OK so it’s the holiday and I hope you’re enjoying it. But as you (at long last) bust out your seasonal whites, allow me to offer one piece of advice: don’t do it. It’s a bad idea.

Pitching past the W that is.

But maybe I should clarify. The concept is as ancient as our days, taking the general form admonishing us to back off once we’ve accomplished our objective. It has many, perhaps the most ubiquitous of which is that once you’ve made a sale, it’s time to stop selling. In my own personal experience, I’ve lived through both positive and negative examples of this, and I think I’ve learned my lesson. For the most part, once I’ve cut the deal, I no longer expound upon its merits to my opposite number.

Another way of describing this, in baseball terms, is Pitching Past the W. If you’re a pitcher who has the game in hand, don’t try to mow down hitters with your dazzling fastball. Serve them up some junk. Throw some strikes, yes, but keep the ball low. Make ‘em hit it on the ground. Of course, it’s possible to still lose under these circumstances, but at least you’ve minimized the odds of doing so.

Of course, not only does the analogue apply to portfolio management, I’d go so far as to suggest that it is a basic tenet of risk management. Consider, if you will, the example of a PM group that bought a troubled stock near its lows, thinking it could maybe double. When the price hits, say, >90% of the specified target, it’s time for them to consider unloading some of it. They may still think it can go higher, but that’s not the point. If they wish to play for further upside, they should either liquidate and then re-establish the position, or at least go through the exercise of re-underwriting it, with new targets and downside exit points.

But many don’t adopt this strategy, and thus find themselves having pitched past the W. More often than I care to remember, they have squandered the fruits of what was, in its formation, a great trade. The stock drops and they defend it; maybe even double down. And when all is said and done, what was a magnificent two-bagger morphs into a gnarly loss.

And, beyond the grubby realms of seeking returns through active investment, it strikes me that Pitching Past the W is a problem for the entire global political/capital economy. It may even be that the whole world may have committed our titular sin. If so, I myself have a problem. Specifically, across all forms of global economic activity, I’m having a great deal of trouble determining just where the W is. And if I can’t find the W, then how am I to advise my minions as to what point they should not pitch past?

Because as this long-awaited, well-earned start to the Summer Season has arrived, I have very little clarity as to what may happen – particularly in the near term. The global markets open up today and the U.S. takes off tomorrow. I really don’t know where it’s going. The China thing is still humongous enough to blot out the sun, and I’m sure I’m not alone in finding these intermediate crosswind communication breadcrumbs beyond maddening. We’re making progress, we’re being deceived, something will get done, we’re prepared to gird our loins for a long battle. Just do us all a favor and shut up already!

And in terms of nearly everything else, there’s no W that we can easily identify. Lots of problems out there. Iran, of course. May’s departure, stage middle, from 10 Downing (and a palpable fear of who takes center stage after her). The Nationalists swept the EU elections. Macron got embarrassed by Le Pen.

There of course are also escalating tensions between the White House and Capitol Hill, with the promise of more of the same to come, and it does appear that both sides are trying to sneak a big fat slider past the dub. Trump walked away from any substantive negotiations with the Dems this past week, in ultimatum against their continued efforts to remove him. This was somewhat of a bold move on his part, and (while I thought it a silly stunt when it I first heard of it) I now think Pelosi is right. 45 is begging, or at least taunting, the Dems into impeaching his @$$. My guess he has more in mind than simply acting, in Clinton/’98, redux, in expectation that the electorate will punish the impeachers politically). Specifically, I suspect that he’s itching for a trial in which his lawyers can put a whole cadre of operatives: Comey, McCabe, Clapper, Brennan, Lynch, Rice, Powers, and maybe even Big Dog 44 on the stand, and let them state, under oath and cross, how a counterintelligence investigation landed in his HQ, without him being even given the courtesy of notification. If the saga plays out in this fashion, it will be quite a show.

But one side or the other will surely pitch past the W, and will live to suffer the consequences.

Maybe even both will. And in some ways, that’s not the worst outcome for the rest of us. The initiatives Trump says he’s forgoing are both pretty stupid ones, says I. We simply don’t have $2 Tril hanging around and waiting to be infra-structured away. Gotta be a better way to fix roads, bridges and grids. Plus, though not an opinion shared by everyone, as a free market economist, I am against government intervention into drug pricing. The costs are too high, and yes there are folks getting rich as maharajas gaming the system (Pharmacy Benefits Managers in particular), but c’mon, do you really think that we’ll get better outcomes, that there will be less chicanery, if the federales step in? Think again.

But there’s other potential past-W pitchers out there, and my next, perhaps my favorite candidate, is the global central banking complex and its now-decade-long strategy of giving away money. While it’s been a rocky outing for equity hurlers over the past month, the starters and relievers on the global bond squad have been shutting them down like Koufax or Ryan in their primes. As our favorite stock indices have been swinging, missing, or, at best, fouling off pitches, long end government bonds continue to crush it, as, with little fanfare, the US yield curve became, for the first time in years, unambiguously inverted:

Now, those who want to adopt a “pitcher half full” viewpoint on this will take comfort in the awareness that if one goes out to maturities in the year 2031 and beyond, it remains possible to secure a rate higher than that of 3-month T-bills. But this, at best, is thin gruel.

And the thing of it is that the United States Treasury Complex appears, by comparison, to have the healthiest and most rational yield configuration among all of the major economic powers of this forlorn world.

However, if we have indeed used QE to pitch past the W, we did so a long time ago. While tt will take many more decades to determine the full impacts (positive and negative), I’d say that up to this moment, the program has earned an addition to the left digit of its record. Whether you realize it or not, in 2008, we were hurtling towards a full-on Depression. The banks were on the verge of failure. The entire global credit system was verging towards collapse. There would’ve been massive unemployment, insolvency and myriad forms of human toll. It might’ve been as bad as the ‘30s. Or worse. And remember, it took the biggest war in history (the heroic efforts of those who forged victory are some of what celebrate today) to pull us out of that economic slump.

Let’s just agree that it was a show well worth our avoiding a second screening.

So the Central Banks, led by the Fed, sought to avoid disaster by flooding the system with liquidity, drowning it in the stuff. And for at least a decade, the results have been miraculous. You can quibble if you will, but the hard fact is that instead of depression, we’ve had more than ten solid years of a growing economy and all of its fruits: breathtaking technological innovation, abundance of employment, and, of course, the mammon that us filthy lucre seekers pursue most ardently: historic investment returns. While it hasn’t always seemed like a raging bull tape, the reality is that over the 10 years (and a partial quarter), the Gallant 500 has more than quadrupled, matching the performance from the waning period of the Carter years through Regan and Bush the First.

So yes it’s been a big fat W, but there was and remains every possibility that we would, at some point, have pitched past it. We may have done so already. It is beyond dispute that the suppression of core rates to zero or below has visited myriad plagues upon us. Companies that have no business surviving as going concerns are being unwisely sustained by easy financing. Capital is being misallocated. Savers are being gutted like fish. And once a country’s 10 year notes hit the inflection point of zero, they have a devil of a time getting out of this rabbit hole. If you doubt this, just check the prices on the paper issued by our former Axis enemies: Japan and Germany. Especially Japan.

Most troubling of all, the debt burden just keeps on expanding – to record levels. As my esteemed acquaintance Jim (no relation) Grant points out this week, the aggregate value of negatively yielding global debt is now in excess of $10 Trillion. Chew on that, if you will, for a moment.

And I feel it a near certainty that the global capital economy will eventually blow this W by pitching past it. But I don’t know if it has happened yet, and, gun to my head, I kind of doubt that it has.

I still feel that securities are in short, growing shorter, supply. Prices in the real economy are, if anything, falling. The government measures of inflation are said to overstate the metric, and, while trying to confirm that would be attempting to corroborate the unobservable, I believe that the assertion is probably correct. Much of this is due to the economic impacts of modern technology, which has taken both consumer and commercial price discovery to a point of near-perfection. My daughter will indeed get another crib for my darling grandchildren, but only after weighing 20 options that are at their fingertips. Companies may be hiring, but given the portability of labor, the competing dynamics of automation, and the ability to perform perfect wage cost due diligence, they ain’t paying a penny over what they have to in order to secure their work force. In my own business, with technology-enabled risk solutions multiplying like hobgoblins, I am unable to contemplated raising fees. Ever.

And on balance, with the free money still flowing, no inflation and basic economic stability, I feel we have not yet reached the point where we have pitched past the W.

But I’m going to keep watching — with a wary eye. Markets will probably be in high motion for the rest of the quarter and beyond, but in general I think the bid is still there. But I’d close where I began, by begging you to keep risks tight and avoid pitching past the W.

And, given that I’ve ground my baseball analogies into the dust) combined with the fact that the St. Louis Blues are currently facing the Boston Bruins in the Stanley Cup Finals) I will finish by stating that if you follow this advice, you may indeed be able to slip one past the goalie.

TIMSHEL

Before y’all get up in my grill about a potential descent into the muck and mire (in this, the age of impeccable decorum), please know that I have no intention of doing so. My days of writing about the pleasures of the flesh ended about a decade ago, perhaps due to my frightening accumulation of trips around the sun. I am now, biologically speaking, what Hamlet wished his mother Gertrude to be: “at (an) age where the heyday in the blood is tame, it’s humble, and waits upon the judgement”.

Instead, our theme derives from a quote from Oscar Levant, who once famously said that he knew Doris Day before she was a virgin. Now, I don’t know much about this Levant person, but according to Wikipedia (that compendium of all human knowledge), he was something of a Renaissance Man, a first rate pianist, composer, and (evidently) a world class wit.

But I do remember Doris Day, who left us after a nearly a century of fluffy, optically prudish elegance this past week. Being a child of the Sixties, I was too young to have carried much of a torch for her. She remains in everyone’s mind’s eye, the lovely, prim, girl next door. Young bloods who doubt this should consider the following: the romantic interest for her most iconic roles was none other than Rock Hudson. Her real life much different; it was wild and wooly, and features many escapades that ran in direct conflict with her public persona. But in respect to the dead, we’ll pass over these without comment.

It was one of those weeks when our idols dropped like flies: Day, Peggy Lipton (the number one object of fantasy for me and any number of my boyhood friends), the architect I.M. Pei, and, for what it’s worth, my daddy. But I’ll spare you any further ruminations on the last of these.

It was also something of a wild and wooly market week, buffeted, as was inevitable, by latest twists and turns in the China saga. I didn’t notice much good news on that front, so, on balance, it’s fair to state that the market held up well against these tidings. I won’t say that we’re virgins again, but the stain of our deflowering is, at this point, barely observable.

Of course, the full tale of our China Syndrome has yet to unfold, but we are perhaps now at a point when we can parameterize various outcomes, and here’s how the fine economists at JP Morgan have handicapped the scenario:

For those among my readership who prefer words to pictures in understanding a story, Team JPM suggests that a bad trade outcome will take the Gallant 500 to depths last observed in the first couple of sessions of 2019, while a favorable result will catapult it to the lofty, never-before breached elevations of 3,200.

On balance, will go out on a limb and agree that it will settle somewhere within these ranges. If I were to quibble at all, I would do so with the implication that any clarity will manifest itself in what remains of the Month of May. Due to the pending holiday weekend, this month has only nine trading days left to it, some of which will be truncated by the Memorial Day getaway ritual.

My best (and of course boldest) guess is that we end the month well below the green arrow tip but significantly above the red one. We may indeed bounce around a bit, but I suspect that the blow-off valuation resolution will not transpire during the date ranges specified in the above-presented graph.

Beyond that, though, and in general, it appears to me that investors are anxious to make a play for those financial instruments that have long been the objects of their collective desires. They may like, Doris Day, again become virgins, but at the point of this correspondence, it looks to me like they have drawn some nectar from the carnal cup, and are thirsting for more.

I offer, as Exhibit A, the market’s response to Thursday’s news that the Trump Administration had placed Chinese component maker Huawei Technologies (and 26 of its global affiliates) on a dreaded blacklist – a step that may preclude it from doing business of any kind with the U.S. or any of its allies. Though long anticipated as possibility, the announcement was, in my judgment very big (and not particularly constructive) news. Huawei is the largest manufacturer of telecommunications equipment in the world. Its goods traverse the entire supply chain — for products ranging from smart phones to satellite equipment, etc. If, indeed, they are shut out in significant measure from the global markets, then all of us are likely to feel the bite. And all of this is transpiring: a) in the midst of what appears to be a burgeoning trade war; and b) as the world gears up for the conversion to 5G, and the boondoggle tech spend it portends.

But the markets barely budged. In the United States, equity indices sold off by a titch, but the week ended strongly – particularly in Europe but also across most of Asia-Pacific. The frenzied bid for global bonds continued apace, the USD rallied across the globe, and even my beleaguered Grains began to register something of a pulse.

Contrast this, if you will, to the action in the immediate wake of the last move that 45 made against the Company. On December 6th of last year, Canadian officials, at the request of their U.S. counterparts, arrested Meng Wanzhou, Huawei’s CFO (and, coincidentally, the daughter of its founder) on multiple charges of corporate fraud. To this day, she is awaiting (and fighting) extradition to this country. Astute readers will recall that this move came less than a week after a supposedly productive summit between Trump and Xi, held in conjunction with the G20 meetings in Buenos Aires. You know, the one where the now-imposed tariffs were postponed.

But this earlier event seems to have transpired in our pre-virginal days. At the time of Ms. Meng’s arrest, the SPX had already fallen ~11% from its late September highs, and was less than half way through a rout that took the index down to levels last seen just days before Trump placed his hand on the Bible on the Capitol steps, and Madonna was speaking in Central Park, threatening to blow up the White House.

This time, however, against the backdrop of what I believe to be a more serious step than the staged arrest of a single nepotistic corporate executive, investors reacted with little more than a shrug.

I have pondered as to why this is the case, and the best answer I can offer points again towards the lusty actions of the Fed and other Central Banks. After ignoring/abusing the market for the latter part of 2018, the Fed, ECB, BOJ and PBOC turned their amorous eyes in its direction, and the fluttered investment community reacted with a sigh and a swoon. It remains weak-kneed, and, in my judgment, fully under the spell of these Lothario monetary policy wonks to this day.

Again returning to the JPM graph, I am more inclined to believe that any broom-jumping ceremony between the U.S. and China will launch valuations into the stratosphere, than I am that a full-on desertion will catalyze a rout. One never knows about these things, but until we put on again our Vestal Virginal robes, we must operate with our eyes wide open, while, perhaps, guarding our nether regions with greater care than we have exhibited in recent times.

And I wish there was more at the moment to distract our wandering eyes than the potentially misanthropic courtship between The People’s Republic of China and the United States of America. But there’s not. A few final earnings numbers will trickle in over the next week, but the Q1 chapter is now substantially written. It tells of a mixed bag of more favorable valuations, coupled with some stock suitor wrath at any whiff of disappointment:

Forward P/E Below 5 Year Average, but..                      Investors Lashing Out at Disappointed Hopes

After the last earnings love sonnets (or Dear John letters) roll in, we’ll all be off to the Beach. We’ll pick up these threads mid-week next week, when, I suspect, we’ll flutter in, hair askew and skin flushed, to conclude a stormy month on Friday week.

And one final comment before I take my leave. Whatever happens after we get some clarity respecting our intentions with the Chinese, I’d fade the next market move. If we migrate towards the JPM green line, it’s likely time to sell. By contrast, if we swoon towards the red, I will in all probability call for us to gather ourselves and do some shopping. Many times after Rock and Doris had a falling out, she’d pull herself together and head to the mall. We may well wish to consider adopting the same strategy.

But as her signature song foretells, “Que sera sera, whatever will be will be”. My hypothesis is that we are no longer virgins, but we could become so once again. After all, Doris Day pulled off this transformation multiple times. And lived for nearly a century to tell the tale.

So, as a matter of risk management protocols, it is advisable that we prepare ourselves for either contingency.

TIMSHEL

Crazy cat peekin’ through a lace bandana,

Like a one-eyed Cheshire, like a diamond-eyed Jack,

A leaf of all colors plays a golden string fiddle,

To a Double E waterfall over my back

— Jerry Garcia and Robert Hunter

It had to happen eventually, that I’d get around to featuring China Cat Sunflower in one of these notes. After all, the joyful, bouncy, two chord journey through what can only be described as a lyrical acid trip has comprised a significant portion of the soundtrack of my life.

The challenge was always with finding the right contextualization: how to offer relevant reference to a series of bon mots — about copper-toned Bodhis dripping silver kimonos, or Comic Book colors on a violin river, crying Leonardo words from out a silk trombone. But admittedly, the task is no harder than that associated with previous lyrical references offered in this space, for instance Lennon’s “yellow matter custard, dripping from a dead dog’s eye”.

But now the moment has arrived, because China Cat Sunflower 2019 is on. Or off, depending upon your vantage point. At all points since last Sunday’s Trump tweet fest against China (regrettably issued after last week’s issue went to press, and, as such, absent from the copy itself), the entire global capital market have become one big US/China Trade Talks derivative. Risk-embracing assets began selling off as early as Sunday night, and bounced around in lock step with the tone/content of every subsequent rumor or 280-character proclamation. I’m not sure if this is the best way to roll – in terms of either policy or investor reaction, but it doesn’t really matter, because that’s what we’re looking at. Equities had their worst week of this amazing year. Global bonds enjoyed a bidding frenzy that threatens to move the Swedes and the Danes into the lofty company of Germany, Japan and (of course) Switzerland — as countries that demand capital allocators pay them interest for the privilege of purchasing/holding their 10-year debentures. Take a look at the Commodities action if you dare, but remember: you were forewarned.

Of course, no one has any idea as to how this all plays out, perhaps not even the principal actors themselves. But one thing we can state for certain is that as of 12:01, last Friday morning, US trade policy includes a 25% tariff on an incremental $200B of goods imported from China. The list of products impacted is a long one, and to tell you the truth, I didn’t review it in detail (OK; I didn’t review it at all). However, I am confident in stating that if any consumers out there are in the habit of purchasing either Cats or Sunflowers from China, they should expect some sticker shock on their next orders.

I’ll be straight up with y’all: I could’ve lived without the drama, even if, inadvertently, it added some credibility to last week’s themes about a pretty entrenched resistance at the approximate 2950 level on the SPX. Well, the technicals held, but not for technical reasons. Inexorable fundamentals flared up, and it is for this reason that the resistance walls could not be breached. But one way or another, the Gallant 500 has now formed a Triple E Top (i.e. as opposed to a Double E waterfall) at these thresholds.

On balance, though, I will join the chorus of those we believe that the market held in pretty strongly in the wake of these machinations. Consider, for instance, that what seemed like a bloodbath all bloody week only rose to the dignity of a 2% correction, and this off of all-time highs. It certainly felt like worse carnage than that, and it perhaps bears mention that if this here market cannot withstand a two-percent downdraft on a tape that is still evidencing greater than 50% annualized returns, we probably have deeper issues than the current hissy fit between Trump and Xi.

China Cat Investors gathered themselves a bit on Friday, ironically in the afternoon hours of Tariff Day One, on the strength of rather tepid but on balance encouraging warbling from the Prez and his trade cops. China have not imposed retaliatory measures – yet. Next week’s summit is still on, and – best of all – apparently Chairman Xi sent a very lovely note to 45, extending his warm but powerful grip of friendship. So perhaps all is not lost.

The betting line favors the execution of some sort of deal, and I’ll avoid being stubborn and go with the chalk. The benchmark CSI index is off a titch more than its opposite numbers in the U.S.; in fact it has relinquished an eye-popping 24% in just under a month, and for what it’s worth, that particular correction was not from all-time highs, as those realms were last seen, ironically, in 2007, in the run up to that glorious crescendo of the Beijing Olympic hosting session. At that time, the CSI reached nearly 6,000; it’s now resting at a beggarly-by-comparison 37 and change.

All of which, when viewed through a lace bandana, would seem to suggest that the United States has an economic advantage in this here trade throw down. But don’t try to make that suggestion out loud — unless you’re prepared to be clobbered with counterarguments about such matters as the significant domestic political advantage enjoyed by the Chinese leadership. They are, after all, in permanent power, and can do what they want. By contrast, our top elected officials must face the voters in 18 months – an angry mob that won’t tolerate much (or, in fact, any) economic inconvenience.

But I’m not so sure that the counterargument prevails. Yes, Xi and his crew have absolute power, and beyond all of that, their populous is conditioned to accept short-term hardship in pursuit of longer-term gain. However, if that was the whole story, I suspect China would be full-on embracing a final trade showdown with us. If they hit us with everything they’ve got, it’s a shoo-in that we would cave.

So why aren’t they proceeding accordingly? My theory, as mentioned in previous editions, is that Team Xi does not wield as much power in practice as it does on paper. From my distant, largely uninformed point of observation, China looks like an oligarchy – akin to that of those nasty Russians. According to published reports, there are barely a half dozen denizens of that country that can even presume to reside in the Bezos/Buffet wealth zip code, but I suspect that these numbers are highly inaccurate. In the 18-odd years since the country entered the World Trade Organization, selected high rollers have been minting it like there’s no tomorrow. I would posit that a true rendering of Chinese individual wealth would reveal more than one trillionaire, and any number of individuals who could buy out Bezos with money left over for a very nice celebration luncheon.

If I’m correct on this score, it follows that these Fat China Cats want to keep what they have made, and won’t have much patience for an aggressive trade war that will bite into their holding valuations. Moreover, if history is any guide, these folks have hedged their Xi-based bets by placing their own agents in very high-level positions in the military. And let’s face it: it’s the military that matters – not only in China but in the United States as well. When all else fails, it’s the missiles and the bombs that guarantee the obligations of the governments that run the show (after all, what is even a unit of the USD other than a promise from the U.S. Government to back any claims it makes or are made against it?).

This is the reason that I’m pretty convinced that we’ll paper something with our frenemies across the Pacific in a timely fashion. Both sides have bluster, but neither can really back up any of its more hawkish rhetoric with true resolve. The money interests simply won’t abide it.

Of course, it is also true that the papering of a deal would be a largely symbolic exercise. It won’t bind anyone to anything. It will not, cannot be enforced. Post-deal, I suspect it’ll all be business as usual.

Still and all, it’s crucial for everyone that some sort of accord, or, at minimum, détente, is reached, as the alternative is an all-out trade battle where everyone loses. If you check your history books, you will find that many of the most gruesome wars in the history of humanity have begun as trade disputes. So let’s not let this thing get out of hand, ‘kay?

In the meanwhile, I fully expect this whole saga to continue to overwhelm any and all events in the financial news cycle – for at least the next couple of weeks and perhaps beyond. I won’t be particularly enjoying the spectacle, but will seek to endure it with cheerful countenance. If T and X break out their big signing pens, we probably crash through 3,000 like a fist through tissue paper; if they walk away, it’s look out below. But either way, it might not be the worst thing to break out of the 3% range that has sleepily held thus far this quarter.

And there really isn’t much else to report at present. I’m happy to report that the Philadelphia Semiconductor Index (SOX), while taking an unavoidable pounding in the wake of the trade action, is still clinging to a triple digit annualized gain. But just to give you another indication of how important this cross-border commerce is, a friend of mine told me that many Chinese tech companies – including the much-maligned Huawei – have purchased two year’s-worth of chips and other component parts – in fear of being locked out of American markets for an extended period of time. If so, the promise of a Q3/Q4 demand surge – particularly if talks break down – is very much in doubt.

Also, on a completely unrelated note, I came across the following graph, reiterating the troubles plaguing my former home state: the one who just elected a liberal billionaire governor whose plan to save the state is to increase taxes and (of course) issue more debt:

But I now somehow find myself living in the State of Connecticut, which only ranks 4th on this list. They’re talking about raising taxes here as well, which is bound to work like a charm.

But I reckon that’s all I got – for now. Happy Mother’s Day to all of you China Cats out there. And if sunflowers are part of your celebration equation, here’s hoping that they will revert back to reservation pricing before too long.

TIMSHEL

Yes, it’s Cinco de Mayo, that, holiday, er, ginned up by American corporations to goose domestic alcohol consumption. Its pretext involves a commemoration of the impressive, but, on balance transient, victory of the Mexican Army in 1862, over the French Empire, in what is known as the Battle of Puebla. It was indeed a solid win, against the much larger and better fortified forces of Napoleon III. So impressive, in fact, that even 15-odd decades later, it catalyzes more single-day beer-drinking in the United States than any 24-hour period other than Halloween, and, of course, St. Patrick’s Day.

And just in case you doubt this, I’ve got the data to back it up:

A couple of points are worth mentioning here. First, I exclude March Madness because presumably they’re referring to the whole tourney, which unfolds over a 2-3-week period. If I’m correct about this, then NCAA hoops doesn’t even belong on the list! When expressed in daily equivalents, I’m not sure it would outrank Arbor Day.

One would also hope that the 5/5 malted hop consumption does not come at the expense of the more obvious beverage of choice: tequila; ideally Mezcal, and of course with the worm floating in the bottom. Shout outs to all of you worm consumers in my vast readership. All I can add is that you’re a better Mexican than I.

But this column is dedicated not to our southern neighbors, but rather to the French, the losers in the Battle of Puebla showdown. It is they, after all, who coined the term purloined for the title of this piece. They did so, as everyone knows, at a different time in history, nearly eighty years later: a point when they were not the victors, but rather the vanquished; the oppressed, not the oppressors. Despite all Allied efforts to duck the confrontation, the Nazis were, by early 1940, rolling their tanks through the Grand Republic with surprising ease. The surge through the Maginot Line (once thought impenetrable), turned out to be a milk run, and, by the Summer of that year, big old gnarly Swastikas banners were flying atop of the Eiffel Tower and the Hotel de Ville. Everybody assumed it was permanent, and started busting out their German language books, to settle in for a long stretch of Teutonic hegemony.

Well, not everyone. Shortly, a resistance of sorts began to form. It was a spontaneous uprising that turned into a formidable military force under the leadership one Charles de Gaulle. The French Resistance was of course instrumental in the ultimate liberation of their home turf, and helped restore a measure of dignity to that country, so steeped in failure in its efforts to reverse the tide of expansion, and evoke the ultimate collapse of perhaps history’s most famous military bad boys.

In its way, Le Resistance never died. It went underground for many periods, but occasionally it has popped up. About 25 years ago, for instance, I bore witness to a full-scale shutdown of the great city of Paris, as workers took to the streets to protest against the horrors of a workweek that had reached the inhuman duration of 38 hours, and the cruel extension of the retirement age to 60 years.

And of course, L’R has cropped up again in recent months, and in arguably more prominent fashion, in the form of le gilets jaunes – yellow vests – who, over the last half year, have made it a habit of busting out their torches to protest a range of grievances. It all started with rage over what is by any definition a counterproductive, regressive tax on fossil fuel products. But it expands out from there. Les Gilets Jaunes ne sont pas heureuses (they are not happy), and are hell bent on doing something about it. In a recent gesture that should shock everyone but surprise nobody, they came out in full force to express their disgust at the approximate 1 Billion that had been raised by philanthropic interests to restore what may be the best G_D church in all of Christendom.

And, naturally, Les Esprits Du Resistance have traversed the Mighty Atlantic, and have resounded their angry din on these here shores for the better part of the last 2 ½ years. Cries to “Resist” can be heard everywhere, even as those winter caps with the dainty earlike flaps at the top have more or less disappeared from the landscape. These folks are also very angry; maybe angrier than they have been in at least 50 years. They see the country falling apart, and want to fix it – before it’s too late. They see their freedoms disappearing before their eyes, and wonder why some of us don’t see the same. Many of them believe that, like their French forbears, the modern equivalent of Tiger Tanks are rolling down the streets of Washington, and Nazi flags are flying atop the Capitol Building. The irony embedded in the reality that they do so in complete freedom, without fear of retribution or even a loss of social standing, is, apparently, and entirely lost upon them.

Meanwhile, the wheels of the righteous engine of free enterprise roll along, untroubled by the above-mentioned hysteria, or, if troubled by it, not showing itself much worse for the wear and tear. For the most part, Resistance or no, everyone who wishes to do so is waking up each morning, making a show or go of doing their jobs, and even, in some cases, minding their own businesses while so doing. As the clearest case and point of the forgoing, consider the glad tidings of Friday’s Jobs Report. Something in there for nearly everyone’s taste – including the Resistors — who might quibble with the drop in the Labor Force Participation Rate/Average Hours Worked, and the continued tepid showing of any signs of Wage Inflation. Might quibble? Strike that. They already have.

This is perhaps particularly the case in the wake of Chair Pow’s Wednesday FOMC presser. Both stocks and bonds rallied upon release of the “no action” policy statement, but when Jay took to the podium, these asset classes started to bounce around, albeit in narrow ranges, like particle colliders, with each answer to every question. It does seem to me that the Fed is perhaps back in play, or may be so soon. If so, the Jobs Report, with all of its nits and nicks, would trend towards a central bank leerier of economic overheat.

I’ve mentioned this before and I’ll probably do so again: there’s every chance, particularly if the capital economy continues on its current magnificent trajectory, that the Fed itself will act in such a way as to create its own form of Resistance. If so, they’ll meet with some investor-based counter-resistance, and, while such a contingency might cause some pain to investment portfolios, it will nonetheless be entertaining to observe.

But in the meanwhile, equity investors applauded the jobs result, bidding up such indices as the NASDAQ to a record sequence of 18 weekly gains out of 19. The NDX continues to annualize at a greater than 90% return clip, but unfortunately, I think everyone would concede that triple digits for Naz ’19 is probably no longer on the cards. But I’ve some more encouraging news for everyone on this fifth day of the month of May. Specifically, annualized returns for the SOX, the Philadelphia (Philadelphia?) Semiconductor Index, are clocking in at a boffo 153%:

Now, one could argue that this action is positively surreal, and it certainly redounds to the bafflement of virtually anyone to whom I speak that follows these stocks. Most notable among many anomalies is the reality that virtually everyone in the actual industry (i.e. the guys and gals that actually produce the chips) is warning that Q2 is either going to produce a record sales slowdown, or at least close to a record.

Of course, as mentioned previously in these pages, the storyline here is one where Q2 will be a cycle of inventory clearance, after which the world will be buying chips at a rate equivalent to the selling of umbrellas on any NYC street corner this rainy April.

And who am I (or we?) to doubt this rhetoric? And the further good news regarding all of this is that in what is certain to be a 150% up year for the SOX, we’re only 35% of the way into this sequence of luscious returns. So there’s still time for you to get in on the action, but you’d better hurry. 2019 isn’t getting any younger, and neither, for that matter, are you.

For those with less intestinal fortitude, there’s always the Gallant 500, a few percentage points of which actually represents semiconductors, so you wouldn’t be missing out entirely if you chose this more beaten path. Here, though, we’re looking at projected index returns in the beggarly mid-sixties. Adjust your expectations accordingly, mes amis.

One other factor to consider about the Gallant 500 is that it appears at the moment to be at least nominally threatened by The Resistance. Thrice since last September, it has reached or modestly breached its own Maginot Line of 2940, and twice it’s been beaten back from this level. As of Friday’s close, it’s at 2945, and, if it somehow can resist The Resistance, who knows how high it can climb?

So next week shapes up as an interesting one. The data flows begin to decelerate, on both the macro and the earnings calendars, but published reports suggest that this China thing may reach a point of clarity over the next several business days. So there’s that.

However, I suspect that a good bit of next week’s action will be driven by the murky world of technicals. Our favorite indices are at very interesting thresholds, and, according to the history books and chartist manuals, should now either bust through them or beat something of a retreat. I’m not thinking they will foretell of a big upside blowout, but that seems more likely to me than, say, a late September redux, where, as will be recalled, after hitting 2940, the 500 managed to drop 600 excruciating handles over the subsequent ten weeks.

So, in conclusion, all that one can do is reiterate our main theme “Viva Le Resistance”, may it wax or wane. One way or another, we’d be well-advised to know it’s out there, and that it will certainly materialize at some point.

But that’s all I got for now. If I didn’t mention it before, it’s Cinco de Mayo, and I think it’s time for a beer. Anyone care to join me?

I thought so. After all, I’ve checked the data, and it appears that it’s “bottoms up” all around.

TIMSHEL

You Only Live Once, right? At least that’s what they tell us. And if it’s true, well, maybe a submarine is as good a place as any to reside. It may not be for everyone. But in the town… Where I was born…

I reckon you know the rest.

Besides, I’m on a roll with this Beatles stuff. I don’t mind telling you that last week’s The Egg Man piece was a cash cow for me, and one whose udders have yet to run dry. They will run its course eventually, and probably soon. But you don’t mess with a winning formula, as anyone who has accumulated enough years to remember New Coke will gladly tell you.

Beyond this, I got to pondering about the relationship between life’s transience and undersea dwellings as I scanned the lightly reported tidings that on Wednesday, the Russians (yes, them!) launched the world’s largest submarine. Stem to stern, it measures 600 feet, and displaces more water than a WWI battleship. The Ruskies named the vessel Belgorod, which translates into English as White City. It is designed to carry up to four Intercontinental Ballistic Missiles, each of them capable, at minimum, of generating a tsunami of sufficient size to take out an entire coastal region (say the New York, San Francisco of Los Angeles metropolitan regions).

Published reports suggest that Putin watched the launch remotely, from his cozy, above-ground enclave in the Kremlin. And even now, rumors are afloat that that “you know who” was patched into the same feed from his palatial residence in Bedminster NJ (in keeping with his trademark good taste, he is said to have felt the White House to be an inappropriate setting for the viewing of this ceremony).

So if the Belgorod is our YOLO Submarine, it’s not yellow, but white. The sky is still blue and the sea remains green (sort of), but the vibe is certainly less uplifting. The villains of the original Yellow Submarine were the relatively harmless and entirely hapless Blue Meanies, who only wanted to remove music and color from Pepperland. Color schemes notwithstanding, it’s pretty clear to me that the Belgorod has more nefarious latent intent, and, if called into action, its objectives are not likely to be much impeded by four Liverpudlian hippies, no matter how musically gifted they may otherwise be.

With all of this in mind, I am forced to conclude that the jury is still out in terms of the advisability of making one’s home in a submarine (whether Yellow or YOLO), but for the time being, I reckon most of us are still stuck on dry land, with our eyes pointed to the skies. For market types, while there have been gratifying pushes to celestial elevations, it cannot unilaterally be stated that ALL markets are on an upward trajectory. For the most part, it would be well to assume that we’re all still rooted on the soil.

It is true, of course that global equity indices continue their improbably climb towards the heavens. I perhaps need not waste much space on reporting that, as prophesied in these pages, our Gallant 500 has now planted its flag on the new high ground of ~2940. It is flanked, of course, by its comrade: Captain NAZ, which, despite the huge force of the unleashing of its afterburners, remains 10 skinny index points (~0.13%) below its point of zenith – mostly because it took a bigger beat down in Q4 ’18, and had further to travel to eclipse its previous highs. However, in terms of one particular metric – annualized return — NAZ is blowing the 500 away. As of Friday’s close, the Good Captain is projecting out a 97% full-year gain for 2019, which embarrassingly blows away the beggarly-by-comparison SPX trajectory of 68.3%. Both, however, are wiping the floor with General Dow, which: a) is registering a laughably small ytd gain of < 15%, and b) is throwing off an embarrassingly infinitesimal annualized rate of approximately 50%.

On the other hand, we can perhaps cut the Old General some slack, seeing as how its main component (Boeing) is only barely emerging from dual incidents in which it inadvertently converted its signature flying machines into submarines.

And elsewhere across the global capital economy, there remains some palpable gravitational pull. German Bund yields, after a valiant attempt to traverse sea level, are again in modest negative territory. Rates last week were indeed under pressure across the globe, as were virtually all major currencies not painted in green and graced with the image of dead presidents. The Euro in particular is feeling the pinch, closing Friday at its lowest level against the USD in two years. This notwithstanding, published reports indicate that speculative interests are lining up against the EUR, and playing for further carnage.

Commodities are also at subterranean levels, particularly on a relative basis. The week ended badly in the Energy Complex, and if you haven’t looked at the Grains lately, well, trust me, you might not want to. But what is really pushing the buttons of the smart guys I know, is the shocking underperformance of commodities (again, the stuff we actually eat, wear, burn and build with) versus the stock market:

Now, admittedly, I’m running a risk here by presenting a graph that eerily resembles last week’s colorful-but-obtuse egg chart. For purposes of clarity, I’d draw your attentions to the “sea of green” lower half, which measures the spread between the SPX and the Bloomberg Commodity Index. It implies the following reality: as of now, a single unit of the SPX will purchase about twice the amount of foodstuffs, fossil fuels and metals as it did a mere five years ago. And one can only point to a single explanation here: again on a relative basis, we appear to be blessed with an abundance of resources that have designated purpose in the economy, and a shortage of assets the ownership of which is designated by and large to generate returns of the filthy lucre variety.

Investors don’t seem to want to want to own Commodities at any price, particularly on a speculative basis, and all I can do is wonder if, at that point when we decide — once and for all — to migrate to our YOLO Submarine, we might not want to load up on some wheat, corn, and maybe even cotton.

Specs are also lining up against the VIX, which is testing multi-quarter lows, even as short positions continue to amass at record levels:

One wonders what possibly go wrong here? Equity indices are flying high in miraculous recovery from a dismal end to 2018. Valuations are at record levels and volatility is deeply suppressed.

So what’s the easiest trade out there? Well, obviously it involves going short the most impaired risk factor across the entire capital markets. If the VIX goes to zero, these short players will certainly have reason to celebrate. Of course, the VIX may not actually go to zero, but why dwell on that unpleasant contingency?

Meanwhile, I think all of us land dwellers have cause to give thanks for the bounty of good news that has come our way across the first trimester of 2019 (which, by the way, was a very timely point for happy tidings to arrive). We’re now about half way through Q1 earnings, and, while they’ve not exactly been gangbusters, they have arguably given the lie to those who were projecting Armageddon in these realms. It’s another big week for reporting – in many ways the last big sequence of the cycle, with names such as Apple, Alphabet and McDonalds stepping up to the podium. Now, normally, I wouldn’t care about McD’s; I haven’t choked down a Big Mac in about two decades. But after Coca Cola’s surprising upside blowout, I’m not so sure. Anyway, in general, the massive downward profits boot has not yet materialized, and the longer that we can stave off this inevitable, the better we will feel about ourselves.

And then there’s the macro stuff. Everyone should be pleased about the better than expected New Home Sales number (‘tis the selling season after all), and then, of course, Q1 GDP was at least superficially a blowout. To be sure, there was some fluff in the 3.2% print. The American Yankees got a rare and perhaps unsustainable win against the world on trade, and there was a justifiably concerning buildup of inventories, which must be depleted lest they are kept gathering dust in warehouses, and threatening to vex us all. But again, any fair analysis must also contemplate the performance against some headwinds we encountered, particularly the partial government shutdown, which was supposed by many to foretell recession. In general, as compared to the dire prognostications that were all the rage around the holidays, I think we can all be understandably pleased with the continued vitality of the domestic economy.

So we end the trimester of ’19 with equities at or beyond previous record valuations, a docile financing environment that in future cycles will most certainly cause us to look back with wonder, commodities on deep offer, and the USD sustaining remarkable vigor. My friends, old as I am, I feel comfortable in conveying that I’ve seen worse conditions for risk-taking in my time. MUCH worse.

And I reckon that the party will continue for a bit longer – mostly because I don’t find anything on the visible horizon to stop it. By purely Newtonian logic, we could be poised for another material leg up. Moreover, if, absent some paradigm-shifting dynamic entering the equation, the market happened to sell off here, I am convinced that many investors would view it as a buying opportunity.

From my perspective, this here market looks like one of those environments where everyone is praying for a 4%-5% pullback so they can buy more. When this form of sentiment prevails, said 4%-5% pullback almost never transpires. Instead, valuations climb higher, until the inevitable happens, and the correction is 2x to 3x (or worse) what everyone wants. This is a pattern that repeats itself (or, to paraphrase Churchill, “rhymes” itself) over and over again. In fact, it kind of reminds me of the late summer of 2018, and I don’t need to remind you what happened after that.

Over a slightly longer time horizon, I suspect that we need look no further than the Fed to identify the source of the next round of carnage. They will meet this week, and announce nothing of import, but if the equity markets continue to soar like they have, at some point they’re gonna reverse course, among other reasons because they’re sneaky sumb!tches that none of us should trust. But I don’t reckon their treachery is imminent. And, given that we only live once, I suggest we enjoy the good times while they prevail.

But I’d do my celebrating on dry land if I were you. The Yellow Submarine is still out there, 50 years after its maiden voyage. But so too is the Belgorod, with friends soon to be living next door.

If I’m right about this, it might be fair to conclude that the concept of a YOLO Submarine, is, at least for the time being, little better than an oxymoron. Let’s thus try to make the best of our landlocked condition.

TIMSHEL

“Yellow matter custard, dripping from a dead dog’s eye”

— John Winston Ono Lennon

With my 59 ½ birthday now a scant two weeks away, it’s time to face up to the following, mixed-blessing reality: I am indeed the Egg Man. I suppose there’s nothing to be ashamed about in this regard. After all, there is more than one Egg Man out there, and though JL doesn’t specify the quantity, I suspect there are in fact a great number of us. Besides, it’s Easter, and therefore the point in the calendar when the Ova community rises highest in the esteem of Christendom. It also bears mention that All God’s ambulatory Creatures: mankind, other mammals, reptiles, birds, fish and even insects, began their existences as eggs.

So while I and other Egg Men can certainly come to terms with our own status, we must always remember that we fall at least one rung short on the ladder of magnificence. Everyone, of course, would prefer to be The Walrus, of which, by inference, there’s only one. And we don’t know who he (or she) is. We’ve had some hints now and then (including John’s “Glass Onion” deception that The Walrus is Paul. C’mon! How can The Walrus be Paul? George, Ringo or even Brian Epstein maybe, but not Paul), but the fact remains that identity of the large, flippered, tusked, denizen of the extreme North Atlantic has never been definitively determined.

So, from a practical perspective, the highest level of prominence any of us can hope to achieve is that of Egg Man, and it is my sad duty to report on this holiday weekend that the capital markets are throwing shade at us Eggies. According to the most recent USDA reports, the value of a dozen of our signal component parts has fallen to $0.69 per dozen (a beggarly 5 ¾ pennies for an individual yoke/white! At that price, Paul Newman’s entire Cool Hand Luke feat of heroism would’ve cost under $3!): the lowest level in at least three years:

Now, admittedly, this chart is rather confusing, placing, as it does, several contiguous time series within the same horizontal, er, horizon. But any Egg Man worth his shell ought to be able to read the sad tidings it conveys. The world now takes a very diminished view of our financial worth. And this during our busiest, highest profile season! Were this not a holiday, I might be tempted to stoop to the profane.

We have some company in the Grain Complex, where Corn and Wheat remain on offer, but can only look on in wrathful envy as investors bid up our bovine and porcine equivalents to multi-year highs.

But as this is the biblical season for law-giving, redemption and even resurrection (as will happen on rare and seemingly random occasions, Good Friday was the first night of Passover this year, which transpired on the Shabbat, to boot), I suggest we move on to more uplifting themes.

The overall market was quiet this week, eerily so, in part because the triple whammy holiday shortened it to four sessions. Of course, earnings season is revving up, and so far there are hits and misses in that realm. But with 15% of the precincts having reported, there’s very little clarity on the trajectory of Corporate America’s fortunes. A boat load of firms will report this week, and it will be an interesting cycle, with numbers dropping from such Walrus wannabes as Facebook, Microsoft and Amazon. My sense is that we’ll get a much better picture about condition of domestic commercial universe during this cycle, and, again, I’d pay particularly close attention to guidance for the back half of the year.

Macro data has been, as expected, a mixed basket, with some of those plastic egg shells containing cold hard cash, and others nothing better than a licorice jelly bean. But a couple of the numbers, most notably the blowout in Retail Sales (+1.6% vs. +1.0% estimate, and particular shout outs to autos, gasoline, furniture, consumer electronics and even restaurants – but sadly, not eggs) were a particular delight. And, in consequence, the Fed’s Q1 GDP estimates have transformed from a carpet bomb into a moonshot:

Now, I’m not sure exactly what’s going on with those computer models down in Atlanta, but I think it would be nothing more than a fair question to ask as to how, in the course of five weeks, their algorithms have managed to gin up an estimate that is approximately ten times its original print (0.3% to 2.8%).

It bears mention, in addition, that the Fed’s estimates are clocking in at 2x those of the Street (~1.5%). In any event, it all will be rendered moot come Friday morning, when the the U.S. Bureau of Economic Analysis drops its actual introductory results.

In the spirit of Peace on Earth/Goodwill towards (Egg) Men, a strong print would be nice, particularly insofar as it might serve to dial down the din of the rhetoric emanating from Washington. Readers may not be aware of this, but the Mueller Report, at long last, dropped this past Thursday. I interpret it, as perhaps fore-ordained by the Gods, as a somewhat Solomonesque outcome, which from an investigative perspective, was the equivalent of a suggestion to cut the baby in half. It’s clear that Smiling Bob looked high and low to find evidence of the always-implausible narrative that Trump called in his boy Vlad for help on an election he didn’t expect to win. And couldn’t find anything with which to tag him. It then turns into an inevitable, inexorable tome about bad behavior in the White House, some of which, if reviewed with a particularly jaundice eye, rises to the dignity of Obstruction of Justice.

That Mueller’s report would be chockful of vague innuendo and conjecture was always a matter of near-certainty, and the only surprise for me is that he had the discipline not to sling his arrows at an earlier date on the calendar. Yes, he held open the door to the Impeachment Posse, but didn’t give them much room to maneuver around. I kind of feel sorry for this crew, many of whom have promised their constituents that they would gut 45 like a fish in the wake of the conclusion of the investigation. Now, they have to gather the troops to attempt this coup – ill-equipped and under-prepared though they are. There’s no knowing whether they can collect themselves to vote for this in the House, but if they do, their hearts won’t be in it. They KNOW that they can’t convince 67 Senators to vote guilty, and they are terrified about a cross examination process that will reveal the underbelly of their efforts in this sordid affair. But the money people and the media will insist, so it may indeed be a case of “on with the show”.

But one thing that could stop them dead in their tracks right now would be for the dream estimates of the Atlanta Fed to be realized. If Q1 GDP comes in anywhere near 2.8, in a quarter that featured a partial government shutdown, episodic but particularly brutal winter weather conditions, and widely socialized fears of an abrupt slowdown in the global economy, it is likely to give them pause. Further, if Mr. Trump, who at least upon occasion has demonstrated impeccable political timing, announces a deal with China over, say, the next 2-4 weeks, all of the eggs in the impeachment basket might just be smashed into particles.

One way or another, and particularly with respect to market impacts, I expect the political fires to cool a bit – at least temporarily – over the next few days. We’ve got a VERY big week coming up, folks, and I suggest you gird your loins. If you are committing bandwidth to trying to unpack whether unconsummated, out of context statements by the President are act of Impeachable Obstruction, you run the risk of missing out on what might be some rather important market action and opportunity. Don’t do it.

And with that, this here Egg Man will give himself and his readers an early rest on this holiday weekend. For me, the course is clear, and anyone searching will find me sitting on a cornflake, waiting for the van to come.

Perhaps you can find more divine and uplifting ways to spend this time. If so, maybe YOU are the Walrus. Even if you are (also) an Egg Man. Because it’s plain that the two are not mutually exclusive. Remember, of course, that The Walrus himself, as a matter of biological certainty, began his journey as an egg in his mama’s womb. Thus, while there is only one Walrus, logic suggests that he too is an Egg Man, or, at minimum, was an Egg Man at the embryonic point of his existence.

And with that, there’s only one more thing to add. So please, if you will, join me in an enthusiastic:

Goo Goo Ga Joob

TIMSHEL

When all else fails, we’ve still got Willie Shake, right? For what it’s worth, our titular quote may be my favorite line in the whole Shakespearian Cannon (much of which I haven’t read), the fact that it derives from perhaps his most muddled mess of a play – “Measure for Measure” — notwithstanding. But I can only offer partial justifications for yet another round of thievery from the Bard. And these are as follows.

With little fanfare last week, and at the ripe old age of 93, Charles Van Doren gathered to the dust of his forebears. He is best known for that Quiz Show cheating scandal in the 1950s, captured brilliantly in the eponymous 1994 film, which happened to be produced and directed by Robert Redford. There’s a scene in there, where, in apparent longstanding family tradition, Charles’ father (Pulitzer Prize winner Mark) busts out the line, and, on cue, Charlie correctly identifies the play that contains it. Van Doren cheated on “Twenty One”, and had a brief, high-profile descent, but he didn’t fall far. He ran the Encyclopedic Britannica Corporation for a few decades, he had plenty of family money to spend, and again died a peaceful nonagenarian death at his family’s estate in Canaan CT. Apparently, though, his hubris stayed with him throughout, as, when he wasn’t editing Photosynthesis updates for the Encyclopedia, he was pumping out books with modest titles such as “A History of Knowledge”, “How to Read a Book”, and, of course, the whimsical “Great Treasury of Western Thought”.

So maybe we’ll move on. Wednesday night, it was my singular pleasure to have attended a Mott the Hoople reunion concert at the Beacon Theater. The lads broke up in ’74. I saw them then. At the time, they were, to my ears, the perfect rock band. But they couldn’t hold it together and yielded the spotlight that might have been rightfully theirs groups such as Queen and the E-Street Band. At present, the rhythm section is well into the dirt nap, and the lead guitarist is full on daft. But they put on a great show – particularly given that their leader: The Fabulous Ian Hunter, will turn 80 in June.

I mention this mostly because once Mott had packed its gear and departed the premises, the Beacon set about to prepare for its next act: (I kid you not) Bill and Hillary Clinton. Wednesday/Thursday holdovers thus had the opportunity on the second night to hear the dulcet tones of John Podesta lobbing softballs to the Once Bitten/Twice Shy former First-Couple. Average ticket prices were $200. I paid $150 for my Mott seat in the Orchestra, and am entirely at peace in the belief that I got the better bargain.

At any rate, the Clintons (who would fill an entire encyclopedia covering their sins and virtues, their rises and falls) press on, laying their own inimitable ethical stylings on us, and fattening their bank accounts along the way. I’m not sure they fit our theme any better than Charles Van Doren does, but there’s something Shakespearian about the whole Clintons-Follow-Mott-at-the-Beacon motif, no?

Finally, by way of rationalization, I wish everyone to remain aware that I’m still disturbed by this whole ESG scoring thing, and to remind my droogies that in the oft-forlorn realms of finance, and as discussed below, the sinful do sometimes rise, and the virtuous too-often fall. It would be wise for anyone wishing to actually generate meaningful investment returns to bear this in mind.

But at the end of the day, we must revert, as we always do, to both Washington and Wall Street to justify our use of that magical “Measure for Measure” line. Let’s start with last week’s spectacle of the leaders of our largest financial firms being summoned to Capitol Hill for their Star Chamber Inquisition. The purpose of this exercise, of course, was to score political points by embarrassing these dudes. My own judgment is that they did pink their swords, but failed to draw significant blood. One of the Inquisitors managed to get on the record the reality that all seven CEOs were white males. Perhaps more impactful were their statements about the truly astonishing fact that while, in the wake of the crash, our banks paid fines amounting to an astounding $243B, not a single individual was incarcerated or even indicted.

On the other side of the equation, House Finance Chair “Mad” Max Waters and her crew had a couple of slip ups – including an attempt to tag the bulge bracket for the truly gruesome student loan mess we currently have on our hands, the reality that it is the government, and not lending institutions, that provide all of these funds notwithstanding.

So the jury’s still out on the sins of the banking industry, but as to the other component of our Shakespearian equation: the early returns are encouraging. On Friday, Top Dog J.P. Morgan reported record earnings for Q1 ‘19, their stock is up >10% this month, and the banking sector has now essentially recaptured all of the valuation ground lost in that grizzly year-end selloff.

But they should remember the long game here, and know their enemies. While all of this was transpiring, Senator Elizabeth Warren introduced a bill that would automatically impose criminal sentences (i.e. jail time) on any financial executive found guilty in a civil proceeding. As has been pointed out, and by inference, if the bill sponsors are at all troubled by constitutional dilemmas (civil outcomes are based upon a standard of preponderance of evidence, a much lower bar than the criminal threshold of beyond reasonable doubt) they’re not letting it stop them from pursuing this path of righteousness. Moreover, these heroic efforts to fix a broken socioeconomic system are only part of a broader package of measures that would also include a wealth tax, the imposition of explicit federal chartering and regulation of publicly traded companies, some form of reparations for the sins of slavery and god knows what else.

Plainly Senator Warren is leading the virtue-signaling, and it only stands to reason that by doing so, she is showing herself to be among the most virtuous of the virtuous. But she’s running for President, is way behind in the polls, and falling fast. She’s behind a guy who hasn’t even announced (and may choose to sit it out), an elderly senator that is not even a member of her party, a skate-boarding/punk rocking one-term representative, and a first-term Senator, who, as mentioned in earlier installments, rose to the top of the California political heap in part by being Willie Brown’s side piece. She may, as early as this coming week, even fall behind the previously unknown mayor of America’s 299th largest city. So maybe for the moment, with JPM on the rise and Liz on the down, Shakespeare was right.

However, if there’s any sector of the global economy more hated than the banks, it’s the Energy Complex. That they sin against the environment and us poor, trod-upon consumers is a widely held tenet. And they had a pretty big week. In one of the most highly anticipated debt transactions of the decade, Saudi Arabia’s Aramco, by some measures the world’s largest company managed to place a cool $12B of paper into the market. Published reports indicate that the deal was oversubscribed by many orders of magnitude. But when the notes hit the secondary market, they sank like a stone, and one way of looking at this is to suggest that Aramco extracted the maximum value achievable for their newly assumed indebtedness. And none of this could’ve happened without the yeoman efforts of their underwriters, as led by the above-mentioned, transgression-rich JP Morgan. Way to rise by sin, Team Aramco.

The week ended with the announcement of Chevron’s purchase of energy exploration enterprise Anadarko, for a cool $33B – an approximate 35% premium to the latter’s pre-announcement valuation. That’s a lot of scratch to pay for assets deployed in an attempt to mine oil and gas resources, in a world which, due to the sins of the Industrial Age, has only 12 years left as a shelter to All God’s Creatures.

If that ain’t rising by sin, well, then, I reckon I’ll just have to renounce Shakespeare once and for all.

And, more broadly speaking, this here sinful rally continues unabated. By Friday’s close, not only had the Sinful 500 breached the treacherous terrain of a 29 handle, but managed to retain this high ground. It now resides a slender 20 index points (~0.7%) away from its highest previous point of transgressional elevation. And nobody, or very few among my acquaintance, are wasting much time looking down. Case and point the CBOE Volatility Index, in my judgment one of the truly virtuous members among the community of financial instruments, has fallen ignominiously to levels not witnessed since those days of relative innocence late last summer:

Now, the holy books of investment (with the notable exception of my own “Trading Risk”) are all clear on one point: the VIX is intended, at least in part, to offer a hedge against the caprices of the equity markets, and to the extent that this is an accurate representation of its virtues, and as illustrated in the left side graph above, it has indeed fallen in a manner entirely consistent with our titular formula.

But further investigation suggests that there may be more to the story (please refer to right side graph). As was the case last time underlying valuations entered these realms, short interest in the VIX is rising towards record levels. Hopefully, at least some of y’all remember what happened next, but in case you don’t, just take a look at the number the Virtuous VIX played on the shorts in December, just when the broader market was in the midst of a crippling, if unambiguously virtuous, fall.

Maybe this time will be different; after all, it always is. But it says here that the VIX will rise again some of these days, rewarding virtuous hedgers and punishing any sinful short sellers that happen to be in its path at the wrong time.

More likely than not, we’ll know a great more about this over the next couple of weeks, as the great engine of an earnings cycle revs to full throttle. In the meantime, and as suggested in last week’s epistle, I suspect that the Sinful 500 will seek to gather itself in a noble effort to breach into new heights, from which, by its very virtue, it is likely – subsequently and eventually — to fall.

It will all be interesting to monitor. My guess is that in terms of sins, virtues, rises and falls, our formula will work – except when it doesn’t. But Willie Shake’s whole point, I think, was to remind us that it is not for us to judge. So my risk management advice to you is another one of Shakespeare’s greatest hits. “To thine own self be true” said Polonius to Laertes. Both were ultimately dispatched by the Mad Dane’s sinfully virtuous sword, but I think that this was wise counsel from a loving father to his son nonetheless.

The rest, my friends, is out of our hands. So keep your eyes open, look before you leap, avoid bending, folding, spindling and (most of all) mutilating if you can. And, as always…

TIMSHEL

Must I do this? Must we? Well, if we must I reckon we must. I’ll tell you fairly that my heart ain’t in it. But I’m a market guy, and if one commits to the long-established protocols of markets, it is imperative that suppliers adhere to the prerogatives of those on the demand side of the equation, often energetically embracing its preferences – even when underlying premises evoke supplier doubt.

Consider the example of ESG, which the investment community is now enthusiastically and wholeheartedly embracing, while, in truth, the concept is being rammed down its throats. Now don’t get me wrong. Lord knows we’re probably be none the worse for embracing commercial activity that is sensitive to our environmental concerns, pays proper obeisance to social issues, and practices governance that meet the capricious standards of those who make it their life business to police the morality of others. But there’s a divine concept known as moderation, and it’s one we should all embrace.

But here I get ahead of myself. For the uninitiated, ESG is an investment concept that mandates the allocation of capital exclusively, or at minimum, disproportionately towards those companies which are deemed to be good actors with respect to virtues of Environmental Protection, Social Justice, and egalitarian Corporate Governance. ESG investing has now become something of a religious mantra among those heretofore tasked with simply chasing a decent return in the financial markets. In some sense, it fills the vacuum occupied a year or two ago by crypto, and more recently by cannabis. The first two have a kind of “if you can’t beat ‘em, join ‘em sensibility”. So, for that matter, does ESG, but in its case, with a dash of something even dearer than filthy lucre, an opportunity for holy redemption.

So ESG investment is on the charts with a bullet, and it looks like more than a one-hit wonder. A very high profile former boss of mine is forming an entire investment platform around the concept, and he’s not alone. Last year, Larry Fink: Founder/Chairman of Blackrock (which happens to be the world’s largest investment platform) sounded formal warnings to global corporate leaders that from here-on-in, they would be judged in large part on their ESG footprint, and he’s been doubling down on it ever since.

I’ve no particular issue with any of the above. Presumably, and as I learned at the University of Chicago, companies that act as good global citizens should most certainly be rewarded for so acting, as by the same logic, firms who behave poorly should pay a penalty. However, you must forgive me for holding dear to the impression that all of this was already built into the investment equation, and wanted little additional institutionalization to work its infallible logic. But when have we ever stopped at a reasonable point on our tortured journey towards perfect systems of moral risk and reward?

So it has come as an embarrassing surprise (I should have known earlier) to me that over the last couple of weeks, nearly one third of my clients have found themselves in something of an ESG focus vortex. Here, they must allocate significant resources away from the galactic task of making investment selections on the basis of such quaint anachronisms as profit profiles, balance sheet strength and growth prospects, to ensure that the investments that breach these narrow portals have passed at least minimal muster with newly-implemented, acceleratingly deployed ESG scoring systems. Institutional investors are now demanding this, and my best advice to my clients wishing to work with these entities is that they do what they can to accommodate their wishes. If pension funds, endowments, sovereign wealth funds and the like want to hold you to an ESG score, you are strongly advised to make it happen for them. It’s their capital we seek to manage after all, so in a very real sense, they call the shots.

However, and as I often inquire (rhetorically speaking) in these pages: what could go wrong?

Well, I’m just not convinced that this scoring system is going to be a particularly effective means of achieving the presumed objective of injecting stone-cold “wokeness” into Corporate America. A bunch of independent analysts are now running around and putting up ratings our publicly traded companies – all $50 Trillion of the market capitalization they represent, all I can say is good luck. These companies, it should be kept in mind, employ more than fifty million workers, operate in nearly all of the 195 countries around the world, produce and/or sell pretty much everything we buy, and, as a result and in aggregate, reflect the full measure of all human activity – divine and sinful – that transpires on this forlorn planet. I suspect that the ESG scoring systems will also, and equal proportion, reflect both our sins and redeeming thoughts and actions. Thus, if there is perceived benefit, sleight of hand will indeed ensue.

Yes, it strikes me that the whole scoring system is comprehensively gameable. If XYZ International wants to goose its Environmental rating, it can probably do so by the application of chicanery — at a lower all-in cost than actually burning lesser quantities of fossil fuels and removing pollutants. Consider, here, if you will, a couple of examples. Tesla is painting the automotive world in emerald hues, in part by consuming more electricity than namesake rival Thomas Alva Edison ever contemplated. The farm belt is all about ethanol, and the energy companies play along, but it still requires, on balance, more refined crude to produce the blended mix than are used when the grain-based middleman is eliminated and we just pour pure refined petrol in our tanks. How do the ESG scoring gods balance this in their equations?

To me, the same sort of thing applies to the S and G components of the formula. Put in some training and social awareness programs, but treat your employees and vendors like sh!t, and you’re probably OK. Throw a couple of mooks who fit the bill on your Board and forget to invite them to meetings, etc.

In fact, the whole thing starts to remind me of the College Admissions Scandal that was our biggest obsession this side of Jussie Smollett during the month of March. I imagine, even now, a handful of savvy CEOs paying specialists to game the ESG scoring system. A few dollars here, a couple of strategic hires there, and bam! ESG problem solved. The perp walks can wait for further discovery.

So the good news I have to share is that a new industry, which will require significant staffing, is on the rise. One of my clients told me that at a bulge bracket bank with which they work, the ESG scoring division is the largest hiring area on the whole enterprise. When we throw in the resources required for the ESG equivalent of enterprises run by this Bill Singer character (who has demonstrated, that for a nominal service charge, he can usher your lazy, empty-headed child into the hallowed halls of USC) , it’s no wonder that the March Jobs Report redounded to the delight of so many, and the consternation of so few. I won’t go into the details; suffice to state that it beat on every metric – except the over-watched hourly earnings estimate – by just enough to avoid concerns about overheating.

And it was not the only good news of the week. Domestic Manufacturing PMIs exceeded expectations, and even recently beleaguered domestic auto sales perked up to a robust 17.5M units. For these reasons and others, the Gallant 500 and its fellows put in their best week of what can only thus far be described as a boffo start to the year. And, improbably, published reports even suggest that hedge funds recorded their strongest quarter since the dark days of early ’09.

And now, somehow, the SPX is 48 skinny index points (1.63%) from its all-time highs registered in late September of last year. I. Am. Astonished. To. Even. Type. These. Words. I encourage my readers to mark the interval. Some of these days, and they might not be that far into the future, we’re all going to remember this period as one of wistful wonderment. I don’t want to keep singing the same note over and over again (even if does represent over half of my ~2-note vocal range), but if I review these tidings from the perspective of conditions around Christmas, I would have placed the probability of reaching this pass before the first blossom materialized on the Merritt Parkway at less than 2%. Maybe less than 1%.

There’s no particular reason, moreover, to think we’re done with this here rally. My experience suggests that when we get this close to a new high, investors feel duty bound to test it. I recall writing (and please don’t force me to prove it) early last year, as Apple and Amazon were approaching market caps of $1 Trillion, that their breaching of these thresholds was a near-certainty, because investors would not resist the temptation to see if such a thing was even possible. And it was. And they did. Both companies hit a tril. And both then retreated, along with the broader markets, in ignominious fashion. But they are each in range again, and who’s to say that investors won’t open the $1,000,000,000,000 door again with an open embrace? So, particularly in the small number of sessions between now and the bone fide commencement of the earnings season, there will be great temptation to see if the Gallant 500 can breach the 2940 level that represents its greatest point of penetration to date. Half a league, half a league, half a league onward, and we’re there. Whether our heroes can hold this ground, is, however, another matter.

Further potential upward catalysts largely derive from the meaningful possibility of a deal with China. I won’t go into too much detail here, but if these two big dogs do put paw to paper, I think that it’s probably worth another 500 index basis points to the good.

But mostly, as the month unfolds, all eyes will justifiably turn to earnings, and here’s where the problems begin to materialize. Everyone expects a weak quarter and tepid guidance. But everyone keeps buying anyway, and that, mis amigos, is a somewhat troubling paradigm. As may have been expected, much of the valuation frenzy resides in tech land, as illustrated below:

But it was ever thus, my loves. Our amorous eyes, once turned towards those bright shiny objects in the Silicon Valley, are always hard-pressed to ever look away.

It should, however and in closing, be noted that the darlings of tech use more electricity than any other sub-group in the economy, that many (AMZN, FB, GOOG) are in essence entirely controlled by their founders, that their global information flow monopoly is almost complete, and that the mitigants they have established for associated misuse are laughably and entirely optical. Moreover, inside those glittering corporate campuses, the free exchange, of, say political opinions is brutally suppressed. By way of example, and as covered in the WSJ, Google activists managed to toe tag an advisory committee on the ethical use of Artificial Intelligence one week after its formation, for having committed the sin of including a black woman who also happens to be the President of the conservative Heritage Foundation.

But Google’s stock is on the rise, and, like its peers down the road, it is also within shouting distance of a tril. The ESG cops apparently have either not caught on, or chosen not to act. Someday, perhaps, they will, though, so be forewarned. And while you’re at it, I wouldn’t throw away those financial models just yet either. Who knows, even in an ESG world, they may be of some use in the future.

TIMSHEL

As the introductory quarter of 2019 melts into Number Two, and given that it’s Sunday (the Lord’s Day across all of Christendom), I feel I must yet again bust out some of that Old Time Religion. After all, today marks roughly the midpoint of the Lenten season, an interval in the Julian Calendar when, by all rights, we should be working ourselves up into something of a holy frenzy.

So I base this week’s note on the elegant quote taken from the Gospel According to Saint Matthew (6:34). It derives directly from his the recounting of the Sermon on the Mount of one of the earliest homilies offered by Jesus (after his being baptized by, well, by John the Baptist), and certainly his longest, unfolding, as it does, across three long chapters in this book of the New Testament. It covers a wide range of topics: from the Beatitudes (which – let’s face it — would make a great name for an Alt Rock band), Lamp Under a Bushel, Light of the World, and a number of other matters pertinent to the day.

It’s a soaring piece, but, as the world knows, I’m much more of an Old Testament Guy, favoring in particular the Book of the Ecclesiastics, and especially that bit about there being a season to everything – a time for every purpose under heaven. I will admit to have wondering what was up with the part about the casting away and gathering of stones, which, to me seems like a rather pointless exercise. Why gather stones only to cast them away later? And you can hardly cast away stones before you’ve gathered them, so what gives? But whatever; it’s a fine book, Ecclesiastics that is, and to me it floats above Joshua, Judges, Ruth, Genesis, Exodus and even the elegantly-named Leviticus. However, I freely recognize that this is by and large a matter of taste.

The Old Testament also is the source of all of the psalms that grace our religious experience, including the divine 23rd, which wants no further elucidation. I will also give a shout out to King David’s old, reliable 32:1 “Blessed is he whose transgressions are forgiven, whose sins are covered. Blessed is the man whose sin the Lord will never count against him”.

Perhaps, in this interval of great strife and dissent, we can at least agree on the following. As we wend across these troubled times into an uncertain future, David 32:1 is likely to become increasingly handy.

But our theme here is the merciful stylings of the New Testament; not the judicious teachings of the Old. “Sufficient unto the day is the evil thereof” reports Matthew on behalf of Jesus, and my observation is that he was onto something.

Meantime, Q1/19 is now in the books, and oh what a ride it was! Domestic equity indices put up their best showing in a decade – since those first tentative steps towards recovery from the Crash began to gather steam.. Now, as was the case then, the rocket ride came on the heels of some stone cold investment carnage, as, while the Spring of ’09 is nothing but a foggy memory for most of us, the last grueling weeks of ’18 should, by all accounts, remain fresh in our collective memories.

At the risk of regressive redundancy, allow me to reassert that the magnificent recent performance of the Gallant 500 and its fellows was in large part justified as I see it. For one thing, at a beggarly Christmas Eve level of 2335, the benchmark SPX was, in retrospect, deeply oversold. At the time, everybody was rationally concerned about a pant-load of difficulties, any combination of which, had they extended themselves, may have deepened the carnage well into the current year. Central banks were doing war dances, as were the key players on the global trade stage, and, for that matter, so too was a new Congressional class, hell-bent on removing the President, and believing that they had the means to do so.

But then, somehow, a series of minor miracles transpired. We’ve covered these ad nauseum, but they bear recounting (albeit as briefly as possible). The Fed turned from potential market combatant to staunch ally, proclaiming its valuation-supporting allegiances on multiple occasions in Q1. The ECB followed suit. The U.S and China signaled that, at minimum, some sort of détente was in their mutual interest. The 116th Congress emerged with smoke emanating from every orifice, and were organizing their forces for a full-on assault on 1600 Penn. Avenue. But their plans went awry. Their frontline troops, led by one General Mueller (whose mission it was to lob pre-invasion, terrain-softening, defense-weakening artillery at the principal target), bailed on them in ignominious retreat, leaving the main thrust of the offensive in disarmed disarray. They may seek to regroup, and perhaps can yet lay siege on their enemies, but their prospects for success have been reduced to little more than hopes and prayers.

All of which places the SPX more than 500 basis points to the good — relative to its pre-yuletide position of shocking retrenchment. But anyone who thinks that from this point on, the troops are looking at a milk run to previously unconquered territory is entitled, during this season of reflection and repentance, to another think.

One does not require the vision of the Creator to see obstacles on the horizon.

Though the ritual will not commence in earnest for another fortnight, let’s nonetheless begin with earnings. They’re supposed to be weak, in case you hadn’t heard – particularly against a backdrop of an P/E-turbo-charging) 15% (depending upon which index “up” quarter. Factset has cranked up its analytical engines in time-honored fashion, and the following graphs tells a story that promises little in the way of holy redemption:

In the days and weeks prior to CEO’s being next called to the pulpit, a consistent rhetorical theme has emerged – particularly in technology components and industrial manufacturing. Q1 was weak and Q2 is a bit impaired as well. It goes as follows: we’re clearing out our inventories, folks, and when we’re done this summer, the good times will roll yet again. While we won’t know for another couple of months, here’s hoping they’re proved to be correct. Because whereas I feel that the Lord won’t count against CEOs any sins of over-optimism, the latter are likely to feel the full wrath of investors on that score.

But hey, like I said, it’s a couple of months off, and, in case I haven’t mentioned it, sufficient to the day is the evil thereof.

We can thus turn our attentions to the bond market, which continues its yield-crushing, heavenward ascent. Rates on the U.S.10-year stabilized at the historically tepid level of ~2.41% last week. But at those thresholds, we’re talking about Uncle Sam paying 8 times the vig imposed upon the Government of the Grand Republic of France (0.314%), and over 100 times what the Dutch are offering up (0.022%) for their own paper of the same maturity. You can fuhgeddaboud Germany, Switzerland and Japan, as here, the practice of ratio calculation fails us, because all are at sub-zero levels.

Domestic macro numbers are mixed to negative, but most point to a slowing, sluggish cycle on the horizon. On Thursday, I took a peek at Atlanta’s GDP Now metric, and encourage everyone, just as I did, to freeze that moment in time. Though they got there by different paths, this was the first and only occasion in my long history of tracking this metric where the estimates of the Street and those of the Fed came together in precise harmony:

It didn’t last long; nothing, after all, does. By Friday, the two sets of estimates had passed one another like ships in the night:

In any event, it looks like we’re in for a slow patch, not only in these here realms but indeed across the globe. Particularly if the earnings paradigm is weaker than even expected (and especially in terms of forward guidance), April might be as good a time as any to pause on our climb to the mountaintop of Olympian valuations. But if the Central Banks stay true to their rhetoric, one way or another, the world will remain awash in idle cash and cheap financing, which should be accretive to risk assets.

At some point it will all have to end. Lenders committing capital for multiple years need, ultimately, to be better compensated for tying their money up and assuming default risk than what is now built into the equation. I don’t know when this reckoning will come, nor how deep a price we will pay upon its arrival.

However, as Jesus purportedly told Matthew and the other disciples on that hot afternoon in the Israeli desert approximately 20 centuries ago “sufficient to the day is the evil thereof”. And while this sort of thing runs contrary to the rhetoric upon which we risk management types rely, I think the point is a valid one. In fact, I couldn’t have said it better myself.

Just do me one solid here. This is a tricky tape, so watch yourself a bit, OK? And, as always…

TIMSHEL

Engaged readers will recall that last week I used a few of the 1,500 odd words that I allot to these ramblings, to pine in mournful, nostalgic fashion, for the year 1985. In that note, my ode to days gone by was triggered by a mob hit that reminded me of the takedown of Big Paulie, boss of the mighty Gambino Family. But now, according to published reports, it appears likely that the Frankie Boy hit may not have been a mob hit at all, but rather an ill-advised act of violence perpetrated by a local loser with a touch of reckless gallantry in his soul, but clearly a deficiency in the cognitive processing department.

Upon learning this I thought: OK, so maybe it’s not 1985 after all. But then I thought again. This past week, the Walt Disney Corporation completed its acquisition of 20th Century Fox, leading to inevitable mash up headlines about the Fox in the Mouse House, and uniting, under a single corporate umbrella, the stylings of the studios which, in the year we seek to celebrate, gave us Mr. Belvedere and The Wuzzles. But what sealed the deal – at least for me – was Thursday’s IPO of the iconic Levi-Strauss Corporation, which went private back in ’85, and remained so until this past week.

So yes, let’s continue to wind the clock back 34 years, and nothing could mark the occasion more appropriately than everyone busting out their skinny jeans. Let’s face it, we’re all young again, some of us are babies; others of us are not even yet born, so how difficult should this be?

Certainly the hedge fund industry is doing its part, as recently published data indicate that the field is shrinking:

Those that remain are mostly moving into the optimum range for our desired fashion statement, mostly by virtue of their tepid returns, shrinking AUMs, compressed fees, and, in consequence, diminished revenue streams.

On the other hand, the concept barely existed in 1985. Alfred Winslow Jones, the George Washington of the industry, coined the term in 1949, and backed it up by creating a product to match it. But no one paid much attention for the next 40 years. It wasn’t until the late ‘80s that the industry began to binge out, and the binge has lasted to the present day, so there’s still some treadmill/salad work to be done before the skinny jeans paradigm can be fully realized.

Elsewhere in our field of vision, however, progress towards the donning of those narrow-waist, pencil-legged denims is more visible, and perhaps in no region so much so as the yield side of the global bond market.

Here, our story begins with Wednesday’s FOMC presser, where Fed Chair Powell (i.e Mr. Kite), jumped over men and horses, hoops and garters (and yes, lastly through a hogshead of real fire) to reassure the public that his and the ECB’s (i.e. the Hendersons) production will be second to none. More specifically he froze rates through at least year end.

We thus concluded the week with the two largest and most powerful Central Banks having committed to the maintenance of sub-atomic interest yields for the final three quarters of the year. This, mes amigos, in a global economy which is indeed slowing but nonetheless still growing, is nothing less than astonishing.

And, for about a session and a half, investors had no idea what to make of this – at least on the equity side of the equation. Our indices sold off in the wake of the release, rallied back on Thursday, and then, in reaction to a truly disastrous factory output report from the Eurozone, followed closely on its heels by the lowest domestic manufacturing PMI in two years, puked out nearly 2% by Friday’s close:

U.S. Manufacturing PMI: Producing Much Indigestion:

By contrast, Fixed Income investors reacted in Pavlovian fashion – by gobbling up every global bond in sight. The German Bund went negative for the first time since ’16, the Swiss upped their reverse vig, and now demand nearly a half a percent a year for putting our money to use, Japan tumbled to -0.08%, and even the often-ignored Danes are on the verge of demanding payment for their borrowings.

But most of the attention is focused on the U.S. yield curve, which – horror of horrors – inverted at various points. To illustrate, I actually created my own chart here, using Excel, and sourcing the data from the United States Treasury Department itself:

Now, I admit that it ain’t hardly pretty, but I’m enormously proud of my handiwork nonetheless.

I leave readers to their own devices in terms of figuring out which spreads are actually inverted, but mostly they reside within the realms of very short-term durations as plotted against the middle of the curve (3s through 5s). Suffice to say that there was a great deal of hand wringing respecting these configurations.

There is some irony in the realization that it is the elevation of front end of the curve – i.e. the part that is most explicitly controlled by the Fed – that is causing most of the inversion agita. My guess is that this won’t last long. Investors are likely to pile into the rich-by-contrast short end as early as Monday.

But one way or another, for anyone wishing to trade yield spreads, the moment when skinny jeans become de regueur is indeed upon us. There’s simply no juice in the alternative: the 1990s-bred “Levi’s With a Skosh More Room” investment construct of borrowing short and lending long – in the action. And, since this is precisely what the banking industry is supposed to do, it bore the brunt of the last couple of sessions’ brutal action:

KBE Bank ETF:

Thus, while broad-based indices plunged on Friday to close nominally down for the week, the Banking Sector experienced a one-way drop of more than 10%.

There’s not much comfort for them to take in all of this, but for those wishing to look on the bright side, at least the banks aren’t Boeing, which is down more than 20% from its highs in less than a month.

I’m on the whole feeling pretty smug about all of this action, because I am on consistent record in stating my belief that interest rates are more likely to go down than up. Moreover, I feel I am vindicated in suggesting that the Central Banks have reviewed the data against their models, and have concluded that rates must continue to be aggressively suppressed, or the world will face a nasty and politically problematic recession. My own belief is that policy makers are most terrified of the bursting of a credit bubble. The amount of short term, borderline junk paper – particularly in the energy sector – that must roll over or evoke a potential cascade of cross-sector defaults is enough to incentivize our monetary custodians to keep priming the yield pump. The hope is that this will keep asset valuations up and impede defaults. I’m paying particularly close attention to the Energy Complex. If Crude drops, it could cause a domino-like credit event that is unpleasant to even contemplate.

Someone said to me last week that the latter half of 2018 was an experiment in interest rate normalization, and this comment stuck with me. He’s probably right, and if so, the experiment was a failure. Policy makers tried this, and found that the global economy cannot abide higher borrowing costs. Central Banks know it, and will act accordingly — by extending their historic cycle of monetary stimulus.

Someone else called what’s happening now an interest rate and currency race to the bottom, and this makes sense to me as well. Both, in fact, I feel, are correct. But here’s the good news: the intent of all of this monetary love is to sustain and, if possible, boost, asset prices, and I believe it will be successful – at least for a time. It won’t end well, of course, but in the meantime, I’m not at all troubled by the end-of- week equity puke. In fact, I rather hope it continues, because at finite distances down from here, I think investors will be impelled to do a little bit of shopping, and it’ll be party time once again.

Call it a form of financial bulimia – the binge and purge kind. And the latter will certainly be necessary if we’re ever to hope to fit into our skinny jeans. As for me, I’d probably need to hork up about two decades-worth of gastric excess to hope to fit even one leg into those buggers. But I can’t find them anyway, and there’s nothing the newly public Levi Strauss can do to induce me to by a new pair. So all I can do in this regard is to wish the rest of you a heartfelt:

TIMSHEL