Why should I care?

Pete Townsend – “515”/Quadrophenia

Happy “why should I care” day.

Though less widely celebrated than, say, Pi Day (3/14), May 15th offers up another Julian Calendar opportunity to reflect upon the nuanced intersections between our accounting of the passage of time, and our everyday experience.

In this case, it confers homage upon the existential struggles of Jimmy – a young, working-class fourway personality split Mod — the unlikely protagonist of Pete Townsend’s musically magnificent (if narratively-challenged) “Quadrophenia”. Our title song tells of his wandering musings, as he travels on a train carrying so many souls from the void of work to the oblivion of home.

It begins with the above-supplied, rhetorical question – “why should I care?”.

It’s highly possible that you shouldn’t. In fact, I’m not sure that anyone does. Other, that is, than me and my cousin Ben Finkelstein (whose image I won’t reveal again, but which I used about a year ago as a copywrite-consideration surrogate for that of writer/TV personality Ben Stein). Every year on this date, Cousin Ben and I ask, and try to answer, the eternal query that is the subject of this note.

We’ve yet to resolve this. Which is probably a good thing. Because the issue keeps cropping up.

The question itself is perhaps too broadly rendered, because, as you probably would agree, some things are worth caring about; some are not. And I’d like to take this opportunity to delve deeper into the question, with respect to several pertinent issues of the day.

But first, I’ve changed my mind. I figure I need to share a picture of Ben with y’all. Not sure if he cares, but I don’t send this note to him, so perhaps he’ll never know.

He takes a nice snapshot, doesn’t he? I’d say he even gives an identically named hockey player, last seen playing defense for the Iowa Wild – minor league affiliate of the NHL’s Minnesota Wild, a run for his money.

Ben is the Booking Agent for the fabulous Birchmere Club in Alexandria, VA. I’d like to tell you that he’ll hook you up with tickets to sold out events, or even get you a gig. But the truth is, my experience is mixed in this regard, so, as they say, your mileage may vary.

But let’s move on. While not prominently featured in the Quadrophenia lyrics, Jimmy is a highly credentialed economist. I caught up with “Dr. Jimmy” to run a few inquiries by him, and obtain his take from a “why should I care” perspective:

GRA: The Federal Government will, according to the latest projection, reach its statutory debt limit within the next few weeks, and, absent Congressional action, could default.

Dr. Jimmy: Heaven prevent the folks in Washington from hitting any kind of limit on their ability to issue increasingly dubious paper to pay for the bloated bureaucracy and flavor-of-the-month helpings of political pork. If statutorily blocked from doing so, all hell would indeed break loose. We would go bankrupt in a manner similar to Hemmingway’s Mike Campbell (The Sun Also Rises) – gradually, then suddenly. First, we’d be treated to Obama-like stunts including the closing of National Parks on July 4th weekend. The Feds might defer paying some contractors. Many of the uniformed, believing, erroneously, that most of our debt is held by China (>75% is owned by domestic institutions) will suggest that we simply welch. We can’t. Then panic would set in. The U.S. Treasury Complex, the largest financial market in the world, would collapse, taking down every asset class in its wake. Cue up breadlines, etc.

But here’s the thing. Precisely because it is unthinkable, it practically CANNOT happen. There will be an excess of brinksmanship and then the warring factions will cut a deal to render us further in hock.

GRA: Most economists believe we’re headed into a Recession.

Dr. Jimmy: I defer to the experts here. Some, including guys like Druk (who is my all-time money management idol) see the economy falling off a cliff. And Consumers seem to be latching on to the bad vibe:

I draw your attention to the yawning gap between the survey projection (60.80) and the final number (53.40). Which is an epic miss. Investors don’t seem to mind, though. Particularly the divisions assigned to Colonel Naz – up a gaudy 18% year-to-date.

With the reporting cycle winding down, Q1 Earnings ended on a high note, with y-o-y blended losses of 2.5% — a far cry better than the -6% anticipated at the start of the sequence. Inflation, while still stubbornly high, is at least headed in the right direction. The Jobs Market is en fuego. GDP came in a bit tepid, but you can’t have everything.

Probably, a recession of some sort is on the cards, but for now, it all reminds me about the longpredicted collapse of the Housing Market — in the 1st decade of the 3rd Millennium in the Year of our Lord. Yes, perhaps it is inevitable. The questions are when and how deep. From my vantage-point, it looks like any recession in the immediate offing, if it comes at all, would be a mild one – perhaps emerging gradually. Then suddenly.

GRA: What will the Fed do?

Dr. Jimmy: With all this talk of recession, a lot of folks is betting that not only will our Central Bank pause its rate-raising ways. but will reverse itself and start cutting again. I have my doubts about this. Particularly because, as political animals first and last, I believe that they are much more afeared of turning dovish too soon than the other way around.

More than this, I’m not sure how much it matters. The Fed only directly controls the Overnight Rate, while the Treasury issues paper out thirty years and more. As of now, the Yield Curve, while improving a bit, remains perversely inverted:

If anyone has any clue what the impact of Fed Policy at the longer end of the curve (i.e., at durations where economic agents actually borrow and lend money) would be, I wish they’d share.

There’s every possibility that Fed Funds reductions could cause, say, 10-year yields to rise. Or fall. Or stay where they are.

About all I can state for certain is that this here curve is a hot, unsustainable mess.

GRA: Though early, the 2024 Presidential Election looks like it could be a rematch of the 2020 combatants.

Dr. Jimmy: Wherever else it may differ, the American electorate is united in its desire to politically disappear Biden and Trump. And a general election battle between the two of them would involve perhaps the least appetizing choice since, well, since 2020.

But looking more deeply into the past, I cannot come up with a single pairing as dismal as this one. Herbert Hoover versus Alfred E. Smith (1928) was perhaps runner up in wretchedness, but this one blows it away.

I’m not sure, though, it pays to care. Just yet. Not sure if Biden makes it that far. He’s literally and figuratively dissolving before our eyes. But with respect to Trump, if he’s still lapping the field towards year end, you have my full permission to care.

GRA: 2023 Bank failures are, in inflation-adjusted terms, of a greater magnitude than those manifested during the Great Financial Crisis.

Dr. Jimmy: Worth considering, certainly. Particularly when we shove in the likes of the once-mighty Credit Suisse. I don’t however, for the foreseeable future, envision the kind of carnage we experienced 15 years ago. Banks are better capitalized and comprehensively protected by the political class. And even in ’08, not a single depositor lost a farthing. The banks that went down (unlike, for instance, Washington Mutual, Lehman Brothers and AIG in ‘08/’09) could easily have been saved.

As I have stated previously, the Credit Suisse and First Republic trades look to me like wholesale, forced asset transfers to more powerful players on the field. Some few, privileged few, entities, made a fortune on these trades, and are most certainly seeking out their next victims. This will extend the agita, and is a dangerous game, but will result only in the further empowering of the powerful, who, from New York to Washington to San Francisco, will consolidate their control of our resources, while telling us of their intention to do precisely the opposite.

I would, however, keep my eyes on the debt associated with the Commercial Real Estate Market. I’ve seen estimates that up to $1.5T must roll in the next 18 months. And this with office vacancy rates at alarming levels. Some borrowers could default and if there’s a real problem in the Banking Sector, this will be the source.

GRA: America is obsessed with gender identity.

Dr. Jimmy: Which is a helluva shame, considering all the other, arguably more pressing problems we face. I reckon this will run its course, but it is bone-wearying in the meanwhile. Here, I can only defer to Pete and our title song:

He man drag, In the glittering ballroom
Gravely outrageous, In my high heel shoes
Tightly undone, They know what they’re showing
Sadly ecstatic, That their heroes are news

I don’t even know what he’s talking about, and, sadly, I suspect, neither does Pete. Who was certainly out of his brain when he wrote this song.

There’s a lot more stuff about which we can choose to care. Or not. But right now, I’ve a train to catch.

If you don’t know which one, you haven’t been paying attention, but then, on this ritualistic day, I can only ask you why I should care.

****

Thanks as always, Dr. Jimmy. And Happy Mother’s Day.

TIMSHEL

[MR. BANKS (MR. DAWES SR., spoken)]
Now, Michael, When you deposit tuppence in a bank account, Soon you’ll see
That it blooms into credit of a generous amount, Semiannually

[BANK DIRECTORS]
And you’ll achieve that sense of stature, As your influence expands
To the high financial strata, That established credit now commands

You can purchase first and second trust deeds
Think of the foreclosures!
Bonds! Chattels! Dividends! Shares!
Bankruptcies! Debtor sales! Opportunities!
All manner of private enterprise!
Shipyards! The mercantile! Collieries! Tanneries!
Incorporations! Amalgamations! Banks!

[MR. DAWES SR.]
While stand the banks of England, England stands…
When fall the banks of England, England falls!

[MR. BANKS]
You see, Michael, all for the lack of…
[BANK DIRECTORS]
Tuppence, Patiently, cautiously, trustingly invested in the…
To be specific:, In the Dawes, Tomes, Mousely, Grubbs Fidelity Fiduciary Bank!

From Mary Poppins

Will it utterly obliterate your good opinion of me if I disclose that I am a stone-cold Mary Poppins fan? So be it. I think it is one of the greatest cinematic works of all time. Yes, it’s a feel-good Disney romp, deemed, for 5 decades, suitable fare for the little darlings. But it was ahead of its time in terms of questioning authority/embracing and enshrining subversion. Released, as it was, a full three years before the Summer of Love, it pokes fun at staid institutions, placing them and their custodians on a lesser rung of power strata — visibly beneath the chimney sweeps and domestic servants who rule the roost in this re-imagined version of Early 20th Century Edwardian London.

It is also a work of pioneering psychodelia, full of laugh-propelled, levitating uncles, and evidenced most notably by the scene where Dick Van Dyke’s Bert the Chimney Sweep coaxes Julie Andrew’s Poppins to jump into a chalk drawing and enter an authentic acid trip — animated with men and horses, hoops and garters and (lastly) a hogshead of real fire.

To be fair, though, acid was legal in 1964; did not get outlawed until ’68.

I particularly call to your attention the climatic turn of the story — wherein the stuffy father of the feature family (named, appropriately, George Banks) takes his son Michael to deposit the tuppence he has squirrelled away into the above-named bank (where the former is a rising young executive). Michael has other ideas – a scheme, encouraged by a grimy bag lady, to use the funds to underwrite the feeding of the pigeons on the steps of St. Paul’s.

Notwithstanding the full force of logic and salesmanship brought to bear by the depository institution’s Board of Directors, Michael remains obdurate. He snatches his tuppence away and makes off with them, causing a full-scale run on the Dawes, Tomes, Mousely, Grubbs Fidelity Fiduciary Bank.

In accordance with Financial Conduct Authority and (presumably) Internal Bank Regulations, the episode impels the cashiering of Mr. Banks, Pere. Who responds in the only way possible – by uttering the signature phrase “Supercalifragilisticexpialodocious”, announcing, in doing so, his fullscale entrance into the counterculture.

And something like the above appears to be repeating itself – almost fully two generations after the release of this magnificent film.

Our present world is dominated by banks – Fidelity Banks, Fiduciary Banks. Think foreclosures! Bonds! Chattels! Dividends! Shares! Bankruptcies! Debtor sales!

And think of adorable little depositors causing collapses by withholding (or, alternatively, withdrawing) their tuppence from these mighty institutions.

The latest victim, of course, is First Republic, which, after putting up a gallant, weeks’ long fight, finally collapsed into the mighty, combined arms of the Federal Deposit Insurance Corporation and J.P. Morgan, Inc. The latter is acquiring the former – all ~$300B of assets, and ~$100B of deposits, for 35 cents/share (approximately 15 tuppence).

As recently as February, FRC was trading at $150/share, implying that Jamie and his crew are picking up this here piece of biz for 1/500th of its value a mere quarter ago.

Oh yeah, and taxpayers are underwriting a substantial portion of the associated default risk.

Nice trade, Jamie! You may have even outdone your yodeling UBS compadre Sergio Ermotti in his snagging of Credit Suisse.

Other banks are now, of course, in play, with the result being the further consolidation of an industry where, in rhetoric but not practice, regulators have fought against this tide for many years.

How beneficial this is for the banking industry, however, is a matter of some doubt. Certainly, depositors will benefit, though, as they invariably do when regulators and big institutions collaborate to rejigger the alignment of the sector.

There are some signals, nonetheless, that merit monitoring.

This past week, for instance, the Bank for International Settlements (BIS) released its 2022 year-end report, revealing, among other dainties, an alarming decline in cross-border lending:

And all this before the banking psychodrama of 2023. Of particular concern, in the present-day redux of the Michael Banks run, is the well-being of American subsidiaries of large, multinational institutions. If the raids continue, they will need all the dollars they can obtain. Yet they have no natural greenback depositor base, so stay tuned.

Meantime, the Fidelity Fiduciary Central Banks, not to be upstaged, are all quite active. In the past week alone, the Fed, ECB, and Bank of England (regal overseers of the Dawes, Tomes, Mousely, Grubbs Fidelity Fiduciary Bank) all raised their overnight rates by 25 basis points.

Away from all this, and in that narrow corner of the universe that does not involve banking, the heavy information sequence is winding down for the quarter. Earnings and guidance are better than expected. The Jobs Market is improbably strong. Buffet’s Berkshire is, in time-honored fashion, blowing the doors off the joint.

The choice that thus devolves to us is as follows. Do we trust the banks enough to deposit our tuppence in their coffers, or do we feed the birds?

There are risks under both options, and I hasten to mention that if we choose the latter course, our little winged friends might fly off, showing their appreciation by dropping parting projectiles on our shoulders.

There is, of course, a third option. We can invest our tuppence in paper and strings, and fly a kite.

It seems to me, on this windy mid-Spring day, there are worse alternatives. So, if anyone wants me, they should look in the sky and follow the string that I am holding in my fist. (Spoiler Alert): that’s where we find the Banks family at the end of the film, and what’s good enough for them is good enough for me.

I reckon, though, that we won’t be able to eschew the banking industry entirely, and I can only urge you to remember that it is Supercalifragilisticexpialodocious.

With an emphasis, at least for now, on Fragile.

TIMSHEL

Somewhere somehow somebody somewhere must’ve kicked you around some

Tom Petty

I’m pleased, this week, to offer a musical theme, which, for once, is not tied to the demise of an artist. Yes, Petty is gone, having left us an unthinkable 5.5 years ago. But he was never one of my faves, and this here piece isn’t even about him.

Instead, this note goes out to Pras Michel – founding member, along with Wyclef Jean and Lauryn Hill, of the seminal hip hop band The Fugees. He’s probably the least famous of the trio – that is, until last week, when he was convicted on ten felony counts for having copped ~$100M for serving as the front man on the heinous 1MDB scam.

As often happens in these pages, I must offer a bit of context here. First, while I sort of dig the Fugs (who I am told derive their name from the term Refugee), I cannot claim them to be my particular jam. I did meet Clef once – at the home of an overpaid, perpetually over-medicated hedge fund manager/Fugee Fanatic, who hired the former to perform at his son’s Bar Mitzvah. I don’t remember much of that gig – other than my impression that WJ seemed absolutely bewildered to be there. I can’t imagine what he was paid for that performance, but presumably my trader friend made it more than worth his while.

Then there’s 1MDB, one of the most mindboggling financial scandals of a generation that has been littered with them. Here, a little, fat person of Asian ethnicity managed, with the help of his friends (including several compliant investment banks and the jurisdiction’s Prime Minister), looted the Malaysian Sovereign Wealth Fund of ~$5B, a portion of the proceeds, in a touch of sublime irony, used to finance the Martin Scorsese/Leo Di Caprio/Margo Robbie film “Wolf of Wall Street”.

As mentioned briefly in this space a couple of weeks ago, the mastermind of the caper, one Jho Lo, is still at large. A fabulously well-healed Refugee of some remote land. Not so Pras, who is looking down the barrel of a multi-decade prison stretch and is currently awaiting sentencing. He will no doubt appeal, but I think the Refugee option for him is a stretch at the moment.

Carlson and Lemon might qualify, but wherever they land we won’t go there.

And what about the rest of us? Particularly the investor inside All God’s Children?

Well, here, I gotta agree with Petty. Somewhere, somehow, somebody must’ve kicked us around some.

And, as he further speculates “who knows? Maybe we were tied up, taken away and held for ransom”.

If so, I’d begin with the banks, and one bank in particular (everyone say it with me): First Republic. After surviving last month’s near-fatal attack, a second wave has absolutely destroyed its sanctuary. It has, for several days, been on a lonely road, seeking succor somewhere, anywhere.

It has had some help. The Federal Deposit Insurance Corporation (FDIC), which, under most circumstances, would have simply padlocked the joint on Friday, is instead pushing it into the arms of one or more larger competitors. The lead here, is JP Morgan, in ironic redux of its distressed purchase – 15 years and six weeks ago – of Bear Stearns.

Like Bear, First Republic made its bones catering to wealthy individuals and institutions, who don’t do the Refugee thing. Instead, they call upon their buddies in Government and Big Biz to escort them into comfortable new realms, whereupon they claim and receive immediate, comprehensive agency. That is what is apparently happening here, and all I can say is it was ever thus.

It does, though, renew one’s worries about the banking system in general – a concern I rather cavalierly dismissed a couple of weeks ago. I may have been wrong, though. Because, as the folks in Laredo, TX will tell you, there’s never just one Refugee, but more typically more than you can count.

These and other factors – viral after-effects, Eastern European war, a Central Bank hemmed in by previous bad decisions, to name a few, have banished virtually every assert class into the wilderness – in forlorn search of a valuation home.

Let’s take a quick inventory here, shall we? We’re in the fat part of the Equity earnings season, which has thus far produced surprisingly gratifying results. But it is all skewed towards those companies sheltered high on the (oxymoronic) hills of Silicon Valley. And this has led to one of the most puzzling valuation conundrums I can ere recall.

Consider, if you will, the following Amazonian juxtaposition:

I know this is a bit contrived, but the graph on the left indicates that the overwhelming core of whatever passes for a positive Q1 earnings vibe derives disproportionately from AMZN. OK; fair enough. It’s less than ideal, though, because there are, after all, 499 other companies in the Gallant 500.

But here’s the thing. AMZN is flat over a rolling year and actually declined after the Bezos earnings drop!

If you can figure out a way to invest into this nonsense – be it buy, sell, or hold – please share it with the rest of us.

The Treasury Complex is uprooted by everything from a grotesquely inverted yield curve, a ginned-up debt ceiling brinksmanship debate, AND a pending FOMC rate decision (Wednesday) that is projected to take the Fed Effective Rate up to 5% for the first time since 2006:

And all of this as the world’s leading economists are united in their belief that we are headed into recession.

All of which, along with incidental matters such as geopolitical conflicts which follows the trade winds from the Crimea to China, puts Commodities into a wandering wasteland.

The Foreign Exchange Complex is also unmoored for a number of reasons. Are the USD’s days as the world’s Reserve Currency dwindling down? Perhaps. Also, while largely ignored on these shores, the newly crowned Chairman of the Bank of Japan, instead of following the lead of Powell, LaGarde and company and adopting an anticipated hawkish stance, has asked for 18 months to study the problem before he acts.

Y’all know how I feel about Credit. Too damned much of it to feel any stability there.

So, with all this wandering valuation worry, it’s nearly impossible to find a comfortable home for your investment dollars.

So, maybe we do have to live like Refugees. Petty’s dead. Jho Lo is in the run. Pras pulled off nine figures for a ten-figure caper but failed to make it stick. Lauren Hill is a twenty-year recluse. Last month, Clef checked himself into a hospital, assuring his fans that he’d be back soon. All of which obliterated the recently planned and highly anticipated Fugees reunion.

Upon his release, and seeing as how he’s available, I might ask him to play at my Bar Mitzvah. Which should’ve happened 50 years ago but didn’t (long story).

Truly, I see no other alternative, as I don’t think I can wait until Pras becomes available for this duty.

TIMSHEL

At the risk of stoking the fires of what is already a pre-holiday frenzy, I wish all my havirim a Happy Yom Ha’atzmaut (Tuesday), which this year celebrates the 75th Anniversary of the Founding of the State of Israel. It falls, as always on the 5th day of Iyar, and, if you’re like me, you’re wondering, in this rapidly evaporating year of 5782, how on earth we are already into the month of Iyar.

Since time immemorial, Israel, Palestine, Canaan, whatever you wanna call it, has been a geographic exemplar of all the contradictions of mankind. Birthplace and spiritual home to the Western World’s three leading religions, it has been ravaged, plundered, fought over, wept over, since it first emerged – some 60 Centuries ago. Jerusalem (its capitol no matter what anyone says) has been attacked 52 times, captured/recaptured on 44 occasions, besieged 23 times, and destroyed twice.

At least in part owing to the pounding they took earlier that decade, the post-WWII Allied Forces officially recognized it as an independent, Jewish State in 1948. Whereupon its four most immediately neighboring countries declared war on it. They asked Albert Einstein to serve as the first Prime Minister. Wisely, I think, he declined the honor.

Yet it has survived nearly perpetual war, considerable doses of bad press, and the unending enmity of its neighbors – for three generations. It presses on. Ironically, it is accused of perpetual warmongering – often by the same sources who have wondered aloud why, say, the Jews allowed ~1.1 millions of their numbers to be executed at Auschwitz by a few thousand Nazis. If every condemned prisoner took out one guard, so they say, the massacre never would have taken hold.

75 years later, they assail Israel for daring to protect itself, for responding to ceaseless attempts to bomb it into oblivion.

Israel abides, arguably thrives, as the premier democracy in the Middle East, with justice and civil rights systems that compare favorably to that of any other jurisdiction in the world. It is in every sense a democracy, but herein lies a divine paradox. In a world of wandering demography, it must daily resolve its commitment to Judaism with its democratic principles. One day, there might not be sufficient voting-eligible Jews to sustain its religious orientation.

Other countries in the region avoid this dilemma, but then again, they are not authentic democracies (or democracies at all). In Iran, the Ayatollahs run the show. The House of Saud stands, creaking as it does, at least for now. I suppose they have some form of elections in Egypt and Syria, but please. From a distance, they appear to be as legit as the recent Chicago Mayoral runoff.

If you’re like me, you take, at minimum, great comfort in the presence of Israel – warts and all. They’re not above a bit of chicanery now and then. There is a widely known story about incessant American fundraising for the development and support of the country’s citrus crop. When I was a kid, every year, they’d come to school and cajole us to buy a tree that would supposedly bear our name. As James Michener records in “The Source” – immediately upon landing on an El Al jet at Ben Gurion Airport (equidistant from Jerusalem, and Tel Aviv and named after the guy that took the job Einstein turned down) every single American would demand to see their tree. Whereupon each would be driven to a single, forlorn citrus grove in Jafa and shown the same depleted orchard.

It was a well-rendered scam (kind of like those folks who, for a price, will name a star after you), but it has not impeded the alarming rise in the price of Orange Juice over the last several months.

Somebody help me here. What gives?

I was under the impression that nobody drinks Orange Juice anymore, finding that it has all the nutritional qualities (but none of the taste) of A&W Root Beer.

Yet the price of the stuff they used to sell from vending carts on every street corner in New York has doubled in little more than a year. Probably, you didn’t notice, because, like me, you may not have choked down a glass of the pulpy potable in at least ten years.

Israel is also infamous as being the one jurisdiction in the Middle East that does not produce fossil fuels. Because there are none of the associated raw materials under its sacred soil. Meantime, those countries around the world rich in this vital natural resource are, for different reasons, weaponizing its production (including, unfortunately, the USA).

As this evolves, the smart hedge fund crew is loading up on the long side of the bubbling crude:

But we’ve other (gefilte) fish to fry this coming week. We’ll get our first look at Q1 GDP on Thursday, and most estimates call for 2% or greater, which ain’t too bad in my book for an economy said to be careening into nasty recession.

Beyond this, and mostly because it cannot be deferred any longer, most of the High Priests of Tech report this week. I wish I could gin up more interest/enthusiasm for the attendant, pending drama, but, right now, it’s not in me. There are certain signs that tech is overvalued and others that the associated earnings picture is bleak. But I’m not sure it matters, as, to borrow further from the Old Testament, Cathie Wood’s ARK may be there to save the day.

Our public servants in Washington will also make their collective presence known. We’re still a fortnight away from the next Fed release, but, in the interim, we can busy ourselves outflanking one another in hysteria over the debt ceiling drama, and the possibility of a default of our paper. It’s not clear when we hit said ceiling; estimates range from Memorial Day to Labor Day. Meantime, opportunities for bi-partisan political brinksmanship abound.

Do what you like, here. I elect to ignore most of this.

I don’t, in the meanwhile, see much likely to move the markets. Not stocks. Not bonds. Not FX. Not commodities. Not crypto.

Perhaps it’s a good time for me to visit Israel. To which I’ve never been. To see my trees, as by my estimate, I bought at least a dozen of them.

I reckon I’ll wait, though, until the Yom Ha’atzmaut celebrations die down. I note the milestone as a significant one but do my rejoicing over here.

Because 75 years is a pretty good run. One that coincides with the period of American Exceptionalism, where this country has been pre-eminent in political, economic, cultural, and social affairs. We have, of course, benefitted greatly as a result, but to the best of my judgment, the rest of the world hasn’t fared that badly either.

Among our most prominent prerogatives has been support of the State of Israel and my own belief is that the latter would never have survived in its present condition without this bounty.

Our position as the world’s global superpower has perhaps never been more threatened than it is today, and, of course, nothing lasts forever. If we are superseded by, say, China, or India (the latter, as widely reported, just passed the former in total population), it’s not clear to me that they will continue to sponsor that fluky little Jewish state. More probably, there will be no f@cks give about, and perhaps outright hostility towards, the Land of Milk and Honey, home of Abraham, Isaac and Jacob. Birthplace and sight of Execution/Resurrection of one Jesus of Nazareth.

So, here’s to you, Israel. I look forward to visiting your shores and (fair warning) inspecting my trees.

But, come what may, I think I’ll take a pass on any orange juice that is offered up to me.

Particularly at these prices, I reckon I can put that ritual off for another decade.

Or at least until Tisha B’av – now just three short months away.

TIMSHEL

Men ought either to be well treated or crushed, because they will readily avenge themselves of slight grievances, but not more serious ones.

Niccolò Machiavelli

Been thinking a great deal about my old crime partner Nicky Mac lately. While I won’t get into specifics here (what happens, after all, in the Florentine Renaissance, stays in the Florentine Renaissance), suffice to say that he, I, Leo DV, Mickey the Angel and Larry the Great Medici (the last of these plausibly the founder of the misanthropic 27 Club) kicked up quite a bit of dust in the late 15th and early 16th Centuries — engaging in unmentionable Hijinx and dodging that buzz-killing Dominican Friar Girolamo Savonarola (original architect of the Bonfire of the Vanities) throughout. And, while a few of them cats had personal tastes, which, shall we say, I did not share, we had one whale of a time.

It was, though, ages ago, and the old crew ain’t what it once was. Luckily, though, they left stuff to remember them by – the Sistine Chapel Ceiling and the Mona Lisa, for example.

And in the case of Nicky Mac – that posthumously published, world-changing Political Treatise “The Prince”. Containing such eternal and universal truisms as “if you strike at a prince, you must kill him”.

As well as our thematic quote, which seems to me to be highly a’ propos to modern times. Because we live in an era where grievance is currency – perhaps the most valuable unit of account under heaven. And, as Nick instructs us, small grievances often carry more weight than large ones. Look at a colleague funny and they’ll drag your ass in front of H.R. Disagree with the settled academic consensus – particularly as to the high crimes of our forebears and, wham, you lose tenure and find yourself banished from the physical plant of the campus itself. Offer compensation for silence to a former side piece? Well, I reckon it depends on who you are.

As I recall, it wasn’t always that way. Saturday marked the 40th Anniversary of the iconic but arguably tacky New York Post headline “Headless Body in Topless Bar”, for which that world-class publication has been lampooned for a full four decades. Further, the cops did bust the perpetrator – one Charles Dingle, who was found guilty of the dual serious grievances of murder and decapitation. He was last denied parole over ten years ago, and I cannot find any more recent information on him. Presumably he’s still in jail.

But in today’s markets, it is certainly the case that if one transgresses in small ways, one can expect to pay dearly for such sins. Larger crimes, though, will indeed tend to go unpunished. Nobody, for instance, went to jail for nearly tanking the entire global capital economy a decade and a half ago. Ditto for the contemporaneous LIBOR scandal – arguably the largest scam in financial history. And, in terms of the latter, the only vengeance extracted only came to fruition on Friday, when the once dominant CME Eurodollar futures contract (settled to LIBOR) gathered to the dust of its forebears.

Jho Low – absconder of ~$5B from the complicit Malaysian Sovereign Wealth Fund 1MDB — remains at large. Bernie lived out his final days playing cards and doling out financial advice to other cons at a North Carolina Club Fed.

And so it has always been. I reckon that what Nicky was really trying to tell us though, is that if you’re gonna f@ck with someone, you probably ought to go big. This was plainly true six centuries ago, and remains so, I think, till this day.

I myself have some grievances against the market, which, unfortunately, are of a finite nature, and thus subject to the maximum penalty under our titular maxim. Risk assets, building on a surprisingly robust Q1 performance, remain on a tear. Newly promoted (yes, it was approved by Congress) Coronel Naz is up > 15% for the year. Bonds of every configuration are enjoying a strong rally. Live Cattle – perhaps unfortunate beneficiaries of that Texas dairy farm explosion which claimed 18,000 head (and appears to be a crime that remains unsolved) is up double digits.

Crypto is through the roof – nearly a double in 3.5 months of ‘23 action. And this despite myriad frauds, bankruptcies, and concerted, coordinated attempts to destroy every exchange and trading platform where it is transacted.

The White Sox are off to a dismal start, but then again, I take comfort that some things, at any rate, are eternal.

Attempting to trade or invest through this madness has routinely evoked the full wrath of the Gods, who seem determined, at least at present, to express their full outrage at such audacity. Unless, of course, you’re a bulge bracket bank. In which case your hubris is richly rewarded.

Meantime, the extended damage wrought on the developed world’s capital economy ensues unavenged. I remarked to one of my clients, in the wake of encouraging Employment, Inflation, Industrial Production, Consumer Confidence and (through inverted logic) Retail Sales figures, that risk assets are configured more comfortably than they ought to be – considering my overall view of the current economic problems that plague us.

And what are these, you may (but probably won’t) ask? Well, allow me to inventory them.

Economic agents of every stripe – Consumer, Government, Corporate and Institutional, are overextended, awash in debt. Policy makers are universally hostile to value creation. Corporations and even small businesses – those vital engines of output, are focused with laser attention on image and branding rather than innovation and efficiency, and if you doubt this, consider the recent Bud Light fiasco, about which I cannot bring myself to offer more than passing reference.

Recent surveys suggest that 70% of American households feel financial stress, nearly 60% are subsisting from paycheck-to-paycheck. Yet consumers continue to binge. Our workforce is listless and unmotivated, a vast majority of them adopting a rent-seeking approach under which they strive to extract more value than they generate.

Politicians and political leaders wallow in small ball – seeking, first and foremost, tactical advantage over their rivals – rather than earnestly attempting to confront, much less solve, the myriad problems that plague us. This theme is recurrent through history – Europe of the 1930s comes to mind. And how well did that turn out?

And, in result, a serious grievance emerges. As I am convinced that the lion’s share of investible assets is priced irrationally, decoupled from underlying realities. To the extent that I am correct, here, it is unavenged. For now, at any rate.

But we will continue to trade. And invest. As we must. To do so, however, we must embrace our myopia. We’re into the heavy part of the information flow season, with the short-term focus fixed on the Q1 earnings cycle. The big banks kicked us off and delighted us with vanities for which no bonfire is poised to combust. Q1 was a laugh riot for them, despite (or perhaps because of) the mortal threats and carnage imposed upon a few (Credit Suisse, SVB, etc.) of their number.

A month ago, it appeared that the banking system was under enormous threat. Now, it’s the place to be. But these wheels keep spinning so it pays to stay alert. This might require an extra dose of caffeine, but it may bear mention that Coffee has had an even better run in ’23 than has our population-depleted Cattle Complex, and that for those who like a bit of authentic sweetener, Sugar tops them all:

No Sugar (Right Graph) Tonight in My Coffee (Left Graph):

God oh mighty, I sound like an old man. But give me a break – it’s 600 years since me and my krew were pounding the streets of Florence, looking for action.

As time goes by, I believe I understand those days better than the present era – rife as it is with risk of undefined nature and magnitude. But like my boy NM pointed out:

“And what physicians say about consumptive illnesses is applicable here: that at the beginning, such an illness is easy to cure but difficult to diagnose; but as time passes, not having been recognized or treated at the outset, it becomes easy to diagnose but difficult to cure.”

I’m not a physician, so I have no idea where we are in this cycle. I only can thus admonish that we heed the symptoms and react in a timely fashion to whatever comes our way.

TIMSHEL

Though my interest in baseball has now dwindled to imperceptibility, I have suffered the multigenerational affliction of being a Chicago White Sox fan. I come by this honestly, as my maternal antecedents passed it on to me at a very young age. Took me to the charmingly decrepit Comiskey Park (now replaced by the banally but aptly named Guarantee Rate Field) – ensconced at the corner of 35th Street and the elegant Dan Ryan Expressway, where I spent many weekend afternoons watching the zaftig but effective knuckler Wilbur Wood pitch both ends of a double header:

Other than the appeal that derives from gang bangers dating back to Eazy-E embracing their merch (and that whole episode when Arnold Rothstein paid them to throw the 1919 World Series), it’s hard to imagine a team in any sport with a less geographically dispersed identity than the Sox. They have one but a single title in more than a century. They clearly play second fiddle to the cuddly, misanthropic cross-town Cubs.

The South Siders in Bridgeport and beyond love them, but for the rest of the world, any mention of them draws little but a blank stare. They are the second team, in (what used to be) the Second City, in a barely watchable sport. Yet they have been and remain my team.

They are, however, the original source of one trend that has taken hold– as the organization whose fans first took to singing the hook line from our title song, when they were on the verge of certain victory. Since the late ‘70s “Na na na na, Na na na na …” would echo across the mostly empty grandstands upon rare occasions when a positive outcome for the contest was assured.

Now, everyone does this. In every sport. Across the land.

But more to our purposes, the theme has traversed Chicago, and can be sung to the city itself.

All of which is a glib means of articulating my displeasure at the outcome of Tuesday’s Mayoral Runoff, which produced a winner directly from the ranks of those most likely to euthanize what already was (arguably) a dying metropolis. Ironically, the fellow is an African American named Johnson, which also the moniker of Chicago’s and arguably the nation’s two pioneering, African American-led enterprises – Johnson Publishing (issuers of Ebony and Jet Magazine) and Johnson Products (manufacturers of Afro Sheen, etc.). These corporations, along with HARPO Productions (created by Oprah, who also made her bones in Chicago), set the pace for minority-owned entrepreneurship around the world.

The companies blazed trails, created great products and opportunities for three generations of economically disadvantaged urban minorities.

Mayor-elect Johnson, however, has other ambitions. He is a product of Public Sector Unions – you know, those righteous organizations who have done so much for the communities they serve, and who, according to public records, financed over 90% of his campaign. Chicago is deep in hock, is losing population and businesses at an alarming clip. Crime, as everyone knows, is rampant and on the rise. The schools are collapsing.

The weather, for several months a year at any rate, still sucks.

His answer? Tag large corporations – many of which have little incentive to operate there in the first instance and are now afforded every inducement to leave. Attack school choice. Divert resources from Law Enforcement.

The outcomes are, and will be, inevitable. Corporations will continue to bounce. Cops will depart in droves. The rich and empowered will, other than what they read about in the newspapers, scarcely notice. The teachers will present aggressive bills of fare for campaign services rendered and will be rewarded handsomely for their support.

The suffering classes will bear the brunt for all of this. And this once-great global city will continue to fade into irrelevance.

Oh well, it had a great run. Became, for no reason other than the applied resources of its leaders and population at large, a vital, global socioeconomic force. It was a place to establish oneself – and thrive. Folks went out of their way to visit the city, and, as evidence of this, to this day, it has hosted nearly twice as many Presidential nominating conventions as any city in America – including those that ultimately elected Lincoln, Grant, Garfield, Benjamin Harrison, Cleveland, Taft, both Roosevelts, and Dwight D. Eisenhower.

Superior transportation and lodging facilities were counted among the major alures. But that has recently been on the wane. Nonetheless, Mayor-elect Johnson proposes a substantial incremental room tax on the city’s put-upon hotels. Large corporations found a highly trained, motivated, and able workforce, but now, under the proposed plan, will face a new tax on their headcount. It has already lost Boeing, Tyson Foods, Caterpillar, and Citadel. Local Big Boy Mickey Ds. is downsizing. Expect this trend to accelerate.

But what really frosts me is the proposed tax on financial transactions.

Because Chicago is the birthplace of Exchange-traded derivatives, an industry that provided the city enormous global visibility, and launched many, many thousands of careers (including my own). Automation and Consolidation have reduced the number of boss dog exchanges from three to two, and massacred the headcount needed to support these franchises.

Still and all, and to this day, if one wants to trade Equity Index, Foreign Exchange, Interest Rate or Commodity futures, the Chicago Mercantile Exchange (CME) is the place to do it. Single stock options? The Chicago Board Options Exchange (CBOE).

And now (or as soon as next month when Mayor Johnson takes office), there is a strong possibility of Chicago imposing a toll for such transactions. For a couple of reasons, it’s a fair question as to whether they will be required to.

Because first, there’s absolutely no reason why the CME or CBOE need to stay in Chicago. They’re businesses long ago went all-electronic. All, in fact, that remains in the city is some senior staff, who will be given the alternative to either relocate to Austin (or wherever) or find other employment. Heck, the exchanges won’t even need to change their names if they move. And no one can make them.

The other potential impediment is the State of Illinois’ rotund trustafarian governor J.B. Pritzker, who will need to ink any city-based levies. He’s reported to be on the fence about this (no doubt a severe trial for the fence itself). But if he’s against it, it won’t be due to his desire to protect valuable civic franchises. Instead, he’ll be following a picked over script that routinely plays out in many jurisdictions, including New York. There and elsewhere, avaricious governors often fight with money grubbing mayors in their states to grab the lion’s share of what, after all, is a finite amount of money that can be extracted from the economically productive numbers among their constituency.

My guess is that this here Johnson is gonna have a tough time raising taxes of any kind. I reckon we’ll see, but what I am certain about is that the Windy City financial sector will NOT abide this assault and instead will blow like the February wind off Lake Michigan.

And the political news doesn’t end there. The newswires reported last week that Bobby Kennedy, Jr. has thrown his hat into the presidential ring. Here’s hoping he meets a better fate that his daddy, who was a stone-cold animal – egging Brother John into the Bay of Pigs Invasion and attacking the mob so viciously that he airlifted New Orleans Crime Boss Carlos Marcello into the Guatemalan jungle. That was the ‘60s – a decade that Marcello survived, and the Kennedys did not.

But this is not a political journal. Rather, it is a probing analysis into market economics. A fascinating week awaits us. The banks report, and that should at minimum be amusing. In addition, we have CPI/PPI. Both of which are slated to fall dramatically. Which would be nice.

After that, there’s the fat part of earnings, more macro statistics, etc. The Fed don’t meet again until the calendar turns to May, and who knows where we will be by then? The consensus of the prognostication class is that we’re headed straight into the teeth of a recession. Perhaps. But I don’t think that it will be particularly noticeable – at least at the outset.

I suspect that bi-directional price movement across all important asset classes will continue, without bringing much clarity to the proceedings. It’ll be a tough trade, but the nimble may have a chance to coin a few shekels.

More likely, it will be reminiscent of the trials and tribulations of the Chicago White Sox – early ‘70s vintage. With Wood on the Mound, Walter (No Neck) Williams leading off, and the nine-fingered left fielder Carlos May supplying the juice.

The score will be low, the stands empty. The winds will blow off the Lake, on to a diminishing city of bureaucrats, run by bureaucrats, for the benefit of bureaucrats.

It all makes me sad. But I haven’t even visited the city limits of Chicago in more than four years. I have fewer reasons than ever to amend this oversight. I’ll follow the fortunes of the Sox in the box scores, though, and hope for the best.

And with that, all I can do is bid everyone a (na na na na, na na na na, hey, hey) goodbye.

TIMSHEL

In the second of a series of themes deriving from Presidential Experience, I draw your attention to an anecdote attributed to the singular Abraham Lincoln, telling of a man attempting to mount a horse so rambunctious that it threw its back hoof into the stirrup. Whereupon the man exclaims “well, if you’re gonna get on, I’m getting off”.

The context of the yarn was Lincoln’s inability to compel George B. McClellan — Commanding General of the Army of the Potomac — to adhere to the military chain of command. There are other examples of this in U.S. History – Patton in Sicily, MacArthur in Korea, come to mind.

As do some episodes in the experience of the newly indicted 45. There was, of course, the unfortunate, post-election saga of the Chairman of the Joint Chiefs of Staff establishing direct communication Chinese Leadership, to assure them that he’d give them a heads up if the Big Guy took a notion to lob a massive orange ICBM their way.

More recently, it seems that DJT cannot rally his MAGA army to generate even the semblance of a respectable protest – much less take to the streets with pitchforks and torches – as he compelled them to do in the lead up and immediate aftermath of a New York DA slapping 34 counts on his sorry ass. He has, to me, never looked like more of a Tin Foil Hat Commander, leading an army of wooden soldiers. And that, given his history, is saying a great deal indeed.

However, in each of the above-mentioned cases, the lesson is plainly this – in military and other affairs, if a horse is trying to ride itself, other riders must dismount and beg off.

All of this comes to mind as Q1 ’23 comes (from some perspectives mercifully) to a close. If you hung around the circles that I haunt you wouldn’t suspect this, but our equity indices (to which I have, for many years, assigned military handles) are all in significant rally configuration. General Dow crossed again into positive territory on Friday; the Gallant 500 gained a respectable if unspectacular 7%. All of which was upstaged by Captain Naz — up nearly 17% and annualizing at a spiffy 86%.

If this continues, I may just kick The Captain upstairs – to Major or even Colonel. Or at least send him a medal like the Distinguished Service Cross.

And all this in a three-month period that featured a banking crisis, a crypto crisis, nigh-massive layoffs in the tech sector, an unrelentingly severe and continuing set of rate hikes, and other assorted dainties. Throughout, the market has somehow surged forward, but it not been an easy steed to ride, and (again in my world) upside capture has been elusive.

As we enter Q2, the several questions confront us. Are equestrian investors riding these ponies? Are they, alternatively, riding themselves? And either way, is now a good time to climb on board and commence galloping?

I am reticent to sanction this action. And I encourage all those out there that monitor my opinion to take care.

We can take some perverse comfort the reality that the dreary, late-quarter information vacuum has come to an end, and that we will soon be on the receiving end of an onslaught of important data. For the most part, though, that’s a few days off, and in the interim, of course, we must divide our attentions to adhere to the solemn rituals of Passover and Easter. Each teaches lessons of Salvation and Resurrection, from which we can certainly benefit in these trying times.

The release of the latest Macro Statistics, Earnings Outlooks and other key information points won’t, indeed, commence for several days. In the meanwhile, we can perhaps be glad that the overwrought, over-analyzed “banking crisis” has, if not subsided, at least take a pause.

But it could certainly re-emerge – particularly with renewed Fixed Income volatility. Bank portfolios, mapped to a “Held to Maturity” designation, have grown at an alarming rate, and we have no visibility into the authentic value of these holdings:

Somebody please help me here. Can I possibly be reading this graph correctly?

Because what I see is a quintupling of the amount of assets on bank balance sheets which: a) they are not permitted to sell; and b) are therefore not obligated to mark to their true market value – all in three short years.

No doubt a good deal of this is driven by all that fabulous QE the Federales laid on us since the lockdowns (now, unthinkably, three years behind us). But – not gonna lie – this makes me somewhat apprehensive.

Bloomberg estimates the associated losses on these asserts at ~$620B – somehow down from even greater, more gruesome heights – with the recovery of Fixed Income assets caused by declining interest rates. Notably, this amount is > 25% of the industry’s entire capitalization, which, as is the case with so many other sectors, is dominated by a handful of institutions (JPM, BofA, Citi, Wells and the recently worrying Schwab). However, the infallible Nouriel Roubini estimates these losses at > 2.5x this figure. If he’s right, and the losses do indeed approach $2T, it implies that, for the most part, these HtM portfolios are worthless.

I doubt this is the case. But nobody knows.

It is perhaps fortunate that according to longstanding protocol, the banking sector is first in the reporting queue for Earnings and Forward Guidance. In the wake of SVB, Signature, Credit Suisse, etc., it should be a fascinating sequence.

But it is more than a week away.

A renewed rise in interest rates and/or a widening of credit spreads (perhaps catalyzed by a resumption of CS-like raids on troubled financial institutions) would certainly cause these depository institution losses to swell again.

In terms of the former, ubiquitous inflation trends remain at the center of the saga. Official government statistics releases are a couple of weeks off, but I wouldn’t expect any miracles here. Particularly, as was reported Sunday, OPEC has just announced a ~1.5M bbl cut in daily production. Even before this surprise move, I sensed that the Crude Oil was oversold, and this action certainly won’t detract from that viewpoint. Further, if the Energy Commodity Complex regains upward pricing momentum, it’s almost certain to goose Inflation trends, in which case Interest Rates could indeed rise anew.

This, in turn, would be dilutive to the assets swelling up inside depository institution balance sheets. But what you can take to the bank is that they will say nothing about losses in their Held-to-Maturity portfolios. Because they don’t have to. And among the certainties in this world is that banks don’t do anything they don’t have to. If you doubt this, just walk into a local branch try applying for a mortgage. Or a loan of any kind.

Still and all, it’s heartening to observe a rally in risk assets – if for no other reason than the opposite condition is so wearying and depressing.

And it may indeed continue. But if it does, I will attribute it to a decline in the risk premium – a realization, among other things, that the Developed World Banking Complex is not on the verge of collapse. This, of course, is a welcome development, but should not be mistaken for the kind of rally that is the stuff of our dreams. One that is driven by economic vigor, possibility, and opportunity.

Because that’s not where we’re at. I cannot think of a single sector where Senior Managements are making bold, assertive plans for future growth. Not Technology. Media. Telecommunications. Not Industrials. Not Financials. Not Health Sciences. Not Consumer (Staple or Discretionary). All, from my vantage point, are playing defense. Waiting until the massive, if undefinable mess that we’ve made for ourselves resolves itself, or, at minimum, dissipates.

Alas, my friends, we seemed to have stepped in it. And I’m not talking about a stirrup. It devolves to us to clean it up, and then to determine whether we choose to ride this mount or walk.

But wherever we’re going, we’ve got to get there somehow. And about the best advice I can offer is to take care that we are sure that we are in control of our conveyances – that we are riding them and not the other way around.

Trust me here my brothers and sisters — as an introductory risk management framework, one could do a lot worse than beginning from there.

TIMSHEL

“An economist is a man who wears a watch chain with a Phi Beta Kappa key at one end and no watch at the other”

Harry S. Truman

And this isn’t even Truman’s most famous economics joke. He is known more prominently for his forlorn search for a non-equivocating (i.e. “one-handed”) practitioner of the dismal science — one that would not dilute his core prognostications by subsequently describing why the exact opposite conditions may prevail.

I have some sympathy with these self-styled two-handed economists, because, as I tell my droogies, the essence of economics is the socialization of tradeoffs. Take Path A, and one may obtain a specified benefit at a defined cost; adopt Path B and the payoff matrices change, or, perhaps, reverse themselves entirely.

Or anything else might happen. Which is what makes it all the great game that it is.

However, our purloined quotation is, plainly, a nastier jab at the econ crew. Here, Truman, never one to mince words, asserts unambiguously that the entire field of economics is worthless. He may have a point, and, as a trained economist (I do have an advanced degree in the discipline – for which I paid good money), I will strive not to take this too personally.

And besides, the modern-day world appears indeed to be over-loaded with double-pawed/timepiecebereft analyzers of the exchange of the world’s goods and services. Many, indeed, support fancy degrees and high honors, but do any of them have the first clue as to where the economy is headed?

Didn’t think so.

We must begin our inventory of those who know not in Washington – at the Treasury and the Fed, who have spent the better part of the last two decades printing, spending, and taxing – to the tune of trillions – and expecting no consequences for this madness.

All of which was justified by the work of watch-less, key-carrying, two-fisted economists.

But the Fed, at least, has gotten some religion of late, and intrepidly continues its rate raising journey, having taken its key overnight rates from 0.0% to nearly 5% in warp speed. The consensus of, er, economists is that they’ll now rest. At least for now.

I will cop to being a bit surprised at this last hike. It was, indeed, the likeliest outcome, but I had a hunch that the just might pause – ostensibly to insure against further losses by banks and insurance companies holding pant-loads of unhedged, Fixed Rate paper (ala SVB).

However, as it happened of course, the FOMC session – long billed to be the headliner of the month, turned out to be mere sideshow – upstaged by the Big Banking psychodrama.

Events here were something of a whirl, but I’m pretty certain that it began on Sunday night, when the Swiss National Bank pushed Credit Suisse into the superficially reluctant arms of rival UBS. There was more here than met the introductory eye, as the state-mandated transaction featured two elements that violated market protocols of at least 50 centuries standing: 1) it rammed through the transaction without bothering to hold a shareholder vote; and 2) in doing so, it unilaterally zeroed out $17B of bond obligations – owed by Credit Suisse to its creditors.

These two bedrock concepts of Private Enterprise – that the owners of a company for sale are afforded a vote on the terms, and that debt holders get paid before the equity guys — date back to before King David and maybe even King Saul. I shudder to contemplate the longer-term implications of these rudely rendered improvisations. All I know for sure is that lawsuits will abound, smart, patient entities will bank profits for years on these now-worthless obligations, and the ADD public will soon forget the whole affair.

Presumably, the Swiss Government will justify its action by reverting to the old bromide about doing all in its power to protect the interests of their lederhosen-wearing constituent/depositors. But nay, my friends, methinks something else is at play here.

It is, instead, and as Harry S. Truman might have said, a case of more fat to a fat pig’s arse.

Let’s begin with who I believe to be the biggest winner in this here game: The Union Bank of Switzerland. Though it kicked and screamed in Brer Rabbit “oh please Brer Fox, don’t chase me into the briar patch” fashion, it comes away from this here trade having vanquished its biggest domestic rival, and copping a half tril in wealth management balances and an equal amount in liquid demand deposits. It now lords over the Swiss financial realms, and, perhaps, over those of the entire Continent (more about this below). And it barely had to spend a penny or lift a finger to do so.

I strongly suspect that other financial behemoths, say, U.S. bulge bracket firms and hedge fund whales, made tidy sums of varying sizes in their successful efforts to euthanize CS.

It was ever thus (see Lehman, Bear, Baring, MF Global, Continental Illinois, etc.). And now they’re out in search of their next victims. On these here shores, First Republic is at the top of the hit list and appears to be wavering.

But the bigger game – for now — is in Europe, with, of course, Deutsche Bank as the primary target.

Now, to fully articulate my viewpoints here, I must state my belief that DB has been economically insolvent for eons. Like the fancy, fabled SVB, it holds most of its assets in a Held to Maturity portfolio which has not been marked to market since Bush II and the Great Financial Crisis. Were these wonky securities ever priced at their prevailing economically accurate valuations, it would likely wipe out the bank’s equity by a factor of five or more.

But this has been the case for more than 15 years, over which time both DB and the world have endured (if not prevailed).

And here’s a one-handed economic projection:

DB ain’t going nowhere. It carries the full weight of the German political economy behind it, which, if its vigor has deteriorated nominally from the reign of Frederick the Great (1740 – 1786), should be sufficient to sustain the viability, if not the vitality, of its largest and most important financial institution.

But DB is, by no stretch of the imagination, a well-run bank and is now under indecorous attack by its industry peers.

If only Frederick the Great were still around:

Let us acknowledge upfront that Fred was not the manliest of men. More of a Freddie Mercury/Fred Rodgers than a Fred the Hammer Williamson. And whatever other accomplishments might be to his credit (including, it must be allowed, a remarkably long string of military successes), he never had to deal with a Prussian Banking Crisis. Moreover, if he was around to discharge the current mess, he wouldn’t have the luxury, afforded to the Swiss, of simply shoving DB into the lap of a competing bank. Because, in Germany, there are no competing banks.

He might also be ill-equipped to tackle the Rothschilds or whoever was around to abet the destruction of said, non-existent competitor(s).

But (he might have asked) why would the competitors do this? Answer: Because they can.

So, they’ll continue to short the stock, bonds, and OTC positions of the institution, until a Teutonic bailout is required, or they tire of the game. I suspect they will then move on to other impaired financial institutions. The French banks look like a big fat target, so stay tuned.

Meantime, the watch-less Phi-Betas (with an emphasis on the Beta) at the Fed assure us that the domestic banking sector is adaptable and sound. And, down the road at Treasury, an institution presided over by a PhD economist whose husband sports an Econ Nobel, we are assured that all American demand deposits either are – or are not – backed by the full faith and credit of the Greatest Nation on Earth.

As indicated above, all this renders the productive part of the economy something of a sideshow. The wheels appear to remain in motion, but at what force and for how long is anybody’s guess.

I won’t hazard one at the moment. Because I feel unqualified to do so. I am an economist. With 2 hands, but without a Phi Beta Kappa key, a watch chain, or, for that matter, a watch.

Thus, according to the Truman standard, I’m half an economist. Or maybe less. I am, however, at peace with this, and will leave it to the readers to form their own, associated judgments.

TIMSHEL

A few years back, in what seems like several lifetimes ago, I came up with a spiffy title for my weekly musings.

The Blognormal Distribution.

Thinking it a clever play on words, I ran it by my company’s Chief Arbiter of Taste (CAoT) – one Charles P. (Chip) Hutton, III.

I had elevated him to that cushy C-Suite post for having called me out on my preceding, somewhat unhinged and published moonings after then-Secretary of State Condoleezza Rice, and more specifically for phrasings such as “that sister really puts led into this boy’s pencil”.

And he was right. I shouldn’t have committed that sentiment to writing, much less in a highly public forum. And I most certainly should not be busting it out again in this, most touchy and sensitive of eras.

But like I said above, that was all was several lifetimes ago. So (I figure) why not let ‘er fly and see what happens?

Meantime, about the title and all, it’s a riffing off of the wonky mathematical concept of lognormal distributions, to which securities prices are said to adhere.

Rather than assuming the boring, symmetrical form of a normal bell curve, a lognormal distribution looks something like this:

No wonder trading is such a hard job. I mean, what in God’s name is going on with this here graph, of which there are, by my count, 4 different renderings?

And, apparently, this s factor is pretty important, because if you set it to 2, it looks like the Black Diamond runs at Jackson Hole. Fix it at 0.5, by contrast, and it morphs into a mathematical depiction of the Bunny Slopes at Alpine Valley.

Either way, I am far from sure that stock returns adhere to this logic.

Consider, if you will, the recent performance of the benchmark Banking ETF – The KBW Index, which has (rather indecorously in my opinion) plunged more than 25% over a handful of trading sessions.

Which is a lot for a Banking Index to drop:

The results are not overly surprising, however, as dumping shares of banks and bank holding companies has become something of a Cottage Industry these days.

I do hate to pile on to what is among the most over-analyzed of dynamics in at least a month, but duty calls. So, about SVB – I have a few beefs with what’s been written. First and perhaps most annoying are these breathless revelations about “gap” and/or duration risk. Seems like everyone just figured out that, like any bank, SVB sourced its funds through deposits that feature instantaneous liquidity and invested the proceeds in securities with maturities of approximately ten years.

C’mon people! Smarten up! The whole Treasury Market runs this way. Nobody buys 10-year Notes with money that is locked up for equivalent time periods. If investors didn’t pay cash for this paper, then there wouldn’t be a market for it at all – causing, among other tragedies, the Green New Deal to go tits up. More to the point, the market liquidity of such a portfolio is equally instantaneous – the whole book can be sold in micro (if not nano) seconds. Thus, with the ability to move in and out of these securities at will, it wasn’t some unaccounted-for risk that caused the losses; it was a failure to trade out of bad positions in a timely fashion.

Much has been written about the vacant SVB CRO position, but to me, it looks like they didn’t even have a Treasury function.

Which is pretty bad for a bank – the financial equivalent of a marching band without a sousaphone.

But SVB’s problems were on the liability/deposit side, with their funding liquidity mostly deriving from animalistic, VC-backed enterprises with happy feet. A 1% loss on a poorly constructed securities portfolio impelled the lead underwriters of these vessels to call for everyone to abandon ship. Abandon they did, and down the Good Ship SVB went.

A review of SVB’s 2022 Balance Sheet reveals > 60% in cash and liquid, tradeable assets and\ standard debt amounting to < 10% of total assets. Trust me, folks, this is an exceedingly conservative banking profile. Longstanding regulatory protocols require depository institutions to maintain no more than 10% of cash and liquid securities to meet the potential demands of withdrawing depositors (fractional reserves in industry parlance), so SVB was off-the-spectrum above these requirements. The idea is that account holders are exceedingly unlikely to transfer or remove more than 10% of their funds at any given moment, and, thus, 10% reserves is deemed practically adequate. This is a system which (other than during annoying intervals like the Great Depression) has functioned efficiently for many centuries.

But apparently no more. And thus, a new kind of bank risk emerges in this amped up age of instantaneous telecommunications. Call it Thiel Risk – the losses that can accrue when a big VC whale orders his minions to move their funds out – en masse – of a financial institution — and to do so pronto. So formidable and fearful is this newfangled Thiel Risk monster that even a $30B cash injection by its (no doubt spooked) Wall Street buddies has failed to prevent First Republic Bank from losing 80% of its Enterprise Value and witnessing the degrading of its debt to junk – all in a matter of days. Other, financial institutions of similar profiles are no doubt quaking in their boots.

But out of all menaces – latent or manifest – some good does issue forth. Covid, after all, brought about a surge in new telecom and biotech innovation. And in this instance, a number of (perhaps mixed) blessings emerge.

The first of these, which I cannot unfortunately endorse, is that for now, the government, playing the role of a latter-day George Bailey, has issued a blank guarantee on ALL bank deposits. So, don’t worry, you pool-playing Building and Loan depositors, your funds are safe!

I’d like to designate this a righteous act but can’t. In fact, I struggle to contemplate anything worse, any step, which, if rendered permanent, would do more damage to our multi-century, on-going experiment in capital-based economics.

Financial risk is embedded in all our economic doings, and if individual economic agents are shielded from this reality, they will, literally, wreck the joint. This includes our banking relationships. If we, as its depositors, fail to regulate our financial institutions by selecting them, at least in part, based upon their soundness and good judgment, they will run rampant with risk. Why not let ‘er rip by issuing the riskiest of loans? Owning the most dubiously speculative of securities portfolios? Our friends in the Brooks Brothers suits will no doubt cut us in by paying economically stupid interest rates for our balances — but not to worry – it’s all backed by Uncle Sam.

Until, that is, something goes wrong – a series of defaults on those funky loans or the like, and the banks blows their wad. We’re then in comprehensive bailout territory (cira ’08) and/or full, inflationary economic collapse (ala the Weimar Republic).

As it is (and again, here, I am compelled to bust out some over-used, over-analyzed metrics), the steps taken in the wake of the SVB debacle – including new funding facilities provided by the Fed, have reversed several months of its long deferred and much needed efforts to reduce the size of its own Balance Sheet:

The other manifest blessing of the “crisis” is a righteous profit opportunity for large, solvent financial institutions choosing to use their resources to put impaired and potentially vulnerable competitors out of their misery. Sometimes it works; sometimes it don’t. But when it does, God Oh Mighty, what fun we have.

The biggest prevailing target, of course, is Credit Suisse, which has seemed, for years, to have bungled its way to the center of every financial scandal and supreme misstep that has transpired over the better part of the last decade. If one took a poll: a) most informed folks probably endorse its gathering to the dust of its yodeling forebears; and b) I might vote with the majority myself.

At the point of this writing, the master puppeteers – including the Swiss National Bank – are in a frenzy to consummate a takeover of CS by local frenemy UBS. The latter has offered 2 bits on the Swiss Franc (~$1B) for the whole show. However, to put this in perspective, as recently as 18 months ago, CS sported a market cap > $50B, so UBS is able to maybe scoop up its biggest rivel for about 2% of its recent peak valuation.

Oh, how the mighty have fallen.

Still and all, it brings a joyful tear to my eye to witness the frenzy of the stronger financial behemoths striving to cash in by shorting their stock, bidding down their bonds, and moving their OTC positions against them. Call me sentimental, but it all reminds me of those giddy days in advance of the collapse of Bear Stearns and Lehman Brothers.

Meantime, the regular mechanisms of the capital economy continue to operate, and, somehow, the numbers don’t look too bad. PPI – lost amid the SVB agita – came in gratifyingly weak. Atlanta GDP Q1 estimates recently surged past 3%.

The Fed, in whatever time it can spare from, yet again, rescuing (?) the banking system, will issue its rate proclamation on Wednesday. Lots of pressure on them to pause their rate-raising ways, and no chance that they go beyond 25.

So, our troubles notwithstanding, I think there’s a bid out there somewhere. Unless, of course, the banking system collapses – in which case there won’t be a bid it sight.

I would advise, however, against modelling for a lognormal return on any investments one makes; it’s just not on the cards. Too much Thiel Risk out there to hope for such an outcome.

CAoT Hutton, III has long ago moved to greener pastures. I haven’t, in fact, heard from him for years. Thus, I am left to arbitrate taste on my own.

So, The Blognormal Distribution is back.

And I still care a torch for Condi.

Because, Thiel Risk or no Thiel Risk, some things, after all, are transcendent.

TIMSHEL

Having dispensed with any effort to play this thing straight, I feel I must plunge into deeper sonic depths here. So, this one goes out to long-deceased drummer Cozy Powell, who played with everyone – Beck, Sabbath, Blackmore, Whitesnake (FFS!). Heck, he even, for a time, replaced Carl Palmer in ELP (it probably didn’t hurt his cause that his Sir Name Initial is P, but still..), and, for those in the know, that is saying quite a bit.

Cozy bought it in ’98 – in a car crash on the M4, and, while, by all accounts a sick drummer, he is largely a footnote in the rock cannon. I myself have no strong opinion about him.

But now, fully a generation after his demise, our backbeat has devolved to the control of Jerome (Not So Cozy) Powell – Chairman of the Federal Reserve Board. Who is having a busy month. This past week, he trotted up to Capitol Hill, to deliver, in time-honored fashion, his semi-annual address(es) to each Chamber of Congress. There, while equipped with neither traps nor snares nor high hat, he nonetheless pounded out a tough, rate-raising percussive on the attending masses. So much so that the markets briefly projected, week-after-next, a full 50-point mallet blast on the Fed Funds Rate (more about this below).

To my recollection, as recently as two weeks ago, 25 was in the bag and 50 was unthinkable.

Powell’s two-day, multi-venue engagement offered up little in the way of new material, and investors came away neither entertained nor amused. There was a bit of a selloff, but an unremarkable one. And, overall, I applaud the markets for accepting Powell’s remarks with equanimity and intestinal fortitude.

All the above would make for a respectable week’s worth of activity and no one could complain about a lack of action, but, as fates would have it, we weren’t anywhere near done. While Powell was spitting out his mad, wicked game, and in the immediate aftermath of same, a couple of banks went tits up. One of them was a crypto bank, so who really cares?

The other, of course, was a Silicon Valley concern – so embedded in that lovely region that it called itself – in elegant simplicity – just that – Silicon Valley Bank. Moreover, with a touch of the area’s trademark hubris, it selected for a logo the universal mathematical symbol for “greater than”: > 

I cannot resist the temptation to point out that this symbology is now perfectly a propos – insofar as SVB’s liability are now greater than (>) its assets. Bank Regulators, perhaps justifiably, take a dim view of this condition, and have swooped in, creating, somehow, the second largest breakdown in American Banking history.

As the tale unfolds in rapid fashion, several frightening concerns emerge. As mentioned above, it’s the second largest bank failure in history. Number 1 was Washington Mutual (WAMU) in 2008. But while the collapse of WAMU unfolded in slow motion train wreck fashion over many months, SVB was toe tagged within a couple of days. Early last week, it was a fancy, little-known highflier; by Friday, there were chains on its front door and the FDIC had taken over.

Further, and on a related note, while WAMU’s demise was rooted in levered over-investment in the dubious mortgages that were, at the time, all the rage, SVB’s vaporization was catalyzed by losses in the world’s most liquid financial instruments – U.S. Treasury and Agency securities. Notably, this caused an old school bank run, as recommended by their big shot, thought-to-be-intrepid VC chums down the road in the Greater San Jose Metropolitan Area.

What we have here is a through the looking glace financial insolvency. Normally, a bank fails due to problems on the asset side of its Balance Sheet – investment in risky loans and such, rising to the point where its typically diversified lender/depositors achieve a sufficient level of concern to withdraw – en masse – its balances. With SVB, the assets were sound, liquid, virtually default-proof, and have rallied sufficiently in the wake of its collapse to have significantly offset the losses that triggered the event in the first instance. It was their liabilities – their deposits (mostly uninsured due to their size) that lacked diversity and liquidity.

I never knew till now that accepting large cash infusions and investing them in Government Securities was a high-risk enterprise.

It is all, finally, reminiscent of the barely remembered collapse of those two Bear Stearns credit funds back in 2007. We were all at the time was alarmed by and annoyed at these tidings, but hardly anybody expected the torrent that followed. In retrospect, the failure of these two funds arguably started the cascade which, less than a year later, nearly took down the entire financial system.

I don’t know and rather doubt that this here situation mirrors that one in magnitude. My strong sense is that SVB will be quickly snapped up by a larger financial institution, their depositors made speedily whole.

And this ain’t ’07. Banks are much better capitalized. Underwriting standards have tightened to rival that of Cozy Powell’s Standard Tom (if you doubt this, just try to get a loan of any kind).

And my relative serenity appears to be matched by our betters in Washington. Prez Bi released his budget plans a few days ago, which feature a quaint $6.9T in incremental spending and $5.5T in new taxes. We are told that these are remedial measures that will help restore the health of the capital economy and improve the balance sheets of programs such as Social Security Medicaid and Medicare.

It is, at any rate, a lofty sentiment. Because the best estimates I have uncovered as to our unfunded liabilities to these programs rises to at least $200T and perhaps a great deal more – rendering our “on the books” Federal Deficit of just over $30T dainty by comparison.

So, maybe, in some perverse parallel universe, raising taxes is a good idea. But here inside the honest-to-God Milky Way, I’d point out a couple of realities. First, the proposed budged overspends the tax levies by ~$1.5 Trillion. More generally, never in my lifetime have I observed a tax increase that was not accompanied by spending proliferations significantly greater than the additional levies imposed. Moreover, in the prevailing environment, there is no possibility that a dollar of tax increase would not be accompanied by, at minimum, $1.50 in new spending.

And all this is to say nothing of the dampening effect that new taxes would impose upon an already impaired economy.

What passes for good news here is that the proposal is Dead On Arrival. The current administration could not manage to raise taxes (or all that much in the way of spending) when it controlled both houses of Congress and the White House to boot. With meanie Republicans having taken charge of the House of Representatives, the probabilities for passage of such absurdities converge to zero.

Still and all, we must attend to these proposals, as they are, by and large, matters of political positioning. Under certain ’24-based electoral outcomes, these wholesale transfers of economic control from the Private Sector to the Government represent our fate. It will be on us to decide whether or no this is what we want.

And, if that weren’t enough, the February Jobs Report dropped on Friday, with more vigor than that embedded in the consensus estimates. Investors, as could have been prophesied, took a dim view of these tidings, causing our equity indices – under pressure all week – to close near their lows.

But somehow, Treasuries rallied dramatically, reducing Madam X yields an astonishing >30 bp in the week’s last three sessions and rendering even more gruesome our already gruesome yield curve inversion:

In addition, the Fed Watchers released the doves, and the 25/50 bp prospect is now a rough flip of the coin. I can only surmise that these more favorable signals from the Fixed Income market are most catalyzed by the above-mentioned bank failures, as the prospects of raising rates into a banking insolvency environment are in no ways ones for the faint of heart.

And, somehow, the credit markets rallied on all of this. Not much, but with banks failing and whatnot, it is surprising, nonetheless.

My friends, these things are unsustainable. I don’t know where we’re headed, but it ain’t where we at.

For now, the plot is clear. We will watch for newly harvested bank failures and wait with breathless anticipation the contents of the Inflation Reports and the issuances of Not So Cozy Powell and the rest of the FOMC Ensemble.

I don’t reckon that any of it will amount to much. Lots of volatility, little in the way of directionality. Unless, that is, the SVB collapse spreads to other financial institutions. The latter wouldn’t be pleasant, but I foresee no chance of a widespread banking collapse. Further, I’d remind everyone that even in the Great Financial Crisis, not a penny of demand deposits was lost to the unwashed masses.

Come what may, the beat will go on. It always does. From the second of our conception, or, at any rate, when our own arterial functions begin to function.

And until we take our last breaths.

Thump, thump, thump, thump. But through our own resources, we sometimes improve upon this.

Sometimes, for instance, the beat is enhanced by the stylings of John Bonham. Or Keith Moon.

Or Cozy Powell. Now largely forgotten.

Someone or something always comes along. Unfortunately, for now, that someone is Not So Cozy Powell, who no one would choose to man the skins for any band anywhere on the planet. This condition won’t last forever, and, meantime, the best we can do is just adhere to the abovementioned beat – in the markets and in life.

By doing so, we may not achieve >, but, as last week’s events demonstrated, > might not be all it’s cracked up to be.

TIMSHEL