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

I wonder where you are, I wonder if you think about me
Once upon a time in your wildest dreams

Justin Hayward

Well, friends, matters have devolved to the point where for the second time in a finite span of weeks, I’m resorting to the Moody Blues. Who I don’t even like very much. And the quote I selected is from a song that does not even appear on the album from which I purloined our title (and which may be identical to that of my last Moody-go-round).

I turn to this, though, because of something I read (where else?) on the Journal Editorial page. A warning to be careful of your present, because someday it becomes your past.

It was presented as advice issued by the author’s mum. And I think she has a point.

Because one thing we ALL have is a past. Even me. I have a past. And, while, if you look carefully, you might encounter a few checkers, I at least can’t think of a single in-the-moment action I have taken that would stand me into disgrace for all time.

The column in question took the form of a guidance to that goofball/knucklehead George Santos – whose recent Congressional victory catalyzed some tragically-after-the-fact diligence on his ass, the latter of which revealed that he is a pathologically pathological liar. The article went on to inform (I did not know this) that he stands accused of having committed forgery in Brazil 15 years ago.

At the time, there was no official action taken by their Federales. But now, the Brazilian government is re-opening the investigation. How timely. One wonders, though, what favors their newly elected, quadruple-named President Luiz Inacio Lula da Silva extracted, and from whom, in consideration of his renewed interest in the case. One way or another, though, they’s hoppin’ mad about something down there in Brasilia, storming the palace that da Silva has barely had time to move into, and demanding the re-installation of his predecessor – that rascally Bolsonaro — in his stead.

Under other circumstances, I presume the media would be running an endless Santos loop and collecting mad advertising Benjaminz for doing so. But there are bigger Congressional fish to fry. Most notably the gleeful, overwrought saga of the Republicans electing a Speaker. For my part, I am less troubled by the spectacle than I am about the concessions made in the associated negotiations. Which will be difficult to reverse. Most prominent of these, as I understand it, is a new clause under which any single coalition member can call for newly crowned McCarthy to (ominously) “vacate the seat”. Best case, it will render presiding over the GOP Caucus a decidedly Quixotic task and bring great comfort to/convey significant benefit upon, their political opposite numbers.

One does expect a few oddballs in any Congressional Coalition, but gosh oh mighty, they gotta be managed. Say what you will about Pelosi, who had The Squad with which to contend. But she kept them (insert female anthropomorphic word that I am to chicken-shit to type) in line.

We are living in an expanding cycle where small numbers of members are able to disrupt legislative consensus. This can be good and bad. I personally believe that the less they do on Capitol Hill the better off we are. But it ain’t a good look. Two Senators: Manchin and Simena, provided instructive example, and in doing so, saved the country from a suicidal spending binge, but it came at the cost of deeply diluting the power of the Senatorial majority.

All of this stands out to me because I am about to publish a book that I wrote with former House Majority Leader Richard Gephardt. Which I shall want you all to buy. And, as this momentous event approaches, I will expand the amplitude of my shilling. It is part memoir/part object lesson in the importance of preserving the protocols of Majority Rule – a concept under serious attack of late.

It’s coming out in a few weeks. Trust me – I’ll let you know. Meantime, this here is the cover:

Before you ask – yes, I was a bit disappointed at the relative by-line font sizes. But how you gonna argue with a former House Majority Leader?

I’m not sure why, but the cover art also somehow reminds me of that of Jefferson Airplane’s “After Bathing at Baxter’s”, which, for reasons I cannot explain, was the first true rock album I ever owned.

Leader Gephardt and I disagree on certain matters of polity, but we both are passionately enamored of the protocols that drive the legislative process, which we both believe have been rudely and increasingly abused of late.

The Majority Party ought, under any circumstances, to be able to elect a Speaker in < 15 rounds. Lying liars like Santos should be, I don’t know – adjudicated?

But it seems like nothing works the way it once did, and, while this is an eternal geezer lament, the pace of change seems to be accelerating.

Many justifiably blame the virus for the acceleration. And it’s certainly a contributing factor. Our response was both heroic and shameful. On the plus side, we – individuals and institutions – gathered ourselves to attack it, and, by doing so, almost certainly saved untold blood and treasure. New technologies (most notably biotech and telecommunications-related), which we have barely begun to harvest, have transformed the future landscape.

But it seems as though we cannot take any form of hardship anymore – without, that is, falling apart. With no offense intended, we received a prime example of this with that heart attack during the Bengals/Bills game. Upon recognizing the seriousness of the medical emergency, officials suspended the action, later deciding to nullify the game entirely. As if it never was played. And anyone who, for a moment, questioned this was rudely castigated.

Heart patient Hamlin is thankfully on the mend. But back in ’71, and by contrast, a dude suffered a fatal cardiac arrest during Bears/Lions, they carted him off the field, and the action resumed.

Most of us would call this progress, and I won’t argue the point. But – not gonna lie — the withering outrage that anyone would even dare to discuss the (significant) playoff implications of failing to finish the contest is, in my judgment, de trop.

In general, and in addition to the externally catalyzed madness imposed upon us, it seems as though our emotional stability, flexibility, adaptability, is on the wane.

And I can’t help but feeling that this is coming a critical pass, that not only will our present rapidly become our past, but that the current conversion process will have larger than normal implications.

’23 thus unfolds as a year where I believe our actions set up so as to be more deeply embedded in the future than is routinely the case.

The markets will communicate a great deal. By the time it all winds down, whither Inflation, Interest Rates, Equity Prices, Commodity Prices; heck, even Crypto Prices dwell will be deeply telling. Regaining vigor implies one set of outcomes; a continued wallowing in nervous exhaustion another.

And, right now, we just don’t know. There are reasons to suspect that risk assets are poised for, if not a recovery, then, at least a “low-bar” improvement over ’22. Nobody can quibble (much) with the Jobs Report. Energy prices are miraculously subdued. Inflation metrics are projected to decline to a 6 handle – down from the 9’s (CPI) and 10’s (PPI) registered this past Summer. Q4 GDP estimates are in the high 3’s.

If Inflation continues to slide, if Crude Oil does not resurge, if Employment remains robustly controlled. If the GOP-led House does not implode.

Then, I say, there might be some pretty good bargains out there in risk asset-land. But that’s a lot of ifs. A great deal could go wrong between here and there. And probably will.

But I don’t need to tell portfolio managers that the present quickly transforms into the past, the irrevocable past. Because today’s returns are transformed into tomorrow’s track record – its irrevocable track record.

And, addressing a broader audience, if we can drop our paranoia, our self-victimization, our focus on the wrongs committed by others, and replace it with thoughts and efforts as to how we can do better, then, maybe, we can unleash all that fallow new technology, re-invigorate our present into a past of which we can be proud.

It just seems to me that there’s more riding on these outcomes this year than even normal.

Ideally, the best thing you could do in the present would be to buy our new book. But you can’t. Because it isn’t out yet. It will be, soon, and eventually, perhaps with your help, it will share a prominent place in the political commentary of the (by then long passed) present day.

It will be a day in future. And it too will pass. Again. Once upon a time. In your wildest dreams.

TIMSHEL

“HERBIE (to WAITER): Go ahead. Give me a number. Give me a number. A random number.

WAITER: Twenty-three.

HERBIE: Beethoven was 23 when he composed his first piano sonata. In 1923 Jack Bentley set the record for average by a pitcher, batting .427. There are 23 chromosomes in the human egg. Also the human sperm. 23rd President? Benjamin Harrison. Asian countries along the 23rd parallel of Southern latitude—”

Quiz Show

Welcome aboard, ’23! I won’t say the weather is fine, but it has improved. Your predecessor, true to form, went out with a nasty storm, which, among other niceties, killed over three dozen good folks in Buffalo, not to mention placing one of our better airline enterprises into existential jeopardy.

Your numerology offers a wealth of fodder for glib analogizing, an embarrassment of accessible riches from which, as indicated in the title, I have already selected. Perhaps the lowest hanging of this fruit is Michael Jordan’s jersey number (and, for the early part of his career, LeBron’s).

Perhaps appropriately, when I think of sports figures donning the number 22, all roads point to Bill Buckner, the misanthropic first baseman who let that slow roller slip between his legs in the 1986 World Series, thereby ending the Mets’ curse but extending that of the Red Sox. Billy Buck logged – yes – 22 seasons in the Bigs, with the Dodgers, Cubs and Sox, donning No. 22 for the first two of these gigs, but switching to No. 6 in Boston.

Perhaps he should’ve stuck with 22. Because, for me, he will always wear the double deuce. He was a pretty tough out for more than two decades but will always be remembered – perhaps exclusively — for his unfortunate ’86 error. There is a morbid joke about this — that so distraught was he about his fielding transgression he threw himself under a city bus – only to have it roll between his legs.

’22 was that kind of year.

21 evokes images of Roberto Clemete, who died in a plane crash – almost 40 years ago to the day — on a charity mission — from his native Puerto Rico to Nicaragua. He bounced with exactly 3,000 hits, and his is one of two number (along with that of Jackie Robinson’s 42) retired across all MLB.

Fast forwarding to 24 makes me think of either Willie Mays — or the Neil Young song “Old Man” (“24 and there’s so much more”). Which I am. Indisputably.

Almost as inarguably, though, the most pertinent application of 23 is that it is the number of chromosome pairs in a human DNA module (also, as Quiz Show Herbie points out, within a human sperm). Much information is contained in these globules – offering opportunities for erudition, and, for the truly enterprising, commercial benefit.

In terms of the latter, an outfit called 23 and Me has made a mint by crunching the DNA of millions of willing consumers – all for little more than a Benjamin (Franklin, not Harrison: 23rd President of the United States). I have little interest in this, but if you wish to check it out, as your risk manager, you’ll get no objection from me. I’ll only offer the holiday wish to the fellas out there that if your kids participate in the project, their chromosomes resemble your own.

But my interest is in 23 and You. Specifically, what you will do in this randy, dubiously-chromosomed investment environment. Much will depend upon your Portfolio Management DNA (and from this perspective, picking up a 23/Me kit probably wouldn’t hurt), but it will also do you well to attend to the external environment.

To me, it looks like a Double Helix of DNA-like complexity:

I’ll leave it to the legion of trained microbiologists who comprise the lion’s share of my readership to unpack this fruit salad. All those A-T’s, T-A’s, C-G’s and G-C’s verily make my head spin.

And so does this here market. We ended ’22 with the Gallant 500 down > 19%; Captain Naz falling a tidy 33% — the latter, due to the unforgiving caprices of non-linear math, thus wanting a full 50% rally to recapture historic high ground. The wearying yield curve remains in a configuration which renders the above-supplied DNA image as simple as a trace of the shortest distance between two points.

Whither the economy is headed is, of course, anyone’s guess, but the subject of considerably vigorous debate. Some of the smartest folks with whom I reason are convinced that it’s about to collapse, but if so, the number crunchers at the Atlanta Fed (who just increased their Q4 GDP estimate to a gaudy 3.7%) failed to get the memo, and the better-compensated (if professionally precarious) economists at Goldman Sachs just reversed their call. No Recession, they now say.

And here’s hoping they’re right.

I enter the new season, however, focused on three imponderables:

1. (Natch) What will the Fed do?

It looks as though they’s planning on a few more hikes. And probably they are. But if they are motivated to do so by a desire to increase the attractiveness of their Special Repo Facility, it would appear that such incentivization is ill-foundedP

Probably, this doesn’t mean too much, but to pointy-headed watchers of the Repo markets, it is astonishing, nonetheless. Usage has verily quadrupled and this at an odd time on the calendar. Normally, at year end, banks, short of cash, are taking the opposite side of this trade – selling excess securities to the Fed and banking the proceeds.

I find this an enigmatic symptom of a monetary system gone off the rails and will say no more.

2. Commodity/Energy Prices?

Perhaps nothing more meaningful transpired in the second half of December than China’s surprise 180 on lockdowns. It seems, now, that the People’s Republic is open for business. If so, it should put significant upward pressure on Commodity Prices – because the Chinese – all 1.4 Billion of them – use a lot of commodities.

And if you’re looking for a touch of the weird, a survey of ’22 commodity prices indicates that the best performer is nothing other than Orange Juice. Which – be it fresh squeezed or concentrate — no one even drinks anymore. The worst? Lumber. Which we still use in abundance. For example, even with the Buckner/Clemente/Mays era long passed, baseball bats are made from tree trunks and branches – mostly good ‘ole Maplewood.

I’m not guessing these trends are sustainable.

NatGas prices – in the US and Europe — have fallen dramatically, but I continue to focus my concern on a resurgence of Crude Oil prices, which, I believe would goose Inflationary Expectations considerably and break the hearts of all those hoping for a kinder, gentler, Fed policy sometime later in ’23.

3. Do We Have a Credit Crisis?

NGL – I think we will. Eventually. Global debt has exploded and is now approximately 3x what it was in 2007.

But this ain’t 2007. The Capital Markets Banking System is surely healthier, better capitalized, than it was 15 years ago. Underwriting standards, loose back then as a factory district street walker, are now gnat’s ass tight.

But the astonishing debt levels are at thresholds where, in my judgment, they simply cannot be repaid, and must instead be monetized (funded, that is, with newly minted fiat currency). This is likely to be passing unpleasant.

I don’t believe the reckoning is on the immediate horizon; probably won’t transpire in ’23 at all.

But there are some ominous signs to the contrary, including the following, which caught my eye:

Notably, this surge derives not from new issuance of junk, but rather from the deterioration of the credit quality of existing paper. I the continuation of trajectories in the coming months.

Eventually, we gonna have to pay The Man. And I don’t believe it will be an easy or gratifying task.

*****

So, my main worries for ’23 are a surge in Energy Prices, a capricious Fed, and some sort of unexpected, chain-reacting credit event.

And I certainly would be fading any early rallies.

However, come what may, ’23 is upon us, and will be over before we know it.

Because nothing lasts forever. 22 didn’t (thank God). Not on the calendar and not even for Buckner. Who wore Number 6 in Boston and booted that grounder into Baseball infamy. Michael Jordan ended his career wearing 45. LeBron, talents now residing with the underachieving Lakers, sports a 6 – perhaps, but not probably, in homage to Billy Buck.

Neil Young is no longer 24, but 77. How much more there is for him is in the hands of God.

So, let’s do our best to nail this newly begun year, shall we? Even if times are tough, it’s in our DNA to prosper. And, come what may, here’s hoping that 23 and You is an uplifting tale.

TIMSHEL

“A Horse is a horse, of course, of course”

— Theme Song from Mr. Ed

“I’m going to catch that horse if I can”

— Chestnut Mare: Roger McGuinn and Jacques Levy

“The story is told that when Joe was a child his cousins emptied his Christmas stocking and replaced the gifts with horse manure. Joe took one look and bolted for the door, eyes glittering with excitement. ‘Wait, Joe, where are you going? What did ol’ Santa bring you?’ According to the story Joe paused at the door for a piece of rope. ‘Brought me a bran’-new pony but he got away. I’ll catch ’em if I hurry.’ And ever since then it seemed that Joe had been accepting more than his share of hardship as good fortune, and more than his share of shit as a sign of Shetland ponies just around the corner.”

― Ken Kesey, Sometimes a Great Notion

Good Christmas, y’all. Even though it’s over. Like John Lennon once crooned, I hope you had fun. I hope, also, that you didn’t have to travel far, for it weren’t no weather to be travelling.

I tried, this year, to arrange a Secret Santa sequence with my partners, but there weren’t no takers. I reckon pro forma escapades like Secret Santa have moved beyond passe’ into the realm of the mortifyingly futile. I lament this as being another sacrificed superficial blessing.

Yup, I always had a soft spot for Secret Santa. Perhaps this is because once, an anonymous version of the game conferred upon me the bounty of a single long-necked bottle of Budweiser. Like the one Jim Morrison is holding in the inside cover of the Doors’ pseudo-eponymous “Morrison Hotel” — to me the SS equivalent of a winning Powerball ticket. I think I drank it, warm, in a single gulp.

In a slightly early nod to auld lang syne, I offer the last of our titular quotes as a unilateral, anonymous Secret Santa gift to my readership. Thanks for putting up with me all the way through this tedious, troubling, fast expiring year.

It comes from what is certainly at least a co-favorite novel of mine – Ken Kesey’s “Sometimes a Great Notion”. It is an enormous, sprawling book, weaving threads of man versus nature, wildcat capitalists versus institutionalized unions, brother versus brother and even father versus son, in a narrative reminiscent of Steinbeck and a cadence worthy of Faulkner. The subject of our quote is a prominent, but non-central character. A simple, optimistic, authentic soul, known more routinely across the pages as Joe-Ben.

I got to thinking about Joe-Ben as l contemplated conditions this Christmas, perhaps not the merriest in anyone’s recent memory – particularly for those that toil in the financial markets. Investible assets of every stripe are down, some dramatically. Even my mother-in-law lost money this year. Fund performance is putrid, deal flow is non-existent, Wall Street bonuses are unthinkably light. SBF’s erstwhile side piece has rolled on him.

Metaphorically, the stockings of many of us are stuffed with horse sh!t, which begs the following question:

Is this a harbinger of scatological scenes yet to come, or of glittering equine ecstasy awaiting us just up the road?

I reckon we’ll find out, but as we shake the dust off from this holiday, my fear is that it may be a while before we rope that pony, and, meantime, we might be impelled to satisfy ourselves with the content of the stocking as we have found it.

Our once thoroughbred economy is showing signs of having been ridden hard and put away wet. It could gather itself, and who’s to say it won’t?

But I wouldn’t be playing the Exacta on that outcome.

A guy I once worked with recently summed up our current economic condition in the following four charts:

I won’t venture so far as to call these trends unsustainable, but I sure don’t like the way them arrows are pointing.

In a fit of frenzied pre-holiday largesse, the folks in Washington delivered up a ~$1.7T Omnibus Spending Bill, with a Secret Santa flair – insofar as its page count clocks in at more than ten times that of the (seasonally appropriate) New Testament. There’s something for everybody contained therein – including the obligors of this unintended bounty – the American Taxpayer – who was last seen running down the road with a stocking full of sh!t, with aspirations that (s)he will soon be mounted on a Chestnut Mare.

There is a bid on longer-term Treasuries, but it comes at the expense of a Tim Burton/Nightmare Before Christmas Yield Curve Inversion that will almost certainly sustain the globulins currently plaguing the Equity Complex and its technology leadership.

The Housing Market is collapsing:

Retain Sales, Industrial Production, Durable Goods Orders, PMIs all are cracking like walnuts. We have yet to complete our mission-critical busting of the Inflation Bronco.

FactSet projects a > 2% decline in Q4 earnings. But we won’t know for sure for more than a month. Meantime, the Gallant 500 (’22 Vintage) has declined more than 19%; Captain Naz to the tune of a third.

And thus we enter ’23.

Perhaps the time has come, though, to channel our inner Joe-Ben, who (Spoiler Alert) laughed his way to a tragic demise.

We might nonetheless do well to benefit by his example. Horse sh!t, after all, is a by-product of horses, which we may catch if we can. And if we do, perhaps we may find that, like Mr. Ed, they speak our language.

Perhaps, then, we can ride him through the desert, but if we do, we will be compelled to either name him, or acknowledge our inability to do so.

But during this holiday season at any rate, I find that three steed analogies is quite enough, so….

Happy Holidays, and, as always….

TIMSHEL

SOFR away, doesn’t anybody stay in one place anymore?
It would be so fine to see your face at my door,
Doesn’t help to know, that you’re SOFR away

With apologies to Carol King

Not much love for Stanley last week, but that’s OK. He’s long gone. As we all must go. Perhaps it is well that this is so. You don’t need me to tell y’all that nothing lasts forever, but I will anyway.

Nothing lasts forever.

Case and point, this month, in addition to the other opportunities and challenges we have encountered, marked the passing of an era. The once-mighty Eurodollar futures complex, long-time alpha dog of not only the short-term interest rate markets, but indeed, of the entire futures universe, has been eclipsed in both Volume and Open Interest by a lesser-known aspirant: Secured Overnight Funding Rate (SOFR) futures.

SOFR, so good, as the man says. The Eurodollar had an extended star turn, but over its history, the fates gave many signals that its reign would be finite. It began with what appears, in retrospect, to be an unfortunate nomenclature choice. Eurodollar is kind of a cool name, but the actual underlier was the London Inter-Bank Offered Rate (LIBOR). So why not just call it that (I’ve often wondered)?

Then, in 1999, came European Monetary Union. As a matter of necessity, this created a new currency pair, called, well, called Euro/Dollar. Which led to immediate confusion, as there were thus, and ever since, two critical market benchmarks of nearly identical appellation.

The second, much larger problem began to unfold about a decade ago, when some slick bank guys manipulated the auctions upon which LIBOR is based. Not by much, only teeny, tiny amounts, fractions of percents.

But that sh!t added up. Because LIBOR was the biggest market in the world. Like, to the tune of $300 Trillion. Thrice Global GDP. And, while nobody except wonky interest rate traders pays much attention to LIBOR, it impacts just about everything with an interest rate attached to it. So, we all got ripped off. Bigly.

I’ll spare you a review of the dirty details (it’s Christmas Week, FFS!), but around 2013, the scheme unraveled, got blown wide open. A couple of cats went to jail; some banks paid fines.

And then the whole thing blew over.

Except for this. The British Bankers Association, stuffy, stolid but routinely shady sponsors of LIBOR, decided that the juice was not worth the squeeze. Started backing away from the project, albeit in a protracted fashion.

Enter SOFR – calculated by the impeccable, unassailable (at least by comparison) NY Federal Reserve. And now, after many years of doing direct battle, SOFR rules pre-eminent.

Again, SOFR, so good. Especially if you were long these puppies, which have trounced their opposite numbers in the Eurodollar pit in unceremonious fashion:

SOFR vs. ED: The Market Has Pronounced its Verdict:

OK; so this is little more than an obtuse joke. SOFR is quoted in yield, which has gone up dramatically, while ED is price based, and thus migrates in opposite direction. As such, these graphs describe an identical trend.

Which is that interest rates are rising. We kind of knew that already, and, in case we were in any\ confusion, Chair Pow reminded us, during last week’s FOMC Presser, that not only is this so, but that he ain’t done yet. Across our little global financial village, the same message was conveyed by the likes of the ECB’s Madame LaGarde and the fine folks on His Majesty’s Monetary Policy Committee.

The risk markets didn’t like what they heard. Not. One. Bit. And perhaps it’s no wonder. Our miracle of a capital economy has weathered much higher interest rate regimes than the one that currently prevails, but this does look like a major buzzkill hiking cycle. Coming, as it does, not to cool a whitehot economic surge, but against the backdrop of an unambiguously slowing one, with Inflation still hovering at > 3x the Fed’s stated target. With all kinds of pressures on margins and earnings, and various other dainties not overly pleasant to contemplate, much less ingest.

Thus, not only is the market selling off, but its longstanding leadership is being annihilated.

Goldman is sh!tcanning a few thousand bankers. SBF lingers in a rudely appointed Caribbean prison, awaiting a likely to be unpleasant extradition to the States. Frenemy Binance’s auditors suspended their review. The world’s largest cylindrical fish tank exploded in Berlin.

In all, I think it is well that we’re finally putting 2022 to bed. Not many in my professional acquaintance will much miss it. And as for ’23, well I don’t have a great deal of visibility as yet.

About all I can state with any confidence is that the first market move of ’23 is probably a big head fake fade. I’m not suggesting that the right trade is to get short an early January rally or to buy into an associated selloff, but there are worse trades I can contemplate.

I do suspect, however, that the rising tide of rate increases will ebb and ultimately reverse itself ere long. The delightfully diluted CPI print is one sign, and last week’s additional data releases corroborate the trend. Retail Sales, Industrial Production, PMIs of every stripe, confirm an unmistakable slowdown in economic activity. Which, presumably, is what the Fed intends.

The contorted yield curve remains in a gruesome state of inversion, and, just because I can, I’ll include an illustration of investors views on breakeven Inflation, as measured in 10-year equivalents:

This suggests that investors are putting their capital behind the concept that Inflation will come careening down, placing the Fed in a position to shift from “taketh away” to “giveth” mode.

To which I offer a few caveats. Yes, I expect Inflation to cool considerably next year. However, I can’t get there without factoring a Recession into the calculus. I am also, as I’ve repeatedly stated, concerned that renewed upward pricing pressure in the Energy Complex, while doing nothing to stave off the latter (Recession, that is) could upset this trajectory. Finally, to borrow a thought from a credentialed former Fed guy I just met, I believe that while the Inflation ride down to, say, 5% might easily be accomplished — still > 2x the Fed’s target– any move below this – particularly in this gnat’s ass tight Labor market — will be difficult to manifest and painful in its unfolding.

But hey, why even think about that no? There’s still two weeks that remain to our current solar circumnavigation, during which time our attentions will be diluted so as to pay proper homage to Hannukah, Christmas and New Year’s.

I wish I had something smart to offer about this final chapter. But in abstaining, please bear in mind that recently I suggested that risks tilted to the upside and gave my blessing to would be buyers.

I might recommend a combination of short SOFR/long Eurodollar, but that, my friends, is a trade, which back in the glory days of Open Outcry, known as a Texas spread.

The pits are shuttered now. SOFR has supplanted Eurodollars. It’s the holiday season, and All God’s Children are on the move. Perhaps it is well that it should be so. That no one stays in one place anymore.

And yes, it would be sooo fine to see your face at my door.

Trouble is, I won’t be home.

TIMSHEL

“The growing good of the world is partly dependent on unhistoric acts; and that things are not so ill with you and me as they might have been, is half owing to the number who lived faithfully a hidden life, and rest in unvisited tombs.”

George Eliot

Allow me, while the world still reels from the aftershocks of C. McVie’s death (and my stirring tribute to same), with time-honored self-indulgence, to take this moment to celebrate the 100th anniversary of the birth of my stepfather: Stanley Maurice Warsaw.

He shed his mortal coil late in 2006, and little has been heard of him since. Still and all, I think of him often, and always with fond remembrance.

Whatever else may be said of him (and of this there is a great deal), perhaps on this we can all agree:

He takes a nice snapshot.

But I can hardly rest my keyboard there. This cat was born in ’22, right in the heart of the Greatest Generation. Played Centerfield for the Chi-U Maroons, a project rudely interrupted by Pearl Harbor. He enlisted that day, and spent the next 4+ years fighting, as a Non-Commissioned Officer, through North Africa and Italy – under the generalship of Mark Clark.

To be sure, there were worse WWII theaters of engagement to be dispatched (Stalingrad comes to mind), but Stan came back to the States covered in shrapnel, and with a deep aversion to speaking of his war experience. Nay, he’d rather discuss his exploits on the Hyde Park diamonds, and who could blame him for this preference?

He went on to live the prototype existence of a successful urban Jewish man of his time. Had a great run as a stockbroker. Married and divorced two wives, giving off progeny in each. His third spouse – my mother, however, got her hooks into him pretty good, and they remained together for the last 30+ years of his life.

He had a big, bellowing voice, sang in the shower, drank, smoked, played tennis, attended ballet recitals and sporting events. Laughed a good deal, cried only in private, dutifully called his mother (who lived to be 100 but shaved 5 years off her age to the very end) every day. And came home every night. Which my bio dad never did.

He had his faults, but gosh oh mighty, he was good to me. Took a great interest in me – at a time when I had almost none in myself.

When he bounced and the battles for his assets commenced, I only asked for one thing – his first print copy of Winston Churchill’s WWII Memoirs and two-volume treatise “The History of the English- Speaking Peoples”.

I carried those off these books and still have them. They give the room an unmistakable Stan-vibe.

But I digress. Going back to our titular theme, the following image struck me:

Someone help me out here. I mean, why cage a tree? I don’t think it was transported illegally across the southern border by mules.

And, come what may, it’s not likely to be going – very far, or anywhere, anytime, soon.

Mostly, of course, I wonder what Stanley would’ve thought of it all.

I have indicated above that Stanley was a broker, and it is easy to slip into the temptation of marveling at how quaint the markets were during his innings at the bourse. 50s/60s – buy IBM; 70s/80s – buy Cisco and Microsoft. But he did endure a couple of nasty recessions, and through 20% interest rates in the early ‘80s.

In fact, across my undergrad years (an enterprise he, at minimum, subsidized) Inflation rose to beyond 13%, and, during my Freshman, Sophomore and Senior years, the U.S. economy was actually in Recession.

The specter of our ignominious defeat in Vietnam and of the Watergate debacle were omnipresent. Geopolitical tensions wreaked havoc on the Energy Complex, and, for the first time in anyone’s existence, Americans became vulnerable to Fundamentalist terrorism.

Just as we were emerging from all these niceties, a heretofore non-existent virus began killing off people by the thousands.

My memories of Stan’s professional experience through these times, for a variety of reasons, are both incomplete and clouded. But it couldn’t have been terribly easy to provide financial advice to his well-heeled tennis buddies, nor to articulate bad tidings to them as they unfolded. Mostly what I remember is that Sgt. Warsaw soldiered on.

Perhaps more pertinently, it strikes me that many of the challenges he faced stand in eerie verisimilitude to our current situation. There was no internet, no FTX, no Bitcoin. Derivatives were but a blot on the financial horizon.

Other than that, though, the financial challenges we confronted were about the same 40 years ago as they are today. Most prominently in my mind, there is a diminished faith in the future that is reminiscent of that time, long past.

It feels, walking around some of these days, like we’re all a caged tree.

But like Stanley, we will soldier on as best we can, and perhaps it’s a perverse pity that we do so without the benefit of the training and intestinal fortitude that developed during the Greatest Generation, and was essential to the survival of a society that was forced to endure the hardships of two world wars, with the Great Depression daintily sandwiched in between.

But that all began more than a century ago. As of now, there’s three weeks remaining to Terrible (on a relative basis) ’22, with the one immediately upon us being perhaps the most interesting. After last week’s equity drubbing, capped off so appropriately by a disappointing PPI print, we’re staring down the face of CPI on Tuesday and the FOMC on Wednesday.

I’d suggest close adherence to both. A bad CPI result will certainly inform the Fed’s behavior, and – not gonna lie – the upside PPI surprise was particularly noteworthy to me, considering that Crude Oil hit its lowest level all year on Friday.

One can certainly take this as good news, but if last week be any indication, investors did not – perhaps in particular because they didn’t appear to kill the PPI pop. My concern is that if Oil Vs (as it very well could), Inflation could, er, re-energize, in a land of higher interest rates, slower growth (pointing towards Recession).

In an environment of geopolitical discord, menacing viruses, and, perhaps most importantly, one where confidence, determination, vigor, and clear-sightedness seem to be in short supply.

Returns, as such, may be hard to come by, and explanations to becalm investors perhaps even more so.

We could certainly use a Man like Stan again. But Stan’s gone. And mostly forgotten. Certainly, though, things are not so ill with me as they might have been without his faithfully lived, partially hidden life.

Maybe it’s time for me to visit his unvisited tomb. If only, that is, I can liberate myself from this godforsaken caged tree.

TIMSHEL