’d note, more in sorrow than in anger, the humanity of the sad spectacle of his testimony. It was not by any stretch a good look for him. The blogosphere has been active in ginning up analogues, but I have my own. Scowling Bob reminded me of no one so much as Captain Queeg under cross-examination in the film version of “The Caine Mutiny”. All that was missing was the steel balls. In fact, if (when) Hollywood decides to produce a movie of the Mueller saga, they may be left with no alternative other than to dig up Bogart for the title role.

Meanwhile, the market rally soldiers on, without crossing its own tow line or dropping a yellow die marker as it races out of danger. Stocks, bonds, the USD all benefitted in particular by a surge in the waning hours of the week. Commodities were a different story, but then again they always are.

The dead horse I choose to beat in this edition is the pressure on Crude Oil. Certain data flows suggest that it’s levitation act risks facing a final curtain. I draw your attention, for example, to the short interest build in WTI, which has emerged, seemingly out of nowhere, in the past few sessions:

Now, as a risk manager who cannot drift far from his basic training and reinforced lessons, I would normally look at a chart like this and prepare myself to go long. Everything about the short build cries out for a cycle of nuts squeezing emerging on the horizon.

But need I remind you that the economy, due to credit reasons, cannot abide a selloff in Crude Oil? I have no way of knowing for sure, but I suspect that all of those fiscal and monetary angels spreading their fairy dust on us till we are ready to choke on the stuff are focused on the potential plagues that await us if the energy credit market collapses.

But it seems as though the market is laying aside these and other potential points of worry. We’re nearly half way through Q2 earnings, and it looks like they’re coming in right within middle ranges of expectations. The count now projects out -2.6%, another down cycle in Q3, and then perhaps a reversal.

But investors seem to be in a forgiving mood. With the odd exception of names like Boeing (which maybe deserves their wrath) and Netflix (whose run, to the extent that it isn’t over, is likely, best case, to experience a competitive chop in the coming months and years), there has been little in the way of retributive judgment in the form of pricing pressure.

The reality that investors are overly rewarding expectations beaters while giving a hall pass to disappointers further reinforces the embedded bullish stance I have taken since earlier this year, when I got it into my thick head that the Fed Fix was in:

My gut is that this sort of thing: more aggressively buying up the achievers and only ditching the laggards in tepid fashion, is likely to continue. After all, it’s been, and I think will remain, A Summer of Love.

Of course, the ride to even more unfathomable elevations will be anything but a milk run. This week could itself be a test, with important earnings releases, as well as the Lighthizer/Mnuchin jaunt to Beijing, not to mention a high-drama FOMC disclosure saga, all geared towards the prospect of heightened two- way volatility.

But were I you (and I wish I was), I’d hang in there. The market, after all, will (hang in there that is). And if by some chance it drops, I am likely to recommend to my constituents that they do some shopping.

And if Trump were to just play along and commute Bernie’s sentence, the possibilities for us are endless. And the only question which would linger under these circumstances is whether we’re looking at a Bernie 1/Bernie 2 ticket or Bernie 2/Bernie 1. Either way, we can’t lose. We’ll have free health care, free education, reparations, subsidized living for those who are philosophically opposed to working for a living, etc. We will have clean oceans, skies and all of the kale we can choke down our gullets.

And better yet: from his desktop in Federal Prison, Bernie 2 has assured me that we can achieve all of the above while also eliminating our National Debt. In fact, there will be a surplus, which Bernie 1 wants to pass around to all of his peeps. Including you and me.

Maybe it’s all just a dream I dreamed one afternoon long ago. And before I close, I would be remiss in any failure to point out that we need more than commutation from the Trumpster: maybe even a full pardon for Bernie 2. He might even need to pass an Executive Order allowing Bernie to run for office.

But together, we can make it a reality.

And we will need everyone’s full support. Because even if we’re successful, it will take all of our focus and energy to ensure that when in office, Bernie 2 does not steal it all.

TIMSHEL