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

So, somebody finally did Frankie Boy. Did him Old School. Ran into the Escalade parked in his driveway, in – where else? The Richmond Hill Section of Staten Island. Plugged him with 12 rounds after he turned his back, and drove off into the night. Frankie’s wife and kids were in the house at the time. And here’s the best news of all: the hit appears to have been arranged, or at minimum, sanctioned, by Gotti’s kid brother.

While I abhor violence of every form, and though I’m not proud of the sentiment, part of me is feeling a warm nostalgia respecting these tidings. It was, according to published reports, the first mob boss hit in 30 years – which is a long time to go between New York Post front page photos of such a scene. But to me, it turns the clock back another half decade (or so), to late 1985, when the Gotti Crew took out another Gambino Crime Boss: Big Paulie Castellano, who was offed by three guys wearing identical Russian sable hats, in broad daylight, at the entryway of Sparks’ Steak House on 46th Street in Manhattan. Gotti and his perfidious sidekick Sammy the Bull watched the action from a parked car across the street.

Now, I have no idea what the beef was about, who authorized the hit, or how it changes the mugshot org chart posted in the police precinct conference room. But I will say that it gives me hope that we can return to a more vigorous time in our lives, when men were men, friends of ours lorded over friends of mine, when made guys outranked connected guys, and, as to everyone else?

Fuhgeddaboutit.

Reagan was President, Koch was Mayor, Rudy was the United States Attorney for the Southern District of New York. I was 25, single, and still somewhat cool (or thought I was). The economy and the stock market were booming. That quaint 1987 crash was an un-thought of nightmare seven quarters into the future. The Gallant 500 was outstripping the heroism of even its literary forbears in Tennyson’s “Charge of the Light Brigade”:

SPX: 3/16/84 – 3/16/86

Of course, the modern-day SPX is currently enjoying its own significant rally at the point of this correspondence, but, somehow, it feels a bit tentative, a bit effete, if I may make so bold. Doubts plague our every purchase, while few divestitures are met with much regret.

In summary, the index feels as though at any moment, it could engage in ignoble retreat. Memories of the horrific pre-Christmas rout are still too raw and present in our psyches to truly rock us into a proper state of mojo.

So perhaps you’ll forgive me as I morph a sensationalized violent crime into a smarmy remembrance of things past. Perhaps such sappiness on my part is also a sign of the times.

Because there’s very little so encouraging in this trail of tears that I have selected as my lifelong career than a tape that reads negative, but keeps roaring upward. I review last week’s action as transpiring against the backdrop of news flow which can hardly be viewed as encouraging. As was perhaps pre-ordained by the Gods, the Brits enter the penultimate week before the Brexit deadline not knowing whether they will leave with a deal, leave without a deal, stay with a deal, stay without a deal, or even carry forward with their current parliamentary coalition. America’s only significant airplane manufacturer – which carries the largest weighting in the Dow Jones Industrial Average (~10%), and which is also the nation’s largest exporter, was compelled, by two deadly crashes in the space of six months, to ground its signature flying vessel. The love-fest between the U.S. and both Korea and China can be viewed as being on the rocks. Trump issued his first-ever veto. Yet another lunatic shot up a couple of mosques in the otherwise tranquil land of New Zealand, killing 50 poor souls in the process.

Oh yeah, and the shooter livestreamed the whole episode on Facebook.

“Cannon to the right of them, cannon to the left of them, cannon in front of them, volleyed and thundered” wrote Tennyson. And so it goes with our own Gallant index, which managed, foregoing notwithstanding, to post a weekly gain of 2.9% — best since November. And, notably, that pre-Thanksgiving uplift transpired in the midst of a rout, during one of the worst quarters in living memory, whereas the current spike has manifested as an extension of a rally of 11 weeks standing, which now positions us a little over 3% from the all-time highs registered in late September.

And, of course, stocks weren’t the only market segment enjoying a rally. I’m pleased to report that the Wheat market lamented in last week’s epistle, has recovered at least a fragment of its vitality:

I’d like to think that part of this is owing to last week’s plea in this space for everyone to eat their Wheaties. However, further research suggests that perhaps our grain farmers may have been feeding these foodstuffs to their hogs (or, at any rate, to investors in same):

Hogs haven’t been this rich in nearly a decade, but, in the interest of full disclosure, it should be pointed out that some of the rally appears to be tied to a breakout of African Swine Flu among the porcine population of China. Given, of course, that 2019 is the Year of the Pig on the Chinese Calendar, this cannot be viewed as a unilaterally encouraging sign. For now, though, we’ll give it a pass.

And then of course, there’s those irrepressible bonds, which, across the globe, are either rallying, or, at minimum, holding on to lofty valuations. This week’s honors stay at home, within the U.S. Treasury Complex, and particularly our 10-year note, currently commanding a beggarly yield of 2.59%. It’s hard to believe that as recently as last October, this paper was throwing off a lordly vig of 3.25%.

Further, the love, by all accounts, has spread to the domestic private debt markets; let’s just say that across the entire credit curve, buyers have represented, and in force:

Investment Grade:

High Yield:

One might go so far as to socialize a hypothesis that all of this bid for debt instruments might’ve negatively impacted the returns that the Gambino family is getting for paper they’re putting on the Street. That, someone had to take the blame, that this someone was Frankie Boy, and that he was compelled to answer in the time-honored fashion associated with these affairs.

I rather think, however, that my original hypothesis holds true. The global QE process, now a decade in standing, and re-invigorated most recently by the ECB, has created a paradigm where too much fiat currency is chasing too few investible assets, in the process turbo-charging bids for both equity and debt securities. With all of that cheap financing, mergers, acquisitions and buybacks abound. Adding further to the imbalance, there is currently a trend for successful, privately held companies to stay private over longer intervals, and in some cases into perpetuity, than had historically been the case. Time was, if a company thought it could go public at pittance-level valuations of $1B, it would crawl through broken glass to do so. Now, the bogie appears to be more like $25-50B. But we’ll cover that in future editions.

In the meantime, suffice to say that while the technicals of the market are remarkably strong, the current rally feels weary to me. I reckon it could lurch along for a spell, but I can’t enthusiastically recommend incremental risk assumption at this moment in time. One way or another, I’d exercise caution. The Franky Boy investigations now suggest that the Gottis may not even be involved, that the hit may have been an unauthorized act of a love-sick knucklehead pining for Frankie’s niece. If so, then it’s definitely NOT the Eighties; instead it’s the New Millennium Teens. I am old, and the prerogatives of decorum have lost their menacing edge. I reckon we’ll have to deal with the consequences, but in terms of the assertive seizing, sustaining and expanding of turf, I can only close, not with my usual salutation of TIMSHEL, but rather with: a forlorn:

FUHGEDDABOUDIT

Though I dealing with non-work-related issues, thousands of miles from my post, the week’s noteworthy events were not entirely lost upon me. And I’d be remiss in failing to begin with the recognition our high-flying equity indices experienced some gravitational drag. In fact, not only did their annualized rates drop below the minimally acceptable level of 100%, they did so in menacing fashion: the Gallant 500 is now on a pace for a pitiful 67% gain this year, Captain Naz is sucking wind at a projected 77%, and even the Icarus-like Ensign Russ is currently extrapolating to a beggarly 95%.

Oh well, it was a good run – while it lasted.

I’d urge everyone to stay calm. And eat their Wheaties. I encourage the latter in particular because perhaps the most shocking lack of energy associated with any financial instrument that that I track is that of the good old Wheat market:

Let’s try not to panic, OK? Published reports suggest that the Ag Bears are coming out of hibernation a bit early, and shorting commodities at their angriest magnitudes in about three years. The crops look strong, and the warehouses are full.

Plus, there’s the whole trade war thing, which, whatever form its ultimate resolution assumes, is not currently helping the holders of this most stalwart of amber wave grain crops. Nor, for that matter, is it offering much solace to the other charter members of the Grain Complex: Soy Beans and Corn.

So there’s some perverse good news here: if the eating of Wheaties does indeed procure the benefits that were featured in those adverts of old, there should be no shortage of affordable supply about which to complain.

Besides, other markets are showing signs of vigor, and none more so than the global bond complex. Yields on virtually every benchmark government security dropped by unmistakably large amounts this past week, as the 30-year bull run in fixed income securities displayed no indication of running out of steam in the foreseeable future.

The signal event of the week – and one that I strongly believe merits our sustained attention, was the comments of ECB Chairman (Super) Mario Draghi, who, in ending what I believe has been a creditable run (he retires from the post in October), looks, by all indications intent on going out in a blaze of glory. Specifically, on Thursday morning, he took to the podium to inform his constituents and well-wishers that: a) the Bank is lowering its 2019 GDP forecasts for the Eurozone from 1.7% to 1.1% (a fairly alarming downward boot); b) is committing to hold rates steady for at least the rest of the year (and beyond the point of his retiring); and c) is reinstituting a menacing sounding program called Tactical Long-Term Refinancing Operations – designed to grease the rusty engines of European bank lending.

His renewed, or, if you will, reinvigorated pessimism is summarized in the chart provided below.

By way of context, it’s important to bear in mind that the more dismally positioned dark blue line is the new, March projection, and, in this chart is compared with the forecasts of December – when everyone (including yours truly) was justifiably concerned that the wheels were coming of the global economic bus – this time perhaps in earnest.

Perhaps most notable about Mario’s aggressively dovish turn is that it comes on the heels of a similar 180 executed by our own Fed Chieftain: Jerome (Jay) Powell.

As might be expected, global equities sold off in the wake of these sentiments, while the world’s bonds rallied like banshees. And, for me, there are only a couple of related inferences to draw from these tidings. First, Central Banks (and we can certainly throw in both the Bank of Japan and the Peoples’ Republic Bank of China) are terrified about a deceleration of global economic activity.

And second, they’re not going to stand idly by and watch it unfold. What I myself am seeing in all of the above is the likelihood that within a finite period of time, the big Central Banks will be revving up their printing presses and creating new money. Stated another way, not only will they encourage economic agents to eat there Wheaties, they’ll be tearing open the boxes, pouring them into bowls, adding milk and shoving them across the table at us.

Further corroboration of this scenario came to our shores on Friday, with the February Jobs Report informing us of the creation of a pitiful 20K new private engagements. Now, as you’ve probably read, the release was not unilaterally negative. Average Hourly Earnings exceeded expectations, the separately calculated base unemployment rate hit a new secular low of 3.8%, and the broader, underemployment metric (including those searching for full-time jobs but only able to find episodic gigs) also breached a decade-long minimal threshold at 7.3%.

But there is a decided lethargy in view across the great economic expanse, and those that ignore these tidings do so at their own peril.

As we have covered in great detail over our time together, much of the manner in which these trends should be interpreted is through a political lens. I believe that a visible slowdown is simply an unacceptable outcome for elected and appointed officials across the globe. It. Just. Can’t. Happen. Not in the United States, where the children are so bored that they decided to start the 2020 election cycle about nine months early, where the economic policy debate focuses most intently on whether we should institute a wealth tax, break up our great technology companies, eliminate, full-stop, our usage of fossil fuels, and provide free education, health care and a guaranteed income for everyone who manages to plant a toe on our shores. Not in Europe, where they have never recovered from the Crash, and where, among other problems that plague them, they must contend with this whole Brexit mess before the end of the month. And not in the Peoples’ Republic, where the slowdown that they do their best to hide menaces the absolute dictatorial control which the ruling party voted for itself just last year.

So I don’t believe that there will be any clearing of the markets. Rather, we will deal with our global hangovers of excessive debt using the same remedy as that of our forebears – with a dose of the hair of the dog that bit us. If you doubt this, just take a look at the proposals for the repair of the fiscs of American states including New York, Connecticut, New Jersey, California, and, of course, Illinois. All feature not only Democratic governors (white males – natch – including billionaire scions, ex Goldman partners, former hedge fund managers and other such world-class statesmen) but majorities in both legislatures, and all propose to energize their flagging economic fortunes and looming insolvencies by a combination of more borrowing, increased taxes, and, of course, bigger budgets.

What could possible go wrong?

But I’m inclined to take a somewhat more optimistic view of these dynamics (except perhaps the issues at the state level). What is most clear to me is that again for political reasons, interest rates CANNOT rise – anywhere in the world, and, with any signs of an accelerating economic downturn, they will in fact have to fall.

So, in a world where financial assets other than perhaps Wheat are evidencing patterns of increased shortage, where borrowing costs are at laughably low levels and may submerge from here, how much risk is there in holding onto, or even increasing one’s inventory of these assets?

Over the medium term, I think the answer is not much. But I do expect that the current downturn carries forward for a spell. I fact, I kind of hope that it does. A few percentage points down from here, with the world awash in fiat currency, with politicians and Central Bankers (pseudo-politicians that they are) telegraphing their absolute terror at any kind of December-like selloff, equities in particular will start to look like a bargain.

And, on balance, I’d include Wheat in this equation. After all, it’s trading at a three-year low, and if, as expected, we do strike some sort of deal with China, the silos across the Great Midwest should begin the emptying process.

And yes, you can help, and, if you’re so minded, you know exactly what to do. So, boys and girls, I close this note by encouraging you to eat your Wheaties, for the good of the nation, its farmers, and the global economy.

I hardly need to add that the extra fiber may also come in handy as you prepare yourselves for what is likely to be an eventful rest of the year.

TIMSHEL

Or should I ask “qui est Robespierre?”. We probably should start with the latter, asking who this Robespierre character is. Or was. And I must mention, by way of full disclosure, that I’m a pretty fanatical Robespierre groupie. His name, Robespierre, Maximillien de Robespierre – elegantly trips of the tongue. Save for the fact that he’s been dead for 9 generations, I’d probably drop all of my present affairs and follow him on tour.

Further, though he didn’t live into the 19th Century and the associated advent of photography, you’ve got to admit he takes a nice portrait, right?

The six or seven biographies and historical novels I’ve read about MdR suggest that he liked this sort of thing, being captured in portraiture that is. From this perspective (and not others) he was something of a late 18th Century Paris Hilton, and in fact rose to fame and infamy in the city named after America’s former favorite social butterfly.

He came from humble beginnings (the de in the middle of his sir-name notwithstanding), and even at the height of his power, he lived in a single room above the stables of a local carpenter. He held no official title greater than that of one of many deputies to the Third Estate, formed in hostile response to King Louis the 16th’s unfortunate decision to disband the senate a couple of years prior.

He never married, amassed no fortune, and in general had no worldly objective other than to advance the revolution he didn’t start, but led for a brief time. Back in turn-of-the-19th-century France, they had their reasons for revolting. The peasants were starving; the farms lay fallow; in the cities, there were almost no staple provisions and what foodstuffs could be secured were sold at obscenely high prices. More than anything, they wanted a Constitution, something akin to the document recently drafted across the Atlantic Ocean, in the United States whose own revolution they had financed.

Meanwhile, Louis XVI and his even more famous wife (Marie-Antoinette) partied it up in far flung locales such as Versailles, often with the uber-incestuous European Royalty (MA was the sister of the Emperor of Austria). Louis doesn’t seem on the whole like a bad fellow, but it appears that he was too occupied with his own grandeur to devote much attention to the welfare of his subjects.

In light of all of the above, the French Revolution wanted no fortune-seeking partiers, only zealots, to lead its cause, and Robespierre fit the bill perfectly. He worked day and night, fueled only by his obsessive commitment to the success of the movement.. For these reasons and others, they called him The Incorruptible. And, for about 18 months in the 1790s, his every utterance was the rule of law in France. One of his first major acts was to separate the King’s head from his carcass – without so much as a trial. It was Robespierre – The Incorruptible – who argued successfully against due process for Louis, suggesting that to hold a trial for the King was to imply that the entire French Revolution stood on shaky ground. The revolution was a war, he argued, and the Crown was the enemy. To submit the case to a court of justice was to unthinkably suggest that the Revolution itself might be founded on flawed premise. And after that speech, there wasn’t much left to do but lop of Louis’ head.

Not long after, through his guidance as a member of the ironically-named-but-indisputably-omnipotent Committee for Public Safety, it became a capital crime to take any action not deemed to advance the cause of the Revolution, or even for thinking counter-revolutionary thoughts.

The streets were soon awash in blood. Hunger and pestilence increased. Opportunistic foreign powers began dreaming of seizing France for their own, and moving their armies into a position to do so.

I’m not the first to suggest this, but with each passing day, the modern Progressive Movement appears to be more closely adhering to the script set forth by Robespierre and his cronies. The 116th Congress, in two short months, has introduced bills to impeach The President, is hitting its marks in admirable fashion, as just over the last several days, it has introduced legislation to, remove the health care system from the filthy claws of the private sector, eliminate the usage of fossil fuels, and to impose a redistributive wealth tax. All of these efforts have evolved in eerie reminiscence of the Jacobin Clubs where the modes of operation of the French Revolution were fomented. Late last week, published reports told of behind-the-scenes meetings where House Democratic Caucus members were instructed to either vote as they were told, or find themselves on THE LIST. Ah, THE LIST. Robespierre would be proud.

But the question remains: who is today’s Robespierre? I’m having a difficult time finding a suitable Progressive to fill his literally small but figuratively enormous shoes. Liz Warren had a chance but probably blew it by misrepresenting the racial origins of her forebears. Kam Harris will have to live down her rise to the pinnacle of California politics while being Willie Brown’s side piece. The more we learn about Bernie, the more his Incorruptible nature is given the lie (see the Burlington College closure episode for further details). Booker? Maybe, but I wouldn’t look too closely under the hood there. Pelosi? Married to an uber-wealthy SF developer. Gillibrand? A documented political opportunist. AOC? Probably the favorite at the moment, but she has a long distance to travel before one can place her in the pantheon violent revolutionaries. I will admit, however, to admiring her efforts to gain this status.

But the modern-day Jacobin engine roars forward, grinding up most everyone that dares to get in its way, and as for me, I am rather enjoying the spectacle. It’s certainly entertaining and enlightening to learn that all employees of organizations that perform such tasks as searching for, extracting, refining and distributing fossil fuels, developing, obtaining regulatory approval and dispensing pharmaceutical medicines, underwriting the health care costs of the populous (at considerable risk) are enemies of the people. Who knew? Progressive politicians who describe those with differing viewpoints (including the President) as racists, bigots, fascists, Nazis, etc. are contemporaneously bemoaning our loss of freedoms and issuing dire warnings about our rapid-fire transformation into a totalitarian state. The irony of their crescendo of verbal assault and descent from decency bearing no consequence to them (on balance it accrues to their benefit) is apparently lost upon them. Can’t you see? Trump is Hitler circa 1933? Wake up! Get Woke! Before it’s too late! But I doubt that Hitler would’ve allowed even the tiniest fraction of these sentiments to be expressed in any forum whatever, back in the ‘30s (to say nothing of the early ‘40s). Just the other day, former Vice President/presumed Presidential Candidate Joe Biden found himself castigated for his suggestion that his successor (Mike Pence) might be a decent guy. Joe wasn’t born yesterday. Or even the day before. He immediately walked back this pleasantry.

You can put me in the camp that believes that all of this is tantamount to a modern-day Progressive circular firing squad. And I can only hope it continues on for, say, the next 6 quarters. Because that’s about the only way to ensure that some of these nutty ideas, which would not enhance, but rather would destroy, freedoms, and which would certainly destroy the economy, can be properly vetted and rejected.

And I suspect that Mr. Market agrees with me. Our indices lurched forward to yet another in the longest string of weekly gains in more than a generation. And I think that we might owe a perverse debt of gratitude to the Progressive Caucus for these happy tidings. Had the left side of the political aisle acted with more discipline, patience and decorum, investors might have had more to fear, might’ve felt less sanguine. As a case and point, let’s wind the clock back to December, before the 116th Congress placed its collective hands on the bible. If we had awakened midweek to the spectacle of the President’s lawyer/fixer slinging as much mud as he could on his former boss (under oath in Congressional testimony), and contemporaneously learn that the President himself had abruptly walked out of a much heralded summit with a rogue nuclear nation, what would’ve happened in the markets? My guess is that they would’ve sold off and hard.

And I think we can in part thank lefty politicians who dominate the airwaves and are in an apparent frenzied struggle to outflank one another in terms of hysteria/ideas to destroy the fruits of our free society

So the markets rallied, albeit with reduced vigor from recent patterns. It is my sad duty to report that the Gallant 500 is currently annualizing at a beggarly 97%, and that it may even slow from here. Earnings are over, and the macro signals are mixed. Confidence measures are at all-time highs, and GDP revisions came in above estimate, but inflation is tepid, as is manufacturing, and housing is downright impaired. The Fed, however, remains in our corner, and all I can say is thank heaven for that.

Those searching around for something about which to fret should consider that the Atlanta Fed’s introductory Q1 GDP estimate has plunged to microscopic depths.

If you’re having a hard time seeing this figure, it’s the single point in the southeast corner of the graph, and it clocks in at 0.3% — a nosebleed-inducing drop from the ~3.0% registered across 2018.

But I reckon we’ll see. The estimate is likely to move around a bit before the Commerce Department weighs in officially at the end of April.

Among other benefits, by then that lonely dot in the lower left hand corner will have morphed into a more visually pleasing time series.

I still think this here market could use a breather, and, as a further indication of this, I note that the global bond prices have backed off a bit, with yields rising in virtually every jurisdiction. The U.S. 10 year is now at a robust 2.75%, JGB rates have risen almost back to the Mendoza Line of 0.0% and the Swiss now only want a skinny 14 basis points/year for the purposes of using our money. Rising yields in a slowing economy at the end of an extended and improbable rally, combine, at least in my judgment, to point the equity valuation arrows nominally downward.

Meanwhile the search for a modern-day Robespierre continues. The man himself, after ruling the roost with such violent panache in 1793, found himself escorted to the guillotine in the summer 1794. But then again, pretty much every member of the Committee for Public Safety met the same fate before the turn of the century. Let’s all agree on one thing, though, shall we? Max de Robe had one heck of a run for a while there, and the modern day Jacobins would do themselves no harm by studying his example – all the way to its violent conclusion.

TIMSHEL

This week, I’m going to start with a digression to my standard weekly digression and ask y’all to first give it up one time to Peter Tork: the Monkees, er, bassist that checked out this past week. Against all odds, Tork was actually a stone cold baller, the fact that he rose to fame as part of a made-for-TV bubble gum boy band notwithstanding. I won’t delve into the whole history, but let’s just say that Tork, as he proved over subsequent decades, could actually play. But Don Kirshner, the media impresario who brain-childed the band as a takeoff of the Beatles’ meandering, illogical, but commercially gargantuan feature film “Help”, had other ideas. Kirshner didn’t want the music Beatles; he wanted the goofy guys doing handstands on the beach. So he hired some photogenic lads to front for a group of uber-legit musicians and songwriters, the latter roster including the magnificent Carol King and Neil Diamond.

Actual band members, most notably Tork and Liquid Paper-scion Mike Nesmith, were aghast when they found out their musical contributions were not wanted. And, bravely, they broke away from Kirshner (who went on to form The Archies – famously stating his preference to deal with cartoon musicians that wouldn’t talk back to him), and gave it a go on their own. The results were a couple of records, which, while perhaps failing to rise to the heights of, say, Electric Ladyland, were legit contributions to the rock and roll catalogue. The best of these is probably “Head”, written and performed by the Monkees themselves, and, if you haven’t done so already, you’ll do yourself no harm in checking it out. Say what you will about the group, they did once headline a tour that also featured an ensemble fronted by a Seattle guitarist named Jimi Hendrix.

And now, ladies and gentlemen, let’s transition to our main digression. Americans who passed their elementary school years during the ‘60s were under a full-on assault by the Monkees. They were everywhere: on TV, on the radio, in magazines, and perhaps most ubiquitously of all, on lunchboxes. Now, I don’t want you to get the wrong idea; it would’ve been an unthinkable assault on burgeoning manhood for me or any of my male friends to bring a food container bearing the images of Davey, Mickey, Mike and Peter to school. We all actually shaded towards the equally popular Batman to carry our mid-day meal. But the contents were always the same: an Oscar Mayer bologna sandwich, topped off by one or more individually wrapped, single slices of Kraft American Cheese.

And if you’ve been paying attention, you know that it has been a bad week for Krafts of every stripe. And it’s their own fault. In order to understand this, we must traverse 30 years of history. In 1989, a then-still-somewhat independent Kraft Foods Corp acquired Oscar Mayer, and this made me believe that all was again right with the world. In a vertical integration move that even John D. Rockefeller Sr. would have admired, the contents of my favorite sandwich were now stacked on top of one another — under a single corporate umbrella. Good and Good. But now wind the clock forward a generation — to 2015, when Kraft Foods completed a merger with the H.J. Heinz Corporation, forming an unholy, unsavory cuisine corporation under the moniker of Kraft-Heinz, Inc.

I was beside myself; tried to warn Management against taking such a fatal step. Because the divine combination of Oscar Meyer bologna and Kraft individually wrapped single slices (provided you removed the latter’s wrapper), wanted nothing to enhance it, and certainly not the intrusion of a ketchup company. I viewed the very concept of bringing ketchup into the equation to be not only an assault on the senses, but an insult to humanity itself. Moreover, I feel that Kraft had missed perhaps the mother of all business opportunities by virtue of its failure to rescue Hostess Brands, which in 2012, was forced into bankruptcy. Had they taken this bolder, more god-like action, they would’ve completed the sweetest lunchtime symphony of all, because they would’ve then not only owned Wonder Bread (the preferred outer layer of the divine sandwich of my youth) but would also gained control of the Twinkie that provided the coda to my lunches of yore.

But instead, they went the ketchup route, and on Friday, Kraft Heinz announced a write-down to the tune of $16B on these assets. Investors reacted with justifiable wrath, selling down the Company’s shares by more than 25%. So bad was this news that it actually kneecapped the Q4 earnings of the mighty Berkshire Hathaway, the fact that the write-down not hitting the tape until Q1 notwithstanding.

Like I said, not a banner day for Kraft-Heinz.

And for Kraft in particular, because, on the same day that ticker KHC issued its tape bomb, a gentleman of the same name, and one who happens to be the owner of the Super Bowl LIII-winning New England Patriots, got busted on a prostitution solicitation rap that is, according to published reports, just in its embryonic stages, and which also snagged a guy who spent decades in the C-Suites of both Morgan Stanley and Citigroup.

But to all of these bad tidings market participants gave nary a second thought, as our indices roared to their 9th straight week of gains, the best such streak since 1964. For those following my annualized return tallies, the 2019 standings are: Gallant 500 +114%, Captain Naz +118% and Ensign Russ +214%. In other words, the great, giddy rally continues. But, one wonders, for how long?

I’m going to stick to my guns here and suggest that: a) at best, the engines are bound to slow down a bit; and b) for the good of investors, perhaps the sooner they do so the better. Like I mentioned last week, the best year that even the Naz has ever recorded was 89% in 1999, and like I also mentioned in that note, this ain’t 1999.

Heck, I don’t even think it’s 1998.

Absent a few stragglers, Q4 earnings and guidance are now fully in the books, and while they might have been good enough to induce some relief, they were hardly gonzo. And the rest of the year is looking pretty bleak from that standpoint as well. Full-year profit forecasts are now measurably below the socialized Mendoza Line of $170/SPX Share, but, as indicated in the following chart, the response has been “who cares?”:

Well, we may find out this coming week (who cares, that is), which will be an interesting one from an information flow perspective. Chair Pow is scheduled to riff off to the Senate Banking Committee on Tuesday, and here’s hoping that he doesn’t modulate – change keys – from his current, docile stylings, because that could mean real trouble. Particularly as, while the spotlight shines on him, the Treasury Department will be issuing another mindboggling $200B of paper across the maturity curve.

On balance, the macro data calendar is light; for reasons not entirely clear to me, the Feb Jobs Report drops on the second (3/8) rather than the first Friday of March. But I urge those thinking that the week will end on a quiet note to bear in mind that Friday ushers in two nominally important deadlines: the end of the suspension of the debt ceiling and the stated point at which, absent a deal (or significant progress thereto), the U.S. is scheduled to drop a pant-load of tariffs on the Chinese.

In terms of the former, there’s no particular reason to anticipate the date with any horror. Yes, the suspension of the ceiling will be lifted, but the consensus of the obtuse suggests we won’t actually breach the debt limit until later this Spring, at which point we can expect our elected officials to act in the spirit of sobriety and cooperation that has been the early hallmark of the 116th Congress.

And, in all likelihood, March 1 will come and go without any Sino-tariffs going into effect. Both sides appear to be itching to do a deal, and whatever else is going in in China, the anointed ones seem to be of a mindset to goose capitalistic economic activity:

If I’m reading this chart correctly, it was indeed one helluva January Jump. And to me, along with other steps taken in the Chinese Credit Markets, it suggests that Chair Xi is feeling some pressure to boost the recently flagging economic fortunes of the Peoples’ Republic.

It also suggests that we may catch wind of a broad framework for a trade deal even before the 3/1 deadline transpires, and that alone could give this here amazing rally a significant incremental boost.

However, on balance, I’d urge caution and prudence here. I have no particular objection to you’re playing around a bit, but would on the whole recommend that you embrace new risks in single slices, as opposed to going off whole hog.

And all of this is making me very hungry. And it’s nearly lunchtime. So I reckon you know what I’m about to do. The Oscar Meyer-Kraft-Wonder Bread trifecta awaits me, and if all goes well, I will indeed reward myself with a Twinkie for dessert: a step I can take due to the beneficence of two private companies: Flower Foods and Apollo Global Management, who rescued the baked goods portion of my culinary trip down memory lane from oblivion.

Finally, as might be expected, I’ve also got the Monkee’s “Head” teed up on Spotify. And as I listen and dine, I will hoist a whole-milk toast to my main man Peter Tork, who was not a clown, but a bona fide musician. I’m thus feeling very good about my next steps, and hope that with great care, you will place yourself in a position to feel the same about yours.

TIMSHEL

Runaway train, never coming back,

Wrong way on a one-way track,

Seems like I should be getting somewhere,

Somehow I’m neither here nor there

— David Primer (Soul Asylum)

Let’s begin with a brief as possible sojourn into passably edgy Early ‘Nineties Alt Rock, which, I tell you fairly, is not my particular jam. So let’s get this over with. Our title track comes to you by way of the Minny-based outfit Soul Asylum, amounting perhaps their only recognizable song and certainly their only hit. I’ve kind of cottoned to the riff on my guitar and think the boys did a good job here; that’s about it.

But that ethereal, eternal theme of a runaway train seemed like as good a place to begin as any, so let’s do it. Begin, that is.

I am delighted to report that after one ripper of a week, into which we entered through the dark tunnel of my published fears that our equity indices might be losing momentum and not even produce the low end of triple digit returns this year, we’re back on track. The Gallant 500 has re-fired its engines — up to an annualized rate of >124%, Captain Naz is revved up to 136%, and that often-overlooked super steamer powered by Ensign Russ churning at a rippling 224% rate.

On balance, we can therefore perhaps state that it was a good week for bullet trains, but not unilaterally so. Shortly after my CA high speed rail project screed, newly minted Governor Gavin Newsome announced a decision to scrap the effort – at least insofar as it aspired to connect by hyper-locomotion those quaint little villages of Los Angeles and San Francisco. All, however, is not lost. The initiative will shoulder on with its plans to build a bullet between the thriving metropolises of Merced and Bakersfield. As the Governor pointed out, this will be a major boon to the misanthropic residents of that corridor. Now, I’ve never had occasion to visit Merced, but I was born not too far from the field of bakers, and have kicked it more than once with my crew there. My biggest memories are of two dominating forces: auto racing and churches, big-a$$ churches. I take great comfort in the fact that sometime next decade, the residents of these two urban colossuses (and those of points in between) can speed their way to a NASCAR event or an old school revival rally. I think, once some track is laid and the engines mounted, ambitious Merceders may even be able to wake up on a Sunday morning, take in some old time religion, catch a race, and make it back home for family dinner.

The other signal event of the week, of course, was the decision by the Almighty Amazon Corporation to abandon plans to establish an HQ2 (or HQ2a) in the Long Island City Section of Queens County, NY. This, of course, was viewed as a great victory by the same political forces that envision a Shangri-La of high-speed electronically powered trains across this great land of amber grain waves — so effective, comprehensive and efficient that it will remove the blight of airplanes infecting our spacious skies. That some of this track may force its way through majestic purple mountains and dissect/disrupt fruited plains is a subject that has yet to be addressed, but I’m sure they’ll get to it sometime or another.

Now, I will cop to sharing prog-like squickiness about the whole AMZN HQ2 thing, which featured a lot of promises from Team Bezos, and caused at least a hundred cities to come begging with treasures to play host to the one-time bookselling concern — only to be forsaken in favor of the two municipalities where they were best positioned to expand their considerable power (NY and DC). As such, a certain feeling of sangfroid is nothing about which any of us should be ashamed. In fact, the whole thing reminds me of the wholesale heists pulled off by innumerable sports teams who have forced their towns to gift them glittering new stadiums and/or arenas, lest their capitalistic extorters, with crocodile tears in their eyes, follow through with their threats to pack up their squads and move them to the embracing arms of another jurisdiction. The worst of these offenders, at least to my knowledge, is the New York Yankees, owned of course by the billionaire shipbuilding Steinbrenner family. They demanded a cool $1B from us Empire State taxpayers, which of course turned in to more like $2B. Bear in mind that this was 2008, when NYC was awash in fear. I haven’t been to the New Yankee Stadium, and even resisted the temptation to turn up there when my Wisconsin Badgers put their 2nd straight beat-down on the Miami Hurricanes in the Pinstripe Bowl. I had already been hating on the Yankees anyway, and had been hating on them for quite some time but every time I drive by that stadium, the dubious gift to these fat cats (to which I contributed material amounts) reminds me why this is the case.

Still and all, I can’t completely fault Amazon for grabbing with both hands what was theirs for the taking. And New York would’ve in all likelihood seen a speedy return its $3B investment. But as I mentioned last week, we must render unto Bezos what belongs to Bezos, and it was a pretty easy and slick move on his part to convey the message that, deal notwithstanding, if you don’t Amazon to come, it will stay away. Some businesses and consumers in that forlorn section of Queens are of course left holding the bag, but hey, they’ve got the promises of the dream girl that represents a contiguous district in the Boro to carry them through.

Perhaps at greater issue is the potential joining of a battle whose time for action is, if anything, overdue. We have all watched with great discomfort the dubious alliance between America’s most powerful corporate concerns and the increasingly self-righteously empowered progressive left, and wondered about the elephant in the room. In an arrangement that, writ small, resembles the 1939 treaty of non-Aggression between Nazi Germany and the Soviet Union, both sides know that they must at some point do deadly battle, but both realize they’ll be better to defer hostilities to future points of their own choosing. So, as long as major TMT companies parrot the appropriate progressive orthodoxy, hire Chief Diversity Officers and the like, and underwrite progressive causes with their seemingly unlimited supply of capital, as long as prog groups (and I’m not referencing Emerson, Lake and Palmer) are recipients of these financings and can use the forums to advance their messages, the uneasy alliance sustains itself. But to my way of thinking, it only sets up for a bigger showdown between these forces down the road. Those Big Tech companies are capitalists with capitalistic agendas, capitalistic modes of operation, and as much power to advance their schemes as anyone this side of John D. Rockefeller, Sr. They are headed on a collision course with the redistributionist dreamers in green fairyland, and it will be quite a spectacle to observe.

So the CA bullet train goes from nowhere to nowhere, and Amazon, while clearly going somewhere, will not point its runaway train towards NYC, so no high speed train from Seattle to Long Island City is at the moment urgently required.

And meanwhile, the economic signs at the switching stations of the landscape are flashing not green, but yellow. Recent macro data (albeit likely skewed downward by that tragic, five-week partial shutdown that heartbreakingly imposed 5-week paid vacation on about 800,000 bureaucrats) has shaded toward the dismal. The delayed December Retail Sales number of -1.2% was so bad that it has many economists smelling some sort of fix. Of course, by now we should be already processing the January report, but that number is delayed till 2/25, placing those interested in the odd position of being compelled to review two monthly reporting cycles in the space of two weeks. And this time, there’s not even a survey (at least yet) by which to benchmark consensus. On the other hand, if the December bomb was indeed an empty payload, we’ll know by virtue of the contents of the January print.

Meanwhile, the Inflation numbers came in like zombies, and it looks like the GDP juggernaut is feeling some significant gravitational pull:

Maybe it’s a Super Bowl hangover, spurred on by embedded cranial images of Adam Levine’s ink, but the Atlanta Fed’s Q1 projection has dropped by some 40% in less than a week.

I intend to pay attention to these trends and believe it would do you no harm to do the same.

Investors, however, and as is their prerogative, are cheerfully ignoring these tidings. The Q4 earning season is entering its last innings, and, as indicated below, it’s been many a quarter since capital allocators have taken in bad news in such forgiving fashion:

The implied message from investors is this: don’t worry if you bitched up the quarter. We know you did your best and let’s go get ‘em for the rest of 2019 and beyond.

I must admit: this attitude of charity is a bit unique in my experience, and I have an uneasy feeling that it won’t last forever. My read is that there’s a good deal of pressure on CEOs to deliver over the reporting cycles that confront them in the near term.

And, much as we’ve enjoyed contemplating a set of equity benchmarks projecting a more than doubling over the full course of 2019, it may behoove us to look at the hard facts of the current rally. The best annual return ever recorded by the Gallant 500 was 46.6%. And that was in 1933, which few of you likely remember, but (trust me here) was not a particularly wise time to be fully invested. It has only exceeded returns of 30% a handful of times since then. The newer Naz clocked in at 85.6% in 1999. But whatever one can say about current conditions in the global capital economy, I think we can agree on one thing: this ain’t 1999. The party may not be over but it’s well past the point of its introductory surge.

So, best case, the near-certainty is that the equity complex bullet train will slow, stop, or even reverse across the next 10.5 months. It could still be a very good year for investors, but even now, I suggest y’all ask yourselves the following question: back on January 2nd, if you could have locked in a full-year 2019 return of 10.72% on the SPX, 12.62% on the NDX and 16.36% on the Russell 2000, would you have taken it? Thought so. Well, that’s where we are right now. And I ask you to take this into consideration in your determination of risk profiles on a going-forward basis.

But on this wintry weekend, let’s hail the bright side. The Fed is on ice, the Chinese appear willing to deal, and, wonder of wonders, the Federal Government is even funded. I recall that a couple of weeks back Pux Phil failed to see his shadow, foretelling of a short winter. And, from a market perspective, he may be right; the green shoots of February are indeed a welcome sight to these decaying eyes of mine.

And then of course we’ve got those trains coming. Big, beautiful trains, all painted in emerald hues. So let’s forget Soul Asylum, shall we? How could we possibly be going the wrong way on a one-way track? Yes, we should be getting somewhere, and if Team Bezos is any example, we may indeed be neither here nor there. But we’ve been there before, and will be again. It falls upon our lot to deal with all of it.

TIMSHEL

Come on, come on down, Sweet Virginia,

Come on, come on down, I beg of you,

Come on come on down, you got it in ya, uh huh,

Got to scrape the sh!t right of your shoes…

— Mick and Keith

Exile on Sane Street? Brain Street? Blame Street? Wall Street? It matters not. This week, we pay tribute to what is widely acknowledged to be one of the greatest records ever produced for public consumption: The Rolling Stones’ “Exile on Main Street”. Some, including yours truly, believe that this album marked the high point of “the world’s greatest rock and roll band”. Mick and Keith were at the height of their artistic powers, Charlie was in the pocket as always, and Mick Taylor had found a magnificent (if temporary) niche in the ensemble, as a replacement for the luminous but misanthropic Brian Jones. They had their moments after that. The follow-up: “Goat’s Head Soup” was almost as good. But from there, with the passage of time, with each new album release more banal than the last, their increasingly diminished edginess became more difficult to overlook. While I love the lads, I think it’s mostly fair to say that they’ve been mailing it in for the better part of 35 years.

We feature Exile for two reasons. First, the title derives in part from the reality is that it was recorded in the South of France, as band members, tired of paying 95% tax rates to Her Majesty’s government, and justifiably concerned about associated wealth seizure, decamped to more that more favorable financial jurisdiction. In other words, the Stones had become tax exiles, and, given the general tone of the fiscal debate in this country, I felt that a featuring of the topic was, shall we say, timely. As this note goes to press, the 116th Congress and other sub-legislative bodies are busy outflanking themselves as to who can catalyze the biggest cycle of tax exodus achievable. There are proposals to set the top income levies at 70%, only to be outdone by nostalgic souls who would like to revert back to the post-WWII top bracket of 90% (which no one paid due to myriad loopholes that no longer exist today). As referenced in recent posts, one truly energetic (though identity challenged) senator/presidential candidate has floated the idea of a wealth tax – one that is not likely to gladden the hearts of the paymasters that are needed to fund her desired move to 1600 PA Ave.

And there are lots of ideas as to how to use this gusher of new money that would presumably roll in — unimpeded from eager high earners/fat cats who never really cared about themselves (only wanted to help the less fortunate), and as managed, of course, by selfless public servant who have no private agendas and who would no doubt spend it with flawless efficiency. We can rebuild every structure in America! We can offer a nice little stipend to those unwilling to work! Best of all, we can replace fossil fuel- hoovering cars and airplanes with a network of high speed trains that will get anyone anywhere they want to go in a jiffy, at lower personal expenditure, and at great benefit to society and its component parts (i.e. humans).

What could possibly go wrong? Well, to begin with, the high-speed rail crew may want to take a look at the Cali bullet train project. 10 years into the effort, the Cali bulleters have burned through $10B, but here’s the good news: the first leg – that uber-dense, car-choked stretch of land between the thriving hubs of Madera and Bakersfield – may be ready to actually transport some passengers by 2025, some 17 years after the launch of the initiative. Yes, it may be ready, but here’s a risk management tip: I wouldn’t bet the ranch on it. If one cares to look even further back into history, to the construction of the Interstate Highway System in the 1950s, one sees many thousands, tens of thousands of homes and businesses being uprooted. Can you imagine what it would take to build a train system from any Point A to any Point B on the map today? In these troubled times, when a stray word, a questionable look, and any minor inconvenience spawns a pant-load of lawsuits, the only job creation I can envision associated in bullet train fairyland is an infinite amount of billable hours for the future attorneys of this great nation.

Oh, even now I can feel the flames.

All of which brings us to our second motivation for our Exile theme. Across the great divide, the rhetorical flames perhaps burn hottest in the Commonwealth of Virginia, Sweet Virginia, for whom the best song on the Stones’ best album was named. I won’t extrapolate overmuch here, other than to say that yes, you got it in ya, and that you GOT To scrape the sh!t right off your shoes.

But if investors are feeling the fires in terms of any of this, they’re not doing much to show it. Equity markets did indeed cool down a bit over the past few sessions. It was by and large a flat week for U.S. indices, and it saddens me to report that this stasis leaves the annualized return for the Gallant 500 at a beggarly 105%. On the whole, however, I find the price action encouraging, as, particularly late in the week, dark forces were clearly attacking it, with little to show for their efforts.

One asset class that remains en fuego, however, is the global bond market. It would seem that there is no amount of paper that sovereign jurisdictions are able to issue that is not immediately consumed by the fires of global demand. Just this past week, our own Treasury brought to auction an impressive $150B of debentures – across the curve – and it did nothing but socialize a rally at every maturity. The godforsaken Italians put out 30B and the issue was overbid by about 50%. Contemporaneously, JGB yields are again negative – this time out almost 30 years, German Bunds command an annualized return of 0.085%, while their neighbors: the always accommodating Swiss, now charge nearly 40 basis points for the privilege of lending to them. True, French rates are at a near-usurious half of a percent, but then again they do have that whole yellow vest thing to finance.

And the corporate buying binge continues apace. The week brought tidings of (regulatory approval, of course, pending) nuptials between two large southern banks: BBT and Suntrust. This would be the biggest bank merger since the crash, but across all sectors, more are likely to be forthcoming. In particular, I’d be keeping an eye on Big Tech and Big Pharma for revelations of items on their shopping lists.

And what’s all of this telling us? Well, like I been saying, there’s just too much cash sloshing around chasing too few securities. It’s probably true that the global economy is slowing, and, by way of corroboration, one need to look no further than the performance of the Baltic Dry Shipping Index, plunging like a mofo since the summer:

Now, tempting as it is, I won’t try to hold myself out as an expert on the Baltic Dry. Suffice to say that it is a measure of shipping activity and associated costs, and as such, is viewed by many smart folks as a leading indicator of the well-being of the global capital economy.

And right now, as of the end of the first full week of February, it is annualizing at -99%+, which I reckon ain’t so good.

So, with rates on a one way ride on the “down” escalator, and amid indications of an economic slowdown other than acquire market share and/or retire stock, what’s a CEO to do?

We’re most of the way through Q4 earnings and pretty much done with anything about which anyone should care. The projections for the full year of 2019 did drop below the socialized Mendoza Line of $170/share on the SPX this week, and the trend-lines aren’t pretty. But hey, it’s early in the year, and if nothing else, there’s always the above-mentioned acquisitions and buybacks upon which to fall back, now isn’t there?

In terms of the upcoming week, there are two important deadlines to consider, both of which happen to fall on Friday. First, the historic 3-week budget deal struck in January expires on that day. And, while the legislatures are at it, they may want to fold in something that also expands the debt ceiling – perhaps permanently – as our ever-voracious Treasury is expected to reach yet another limit of its statutory borrowing powers – the 10th such milestone this century – on or about March 2nd. The latest headlines indicate that the two sides are yet again at an impasse, but I’m not overly concerned. Because if there’s any topics upon which politicians can overcome otherwise intractable differences, it’s their pressing need to spend borrowed money.

Feb 15th also marks the 45-day hedge fund redemption window, and, like the market rally itself, it looks like perhaps my clients and their peers may dodge a 100-year flood. Absent the post-Christmas equity melt-up (in which most funds at least nominally participated), the deluge did appear to be in the offing. However, I suspect that the numbers now will be more benign, and, from a personal perspective, I will thank God for that.

There’s not much else on the immediate horizon that appears likely to either enchant us or vex us, so I’ll close with a couple of risk management warnings. First, Thursday is Saint Valentine’s Day, and I suggest that those who do not wish to be flamed by their flames take the trouble to adhere to prevailing protocols.

Because, with extreme negligence, they risk complete Exile from Flame Street. And as for the Stones, they remain tax exiles from their native United Kingdom. Mick Taylor is long gone, replaced by the accessible but uninspiring Ronnie Wood. Bassist Bill Wyman, now an octogenarian, also split the scene, replaced by Daryl Jones, who contributes much, but somehow has not been granted band membership status. My advice to them is that the clock is ticking, and that they should amend this oversight before it’s too late.

The band is now said to be working on a new album – their first containing original compositions since 2005, and will take the material out on their 1,223,407th World Tour. But in terms of the locus of the studio, you can bet your boots it will be outside of the reach of Inland Revenue. Mick spends a great deal of time in New York these days, and if he’s following the news, he may be aware that state tax revenues are sinking like, well, sinking like a stone, and that even Governor Cuomo has warned the masses that they can only tax the local fat cats so much before they pull their own en masse Exile from the Empire State.

For this reason and others, it may behoove us to watch them, and pick up some pointers to deal with what may be the menacing reach of our own revenuers – which may be coming to a venue near you, and sooner than you think.

TIMSHEL