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

I write today in immediate advance of a personal, crushing yartzeit – the details upon which I will not elaborate. Those who know of this, know. As to the others, well, I’ll spare you.

Meantime, Sunday marked 70 years since the passing of that always grouchy, often petulant but somehow lovable old bear — Josef Stalin. He founded the Pravda newspaper (sort of a USSR version of The Onion) took over Supreme Leadership of the Soviet Union in the immediate aftermath of the demise of his jocular predecessor – V.I. Lenin — and held the post until his death in March 1953.

In his three decades of dictatorship, he occupied himself with countless purges, the military modernization of Mother Russia and the winning of World War II. If you doubt the last of these, read up on the topic. The best estimates suggest that >80% of all WWII casualties on all fronts occurred in the battle between the Nazis and the Bolsheviks. He named a town after himself, the scene of the most important of that global conflict’s battles – the War’s military equivalent of the Battle of Gettysburg. Like Lee following Pickett’s Charge, after losing the Battle of Stalingrad, Hitler never again seized the effective military initiative, and before you knew it, Stalin’s troops were linking up with Eisenhower’s Americans on the banks of the Elbe River, and daintily waltzing into Berlin.

Having thus vanquished the Germans, he set about establishing the Cold War (with a little help from the West), building the Iron Curtain and compiling what for decades was the biggest nuclear arsenal in the world.

As I was culling the herd of my scrap books, I came upon this old photo of my pal Jo – one I don’t even remember taking. I think the glassy eyes derive from a few shots of vodka we had just downed in a cozy little tavern near Minsk.

Joe didn’t like random pictures taken of him, and his responses could be, let’s just say, rather disproportionate. I’m surprised I got this one off, to say nothing of smuggling it past the Secret Police of the Union of Soviet Socialist Republics.

Others can feel free to assume a different view, but I think he takes a nice snapshot.

And it must be admitted that for an assistant cobbler’s son, he amassed quite a resume. But after the collapse of the Soviet Union – some half dozen or so Supreme Leaders later, there was a movement to erase Ol’ Jo from the history books. His legacy met with even a worse fate than that of Teddy Roosevelt, who only suffered the indignity of having his statue carted off from in front of the New York Museum of Natural History to some spot in North Dakota. Stalin lost a whole city. What was once Stalingrad is now Volgograd. Many dozens of streets named in his honor have been retitled; mustachioed statues melted. He was, in short, roundly banished by his former subjects.

However, now, as was perhaps inevitable, his rep is experiencing a renaissance. He polls favorably at nearly 50% in Russia, and, if that nation actually held legitimate elections, could arguably give Vlad the Invader a run for his money.

While JS could hardly be described as being Woke, there are certain elements of the modern vibe which he probably would have carried out to new extremes. Invade the Ukraine? Please. He’d have bombed the place into oblivion by now, perhaps have taken Poland and the Balkans, and set his sights on poor old Finland. He would not be over-prone to coddling filthy capitalists and their despicable lust for profits. He would’ve lined them up and shot them. He would not have cast aspersions on religious faith and its protocols, he would have eliminated religion altogether.

All of which, inevitably, impels me to ask – where have you gone Jo Stalin? A nation turns its lonely eyes to you.

But the best we can do, apparently, is to roll with our own Joe – Joe (Bag of Doughnuts) Biden. Not many similarities except that of nomenclature are present here. One was stumpy and dark; the other tall and fair. One imposed scorched earth on any territory he occupied militarily. The other loads up aircraft for retreat, leaving billions of dollars of cash and equipment behind, and somehow, declares victory. One ruthlessly eliminated anyone he felt impeded his absolute rule. The other kowtows to the enablers that launched him to his present lofty position.

But times is indeed different, and perhaps it is heaven above that ordains each generation the Jo(e) that it deserves. Stalin was a ruthless autocrat who destroyed whole generations of humanity. But Americans owe him a debt of gratitude. Magnificent as we were in WWII, I’m not sure even our best units were in a position to lock horns with the Nazis on the Eastern Front. There are, of course, mixed views on Biden. My own is that he is a something of a hypocrite, with little to recommend him but an outsize allotment of glib affability, and never could have gotten elected save his paymasters’ hatred of Trump and fear of Bernie.

I don’t think he’s calling the shots in Washington, and that’s probably a good thing. I’m not sure who is, but there doesn’t seem to be much of a plan beyond simply strategizing for optimal outcomes in the next election cycle. So, they send our Joe to Kyiv, where Stalin once ruled, for photo ops — and completely ignore (the presumed to be politically dispensable) East Palatine.

But I don’t want to get off on a tangent here.

They’s not much good news in the markets to report. Mortgage rates climbed yet again above 7%. The Sagacious Nouriel Roubini is predicting a wicked bout of stagflation. The construction of Amazon’s much battled-over second Corporate HQ – associated tax breaks having already presumably been harvested — has been put on hiatus.

On a happier note, Lori Lightfoot did go down in Chicago, so there’s that.

But God Oh Mighty, it’s a tough tape to trade.

All market and idiosyncratic factors appear to be moving in lock step with spitball conjecture on Inflation, Interest Rates and Recession. The next FOMC meeting is still > 2 weeks away; Inflation data streams in over the next fortnight.

As for Recession, we’ll have to wait awhile on that one, as even if it forms, it cannot be deemed as such for at least a couple of quarters.

By Friday, at any rate, we will obtain a glimpse of the prevailing economic picture, with the release of the February Jobs Report. And then, next week, CPI/PPI; FOMC brings interest rate tidings a week hence.

I doubt if any of this will offer much clarity, though.

With asset classes, sectors and individual financial instruments annoyingly correlated, each in anticipation of greater clarity about the state of the macro environment, and with such clarity, deferred, elusive and difficult to interpret, I foresee a cycle of diminished but dangerous volatility. Not much is likely to move in dramatic fashion, but what does move is more likely to bite than feed portfolio returns.

As in all matters, we must wait. Lenin gave way to Stalin, who passed the torch to Khrushchev. Then came Brezhnev, Andropov, Chernenko, and, ultimately, Gorbachev. Who shut the whole show down.

And then, at last, Putin, seeking to re-Stalinize the whole joint.

On our side of the ledger, it’s Wilson, Harding, Coolidge, Hoover, Roosevelt, Truman, Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush, Obama, and, finally, Biden. Who may not be Stalinizing the States, but perhaps not failing for not trying.

We can take comfort in this at least – our guys’ names are easier to spell.

Not much to do in the markets but to be extremely careful while so not doing.

And now, if you’ll excuse me, I think I’ll have myself a good cry.

TIMSHEL

I was glad to come, I’ll be sad to go,
But while I’m here, I’ll have me a real good time

Ronnie Lane, Rod Steward, Ron Wood

Well, that went over like a Led Zeppelin. Yes, I promised to devote less of this real estate to my musical meanderings and to focus more keenly on The Markets. Many will recall that I offered this in response to what I believed – gut feeling – to be the catalyst for a previously unthinkable, unceremonious, and unilateral unsubscribe request from a weekly recipient.

So, I pledge to Cut the Crap and what happens? A wholesale bail out by my distributional troops. Actually, no one, to the best of my knowledge, quit on me this past week, but that strikes me as being entirely beside the point.

Logic, in any event, impels me to restore the crap, and to do so immediately. Because — are we going to allow ourselves to observe unremarked the surviving members of the Beatles and the Stones cutting tracks together? Hardly. The concept of Mick, Keith, Paul, Ringo and the (perhaps dispensable) Woody coming together is simply too scintillating to exclude from this most public of historical records.

All that’s been confirmed thus far is that Paul has laid down bass lines for a couple of new Stones numbers and that Ringo will soon contribute some percussion. This alone is cause for great elation, but there are tantalizing rumors of more, much more, to come. The Rolling Steatles may cut and album of new, collaborative material, and then go out on tour.

There’s some talk about Ringo bagging off here, but I pay it no mind.

Ringo, I’m certain, will do as he is told.

Come what may of this, it behooves us to celebrate the moment, and to rejoice in the reality that whatever other forms our bitches may take, we lived in a time where these living, breathing deities historically transformed life as we know it. They are, none of them, getting any younger. Paul is 80. Mick and Keith will each reach that milestone this year. Ringo? A spry 82. True enough – Woody is mere fondling of 75, but I figure he’s mostly just along for the ride. The 80th anniversary of George’s birth transpired on Saturday, but sources have all but confirmed that he will be unable to make the scene.

I hope the lads give it a full go, and I don’t even care how good or bad the music they create is. This is an opportunity for them, and, indeed, all humanity, to proudly state: “This happened. This was”. It would be divine. The closest analogue I can devise is the release of the 2019 film “The Irishman”, which was entertaining, but more significant in its bringing together of De Niro, Pacino and Pesci – under the directorship of Marty. Somewhere down the road, folks are gonna look at this thing and say “Wow. How cool was it that these guys were able to get the band together — one last time.

The same can be said for the Bea-stone Boys. Only more so. Because they were bigger, so much more important, than even those great Italian American tough guy players on the 20th/21st Century Silver Screen.

And that, my friends, I all I have to say about that (for now).

It is also important to point out, crap restoration-wise, that the action in the markets is just that – crap.

Allow me to elaborate. As widely lamented, last week was the worst one going for the Equity Complex this year. So be it. It had feasted for > 1.5 months and a subsequent bio/econ voiding cycle was entirely inevitable. The evacuation, while not particularly pleasant, was finite and orderly.

Almost undoubtedly, the big catalyst was continued Inflation pressures and their attendant impact on interest rates. Yields at the long end of The Curve are up an astonishing 60 basis points this fastexpiring February. One would have expected that this might, at, minimum, have served to flatten it a But one would be wrong on that score. Short-term rates – particularly around the 6-month expiry, have sky-rocketed to ~5.2%, and the curve now looks this-wise:

After Monday’s Patriotic Presidential Pause, while we wasn’t exactly going great guns, we were hanging in there – until, that is, Wednesday afternoon. The Fed released its hawkish minutes — and it was all downhill from there – as capped off by Friday’s rout, initiated as it was by the release of an unexpectedly elevated Inflation level embedded in the Fed’s favorite such statistic – the dreaded and ominously nomenclatured PCE Deflator.

To me, the main takeaway from what we’ve learned thus far this year is as follows. Americans continue to binge, often on inadvisably assumed debt. The Labor Market is tilting red, including (unthinkably as of a couple of years ago) surging wages. All the above is Inflationary, and – here’s the thing – it’s almost all on the Demand side. Feel free to flush the entire argument about “supply chains” and their “transitory” nature. The only way this round of P disappears is for the almighty consumer to push away from the buffet table.

If our misanthropic, inept but intrepid policy makers truly wish to tame the pricing beast, they must cool the demand fires, and this won’t be a pleasant operation. It may not require a full, undignified financial bowel evacuation, but it will, at minimum, impel the removal of the blockage that seems to be plaguing our economic innards.

Investors aren’t digging any of this over-much, but are, under the circumstances, holding themselves manfully in the face of the associated abdominal pain. My guess is that they will continue to do so. I seriously doubt that they will repeat last week’s less-than-stellar performance. There’s a bid somewhere down here, but not one that is likely to demonstrate much in the way of sustained vigor.

And now, we enter the dregs of Q1. Nearly all Earnings precincts have reported, and the returns are dismal as expected. They haven’t mattered much, though. Equities are moving in lock step with one another, and paying little heed to anything but Fed Policy and Inflation:

Next week features some PMIs and little else, but even the February Jobs report is postponed until 3/11. The FOMC doesn’t meet until after St. Pat’s Day – on the cusp of the Vernal Equinox.

Not much meat to chew on in the meanwhile. If we want our proteins, we may be forced to eat our beans. And we know what happens after that.

So, again, I have few qualms about restoring the crap. Which, after all, makes the grass grow.

The Rolling Steatles are shading coy about their collaboration, and one can hardly fault them for this. Don’t commit to anything they can’t deliver. Let the rest of us build up the speculative anticipation. I reckon we’ll wait it out as best we can.

And in this spirit, I’m going to call – yet again – for Woody to focus instead on reuniting with the surviving members of the Faces – Rod the Mod/Kenney Jones. I don’t think he added much to the Stones, and his accepting the role of being Keith’s wingman broke up the Faces. Thus, this one move marked the ruination of two great bands.

But now, as we are in restoration (not ruination) mode, is time to amend all this. John and George are, well, you know, gone. As are Charlie, Brian Jones, Ronnie Lane and Ian McLagan (Bill Wyman is still around but retired > thirty years ago – not just from the Stones, but also, hopefully, from tapping 14-year-olds).

So, let’s roll with Paul/Ringo/Mick/Keith and Woody/Rod/Jones.

And that, my friends, is what I’d call having a real good time.

TIMSHEL

I am going to try to wean myself off an obsessive focus music – particularly the toppling of the sonic monuments I have worshipped all these years. It won’t be easy; particularly given that my heroes are yielding to the inexorable cruelties of the calendar and gravity at an alarmingly accelerating rate.

But I’m sick of writing about this sh!t, and, no doubt, you’re sick of reading it. In fact, my thematic shift is catalyzed, at least in part, by a request I received from a (presumed) longtime reader, that his name be removed from the exalted roster of those who receive these notes in advance of my posting them on ZeroHedge and LinkedIn.

This has not happened in more than five years, and, to add to my humiliation, the individual in question is not even on my direct distribution list. Rather, he receives these notes as a subscriber to an internal, er, research listserv sponsored by my client of longest standing. I therefore (as others on this portion of the distribution have NOT made this request) am unable to even accommodate him.

I don’t know his reasoning but suspect that he is overwhelmed by the digressions that often comprise the lion’s share of this column. And if so, he is right to be so overwhelmed.

I’d like, without sacrificing my trademark pithiness, to focus more directly on the doings in the markets. But, in my defense, this is a hard slog. Has been for quite some time. Markets, at least for now, fail to respond rationally to what I believe to be the most salient of available stimuli. Oh sure, they obsess about Fed Policy and the like (and appropriately so), but tend to ignore such matters as Earnings trends, Commodity Prices, critical economic releases, and other such stuff which historically form the building blocks of my withering economic analysis.

Still and all, I must try. But not, so to speak, in Cold Turkey fashion. This week’s title comes from the last, most widely panned albums of one of the greatest bands ever to grace studio or stage, self-described (again, appropriately so) as “the only band that matters: The Clash.

They cut this crap record having fired the irreplaceable Mick Jones, the less-irreplaceable drummer Topper Headon, and, ultimately, even bassist Paul Simonon (forever immortalized on the cover of the group’s magnum opus: London Calling). This left only the singularly great Joe Strummer from their original lineup. The results were as expected. It’s not as if CtC is a terrible album; it is simply not worthy of the impossibly high standard the band had set for itself.

After disappointing critical and commercial results, Strummer himself called it quits. And maybe I should follow his singular example. But quite yet. Because, as a follow-on to my above-stated complaints about market response to stimulus, successful investment in the prevailing environment, is, I believe, less an exercise in determining fair market value and more one of figuring out what the other trading jabronis will do. They will not cut the crap, so neither, entirely, can we.

It was something of a humdrum week for the markets, which continue to react in counterintuitive ways to prevailing information flows. It took disappointing Inflation statistics entirely in stride. It absorbed an upside Retail Sales blowout (modelled out to be bearish due to its potential impact on Interest Rates) within a couple of hours – perhaps because Industrial Production, expected to surge 0.5%, clocked in as a Goose Egg (purportedly good news in an environment of obsessive rate fears).

In result, investors limped along limply all week. Our equity indices failed to sell off – much – but neither did they rally.

There are a couple of factors at play here which have caught my eye. First, 6-month Treasury Bills have rendered themselves so unlovable that they are now, and for the first time in nearly two decades, priced to yield > 5%:

Meantime, a bid persists at the long end of the Treasury Curve, leading to a condition of inversion so gruesome that it cannot be displayed in this family publication.

First principals, this suggests that: a) investors take the Fed at their word that they ain’t done raising rates; but b) their hawkish ways are much more likely than not to push us into Recession.

Well, maybe, but my own take is that while I buy into a), I believe the bid at the longer end of the curve is more indicative of excess investment liquidity, which must, after all, find a home somewhere, than a harbinger of multiple consecutive quarters of negative GDP.

Another indication of said liquidity overabundance is the remarkable bid manifested in BTC. Crypto is going through its worst news cycle since the Moses-like proclamations of Satoshi, and, only this week, was forced to absorb a string of blows – in particular, tighter custody regulation and a wholesale bail on the part of the handful of banks still willing to traffic in the stuff.

Why the bid on Crypto? Well, as stated above, all that fiat cash must go somewhere. Thus far this year, it has modestly embraced stocks, long-term Treasuries, Corporates. And Crypto. It loves Crypto, which is up nearly 50% in the six short weeks that have passed us by in ’23.

Commodities? Not so much. Crude Oil is down ~5%; Nat Gas nearly 50%. So, the market vastly prefers wonky, digitally engineered “stores of value” to useful energy products. It’s no wonder that I give up on fundamental analysis.

Meantime, the other item of personal interest is the gaggle of legit economists who are advising the Fed to lift its 2% Inflation target. To something more civilized. Say, 3%.

I think they’re on to something. I am quite willing to accede to the notion that all that Fed rate raising jazz has taken the bleeding edge off Inflation. But moving from > 9% to a 6 handle is one thing, migrating from a 6 to a 2 quite another. This will require the climbing of the rate tree to dangerously uncomfortable levels, almost guarantee a Recession, and, end of day, I don’t think the Federales have the will to do this.

Contemporaneously, the Earnings Season is whimpering to a close, with aggregate negative results to the tune of ~5%, a deep skew towards negative forward guidance, and upside surprises nowhere to be found. All this has the feel of listless gravity to it, perhaps akin to Joe Strummer’s Clash touring with what amounted to a backup band.

What lifts us out of these doldrums? Beats the hell out of me.

Still and all, just as the intrepid consumer continues to, well, consume, so do investors appear to be willing to buy stocks, bonds, and crypto, tepid conditions for doing so notwithstanding.

Cutting the crap, I see it this way. Investors are pre-disposed to bid up securities and will continue do so unless or until a compelling (though not necessarily rational) case is made for them to suspend this operation. The near certainty of a string of rate increases will probably not change their tune. They’ve got the cash, are (perhaps justifiably for now but not forever) willing to set aside such tail risks as geopolitical turmoil, unanticipated solvency issues, and others. They appear hell-bent on at least partially eradicating the nightmare otherwise known as 2022.

If, however, as prophesied, we do devolve into a nasty Recession, all such bets are off.

It will at any rate, be interesting to bear witness to these manifestations in their unfolding.

I’m not terribly concerned about downside here. I rather believe that barring any nasty surprises, one can at least consider buying the dips. And why not? Everyone else will be.

In closing, I hope I have accomplished something in taking steps to cut the crap – an album of the same name which killed The Clash. Jones and Strummer went on to put out respectable music – that is, at least until the latter’s untimely death in 2002.

Topper’s still bouncing around but plagued by health problems caused by his excesses during his glory days. Simonon has been similarly quiet, apparently devoting what remaining juice he has to supporting Greenpeace.

Oh well, there I go again. Boring y’all with musician anecdotes. I cannot promise this won’t continue; only that I will try to stop it.

But if any of the remaining icons of my existence, turn tits up, I reserve the right to pay whatever I feel is fitting tribute.

After all, much as we’d all like to cut the crap, crap abides, and is likely to outlast us all.

There’s a risk management lesson in there somewhere, but perhaps it will keep for another day.

TIMSHEL

To be robbed of one’s grievance is the last and foulest wrong. A wrong under which the most enduring temper will at last yield and become soured. By which the strongest back will be broken.

Antony Trollope

Raindrops keep falling on my head,
But that doesn’t mean my eyes will soon be turning red,
Crying’s not for me,
‘Cos I’m never gonna stop the rain by complainin’,
Because I’m free… … nothing’s worrying me

Burt Bacharach and Hal David

I stumbled across our first quote in rereading a tasty literary morsel from perhaps my favorite author – Antony Trollope. And I believe what he conveys here is the stone-cold truth. Human beings can endure the loss of nearly anything – except their grievances. To which they will cling as to a bit of buoyant wood in the aftermath of a shipwreck. This is certainly true of me, as, I suspect, it is of you.

I believe we have something to work with here in terms of this week’s note, but, for better or for worse, I must first veer off course – to pay tribute to the magnificent Burt Bacharach, whose music had an enormous impact on my life.

I am impelled here to retell the story of having, in a chemically induced fit of madness back in the early ‘80s, led the collective emptying of the pockets of my entire posse, converting them to quarters, and then flooding a diner juke box with over a hundred repeat play versions of Bacharach’s “What’s New, Pussycat?”.

As intended, it drove the other patrons into a mad dash to the exit and sent my crew into an endless fit of mirth.

It was, in many ways, my finest hour(s).

But “Pussycat” doesn’t fit our motif. So, we’re stuck with “Raindrops”– a magnificent tune, theme song of a magnificent movie (Butch Cassidy and the Sundance Kid, you dolts), and more apropos to today’s theme. Telling, as it does, the story of a rare one who rises above his grievances and takes what’s coming to him with equanimity.

I on the other hand have held fast to my beefs (one in particular), which have increased in value over time.

Perhaps in sympathy at this point in the year, the physical beef market extends its extended rally:

Live Cattle Doggies Keep Rollin’:

I also hold a grievance with risk assets, which, my prognostications notwithstanding, paused their rallying ways this past week. Please do not misapprehend me – it’s not as though my hurt derives exclusively from the breaking of my career-long string of impeccably accurate pricing forecasts (though there is certainly that to consider). More to the point, we’re off to a great start to the year, and, I ask, would it be too much to just carry on as we have since New Year’s?

Apparently so. But it’s not like we’re in wicked selloff mode. We just kinda bleeded down a little.

Still and all it hurts.

But at least I’m not alone in my beefings. Reporting CEOs have lined up, on after the other, to utter pathetic whimperings. The President took to the ritualized, annualized podium to offer up a cornucopia of higher taxes/more restrictive regulations (none of which will be passed into law), and, to accuse his political opposite numbers of intending politically suicidal steps of eliminating Social Security and Medicare.

C’mon, Man. Who among the hat ring tossing class would even contemplate such a thing? And it doesn’t matter in the least that our government has no legitimate means to fund these entitlements. It cannot afford much of anything these days, and yet it continues to spend like Ponzi schemers with the Federales hot on their heels.

But Big Joe threw it out there, and the Republicans took the bait, responding with jeering and catcalls. This, presumably, was Biden and his handlers’ hoped-for response. They must’ve been delighted.

However, as for me, I prefer the simpler, more refined days of yore, when the Speaker of the House, during a State of the Union address of a president she deplored, spent much of the speech putting dainty little tears into the official copy presented to her, and, upon completion of the remarks, proceeded to rip the document into shreds.

Meantime, our grievances with China continue. We shot down that balloon a few days back, and I pondered using a few lines from “Up Up and Away” in this week’s note (“the world’s a nicer place in my beautiful balloon, it wears a nicer face in my beautiful balloon”). But that song was written by the great Jimmy Webb. Who is still with us.

I have a minor beef that this is not a Bacharach composition. Because by everything that is holy, it should have been.

Meantime, we’re now shooting other Chinese aircraft out of the sky. And they’re fixing to shoot back at some sh!t in their airspace. What could go wrong there?

No doubt our grievance trajectory this coming week will be informed by the CPI and PPI releases scheduled therein. Both are expected to continue their descent. Here’s hoping they do, because if they resume their path towards the heavens, it could be that these valuation balloons come careening down like successful targets of an F-22 assault.

I also retain grievances that the by-now-misnamed Rock and Roll Hall of Fame sees fit to induct the likes of George Michael, while ignoring such sublime ensembles as Mott the Hoople, King Crimson, Jethro Tull and Little Feat. That the Minnesota North Stars moved to Dallas (that one dates back to ’93), that they shut down the Riverview Amusement Park in Chicago (closed in 1967), that no one went to jail for either the mortgage meltdown or the Libor scandal.

That the last employment bonus I ever received (around 2003) was about a quarter of what I feel it should have been.

And a bunch of other sh!t. I reckon I’ll hold fast to these, as, I suspect, you will to yours. It’s how the Good Lord made us.

But we are compelled, as investors, to routinely let go of our beefs. After a fashion that is. Feel free to cling to your sense of the unfairness of it all, but bear in mind that there are no f@cks given by the markets about them. We’d be well-advised to simply shrug these off and focus on the next tick.

Deeming ourselves to be free implies and understanding that we’re never gonna stop the rain – or the painful idiosyncrasies of the tape — by complaining. And a knowledge of the futility of even attempting to do so.

This is perhaps particularly true at present. I still believe there is a bid out there, but even if I’m right, it won’t last. And what removes it is likely to be something barely on our radar right now.

Ending on a more hopeful note, I remind everyone that Jimmy (Wichita Lineman) Webb is indeed still with us, flying up, up and away, in his beautiful balloon.

Until, that is, somebody decides to shoot it down.

TIMSHEL

Kick a buck

Luke

As in Cool Hand Luke – the misanthropic jailbird hero of the eponymous 1967 film. The title of the movie, and this week’s quote — come from Lucas (Luke) Jackson’s exploits at the prison poker table, where, in one particular hand, he keeps raising (“kick a buck”) until the rest of the players are forced to fold. Whereupon it is revealed that he held nothing, nary a pair, and remarks, in offhand fashion “sometimes nothin can be a real cool hand”.

Luke, in other words, was bluffing. And won. Though hardly the norm, this sometimes happens – in games of chance and skill, in the markets, and in life itself.

This past Wednesday, the FOMC, perhaps (though probably not) channeling its inner Luke, raised again – the eighth such hike in less than a year.

They hasten to warn us that more is on the way, and we’d be well advised to heed them.

But the Fed did not “kick a buck” last week, nor yet even half a buck. Their latest increase was a tepid .25, which, according to old timey vernacular, equates to two bits.

Are they bluffing? I reckon only time will tell. But as any player worth their salt will tell you, success impels the bluffer to convince his opposite numbers that he can raise them into insolvency, lest they stand true, last him out, and, thereby, vanquish him.

In time-honored fashion, Chair Pow (played by Luke’s jailer Strother Martin) attempted to explain the Committee’s thinking/articulate just what in blazes is going on out there in the capital economy. I feel that overall, it was a “what we have here is a failure to communicate moment”. He tried his best to talk tough, but investors responded by bidding up stocks, bonds, commodities, crypto, etc. in laudatory fashion.

The Barking Dogs of Tech also yelped last week, and delivered earnings tidings that were, at best, mixed.

The final setup for our plot came Friday morning, with a January Jobs report that verily blew the doors off all rational estimates. Lots of smack talk about shady methodological adjustments, some of it no doubt valid. However, it’s hard to argue that the jobs economy – in optically difficult conditions – is, for now, anything but white-hot.

So, where does this all leave us? Beats the hell out if me.

First blush, I’ll be damned if it doesn’t appear that the economy has drawn the real-world equivalent of an inside straight. It has taken the very bad hand dealt to it over the last few months – slow reanimation from viral shutdown, the nastiest war in nearly a generation, massive inflationary pressures, historic rate hikes and a few other deuces and treys, and turned them into ten-Jack- Queen-King-Ace sequence, perhaps even one of the same suit. With declining inflation, robust GDP growth, and an employment picture which improbably features both record low joblessness and historically high numbers of job openings.

Equity indices seem untethered to these latest data drops – rallying on Fed rate hikes, shrugging off earnings misses, and attempting to sell off in the wake of the astonishingly good jobs numbers.

Instead, market participants are “kicking a buck” – thus far all year. Captain Naz, for example is up over 14% year to date — and this after and this after Friday’s ~1.6% selloff. If he keeps up this torrid pace, he’s looking at an approximate five-bagger by Christmas and will close the year at thresholds exceeding 50,000.

Let’s not get carried away, though.

Because maybe investors are holding a Luke-like hand of pure dreck, and only pushing up risk assets by way of bluff. But that’s the thing about a bluff; you gotta pay to find out.

If you fold here, you’ll never know.

And I don’t think it is/we will – a bluff or a fold, that is. One simply cannot ignore, and instead must marvel, at the strength of an economy that has taken so many lickings and keeps on ticking.

With a big, dramatic data sequence behind us, I don’t see terribly much in the way of short-term downside risk. I was – not gonna lie – a little worried about that whacky balloon. But I’ll be switched if we didn’t shoot that sumbitch down. And I am heartened by the implied geopolitical messaging: Take that, China. You can send your Willy Wonka Flying Machine across the Bering Straits, down through British Columbia and into the Great Plains. Across the Rust Belt and over Tobacco Road. Violate our territorial waters off the Carolina Coast, though, and we will blow your ass up with an F22 missile.

Having dodged these and other bullets, it looks to me like this here economy is torqued. That absent a couple of vexing, nagging problems, would arguably reside at the verge of a new Capital Markets Golden Age. We’ve barely begun to harvest myriad miraculous technological advances (centered in telecommunications and biotech) that emanated from our virus response alone. We’ve got a ridiculously robust consumer contingent, oceans of liquidity, a highly engaged workforce, and untold hosts of hungry, savy entrepreneurs dying to make a little coin.

But several challenges loom. Feel free to disagree as you will, but I feel that we have a monetary and fiscal policy portfolio hell-bent on effecting dilutive action. The Fed is formally in this camp. And anyone willing to look objectively at the action in the elected part of Government finds little but energetic moves towards higher taxation, more restrictive regulation, redistribution, and other righteous objectives that make for effective, pandering soundbites, but will do little to add to, and much to detract from, our collective ability to add economic value to the proceedings.

Oh yeah, and then there’s this. We’re in hock. Deep hock. Consumers have spent down their covid savings and now owe more, on a relative basis, than they have since before those unlovable little viral buggers arrived on the scene:

Higher interest rates won’t help this picture, but if the Fed is serious about slaying the Inflation beast, Powell’s not bluffing. He’ll never get to 2% without doing more gratuitous economic violence that he’s managed since he transmogrified himself from docile monetary dove to harrowing money hawk.

Still and all we can try. We can do that, at any rate. Sometimes, we surprise ourselves with what we are able to accomplish. I would have never expected the type of persistent economic vigor witnessed these last several months. But there it is.

All of which takes us back to Luke. And his iconic boast that he could eat 50 eggs. His cellmates put him to the test, and by God, he met the challenge.

Of course, these days, in addition to the gastronomic hurdles (unchanged over the ensuing two generations), a modern-day Luke would have to consider the cost of the enterprise:

This here graph only goes back to the ‘80s, but nonetheless evidences a near tenfold increase in the material expense. I suspect that if we were to wind the clock back to ’67, it’s more like 20x.

It may very well be that the current cost of 50 eggs might exceed all that was wagered on the contest back in ’67.

No matter, I’m still putting my money on Luke. And if anyone cares to raise me, they will find me prepared to meet all takers.

TIMSHEL

Yes, I see you got your brand-new leopard skin pillbox hat
You must tell me darling, how your head feels under something like that

You look so pretty in it, honey can I jump on it sometime?
I just wanna see, if it’s really the expensive kind,
It balances on your head like a mattress balances on a bottle of wine

Bob Dylan – Leopard Skin Pillbox Hat

Among the most iron-clad of risk management truisms that I have accumulated over the ages is this: when lacking anything else about which to write, it’s always best to revert to Dylan.

Along with a couple of corollaries: 1) one is best served, when reverting to Dylan, to plumb the depths of his finest album (Blonde on Blonde); and 2) when plumbing the depths of Blonde on Blonde, one can never go far wrong homing in on the song Leopard Skin Pillbox Hat. So, for once, I reckon, I’ll take my own advice.

LSPBH is a rich homage to days gone by. When women like Jackie Kennedy wore these tiny hats – affixed (no doubt with innumerable pins) on the top of their dainty noggins and looked fabulous in them. I don’t believe I’ve seen a pillbox hat, much less a leopard skin one, on any fair head in several decades, and my guess is that the leonine portion of my readership has never encountered one. I call this a pity; another dash of elegance consigned to history’s rabbit hole.

But I do think that our titular theme bears some relevance to current tidings. Because balancing like a mattress balancing on a bottle of wine seems an apt description of the state of the capital economy. The cushion is indeed perched above terra firma, but the stability is precarious, and by no means certain, or even likely, to survive a gale wind, a modest breeze, or, for that matter, two human bodies using the platform for its preferred non-sleep-related function.

We ended last week with much to please us and much to vex us. From a domestic macro perspective, Q4 GDP dropped into an ideal range. The Employment picture is robust almost to excess. And both the commercial and capital economies have absorbed an historically rapid/aggressive series of interest rate hikes without collapsing into utter, catatonic despair.

OK; maybe just a little bit of despair. This here graph above plots the course of an important economic indicator, the number of cars out there upon which the Repo Man has trained his sights.

I was forewarned of this a couple of months ago, and if I understood what was being conveyed, the trend is likely to continue.

All I can add is that I hope my ride ain’t on his list.

In eerie verisimilitude the Housing Market has also cooled considerably, but this was both inevitable, and, perhaps long-term constructive. And, to boot, Earnings, by all appearance, are on the down.

But by way of perspective, let’s wind back the clock back a few months if you will. Say, to mid-last year. When everyone still cared about the Russian/Ukrainian war, when WTI Crude was perched above $100/bbl, when Natural Gas was approaching double digits, and everyone up North was preparing for a winter freeze out. When our equity indices entered corrective territory. With 10-year yields having doubled over the previous year, with our beloved Bitcoin in free fall.

When we were closing out a second consecutive quarter of negative GDP Growth. With CPI sporting a 9 handle and PPI breaking into double digits.

It’s fair, I believe, to opine that the projection of improvement across these metrics to current, prevailing thresholds would have been dismissed as the ravings of a lunatic:

It also bears reiterating that the Fed was jacking up rates to beat the band last summer, with no particular end in sight, and now may be wearying of this operation.

Glancing at this change in our fortunes, should, I believe invoke some combination of wonder and delight.

So why are we (I) so depressed?

In my case, because it strikes me that the capital economy is balancing on the markets like a mattress balances on a bottle of wine.

Which, first principals, cannot be said to be terribly comfortable for the user of the fluffy platform. Unless it is very thick, it is bound to protrude on our horizontal corpuses in annoying and perhaps embarrassing ways. And if it is thick enough so as to render its presence undetectable, well, that can only diminish the stability of the construct.

Plus, one wonders whether the bottle is full or empty. If the former, it implies superior sobriety and spacial stability. If the latter construct prevails, however, it suggests that we’re sloshed and suspended on nothing but a slender perch of glass and vapor.

And, applying the metaphor to the markets, it’s exceedingly difficult to make the determination.

So much can go wrong here, so quickly, so unpredictably. Geopolitics, domestic politics, weather, supply chains, viral viruses, credit crises, so much more seemingly lurking in menacing and unseen ways within our vicinity.

What’s worse, from a vibing perspective, is that there is little or no visibility into what may come to clobber us, when it will arrive, and how badly we will be clobbered.

Heck, we might even avoid the clobbering entirely. The mattress may balance on the bottle of wine for all time, that fetching little feline hood may remain affixed atop her pretty little noggin for eternity. But it is not the most serene of conditions and will render the investment process even trickier.

The precarious perching of the pillowed platform atop the potable pouch may be put to a legit test this week, as the market’s largest capitalization companies report earnings, and, of course, the FOMC lays its next interest rate decision/attendant wisdom upon us. It probably pays to take in these data flows before deciding how to roll.

Most of my compadres have the scratch to do some shopping, should they be so inclined. And interestingly, for reasons that I do not entirely understand, there’s a great deal of deployable cash in corporate pension fund land (something about higher interest rates reducing their liabilities, but if so, the positive reversal of fortunes appears to be driven, not by improved economic fortunes, but rather by the caprices of accounting):

Hard to say whether and to what extent they will put this wood to work, but – not gonna lie – I like living in the elevated grey range more than the subterranean orange section occupied for so much of the last generation.

Groundhog Day is hard upon us, marking the countdown to the end of what seems to me to have been a rapidly paced, benign winter season. And, in general, I believe we can count ourselves fortunate to have come to this pass so fully intact, so little nicked up by myriad, intractable problems that have seemed to have multiplied like hobgoblins these last couple of years.

But something about it all just doesn’t feel right to me, and I suspect I’m not alone in this sentiment. So, I’d suggest proceeding with caution.

Because whatever is going on won’t last. Sentiments change, styles change. Pillbox hats are replaced by floppy ones, fedoras by stocking caps, and, eventually, by no hats at all.

Perhaps, someday, they will return, leopard skins and all. I may not be around to see it, and if I’m not, I hope whomever is takes the trouble to appreciate it, taking you, as promised, to see the sunrise, belt round his head, and you just sitting there.

In your BNLSPBH.

TIMSHEL

Why can’t we be three?

David Crosby

Please believe – I’m of this. Sicker of this than any of y’all. Tired of spitting out tributes to musicians that shaped my identity who have turned toes up.

But what am I to do? They keep croaking so I keep writing about it.

And, to answer Croz’s (cheeky) rhetorical question, we can indeed be three. We are three. You complete your own Triad. First Christine McVie. Then, Beck. And now, Croz.

I must cop to having mixed feelings about Croz. Loved his nasty baritone. Am grateful for his contribution to the Byrds. Can’t deny the fleeting brilliance of CSN(Y). He wrote a few good, and a couple of great (Long Time Gone, Wooden Ships with the magnificent Paul Kantner) songs.

But he mailed it in for decades and carried himself with a discrete absence of humility throughout. Some of this is justified. He made a finite but important contribution to something eternal. But he was arrogant to his betters (including, somehow, Bob Dylan) and dismissive of those he deemed to be made of lesser stuff.

I saw him once on the Upper East Side, picking up what I presumed to be his young daughter from school. I did what I normally do on those occasions – told him I was ready to jam/be his new bestie. He looked at me like I had three – a triad of — if you will – heads.

I had a similar experience with Roger Waters, but, somehow, I feel that the latter was more justified in his disgusted disdain at my overtures. Perhaps this is why I have endured the death of Croz with relative equanimity.

Still and all, we will bid him a bittersweet adieu and pray authentically for his immortal soul.

And move on to the concerns of the living.

The markets, lord knows, are at an interesting pass. I had been expecting them to rally, and they have treated this prospect with near Crosby-like disdain. Not exactly collapsing but hardly rallying, and, overall, mailing it in in Crosby-like fashion.

So, whither from here? Well, largely because it fits thematically, I’d say it largely depends on three contingencies.

The first of these is Earnings. Which are under way, and, thus far, underwhelming. Though we’re less than 25% of the way through, FactSet is projecting the 6th straight quarter of profit margin decline.

Which looks like this:

We are compelled to wait a spell for a clearer picture, though. Most of the Big Tech Dogs (arguably shrinking before our eyes) don’t report till (as the fabulous, also recently departed, Ian Tyson once wrote) February comes.

Let’s hope that their once dominate but recently eroding market leadership trajectory continues, because the tech earnings picture is arguably more dire than that of the broader market.

I reckon we’ll find out soon enough. But, in the meanwhile, it’s not as though we won’t have other matters with which to attend. Which brings us to our second contingent – the strength (or lack thereof) of the economy. In this regard, we will have both PMIs to ponder as well as our first glimpse at Q4 GDP. The prediction models here are cheerier, it can be said, than those in earnings-land.

GDP estimates range from modest to optimistic, but nobody is anticipating a contraction. Yet. Imagine, though, if we experience a sustained, unpleasant, downside surprise, and project its impact on future earnings cycles. Or don’t. Because the prospect isn’t pleasant.

With all of this in the hopper, we can migrate to “three” – the attitude and actions in the realms of central banking. Last week featured a great deal of conjecture as to whether, as telegraphed, the

Bank of Japan would back away from its rate targeting policy, allowing yields to be set instead by – get this – market forces.

The concept was always somewhat rhetorical; last month, the BOJ’s holdings of Japanese paper surpassed, for the first time ever, 50% of the outstanding debt. It has long been uniquely positioned to set yields at its own whim. So, the real question was rather whether they would allow them to float above the outrageously usurious threshold of ½ percent – breached for the first time in a decade December.

They backed off on this madness, and JGB yields retreated – in sympathy – to the more civilized but still Shylock-like threshold of 0.4%

The Mighty ECB is telegraphing greater rigor. Continental rate hikes appear to be on the docket well into Spring (at least).

All of which leads us to the Fed, which next weighs in on Groundhog Day Eve. It will be an interesting week, what with virtually all the Big Tech firms reporting, the January Jobs report and the Pro Bowl (which in a singular sign of the times, will take the form of a flag football game).

But it’s 10 days away, and, in the meanwhile, the investors have weighed in, now projecting with >99% confidence a mere 25 bp hike, taking the Fed Effective rate to the threshold of 5%. I would not quibble with this confidence, but what they’re thinking about the rest of the year remains a mystery. Inflation may be on its way to hibernation. Or not. The much-feared, looming Recession may fail to materialize. Or may come.

I don’t, on the whole, believe that they have an identified strategy at this point. Might be that’s for the best because there’s a lot of imponderables in play.

We also face the melodrama of debt ceiling expansion – one of the silliest exercises on the planet insofar as the outcome is inevitable. We WILL raise it. And keep borrowing. And spending. And be compelled to endure a great deal of smack talk along the way.

For the immediate future, though, I believe it best to train our foci on Earnings, if, for no other reason, because this is where the data flows are most opaque. The Economy is neither surging nor collapsing. The Fed will keep hiking, but probably at a gentler cadence. Corporate Revenues, Profit Margins, and prospects, by contrast, are somewhat inscrutable.

I do suspect that rock and rollers from the Golden Age will continue to expire. In fact, I’m pretty sure of it. They were, as Croz crooned, a long time coming and will be a long time gone.

He made his bones in a magnificent Triad spawned from The Byrds, The Buffalo Springfield and The Hollies. They made a couple of great records and then hung around – for decades, half-heartedly seeking to recapture a magic that eluded them throughout.

No matter, I reckon. They were once three. And so were we. And so will we be again, in a dawn that appears to be a long, long, long time before it emerges, anew, on a distant shore.

TIMSHEL

I’m going down. Down, down, down, down, down.

Don Nix (via Jeff Beck)

As those of us who toil in the markets are all too aware, we inevitably, from time to time, come upon instances where we lose that which we cannot afford to part.

Last week, we came to such a pass.

Of course, here, I speak of the demise of Jeff Beck, who bounced after a brief bout with bacterial meningitis this past Tuesday.

Much has been written about Beck; much has been said, and there’s more to come. But I zero in on a moment from his uber-varied career as being most exemplary. At the end of the last show of the Ziggy Stardust Tour (London’s Hammersmith Odeon/July 1973), when Bowie shocked everyone in the room (including, unfortunately, the entire Spiders from Mars ensemble) by announcing his intention to “break up the band”, he invited one guest to accompany him for the finale/encore.

Jeff Beck.

To my way of thinking, that event alone was enough to crown a career, any career. But to understand what we lost, we must back up a bit. Beck began his recording career as lead guitarist for the Yardbirds – sandwiched, somehow, in between Eric Clapton and Jimmy Page (think about that for a moment). And held his own – arguably, at the time, outdid them both.

The Y-Birds kicked him out after about 15 months; Page slid from bass to lead. But not much was heard from them subsequently. Pagey got bored, formed the New Yardbirds which morphed into an outfit called Led Zeppelin. Clapton did Cream, Blind Faith, Delaney and Bonnie, Derek and the Dominos, and, well, Clapton. Singer Keith Relf planted the seeds of Renaissance, and then, a couple of years later, electrocuted himself by plugging an unground patch cord into a live amp.

Beck, as always, went his own way. Formed an eponymous group which catapulted two thenunknowns – Rod Steward and Ron Wood – into the permanent public (rock) eye.

Continuing with his journey, he turned down the Stones offer to take the Brian Jones spot ultimately claimed by the above-mentioned Woody. Instead, he went solo. Co-wrote (though uncredited) Stevie Wonder’s sublime song “Superstition”. Put out the album containing our title quote, and then, a couple of years later, recorded two of the most astonishing instrumental records of all time – “Blow by Blow” and “Wired”.

His prolific endeavors as a working musician continued unabated, always lifting others along the way. He brought visibility to the criminally underrated Vanilla Fudge rhythm section (Tim Bogert and Carmine Appice). Did the same for virtuoso keyboardist (Mahavishnu Orchestra) Jan Hammer. Recorded with Ozzy, Joni, Stanley Clarke, Roger Waters, others – claiming little credit each time.

And yes, most recently, toted Johnny Depp along with him on tour. First principals, I have no problems with this. Depp is a fine actor whose rep at the time badly needed rehab. Beck elevated his own visibility and ticket sales in what proved, sadly, to be his last shows. My only problem is this – Depp can barely play and had no business up on stage with the magnificent Mr. Beck.

I had already forgiven him for this.

Suffice to say, whatever one’s affinity for what is broadly called rock, there’s some Beck stuff, which, if not in your cannon, ought to be. He never wrote a widely played tune, his singing voice never reached our ears. But he was everywhere.

Given this remarkable resume, one finds it difficult to find brief ways to honor him. By virtue of our titular theme, I have made my own selection. I must, though, admit here that “Going Down” (chord progression: G-F-C-Bb-G), in addition to being a sublime Beck riff, offers a handy transition to this week’s market commentary.

Because, sometimes, markets do indeed go down, down, down, down, down. And sometimes they do not. For long periods, they do quite the opposite. And it is our challenge, as investors, to determine both the timing and magnitude of this directionality.

There are those among my crew that believe we are on the verge of our titular redux, that we are indeed about to go down, down, down, down, down. And perhaps they’re right.

Certainly, in the hedge fund universe, there’s a bit of this sort of thing going on. Take, for instance, the macro-critical Natural Gas Market, which has miraculously sold off — throughout the emergence and arrival of the cold weather interval. Tellingly, it is only recently, as the days begin to get longer and warmer weather is on the intellectual horizon, that fund managers have decided, in aggregate, to assume a net short position:

Not gonna lie: it all makes me nostalgic for twenty years ago, when the industry’s most respected stock analysts – Jack Grubman comes to mind – clung desperately to their “buy” recommendations on names like Enron and WorldCom – only to flip to “sell” when bankruptcy was imminent.

But it is this very trend, among other matters, that leads me to believe that risk assets are likely, over the near term, to go up, up, up, up, up.

As ’22 wound down, I felt that an upward reversal of energy prices was a major risk factor – one that not only did not materialize, but which manifested in the opposite direction. And now, given the relatively mild weather (thus far), the temporal proximity of a spring thaw, and storage tanks more than adequately stocked, these economic risks have dissipated.

Not by mere coincidence alone have Inflation numbers declined in gratifying fashion, with nearly every reliable indicator suggesting more of the same on the horizon. All of which has brought a bid to Interest Rate Markets, and, presumably, brightened the mood of the FOMC, which (according to CME FedWatch) is now > 90% certain to hike only 25 bp at its next meeting (early Feb).

Contemporaneously, and though Gloomy Gus banking execs and highly trained economists still predict Recession, the economy can hardly be said to be rolling over. To wit, the unfailingly clairvoyant Atlanta Fed GDP Now meter currently projects >4% growth in Q4.

Market technicals are also showing more vigor, with equities, bonds and the like having risen, at long last, above key (50, 100, 200-day) Moving Averages.

Corporate Earnings/guidance are another matter, though. Lots of mellow harshing in those realms. But one must assume that at least some of this is baked into current valuations.

I could, if I so chose, go further down the dark hole, pointing out that this week brings one of the most depressing events on the economic calendar: that annual Gathering of Old Hypocrites on the slopes of Davos. We’re also staring down the well of yet another of our endless stream of overwrought, wearying debt ceiling expansion political debates.

But I think we have it in us to rise above these latter-mentioned challenges. And I think we will. And that the rally, which more or less began in October, will continue.

I doubt, though, that it will sustain itself for very long. Too much out there that can go wrong and almost certainly will. I’m only informing you that, for now, risks tilt to the up, up, up, up, upside.

Here’s hoping that if I’m right, you make a little coin on the move. If you do, I’d advise you to save some for some stormy days likely to descend upon us as the year unfolds.

Because nothing lasts forever. Or even for very long. And we must attend as best we can to the next chapter. Bowie did indeed bust up the Spiders, but then re-invented himself dozens of times before finally checking out for good a few years ago. Rod the Mod is a modern-day Tony Bennet, and Woody takes his orders, albeit in very lucrative fashion, from Keith.

While I have spent decades anticipating the death of Clapton and Pagey, I thought that Jeff would live forever. Last week, I found out I was wrong.

We will, as ever, carry on. A little heavier, a little sadder. Others will emerge, but probably not soon. No matter, we have had what we have had, and will make of what we get what we make of it.

It would be well to remember this as we navigate the challenges and opportunities that await us. In the meantime, I will go down, down, down, down, but not down.

TIMSHEL