“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

Did you really think I would ignore this? If so I’m disappointed in you, and a little bit in myself.

Because as your risk shepherd, I am duty bound to protect my flock, and anything that threatens my lambs is a matter of solemn priority for me. If I have failed to make this clear, well, that one’s on me.

So when the ionosphere exploded with news that aliens were arriving – not the kind that have turned into the biggest political football this side of the Dirty Dossier, but actual space creatures – and the call came forward to meet them head on in the famous (infamous) Air Force testing sight known as Area 51, I was certainly compelled to fully investigate the threat.

For those of you not in the know, the entire episode was socialized on a global basis through that infallible information forum known as Facebook. Late last month, an invitation was posted there to meet these extraterrestrial creatures in desperate engagement, and over 1.5 million patriotic souls answered it. The number is growing, and even now, perhaps hundreds of thousands of our fellows are making arrangements to either countermand the threat, or at least observe the spectacle.

Published reports have subsequently revealed that the whole thing was a hoax, perpetrated, with no malice aforethought, by a clever California resident named Matty Roberts (Matty R to his friends). The United States Air Force has not offered much in the way of comment, other than to: a) assure the public that it has matters under control; and b) warn everyone to just stay away.

But are you really gonna rely on the USAF’s word alone? I mean, didn’t they leave all those planes as sitting ducks in Pearl Harbor in ’41 (strike that; it was the Navy that done that)? True, all of this is transpiring on the Golden Anniversary (plus one day) of our spectacular conquest of the moon, as led by a group of trained Air Force fighter pilots/engineers the likes of which grace us maybe once in a century. But Armstrong is dead and pilot Mike Collins is living out his last years on an island off the Carolina Coast. Buzz Aldrin is making the rounds, milking his moon walk for all it’s worth, and god bless him for that. He’s still a feisty sumb!tch, who evokes images of an older version of George C. Scott’s portrayal of General Buck Turgidson in the Stanley Kubrick’s remarkable film: “Dr. Strangelove”. But his wits are wandering, and I just don’t feel comfortable trusting his judgment on this here alien invasion thing.

So, consistent with my mandate, I checked out Area 51 myself, located as it is in Lincoln County in the Southernmost portion of the Nevada desert. Didn’t see much, and nobody would speak to me. But remember, I’ve been doing this risk management thing for a long time, and my professional judgment is that there’s little to worry about. Earthling technology at its best can only reach Mars in the space of seven months, we have very advanced satellite surveillance, and I can assure you nothing is emanating from that quarter of the solar system. So, worst case, the hundred-eyed devils won’t be here for quite a while, and if they can indeed menace us with a speed-of-light invasion, well, then, I don’t think there’s much that even the marshalling of all of Facebook’s 1.2 Billion users (including several million cats) can do about it.

But I was never one to rest on the comforts of a clean, visible horizon. So I decided I’d better check out Area 52. Now, in mathematical (if not geographic) elegance, the Air Force does indeed have such a designation: for an even-more secretive aeronautical testing ground. It also is in Lincoln County, but (like house numbers on the streets of Tokyo) it is not explicitly adjacent to 51. It resides, in fact, to the North and the West, in what is known as the Cactus Flat Valley.

Didn’t see nothing of interest there either.

But as long as I was in the hood, I thought I’d investigate Area 50, and it turns out that the Air Force doesn’t even control such a region. Instead, it falls not even within the jurisdiction of the Department of Defense, but is jointly overseen by the Treasury and the Federal Reserve Bank of the United States.

This, I find, is where the secret market experiments take place, and, try though I did, I was unable to even determine its precise location. Further, I’ll save you the time and effort that I myself wasted, and inform you that a Facebook search of Area 50 will bear little fruit.

As a matter of divine coincidence, Facebook actually discloses its earnings this coming week, in a critical reporting season now 20% of its way to completion. Thus far, it’s no worse than what modest fears suggested, and maybe even arguably a little bit better. The banks were hardly gangbuster, but they didn’t ruin the party per se. Microsoft also clocked in with numbers which, if they failed to delight, at least did not over-much disappoint. There were some bad misses: NFLX told a story of pathos that broke as many hearts as did the ending of that (recently cleared) Kevin Spacey show, the name of which I forget. Boeing pre-announced a $4.6B write-off (they don’t report until Wednesday and it will be anticlimactic), and investors took their actions constructively.

But as the big dog risk manager I offer the following admonition: Boeing better get those 737s back in the air soon, not only for the health of their valuation, but also because if we’re wrong about this alien invasion thing, we’re going to need it to be “wheels up” for every tin can we can mobilize.

The real drama of the earnings cycle begins this week, as, in addition to Facebook, we face the prospect of the leaders of Amazon, Google and even such critical backbenchers (oxymoron alert) as Nvidia taking their turns in the white lights. As mentioned in prior installments, I think that investor infrared missiles and projectiles will be trained much more directly upon back half guidance than they will on the actual results themselves.

If we get through these spectacles no (or not much) worse for the wear, they maybe we’ll be OK for a spell.

But all of this brings to mind concerns about what else they may be cooking up in Area 50. And I wish I had better answers for you. Plainly, interest rates remain under pressure, with non-US government debt hitting new lows (the hangover from Bastille Day, for instance, took the French 10-year back to new lows of approximately -0.07%).

The FOMC doesn’t even meet until Wednesday week, but has already pretty much telegraphed a 25 bp cut. If they stand pat (which I think they should but won’t), it could be a scenario of look out below.

And yes, everyone is nervous. Perhaps more than they should be. After all, we live in a world where a farcical Facebook post about a space invasion can mobilize over a million of our numbers.

Other signs of stress emanate from the FX markets, with the prime example coming from the EURJPY cross rate (which for reasons that I have never fully understood, has served as a long-time barometer of the level of concern among smart investors as to the risk inherent in the capital markets):

Sharp-eyed observers will notice that this pair is testing rolling one-year lows, in realms last visited in the aftermath of Trump’s China tweet.

OK; I get it. I myself am expecting 45 to turn the heat up at any time on Chairman Xi and his crew, if, for no other reason than he can. As I’ve stated previously, the most maddening thing about this very maddening guy is his inability to avoid sh!t stirring for as much as an entire day. I think that if he hasn’t tweaked somebody’s (anybody’s) nose within the space of a few hours, he starts to break out into a rash. Now, during the dog days of summer, I have a hunch that the Chinese might be an irresistible target for the big guy.

The markets won’t like it if this happens. But I have another theory that increases the likelihood that such a stunt may be in the offing. Specifically, my guess is that Trump and Xi already have a deal arranged, but are slow-walking the timing. As noted in prior installments, any paper they sign will be worth neither ink nor electronic pixels. But it will remove the risk of an escalating global trade war, which they can’t afford and neither can their, er, constituents.

But I feel that Trump will want to time this announcement for political purposes, and that means maybe next Spring. He may, in other words, be saving it for a rainy day. As he observes the circular firing squad in which his electoral opposite numbers are engaged, he might just be smart enough to have figured out that only one person can stop his re-election, and that is the Trumpster himself. If nothing untoward transpires in the economy, if no big wars, natural disasters or space invaders arrive on the scene, it ought to be a milk run. Certainly the market is telling him so; would the prospects of a Bernie or Liz presidency be otherwise consistent with current assaults on all-time highs?

But this economic recovery is nothing if not long in the tooth, and, on the odd chance that it starts to go tits up, say, in Q1, then a Chinese deal would be one heck of a remedy. In the meanwhile, why not stir some sh!t?

It is also for these reasons that I believe the Area 50 guys and gals will up their game in terms of suppressing the specter of corporate defaults. Corporate America owes historic amounts to the banks, and some of them are in a weak position to honor these markers. But I think that any bank holding this wiggly paper would be ill-advised to do anything but engage in a Trump Casino-type renegotiation/refinance. This is particularly true for any indenture whose declaration of failure would catalyze a loss of jobs across the great expanse of this nation. So my advice to the banks is as follows: ignore bad financials to indebted employers in the United States. Otherwise, you may have some permanent company: in the persons of examiners from the SEC, FTC, IRS, NRLB, NSA, and on and on.

And my bankers, know this: God help you if the Area 50 crew shows up in the reception area. I know enough about them to offer assurances suggest that it won’t be a pleasant interlude for you. You already know this, and I’ve no doubt you’ll do as asked, so I think the credit bubble and the interest rate vaporization will continue on for, say, a few more quarters.

So, as for the rest of us, I think it’s time to relax a bit. I can reiterate that 51 and 52 are all clear. And as for 50, my strong conviction is that it’s denizens are looking out for our interests. At least for now.

TIMSHEL

I don’t want y’all to get the wrong idea. This here article ain’t about race relations. It’s too touchy of a subject, even coming from the most woke un-woke guy you know.

The fact is, I have a confession to make. A big one. For most of the last 3.5 decades, I’ve been on the payroll of James Joseph (Whitey) Bulger, the notorious Boston mob boss/informer/fugitive, who died in a federal prison the day before last Halloween.

I can already hear the chorus of “so whats?”. Lots of guys worked for Whitey over the years, thousands of them, tens of thousands of them.

Ah, but my case is different, because, you see, I am among a very small member of his crew that worked for him on both the wise guy and rat side of his business.

I made some dough, yeah, but I earned it. The hard way. Made my bones when I was twelve. I’d share more details about this, but my government plea deal precludes me from doing so.

And I hardly need to tell you that it was a difficult ride. Whitey was a tough boss. A stone cold killer who could give you the Michael/Freddie Corleone GFII kiss for just looking at him funny.

But I don’t think I need to elaborate much here, because, as is well known, we all work for Whitey, every last one of us. Always have; always will.

And we’ve worked for him, like, forever. Consider, if you will, the reality that today marks the 230th Anniversary of the storming of the Parisian Bastille, which (like the signing of the American Declaration of Independence some thirteen year’s prior) is recognized as the beginning of a Revolution. The French Revolution. The Bastille itself was at the time crumbling and largely unoccupied, but the event resonates through the ages nonetheless. And to this day, it’s a national holiday in the Grand Republic.

It came about because a bunch of guys got sick of working for Whitey – in this case, King Louis (Whitey, or if you will, Blancy) XVI. That they had a legitimate beef there was little doubt, because Louis was doing an indisputably poor job of spreading the vig around beyond him, his luscious wife and his immediate crew. So, just like Gotti did Big Paulie for similar reasons nearly 200 years later, Louis Blanc had to go. Didn’t get whacked by some guys in Russian hats in front of Sparks Steakhouse, instead got his head chopped off.

He was replaced by something called the Committee for Public Safety, which created an even nastier set of Whiteys itself, as led my main man Robespierre. Not only did they whack anyone who crossed them, but in the space of less than five years, they actually whacked themselves. All of them.

And so it goes throughout history. One Whitey replaces another, sometimes violently, sometimes not.

And sometimes we don’t even know who Whitey is. But we all work for him. Or her. Or them. Because as illustrated above, there can often be more than one Whitey, and when this happens, all mayhem can break loose.

But if you toil for your wages in the investment racket, at the moment you probably don’t need to know. Whoever Whitey may be, his/her/their reign has been nothing but benevolent thus far into 2019. Our glorious equity indices, as everyone is aware, have surged to new all-time highs, and are showing no particular signs of stopping for a rest. To be fair and balanced, bonds have backed off a bit, as (perhaps to honor today’s Bastille Day Celebration) French yields actually slipped back into positive territory. The USD was also a bit on the schneid. But on the whole, Capital Markets Whitey has been treating us pretty well lately.

Among the many recipients of Whitey Largesse, of particular note are the holders of Investment Grade Corporate Debt. The full on, year-to-date return on the Lehman-cum-Barclays-cum-Bloomberg index tracking this paper is an astonishing 10.34% so far this year, which, even in mid-July, represents the strongest full year gain since those whacky days of 1938 (the first year somebody decided to track this here stuff):

Sometimes, that Whitey can be a really swell guy, ya know? Particularly so when you do what’s asked of you: 1) be a good earner; 2) never rat out your friends; and 3) always keep your mouth shut.

Oh, and there’s one other thing you can do that pleases Whitey to no end: go out and buy up every financial security you can lay your hands on. Because Whitey wants you to hoover them all up. And when he does, you will not need to guess at his next marching orders: you will be instructed to turn said securities over into his own keeping. Because Whitey wants them all for himself.

Whitey of course has many fine qualities, but subtlety is not among them. And just in case you failed to get the message, this weekend, he reached out to some WSJ guys he has on the payroll and had them write an article about European Junk debt trading at negative yields. He even went so far as to force me to put up the following charts in this week’s note:

Let’s keep this on the DL, OK, but sometimes I think Whitey pushes things too far. I mean, c’mon! The average aggregate vig on European slacker junk paper is less than that of the frigging U.S. 10 year note! Whitey: didn’t we just have to fly over there and go the old school route collection on a few of them dudes?

Plus, according to that same planted WSJ article, there’s like 3 Billion of junk paper actually trading at negative yields. Who’d you get to buy that crap? What did you do to make ‘em buy it?

On second thought, don’t tell me, because I don’t even wanna know.

Among Whitey’s top lieutenants, none are rising in his favor more gratifyingly than Fed Chair Jerome Powell. Like the good soldier he is, he dutifully faced down the Whitey wannabes in both chambers of Congress this past week and told them yes, of course he plans on lowering the vig. In fact, he plans to do so before the month is out. Good capo, that Powell, and we should thank our lucky stars that he’s doing Whitey’s bidding.

Because there are potential trouble spots ahead, taking the form of the earnings sit downs that begin in earnest this coming week. CEOs (the made guys) and their CFOs (the connected guys) have all been briefed on what needs to go down. They also know that they better deliver, because if they don’t, Whitey has them on notice that he’s gonna be mighty p!ssed.

And just to be clear, it’s not so much about what the Q2 take was, because Whitey already knows it was tough out there this spring. But you better have pretty good news about what the rest of the year looks like, because if not, then Whitey’s boys will be paying a visitation to your valuation, and, if you really b!tch things up, you may find yourselves next to Luca Brasi: sleeping with the fishes.

The estimates foretell of a down quarter, and they keep getting worse. Right now, the consensus calls for an approximate 3% downward boot. On the other hand, when one factors in the average aggregate beat when the numbers actually come in (4.8%), we might avoid bringing the bad news to the bosses after all.

However, in terms of the immediate trajectory for the Gallant 500 and its peers, none of this may matter much. I think most of the risk going into the earnings cycle is idiosyncratic in nature. For any individual company, disappointment is indeed likely to bring about wrath (and I’d advise getting this over with, because, like Don Corleone, Whitey doesn’t like to be kept waiting to receive bad news). But I’m not sure that at the index level, investors will be over-much annoyed. There is a bid everywhere across the financial instrument landscape. Whitey wants it that way. And what Whitey wants, Whitey gets.

I reckon as always we’ll just have to wait and see. I can envision a dip here – in stocks, corporates, govies, but based upon what I’m seeing from my remote, undisclosed outpost in the Witness Protection Program, I’d have to designate any downward action as a buying opportunity.

God I’m jonesing for more action that I’m getting. But that’s what happens when you’re a wise guy turned rat. No sooner do you roll than they put you in a spot where macaroni noodles covered in ketchup is what passes for pasta fazool..

And now, for once, I’m gonna cut it short. I just got a message from Whitey, my Whitey, so I gotta scoot. Yeah, I know that the old man was supposed to have died last October, but I ain’t never saw no proof of that. And even if he is dead, there’s always another Whitey to take his place.

And we all work for Whitey.

And on this here Bastille Day, I offer the following final message.

If you remember that always, from a risk management perspective, you ought to do just fine.

TIMSHEL

And so the Madness has ended. And I can’t help but think we’re all the worse for it.

For those wondering what I’m talking about, while everyone was working their grills and debating whether America is great or just OK, one of our unambiguously great institutions: Mad Magazine, announced that after 67 years, it will be shutting down its vaunted printing presses for good.

It’s a crushing blow, but we have no alternative other than to endure. After all, we survived, after a fashion, the much-lamented demise of the Village Voice last year. Other print icons have and will crumble. Being (albeit somewhat perversely) an optimist, I’m confident that new ones will emerge.

But I’m gonna lie. This one stings pretty bad. For my peer group, Mad Magazine was a bible of sorts. Multiple issues lay at our bed stands every night for years. They were next to the flashlight, and we all passed many nights taking in its particular brand of zaniness.

It started, of course, at the top, with founders Harvey Kurtzman and Al Feldstein. They had a single subscriber in Haiti, and when they received his cancellation notice, Feldstein flew his entire management team down to Port-au-Prince to talk him out of cancelling. I don’t know if they were successful.

One way or another, the magazine shouldered on, from the antiseptic 50s, through the Summer of Love and beyond. It endured the Disco Generation, the Big Hair ‘80s, the dot.com frenzy, the 2001 attacks, and everything that came after. But it became an increasingly hard slog, and a foreshadowing blow came just a year ago, when the Mad Men (and Women) moved their headquarters from gritty Madison Avenue in New York to sterile Burbank, CA. Something died right then and there, and, in retrospect, we all should have known it was the beginning of the end. And now, barely one year later, it’s all over.

But in its heyday, Mad was pure satirical magic. No subject was sacred or off limits. When I heard about the shut-down, all I could think about was those great Don Martin “Scenes We’d Like to See” cartoons, where everyone had protruding ears and a cucumber nose. One in particular sticks out in my mind. A knight approaches a castle, and calls, as in days of old: “Rapunzel, Rapunzel, let down your hair, so that I may climb your golden stair. Down comes these love blond tresses, and up goes the knight. When he reaches the top, he encounters a bald man with blond armpit hair that reached to the ground.

Not even Shakespeare reached such heights of tragi-comedic pathos:

And of course, the Magazine’s perpetual protagonist: the cat-ate-the-canary-grinning, gap-toothed Alfred E. Neuman, was a transgenerational superstar. He was a dead ringer for George W. Bush, and more recently was compared to current presidential candidate Pete Buttigieg.

His signature phrase “What? Me worry?” became the touchstone for three generations. And even today, in the wake of the tragic tidings of printing presses going silent, the rhetorical question is resonant.

So I ask my readers “What? We worry?” Is this golden rally that has traversed the entire first half of 2019 sustainable? Or is it nothing more than the overgrown underarm hair of a captive geriatric?

I think these are fair questions, and the hard truth is that we don’t really know the answers.

The Gallant 500 and the divisional forces of Captain Naz and General Dow gathered themselves, in patriotic frenzy, to surge to records during the holiday-shortened July 3rd session. And bonds. Oh. My. God. The U.S 10 Year Note, the one with the big fat coupon of 2 3/8th, surged to 103 ¼ on the same Wednesday, throwing off an unthinkably Shylockian yield of 1.95%. In perhaps a show of gratitude to those dead presidents that grace our units of account, the USD also staged a heartwarming rally.

And I’m pleased to report that all of these droplets of love managed to work their way beyond our shores and across the Atlantic Ocean. Also on the 3rd, a fortnight before the big national celebration of the Grand Republic, published reports confirmed that IMF Chair Christine Lagarde would indeed succeed (Super) Mario Draghi as ECB Chair. And, in celebration, I ask each of you to join me in a robust “viva la France”. Madame Lagarde will be only the 4th holder of this vital seat, and of course the first woman. However, she will be the second person of French nationality to occupy the post. My math indicates that 50% of the ECB chairs are now French.

Madame Lagarde has a very colorful history, and just a couple of years ago she was found civilly liable for a criminal 403M IMF payment to a shady businessman. No matter, she is, by all estimation, a monetary dove, and perhaps on this basis alone, global investors decided to bust out some joie de vivre.

It all came crashing down, albeit modestly, on Friday, when investors turned a menacing eye to a boffo June Jobs Report. And you know you’re in a pretty strong rally when investors interpret good news as being bad news. So the ~225K Non-Farm Payrolls number did indeed socialize some selling, but nobody’s hearts were in it. Bonds backed off to a positively usurious 2.05%, and the Gallant 500 yielded 20 basis points from its pre-holiday all-time-highs.

A review of the punditry suggests that the big jobs gains take the option of a 50 basis point cut by the Fed off the table for the July meeting. 50 basis point cut? You must be joking me. What in God’s name do those in the half-percent camp hope to accomplish? For me this is, was always, a Hard No. But what do I know anyway?

So, with all of this in mind, should we channel our inner A.E. Neuman, or should we be worried?

I reckon we’ll find out soon enough. My current hunch is that July will be a barn-burner with plenty of two-sided volatility with which to contend. And it should all start this coming week.

At the top of the list of concerns that run contrary to the Neuman Principal will be Q2 earnings, and even more importantly, back-half-of-the-year guidance. Even before the proceedings begin, analysts are projecting a drop of 2.6% on a year-over-year basis. If this calamity does indeed come to pass, it will mark the first time in three years that the American Corporate Juggernaut has experienced back to back quarters of negative earnings growth.

And all of this with stock prices climbing to the heavens. For the visually inclined, the situation can be summed up as follows:

Not necessarily the best look for those among us with bovine dispositions, now is it?

But not, on the other hand, necessarily a cause to answer the eternal Neuman question in the affirmative – yet. Because as I have argued repeatedly, the scarcity of investible securities is acute and growing. I’ve said this before, but just look at the bid on bonds. Then watch the parade of merger, acquisitions and buybacks.

All suggest to me that at least for the time being, higher multiples can be justified. This can only continue for so long of course, and when it ends, well, I don’t want to think about it. But I don’t see it ending anytime in the foreseeable future.

I am worried, however, about the dreaded guidance factor, and I can promise you this: any CEO stepping to the podium foretelling of bleaker prospects for the back half of the year than are currently expected must gird their loins. They are likely to bear witness to their stock valuation being gutted like a fish.

And then, of course, there is no greater clarity on the International Trade front than there was before G20. We did postpone some nasty tariff increases; otherwise we would not be looking at record highs. But I ask anyone with any clairvoyant insight into what happens next to please share it with me. On second thought, don’t bother. Because none of us knows sh!t about what happens next.

One way or another, though, the Central Banks are almost certain to react to any downturn with aggressive stimulus, and my guess is that Madame Lagarde is sitting with itchy trigger finger to do something of this nature. But she’ll have to wait. Draghi won’t be packing his bags till October.

Thus, while stocks and bonds could back up, if they do, I’ll be recommending a shopping spree.

In general, I’m not gonna worry about much for the moment, and instead focus on mourning Neuman and Company’s heartbreaking departure from the journalistic landscape. However, while I grieve the end of his run, I will try to remember that I myself evolved at some point beyond my Mad obsession. At approximately age 14, I replaced my night-time reading materials with other periodicals. They still contained fair damsels, but their hair did not emanate from their underarms, and their noses did not look like pre-vinegar pickles. I moved on, and so must we all. So my final answer to the “What? Me Worry?” question is as follows:

Exactly.

TIMSHEL