“I was alone in the cold of a winter’s day, you were alone so snug in your bed”

Yeah, I know my obligations, so let me begin by joining in the chorus of lamentation over the final flight of “Songbird” C. McVie, for whom I have long carried a respectful torch. Much credit is due to her — for her pioneering work both behind the Fleetwood Mac microphone and on the FM keyboard bench. While Rock and Roll features many great ladies, she was certainly the first, arguably the best (and maybe the only) female band member to drive an entire ensemble. Much more than psychedelic eye/ear candy (though this, undoubtedly, she was), she also served as both a principal instrumentalist and songwriter.

Of what other sixties sirens can this be said?

But with this out of the way, I must now strongly state what is obvious – at least to all of us aging, crusty, curmudgeonly rockers: Fleetwood Mac was a much better band before the arrival of those impossibly fetching California kids – Lindsay Buckingham and Stevie Nicks, than it has been across their five decades of smarmy pop sensuality.

Of course, I’m supposed to think this, but nonetheless I do.

FM was conceived out of that prolific womb of Brit Blues Rock: John Mayall & the Bluesbreakers. They went through many lineup changes but hit on their peak combination with the insertion of Christine on the piano. The albums this quintet released – “Mystery to Me”, “Heroes are Hard to Find” and their masterwork: “Bare Trees”, stand up to the best works of that sublime era. After which, by all appearance, the band appeared to be headed into oblivion.

Then, almost if by chance, the crew met Lindsay Buckingham – in L.A. – natch. Asked him to join, but he insisted on bringing the delicious Stevie along with him. They assented, and it was the ruination of two bands. Because Buckingham/Nicks was a fine duo. As fates would have it, they kludged it all together, and released two of the most over-rated records in modern music history. The songs demanded nothing of the listener, and the salacious, incestuous bed hopping between band mates became the stuff of trite, weary legend. The songs themselves refuse to die.

One could argue (as I myself might) that the monster success of “Fleetwood Mac” and “Rumors” brought about the end of the golden age of Rock and Roll. Everybody copied their vibe. Exit the unkempt one-finger salute to the man; enter an over-produced idiom where optics and branding became, at minimum, co-equal to the Almighty Riff. Even the Grateful Dead (FFS) hired their producer, who engaged a stylist to coif up Jerry’s hair. They did about as well (badly) as one would expect with this, and we had to console ourselves with the marvelous tresses of our two golden haired Mac ladies, as well as that of Peter Frampton.

But the music devolved, and, except in rare snippets, has never re-ascended.

All of which bring us to the markets. Which hardly peaked in the mid-70’s but, like our fave bands from the Golden era, have seen better days.

However, like the ears of my peers two generations ago, we hoover up what we can get. Thus far in Q4, risk assets of every stripe are up considerably, some, improbably like the Gallant 500 and Investment Grade Corporate Credit, double digits.

And why not? Economic activity appears to be robust, as witnessed most recently by the boffo November Jobs Report, released this past Friday morning. Wages are up; gasoline prices are down.

And Madame X has dropped her yield skirts an astonishing >20% over this same interval:

As December unfolds, bells are ringing, pipers are piping, shoppers are shopping. There’s still a war in Eastern Europe, but we seem to have lost interest in it. We enter ’23 in blissful anticipation of a neutered 118th Congress. There are some vague issues in jurisdictions such as China, Iran and North Korea, but what of that?

Thus far, and with due respect to the victims, the FTX saga unfolds more like a perfect Netflix docudrama than an earth-shattering bloodbath. There are those that believe the episode marks a death knell for crypto in general. But the numbers give the lie to said assertion. The key liquid coins are down a bit since the story broke but are flat to up over the ensuing three weeks.

Thus, crypto abides. At least for now.

So, too, and this eternally, does risk. Yes, there are some worrying signs on the horizon. Lots of\ spit-balling about troubles in the land markets, and massive, elegantly named Real-Estate Investment Trust run by Blackstone (ticker symbol: BREIT) announced that it is restricting withdrawals.

This, my friends, is indeed unsettling, and, combined with the FTX drama, foretells of a rash of markdowns-to-reality of a wide variety of illiquid assets.

This, indeed, will be an unpleasant, if cosmically welcoming, development.

But I reckon for now we can live, nay, even benefit, from a downward adjustment to housing/real estate prices, which were too danged expensive, and this by a significant amount, for anyone’s liking anyway.

We’ve now only the 12/14 FOMC meeting to endure, and it’s bound to be a dreary affair. But the outcome is perhaps already foretold. They’ll go 50, and push Fed-Effective above 4%.

On the whole, though, I don’t see much downside risk for the remainder of Terrible ’22. I’m not sure I’d be doing any frenzied shopping up here, and I wouldn’t be inclined for much rejoicing over what you own.

But given where we are now, you’re probably OK buying what you will.

I myself would recommend “Bare Trees”. By Fleetwood Mac. The old (though not original) Fleetwood Mac.

They don’t make records like that anymore; maybe they never did. For decades, sometimes generations, we buy and listen to what our fashionable betters instruct us we ought. I reckon this is true in both the markets and the music.

Likely, some of these days, the skies will brighten, and the trees will shed their bareness. Even now, it’s not so dark as we rightly perceive it to be.

But let’s not, for all that, mistake ourselves by embracing the misapprehension that the inauthentic is anything but that. We can consume what is in front of us, gratefully, but with remembrance of the good things now gone that passed our way.

And yes, I am alone in the cold of a winter’s day. Not sure about you, but it would please me to think that you are snug in your bed – preferably (it must be allowed) alone.

And with that, I bit Christine a gentle good night, with thanks for sparing us a little of her love.

TIMSHEL

I don’t want to write an encyclopedia here, though Lord knows I could. But we’ve just completed a long holiday weekend, during which the news cycle has, inevitably, slowed to a crawl. We’ve still 5.5 trading weeks yet to go in this godforsaken year, and not much visibility as to what may transpire.

If my nerves are shot, I feel I have come by this condition honestly. And it may just well be that a little bit of enthusiastic shade throwing could restore my flagging energy.

At any rate, it’s worth a try.

So, what am I sick of? I’m glad you asked.

Let’s begin with the Titanic – which to this day retains the status as the world’s most deadly passenger ship disaster, claiming more lives than the Lusitania and Empress of Ireland (the next two on the list) wrecks combined.

But it hit that iceberg more than 110 years ago FFS, and I think it’s high time we just shut up about it.

I’m also already sick of the 2022 World Cup, which is only now in the midst of its qualifying rounds. It’s scheduled to go on for another month or so, and all I can say is God help us. The tourney is in Qatar, which nobody even knows how to properly pronounce. There’s a great deal of whining about the tragic lack of provisioning for malted hops.

Next.

Next? How about China? Lots of yackety yack about China. What with that big army of theirs. And the reality that their efforts to douse the population with poison gas notwithstanding, they’re back contending with a record number of them covid buggers.

This is buzz kill from too many perspectives to enumerate.

But China was around long before we arrived on the scene and it’s a fair bet that they will be so — well after we’ve peaced. So, let’s get over it, shall we?

Kinda sick of SBF/FTX as well. No doubt it’s good copy, and I’ll probably be among the first to purchase the definitive written account, which, presumably, any number of aspiring authors are already outflanking one another in hysteria to produce.

The most interesting thing about FTX is the warp speed at which it collapsed. The Theranos, Enron, Lehman and other similar sagas unfolded over months, and, in some cases years. In almost every case, some dogged reporter called BS while everyone else was singing praises. But ultimately, the story broke wide open and the reporter was vindicated. Not so with FTX. It didn’t want the vigilance of investigative journalism to bring it down, but rather collapsed of its own ossified greed and incompetence. And this in a matter of hours.

Also not surprisingly on the list is pickleball. Which I’ve never played and don’t intend to. But lots of folks is all wound up about it, and I am rapidly wearying of the topic.

Then there’s Twitter. Ah, Twitter. I don’t tweet; never have. I don’t care who owns it, who is trending or who is banned. Twitter – stop squawking!

I’m sick of all public servants. Elected and appointed. But that’s nothing new. And though I’m not proud of this, I’m already sick of Christmas songs, and November ain’t even over yet.

Finally, at least with respect to this note, I’m sick of this market. And all its drivers. Some of which I intend to use this opportunity to call out.

At the top of the list is the Fed. All of it. I’m sick of their Forward Guidance. Of their Dot Plots. Of FOMC Pressers and the parsing of every associated spoken and written word. I reckon we’re stuck with it, though, and, in this demented, unhinged market environment, what’s worse is that what it says is all we’re supposed to care about. Case and point: the Gall 5 and Cap’n Naz have both risen to the tune of 10% in a little over a month – with the main catalyst being a potential pause in the aggressive Fed’s rate raising ways.

Their main task is to manage interest rates at various maturities – in other words the Yield Curve. Here’s what the textbooks tell us it’s supposed to look like:

When we is goin’ great guns, the green line prevails. When we’re stymied and frustrated, Big Red takes over.

But look what they’ve ginned up now…

I don’t even know what to call this. It’s all twisty and turny, and mostly inverted, This indicates recession. But if that’s what they think, somebody forgot to send the memo to the Atlanta Branch, which is predicting blowout growth in Q4:

But I’m sick of all the Fed Banks (not just Atlanta). And of the ECB, and the BOJ, and the PBOC. And so on and so on and scoobie doobie do.

And I’m sick of Risk Factors, Quantitative Algorithms, Actively Managed ETFs, Passively Managed ETFs. Of Drawdowns, Correlations, the Volatility Skew, the Bid/Offer Spread. Fundamental Investors, Quantamental Investors, Short Squeezes, Triple Witches, Quadruple Witches, Yields to Maturity, Fair Value, Intrinsic Value, Extrinsic Value, Value Investors, Value Gaps, Surplus Value…

OK; strike the last one, which is a Marxist construct and therefore clearly outside the market matrix.

But I’m not sick of you. Far from it. I can use all of you I can get.

And you’ll have to carry me through this malaise. Until I gather myself.

Because right now, all I can think of is tweeting about pickleball tournaments held on the Titanic as it makes its way towards China, with winners paid out in FTX stable coins.

I’m sure I will get over this, but in the meantime, it’s all on you.

TIMSHEL

“Well, it’s sugar for sugar and it’s salt for salt, If you go down in the flood, it’s gonna be your fault,
But, Oh, Mama, ain’t you gonna miss your best friend now?
You’re gonna have to find yourself another best friend somehow”

Bob

I ain’t sayin’ you ARE going down in the flood, or that if you do, it will necessarily be your fault.

But oh, mama, ain’t you gonna miss your best friend now?

It’s a valid question, but I nonetheless adopted a more hopeful title. There has been a flood, a flood of data, and now, at least temporarily, it has subsided. We’re still here, so “After” seemed like a more appropriate modifier of the recent deluge than “Down in”.

There are a couple of songs that share this week’s header – one of them by a once-promising but now largely forgotten outfit called Lone Justice, who I had the pleasure of seeing at Farm Aid 1.

All of which is, of course, beside the point. More pertinently, we entered October with a gully-wash of pending information, and in this pre-holiday interval, I thought it might be worth reviewing: a) what tidings the tide delivered, and b) where it leaves us as we dry off the drench.

Let’s start with the macro data, shall we?

The first half of Q4 featured two strong jobs reports, a recovering GDP, and, more recently, a dip in Inflation and a surge in Retail Sales.

On virtually every level, it coulda been waaay worse.

The Fed, nonetheless, increased rates to the upper end of the consensus, which now, after resting for most of Q1 at 0.0%, be knocking on the door of 4%. The curmudgeonly President of the St. Louis Branch, James Bullard, is calling for a continuation of this rising rate tide – all the way up to, or above, 5% (the crusty old dog even threatened an eventual 7 handle, FFS!).

Moving along, Q3 earnings appear to net out at < 2%, which ain’t good. And most of my krew believes that the true profits plunge will transpire in the first half of ’23.

We also endured a soggy election cycle, the outcome of which, while surprising some and disappointing others, probably reflected the will of the electorate. We now have a divided government and can rejoice in this optically minor but (I believe) substantively significant blessing.

Then, seeming outta nowhere, came the sinking of that Titanic Crypto Ship – FTX. To suggest, metaphorically, that it hit an iceberg would be to understate the case. By all appearance, the vessel was built of duct tape and balsa wood, cannot be salvaged, and lacks sufficient lifeboats to rescue the millions of its passengers stranded on its deck.

All of which brings us to our present state — wondering what on earth to make of it all. With five trading weeks remaining to this frustrating year, the Gallant 500 has retreated by magnitudes in the high teens. Captain Naz – stalwart that he is, is going down with his ship at a nearly 30% loss. Madame X (U.S. 10-Year) has dropped an un-demure 10%, which doesn’t sound like much but is an historic retreat for this dainty, delicate debt doyenne.

On a more positive note, alternative dating site Grindr (ticker symbol: GRND) launched an IPO on Friday – inevitably, as a SPAC — and shot out a 4 bagger on its first day of trading.

But perhaps, my friends, my best friends, the less said about this the better.

Whither does all this lead? Not gonna lie; for me it’s a head scratcher. It does indeed appear to me that for now at any rate, we’ve managed to dunk the Inflation Monster under the drink, and here, I look no further than the Energy Complex, which features a Crude Oil and Nat Gas market trading below all important Moving Averages:

But prognosticating whether it pops back up in the next few months is above my paygrade.

There’s a good deal riding on whether the P wave waxes or crests, because, among other matters, it will inform the future trajectory of the public vig. The Fed is on record as reiterating its 2% target, and it’s hard to imagine success without even higher rates an accompanying recession.

Lower energy prices for longer would cure a multitude of ills, so let’s keep our eyes peeled there.

There’s probably some yet-to-be revealed, incremental fallout from the capsizing of FTX, but that debacle will most probably run its course rather benignly. Unless, of course, if you’re one of the > 1 million poor schlubs trying to recover a portion of your capital from the shipwreck. I wish you the best of fortune in these efforts. Meantime, we know two things: 1) the lawyers are poised for a massive payday; and 2) as mentioned in this space last week, Wall Street carnivores are already bidding between 5 and 8 cents on the dollar for your claims. If the script holds, significant amounts of heretofore untraceable collateral will materialize immediately after you take your nickels and dimes.

Meantime, I’m also a bit worried about what the lame duck 117th Congress will do in the six weeks that remain to their term. And this on both sides of the aisle. Expect some brinksmanship on debt ceilings and some weird legislation to be ascendant — none of which will be uplifting, or, for that matter, accretive to investment returns.

’23 is, improbably, just around the corner, and it does not from this vista appear to portend much positivity. But hey, you never know, and, as attributed to legendary but controversial Kentucky basketball coach Adolph Rupp: “that’s why they play the game”.

I hope you do indeed suit up in ’23, but that’s still a few weeks away.

Meantime, whatcha gonna do?

Well, unfortunately, you cannot train on down, to Williams Point, because the only such-named location of which I am aware is on the northern tip of Livingston Island, just northwest of fabulous (frozen) Antarctica.

And there ain’t no train from here to there.

Apparently, though, you can drive there. Or at least drive once you have disembarked. More than this, personalized license plates are seemingly available:

And, once there, you certainly can bust your feet/rock this joint, and if you do, you will not be alone.

Because your best friend will be there with you, all bundled up and sporting a life vest — in anticipation of the floods that, our best precautions notwithstanding, are sure to come our way.

TIMSHEL

“Evening, time to get away”

The Moody Blues: Days of Future Passed

File this week’s theme under the burgeoning, nigh-overflowing, low hanging fruit section. It is, of course, a titular inversion of the iconic 1985 film “Back to the Future”. The accompanying quote comes from a forgettable Moody Blues album (which nonetheless features the band’s two greatest hits) of a similar motif.

But there’s lots going on which I believe tethers what has already transpired to what has yet to come — a notion which occurred to me as I became aware of a couple of bittersweet but otherwise irrelevant developments that revealed themselves last week.

First, filmmakers from the History Channel apparently discovered a large portion of the fuselage of the ill-fated Space Shuttle Challenger – off the coast of Florida – where it blew to pieces minutes after liftoff, as well as approximately 6.5 months after the release of “Back to the Future”. Moreover, the ever-irrepressible Boulder, CO Police are re-opening the JonBenet case — the poor little seraphine, who, much to everyone’s horror, was found murdered in her basement on Boxing Day, 1996.

And I thought everyone had concluded that it was the brother that did her.

Meantime, the markets themselves served up some futuristic nostalgia for us this past week, with the lightening quick demise of crypto giant FTX, recalling such epic collapses as those of Enron, Lehman Brothers, Bear Stearns and MF Global.

The death throes of each of the above-mentioned financial ghosts could be heard for months, whereas FTX went from crypto colossus to computerized coinage corpse in just over ’72 short hours.

Isn’t technology development a wonder to contemplate?

Well, yes and no. Modern transaction processing and telecommunications protocols undoubtedly hastened the euthanizing of FTX, but the underlying story is as old as civilization itself. It is an Old School tale of excess leverage, hubris, mismanagement, and misappropriation of funds.

Specifically, FTX used the coins it sold to customers, which were believed by the latter to be held in sacred custody, to fund its own speculations. What could possibly go wrong there? Well, when the levered portfolios went sideways, the coins themselves became worthless, and with them, the value of the issuing enterprise.

Kinda like Enron, with the creepy, additional similarity that, shortly before they collapsed, each company bought the naming rights to high profile sport stadiums.

Enron imploded fifteen years ago – arguably a simpler time. But to me, the tightest parallel is to MF Global, the misanthropic derivatives trading firm that foundered in rapid fashion when levered speculations moved dramatically against its interests.

Like MF Global, FTX committed the additional unpardonable transgression of using client funds to collateralize its own risk-taking activities. In case you were unclear on the concept – this is a deadly sin. The derivatives markets rest on the principal of segregation of client funds – explicitly precluding their use for any commercial operation which would put them at speculative, proprietary risk.

But there is this difference. The fatal MF trades were generationally attractive investments. At the direction of their chieftain: former Goldman Sachs Chair/New Jersey Senator/New Jersey Governor Jon Corzine, the firm bet the ranch on the likelihood that sovereign debt rates in Southern Europe – which, at the time, approached and sometimes exceeded double digits, would come careening down.

Well, they did. All the way to near, or, in some cases, below zero. But not before Corzine’s former buddies at Goldman and elsewhere had squeezed the firm into oblivion. There were many object lessons in this, but the following is also clear. Had ‘Zine been able to hold onto them trades, he would’ve broke the bank. But what edge did FTX (or, more specifically, its sister company Alameda Research) have with respect to its levered crypto speculations? Beats the hell out of me.

The FTX death rattle and immediate aftermath also bring us forward to the past. Desperate, ultimately unsuccessful attempts to fall into the saving embrace of heretofore hated competitors. Postmortem fallout – yet to be fully revealed — featuring the crippling, if not all out demolition of proximate enterprises that had transacted with the recently departed organization. A legion of disenfranchised individual investors who can now only hope (and wait) for a return of a small portion of their capital. And, certainly on the horizon, some smart Wall Street guys who will swoop in, grab these claims at pennies on the dollar, and stand a fair chance of cashing in for years to come.

Certain markets wobbled on the demise of FTX, but others were untroubled. The Equity Complex experienced its best day in a couple of years on Thursday – ostensibly on a docile CPI report that told of a drop in the year-over-year rate to 7.7%. So, we’re ahead to the past Inflation-wise as well. Back to levels last seen this past January.

The late week, uber-aggressive rally has the look and feel of an old-school short squeeze.

But we must also remember this, my McFlys: short squeezes, like so many other elements of our existence, are only identifiable in the rear-view-mirror; we won’t know if this here rally is legit or fugazi unless (until?) the market sells off yet again.

Reticent though I am to bring up the subject, the recently (nearly) completed election cycle also brings us forward to days gone by. Whatever the final result, we’re looking at a government with elected officials and associated constituencies deeply at odds with one another. But here’s the good news: this configuration virtually ensures they won’t be able to do much incremental damage. And for this we can truly rejoice because Lord knows they’ve certainly done enough to vex us already.

I also must wearily join the chorus of complaint as to the inability of the system to deliver a vote count in a timely, accurate fashion. Which is particularly mortifying considering that backwater jurisdictions such as Brazil and Florida are able to complete the process in a matter of hours.

To my everlasting shame, I also find myself unable to resist the temptation to deliver my political synopsis of the (still-undetermined) outcome. First, I’m praying that the Republicans are able to recapture the House. Laying aside any party preferences, my hopes in this regard derive from my strong belief that the last thing we need during these troubled times is one party – either party – wielding explicit control over the action in Washington.

I also (here from a more partisan perspective) am pleased with the prospects for the next political cycle. It is now clear that Trump Derangement Syndrome has hit the Big Guy himself. He positioned himself to take credit for a GOP rout that he was sure would come to pass. But failed to fully consider the contingency that the rout would not be forthcoming. He’s absolving himself of all blame now, but not with any particular effectiveness. And his post-election rants against those who are supposed to be his political allies should have the whole country calling for the butterfly nets to be placed above his enormous neck.

With a little luck, we may be able to deem him gonzo. Meanwhile, on the other side of the ledger, the guy with the ‘70s style aviator glasses and leather jacket is strutting about like he owns the place. His bluish fellows clearly wish to banish him, but now will face some incremental difficulty in doing so.

None of them are particularly well-positioned. In the lead-up to the voting, they artificially suppressed energy prices and ginned up ~trillion-dollar giveaways to favored constituencies such as relatively affluent student loan obligors, microchip manufacturers, and Green Energy vendors. A judge just put the kibosh on the first of these. And if the GOP does indeed cop the ‘ouse, neither of the last two stand a snowball’s chance in Florida (or Rio) of obtaining funding.

And, as investors, we should be doing a rain dance for a GOP Congress. We need to control Ways and Means/Appropriations, or, I fear, all hell will break loose for risk assets. As I type this out, the Repubs need to win only 6 or 7 of the remaining 29 uncalled races to secure a majority. Should be doable, but with the Dems continuing to draw last minute inside straights, one has cause to wonder.

In any event, it looks like a hard slog for the capital markets. Inflation is still nearly 4x the Fed’s stated target. Our Central Bank remains on a warpath and seems intent upon ginning up a recession. They’re likely to succeed. Corporate earnings are on the down. The country and the world are awash in debt. War still rages in Eastern Europe. Our enemies in the Middle and Far East continue to menace.

But when was it ever easy? Never, is the answer. Except in the rear-view mirror. What lies ahead, from many perspectives, looks indeed like episodes from the recent and distant past.

But as I type this, it’s evening, and time to get away. I’m locked out of my FTX account, where I keep my vast fortune. I’ve got the Moody Blues on my re-modeled turntable, but “Days of Future Passed” is full of scratches (how did that happen?) – particularly on the smarmy “Knights in White Satin” track.

I think I’ll switch to a better Moody Blues record: “In Search of the Lost Chord”. And my fave Moody’s song: “Ride My See Saw”. Seems appropriate for these nostalgic, futuristic times.

Also got my VHS all teed up, and if you don’t know what I’m watching, you ain’t paying attention.

TIMSHEL

“Mr. Praline: Now that’s what I call a dead parrot.

Owner: No, no…..No, ‘e’s stunned!

Mr. Praline: STUNNED?!?

Owner: Yeah! You stunned him, just as he was wakin’ up! Norwegian Blues stun easily, major.

Mr. Praline: Um…now look…now look, mate, I’ve definitely ‘ad enough of this. That parrot is definitely
deceased, and when I purchased it not ‘alf an hour ago, you assured me that its total lack of
movement was due to it bein’ tired and shagged out following a prolonged squawk.

Owner: Well, he’s…he’s, ah…probably pining for the fjords.

Mr. Praline: PININ’ for the FJORDS?!?!?!? What kind of talk is that?, look, why did he fall flat on his
back the moment I got ‘im home?

Owner: The Norwegian Blue prefers keepin’ on it’s back! Remarkable bird, id’nit, squire? Lovely
plumage!

Mr. Praline: Look, I took the liberty of examining that parrot when I got it home, and I discovered the
only reason that it had been sitting on its perch in the first place was that it had been NAILED there.

(pause)

Owner: Well, o’course it was nailed there! If I hadn’t nailed that bird down, it would have nuzzled up
to those bars, bent ’em apart with its beak, and VOOM! Feeweeweewee!

Mr. Praline: “VOOM”?!? Mate, this bird wouldn’t “voom” if you put four million volts through it! ‘E’s
bleedin’ demised!

Owner: No no! ‘E’s pining!

Mr. Praline: ‘E’s not pinin’! ‘E’s passed on! This parrot is no more! He has ceased to be! ‘E’s expired
and gone to meet ‘is maker! ‘E’s a stiff! Bereft of life, ‘e rests in peace! If you hadn’t nailed ‘im to the
perch ‘e’d be pushing up the daisies! ‘Is metabolic processes are now ‘istory! ‘E’s off the twig! ‘E’s
kicked the bucket, ‘e’s shuffled off ‘is mortal coil, run down the curtain and joined the bleedin’ choir
invisible!! THIS IS AN EX-PARROT!”

Monty Python

I couldn’t resist the long opening quote here, and that’s not the totality of my transgressions. Because I lifted the reference to the iconic, Pythonic “Dead Parrot” sketch, I think, from a recent editorial in the WSJ.

It can be hoped, at any rate, that y’all get the gist of the interplay between the justifiably vexed Mr. Praline and the dissembling (unnamed) pet shop owner. The latter sells the former a dead parrot, and then, upon the former’s complaint, he heroically sticks to his story.

I admire him for this.

Among the alternative realities he lays before the misanthropic Mr. P is that the bird, exhausted after a prolonged squawk, is “pinin’ for the fjords”. But I think, with his rant at the end, Mr. P resolves the argument in his own favor.

The bird is dead. But it causes me to wonder whether, this reality firmly established, he could not also be both exhausted after a prolong squawk, and, in fact, engaged in some authentic fjord-pining.

Moreover, it seems to me to be a rather timely matter to consider, particularly as it pertains to this past week’s most salient event – the FOMC meeting/rate announcement, and Fed Chair Jay(bird) Powell’s comments during the presser that immediately ensued.

Our chief monetary policy orinth first disappointed his constituents by going the full smash 75, but then, in his written remarks, managed to bouy buoyancy-bereft spirits with the following statement: “As we come closer to that level and move further into restrictive territory, the question of speed becomes less important. … And that’s why I’ve said at the last two press conferences that at some point it will be important to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made.”

This was the “tell” that investors were seeking. Equities and Treasuries rallied in Pavlovian fashion.

Then came the presser, a decidedly avian affair, during which, however, there were neither doves nor parrots to be found. Only hawks. And my extensive research corroborates that this lastmentioned predatory bird will indeed feast on the two more docile species mentioned just before. So it went with the presser, during which Jay-Hawk Powell somehow managed to be loud and clear – lovely plumage extending from his beak notwithstanding.

Investors, reacting to his prolonged, beak-stuffed squawking and knowing they’re next, responded in pain and fright. He made it clear that: a) what he fears most is pausing too early; b) his objective is the time-honored (but perhaps highly aspirational) 2% Inflation target; and c) that the rest of us better buckle in for some unpleasantness, because we are galaxies away from achieving b).

In short, he took the opposite tack of that scamp pet shop owner. Channeling instead Mr. P, he informed us that the pausing parrot has, for now, joined the bleedin’ choir invisible.

This certainly clipped the wings of the buying crowd, which was flat on its back for the remainder of Wednesday and all Thursday, before being hoisted up and nailed to its perch during Friday’s session.

I was surprised as anyone at Parrot Powell’s Presser 180, feeling certain that he directly intended, in his formal statement, to calm the mournful warblings of beleaguered investors, and, by so calming, bestow some illusory life upon comatose capital markets. I was wrong.

I wonder what his game is and can only conjecture that politics is deeply in play with respect to his pet shop owner policy plays.

Specifically, he has now raised rates from zero to ~4% in eight short months and has made clear he ain’t done yet. From a political perspective (his presumed political perspective; he is, after all a Yellen acolyte) the timing is passing unfortunate. He has swooped in to ground the economy right up to the point of an important election, with (if the perfidious polls can be believed) his side feeling wicked gravitational pull. His friend and mentors must be quite angry with him.

But what’s done is done and cannot be undone. The elevated rates are upon us, and the economy will feel their presence. Here’s hoping these moves will help tame Inflation, and for all I know they probably will (or should).

But history instructs us that these levels of Inflation almost never dissipate without an accompanying Recession, which I believe is part of the Fed’s calculus. Better, or so I assume they think, to bring it about, in, say, the early innings of ’23 than a year later, when it might cause even greater partisan damage.

That’s my hypothesis, at any rate. And if it so plays out, we’d best strap ourselves in for (oxymoron warning) an immediate accelerated economic slowdown.

All of which offers a bleak prognosis for risk assets. As perhaps the most overworn of market platitudes admonishes us: “don’t fight the Fed”. I made the mistake of operating against this wisdom in the wake of the lockdowns. Even at the Q2/20 lows, I figure we had much further to drop. But then the Fed came in with its $4.5 Tril, and y’all know what happened next.

Well, if you don’t want to fight the Fed as it giveth, it certainly does not pay to do so as it taketh away.

It presents quite a quandary, no? Because there’s other menacing stuff out there that has nothing to do with Fed policy. We can feel the rumblings of economic deceleration from several sources, and I’ll offer a few visuals in support of these fears.

Q4 projected Earnings Growth is not only careening to terra firma, but has actually crashed through the zero boundary:

As we wearily turn towards Q4 economic estimates, Wall Street economists (who are paid to shade to the chipper in their chirping) are prognosticating an approximate goose egg:

Inflation figures drop over the next several days, and, rather than approaching 2 handles, they’re looking more like 7s and 8s. And, ever so quietly, this is reflected in commodity prices. Brent Crude is creeping back near 100, and the broader basket of Oils, Grains, Metals, and the like, is flapping its wings towards liftoff velocity:

If it all makes you pine for the fjords, know that you’re in good company (myself included).

Yes, our parrot is dead, off its twig. And our pet shop owner is only too prone to sell us another of similar status.

But we ourselves remain among the quick, and, as I conclude this prolonged squawk, I can only advise you to keep your feet firmly nailed to whatever perch you presently occupy. If you cannot do this for yourself, perhaps there’s a perfidious pet shop owner available to assist you.

If we can keep ourselves upright, perhaps, defying laws of logic, biology, physics, and economics, we will emerge to a day when we can rise again.

TIMSHEL

“Bis dat qui cito dat”

Miguel de Cervantes

“He gives twice that gives soon, i.e., he will soon be called to give again.”

Benjamin Franklin

Let’s work our brains a bit, shall we? Our title phrase offers significant food for thought but must be analyzed carefully, as it can be interpreted in multiple ways.

Understanding the first of these – indisputably the more hopeful of the two — compels us to brush off our Latin, which, I fear, for most of us, is probably a bit rusty. It comes from Cervantes’ magnificent “Don Quixote” and suggests that rapid largesse dispenses a double gift – precluding the need for multiple solicitations and placing the associated fruits immediately in the hands of the recipient.

In a more perfect world, I’d be able to resist the temptation to refer that most ubiquitous of DQ images: that of the title character tilting his lance at windmills. Moreover, as I am unable to ignore this glib parallel, I reserve the right to bring it forward again a bit further down the road.

“Don Quixote” was published in two volumes in the first part of the 17th Century. Over a hundred years later, that singular American statesmen, philosopher, inventor, and wit – Ben Franklin – put his own spin on the notion, pointing out that a too rapid giving leads to a near-certainty that the giver will be compelled to give again.

Both interpretations, so it occurs to me, appear to be valid.

Applying this to our long-time and current obsessions, investors have acclimated themselves to favors, given rapidly and repeatedly, for at least the last 15 years; arguably longer. It may have started about two decades ago, when politicians and bureaucrats in Washington decided to subsidize the mortgage markets – in a misguided quest (Impossible Dream?) to confer the blessings of home ownership on broader swaths of the electorate than had heretofore enjoyed the privilege. Lots of folks got their piece of the rock – albeit temporarily and, for many, at prohibitive cost. Wall Street turned these mortgages (and other forms of loans) into sparkly, fee-rich financial instruments, and everyone made a bundle.

Until they didn’t.

The packaged loans ultimately proved themselves to be about as flimsy as Don Quixote’s homespun armor – unable to withstand anything but the feeblest of assaults. When they shattered, the whole financial earth shook, placing at risk much of the core of the capital economy.

Cue the Fed and its magic money-printing machines. Hark the tinkling of the fiscal sleighbells.

Within months, we were the recipients of glittery, gravity-defying, green gravy, bestowed upon us, each month, for > 5 years. Moreover, these care packages grew as the decade of the 10s unfolded.

By the end of ‘13, the Gallant 500 and Captain Naz had tripled. All was good and quiet in the land.

Lots of stuff happened in the intervening years, including a global pandemic that crippled the world’s economy for quite a spell (and is still – truth be told – somewhat of a pain in the ass). Here’s where the Ben Frank side of the equation kicks in. The Government was compelled to give again. And boy oh boy did it come through. The Fed shelled out ~$4.5 Trillion of manufactured money, and used it to buy its own publicly traded securities. Its elected counterparts, determined to surpass the bureaubankers, managed to indeed excel them, but only by a measly $100 Billion ($4.6T). Of course, it would’ve been more had not meanies McConnell, Manchin and others not veered from script.

Be that as it may, the covid Christmas spirit extended for more than 18 months in Equity-land and more than two years in the realms of Fixed Income. The former more than doubled from its viral lows; and the latter saw benchmark yields plunge to deeply negative at the short end of the Treasury Curve, and < 1% at the longer end.

And then the giving, which had certainly been historic in its scope and proportions, stopped. The Fed switched off the Money Machine, began allowing the assets on its Balance Sheet to mature without replacement, and, in cruel coup de grace, started to jack up its own terms for lending.

The White House and Congress have tried to fill the breach, allocating another couple tril – earmarked to favored constituencies – Green Energy Purveyors, Scholar Borrowers, and Microchip Manufactures (FFS!). But these offerings are currently subject to the caprices of Congressional appropriation and the Courts, and their ultimately delivery is thus very much in doubt.

Investors, feelings and sensibilities injured, have shown their wroth. Been, until lately, putting stocks, bonds, crypto, crude oil, nat gas (?) on fire sale.

My own notion is that they were channeling their inner Ben Franklin, and figuring that if they moped around enough, they could force the re-ignition of the giving engines anew.

Who knows? It may even work, and we’ll find out more this week when the FOMC lays down its latest round of righteous wisdom on us. Official Fed Watch metrics indicate an 80% likelihood of another full-smash 75 bp hike – which would place Fed Funds on the threshold of 4%. Hard as it is to believe, as recently as this past February, the Fed Effective Rate was Zero:

All this Fed Giveth/Fed Taketh Away folderal has the yield curve tied up in knots. Never (I believe in anyone’s living experience) has the government been forced to pay a higher rate to issue 6-month bills than it does for thirty-year bonds:

And thus investors, as depicted in the following graph, can be forgiven if they are confused as to how best to position themselves in the Treasury markets:

What any of this means is anyone’s guess; yours is certainly as good as mine.

I do like the color scheme, though. So, there’s that.

But I hate to see our investment warriors so at odds with one another as to whether they wish to be long or short, and where, upon the Treasury Curve, they wish to be so.

I reckon it all boils down to whether the Fed, who certainly gave early anytime it was remotely compelled to do so, will find itself obligated to give again. The consensus is that it will; the main question is when.

Maybe, someday, we can address the larger, philosophical issue as to whether dual or multiple largesse cycles is a blessing or a curse, — to the giver or the recipient.

Cervantes and Franklin disagreed on this score, but both are dead, and the debate has thus never been resolved. Don Quixote and Poor Richard live on, though, and it may be well to conclude that an overabundance of the windmill tilting proclivities of the former, places us at risk of devolving into a condition of poverty, as indicated in the modifier of the latter.

Don’t do it is my advice, given quickly and with the hope that I am not obliged to give it twice.

TIMSHEL

“If I am occasionally a little over-dressed, I make up for it by being always immensely over-educated.”

Oscar Wilde, “The Importance of Being Ernest”

In a flush of admitted (if partial) desperation, we turn to Oscar Wilde. But we will not dwell on his works and will entirely bypass any reference to his private life. Further, while I am unable to comment on his sartorial standing, in terms of his claims of overeducation, either its true or, having attended both Trinity College (Dublin) and Magdalen College (Oxford), it wasn’t for lack of trying.

“The Importance of Being Ernest” is a fun little romp, but Wilde is perhaps better known for his dark, disturbing novel “The Picture of Dorian Grey”, which tells of a handsome young man who makes a Faustian bargain to transfer the aging of his person to his exquisitely rendered portrait, while he himself remains unblemished by the marks of time, debauchery, and hard experience.

One wonders if many investors wouldn’t accept this trade with respect to their portfolio summaries.

Meantime, the eternal debate – whether it is better to be overdressed or underdressed – has never been firmly settled. Across my monitoring of the subject, the consensus has generally tilted towards the former: one might be embarrassed about wearing a tux or formal gown to an event where everyone else was rocking biz cas but would be less so than by showing up in flip flops to a cotilion.

However, that was then. Before lockdowns. Before the Jeffery Toobin episode. And, in the interim, I’m not entirely convinced that the tide hasn’t turned in favor of insufficiently formal attire as being the preferable transgression.

Naturally, one can apply the question to the state of the markets. Are they overdressed or underdressed, and, either way, which is the favored configuration? I’ve reflected on this and believe that the answer varies by market and jurisdiction. An inventory of the breakdown follows.

We begin, in time-honored fashion (dating back to last week), in the U.K. I’m not enough of a clothes horse to judge whether Madame Truss was over or underdressed, but I suspect the former. Because she was on the receiving end of a nasty dressing down, having been summarily defrocked, so to speak, of her Prime Ministership — her double fortnight reign standing as the shortest of any in the more than a ten-century history of British Parliamentary Government. What comes next no one knows. But her program has been certainly withdrawn in boddice ripping fashion. In result, English cross asset class finances have improved a titch. Whether they can sustain their recaptured vigor remains to be seen.

Our query also applies to the first world’s other most prominent island nation – Japan — and particularly to its benchmark currency pair: USDJPY, which breached the astonishing threshold of 150 earlier this past week – highest level since 1990.

In response, the normally ceremonial Bank of Japan decided to let its hair down a bit – intervening in such a way as to cause a neckline plunge to 146.

What is perhaps noteworthy about this is that it comes against backdrop of significant financial duress, which, time immemorial, tends redound to the benefit of the JPY. During the Big Crash, USDJPY fell to barely half of the elevated levels experienced last week. But this time ‘round, with global indebtedness more than double its pre-crash levels, with Inflation, rising interest rates, with economic pressure points too numerous to enumerate, nobody loves, nobody wants, the JPY.

Except for the BOJ, which was forced to throw a coverlet over its exposed loins at the end of last week.

Not to be forgotten in our tour of the fashion globe is China. Where, in an election the results of which nobody bothered to contest, Xi was anointed for another term. We’ll hope for the best here, but I will take some comfort in the stylish, western suit he rocked at his People’s Congress acceptance speech. Say what you will about Xi, but his accoutrements are most certainly an improvement over that drab, grey tunic that Mao used to wear.

Stateside, we revert to our own Fed. Is it over or under dressed? Well, across the summer and into the autumn, its appointments suggested that it was girding itself for a Napoleonic, winter battle for Moscow. It donned its heavy armor and its thermal underthings and advised its investing minions to do the same. All of which put a serious drag on risk assets.

Rumblings at the end of the week suggested that the Fed might be rethinking its wardrobe selections, that it might want to shed its heavy boots – rammed so recently, so repeatedly, so rudely, on the accelerator of monetary hawkishness. Our next glimpse at its prevailing fashion choices will arrive with November, when the suits at the FOMC stride down the Washingtonian runway. Meantime, investors, breathing heavy under the weight of its Fed-mandated vestements, reacted with delight at the mere rumor of such relief, ginning up the first weekly rally in, well, in quite a while.

But we anticipate ourselves.

Because, oxymoronically, Energy markets have taken the opposite tack, attiring themselves for an Endless Summer. Nat Gas in particular – both stateside and in Europe — continues to plunge:

Domestic and European Natural Gas: Perhaps Excessively Au Naturale?

I reckon somebody knows something here that I don’t. Because I believe these markets to be scandalously over-exposed. So much so, in fact, that I feel I must turn my virgin eyes away from these here charts.

Winter’s a-coming, and I fear without a few more layers of protection, this showing may transcend pure embarrassment and devolve to physical discomfort.

Maybe the folks in Wisconsin and Bavaria simply plan to turn down their thermostats and throw on extra sets of woolies this winter. But I suspect that if they don’t, buyers of these commodities will be the ones that end up dressed to the nines over the coming months.

Meanwhile, in the realms of Crude Oil, we’re emptying our strategic closets of late – in advance of an election where everyone wishes to look their best (what could go wrong there?). They are now at their lowest levels since the 1970s. Here’s hoping that we don’t soon find ourselves in a perverse construct where we’re all dressed up, with important destinations on our itinerary, but with no affordable means to transport ourselves from here to there.

All of which brings us to Equities. We are now entering the period where those most Imperial Emperors of our global corporations sashay forward to proclaim recent results and future tidings. We will thusly learn whether they channel the Hans Christian Anderson Fairy Tale – wallowing in their spiffed-up splendor until some poor innocent points out what no one else will say. Namely, that they are standing there naked.

In which case, upon this we will all agree – they will have been disastrously underdressed.

And investors, if early earnings returns can be fairly extrapolated, are not likely to be in a forgiving mood no matter what they say (or wear):

It all makes for a tricky wardrobe selection conundrum, but I recommend that, let others think what they might, you dress for comfort as events unfold. It would be foolish at this juncture to over accessorize your portfolios. Simplicity equates to elegance during these times, as it does – so the fashionistas inform me – across most of the interludes of our existence.

I have every hope and expectation that you’ll look fabulous in basic black (or blue).

But whether you can generate satisfactory returns is another matter, and one entirely above my pay grade.

TIMSHEL

You Break It, You Buy It”

The Pottery Barn (wholly owned subsidiary of Williams-Sonoma, Inc.) Rule

As we approach Wednesday’s (scarcely lamented) 35th anniversary of the (quaint by current standards of market trauma) 1987 Crash, three questions come to mind: a) is the market broken? b) did we break it? and c) if the answer to a) and b) is yes, are we compelled to buy it?

Our titular colloquialism has been around for ages – perhaps because it seems like an entirely rational protocol. In recent times, Bob Woodward, quoting Colin Powell, described it as a warning to Bush II about his then-contemplated (but not yet executed) Iraqi invasion (turns out, after a fashion, he was right). That was ’03; a few years later, in a nod to the Company’s newly installed policy to this effect, it became known as the Pottery Barn Rule.

Which is fine. Except for this: Pottery Barn (now a wholly owned subsidiary of Williams-Sonoma, Inc.) does not, and never has had, such a policy. Instead, it writes off broken merch.

Kinda like the Fed. But I get ahead of myself.

As alert readers recall, I personally lived up to this standard, having purchased my first home after crashing my foot through its ceiling during an Open House. All good; we wanted the place anyway.

However, for our present purposes, in order to measure the applicability of our axiom we must determine whether (or not) the market is broken. So, is it, or isn’t it?

Well, yes.

Indications that it is are everywhere one chooses to look, with perhaps the most visible of these perhaps emanating from the U.K., where shards of market glass hurtle across grey skies, where economic engines groan, flutter, and sputter, where financial springs and wires pop out of their casings.

The sequence over there has been so rapid and multi-faceted that I suspect it’s beyond the reach of human description. But let’s try. Liz II died – immediately after putting her namesake (Liz III) in charge of the operation. The latter wasted no time in implementing a stone-cold Thatcher-style Supply Side Economics program. Brit markets went into free-fall, the most pressing consequence of which was outright panic in its once vaunted/now deeply impaired Pension System.

Whereupon Liz III and the Bank of England immediately turned tail, reversing course on both tax cuts and monetary policy. Whether or not this “fixes” the U.K. Pension System remains to be seen. Like their counterparts across the globe, the custodians of British retirement funds have been chasing yield in all the wrong places for eons. But this much is indisputable: their constituents now have a free hand to impose the Pottery Barn Rule on their own government.

Contemporaneously, Former Fed Chair Ben Bern copped 1/3rd of an Economics Nobel, prompting partially justifiable outrage from those who blame our current mess on his overly enthusiastic QE extravaganza. No matter, say the folks in Scandinavia; we gave him the award for an obscure paper he wrote in the 1980s.

In a touch of irony, his Nobel coronation came immediately in advance of last week’s Inflation reports, which was neither of them none too good. They didn’t rocket up, but neither, it is to be feared, did they come down — >2x increase in interest rates across the curve notwithstanding.

The initial reaction to these reports was anything but enthusiastic; particularly problematic was the rise in the oxymoronic “core” rate, which excludes the Food and Energy that would seem to be at the essential (core?) epicenter of the human pricing matrix.

The early returns suggest that the Fed’s aggressive Inflation busting moves have been effective, but only partially so. They seem to have cooled the economy (e.g. Retail Sales flat for September) without much denting Inflation itself. All of which raises the following question: are Central Banks in general broken? Well, I think we can draw appropriate conclusions about the Bank of England. Meanwhile, the Bank of Japan’s stubborn adherence to sub-basement rates has not only collapsed the JPY but has so paralyzed their country’s bond market that for the second straight week, days have passed with no trades in this once most liquid of financial instruments.

But the question remains: is the Fed broken? I won’t pass judgment just yet. However, for the record, given their $9T Balance Sheet and the carnage in the markets in which they invest, their mark-tomarket losses since the July highs most certainly approach $1T or more. This is against an historical annualized P/L of ~$25B, — implying a 4000% earnings reversal in one rolling quarter. And it could get worse. Were the Fed not a public utility, heads at the top of the structure would no doubt roll, and former chairperson(s), instead of preparing speeches for the top honor of its kind in the world, would be consulting attorneys and girding themselves for a mountain of lawsuits.

Equity indices fell nominally after Wednesday’s PPI drop, and positively collapsed in the wake of Thursday’s Consumer Price Report. But then, late morning, they aggressively reversed themselves. By close, the Gallant 500 surged nearly 6% above its bottom feeder lows; Captain Naz nearly 7%.

This fleeting V-bottom had all the trappings of a galactic short squeeze, and one could indeed hear the voices of traders across the spectrum rising an octave or two as the proceedings unfolded.

At the depths of Thursday morning despair, NAZ was knocking, from above, at the threshold of 10,000, and, on Friday, after yielding a good portion of the short-lived rally, is within visible distance of 10K again. And I couldn’t help recalling, a few years back when it breached this milestone to the upside. Bloomberg Radio held multi-day celebrations. They passed out hats on the floor of the Exchange (not that there actually is a floor).

And I couldn’t help but wonder whether somebody – maybe a MAGA haberdasher with an enthusiastically-rendered but now depressingly excessive inventory, might not want to convert them, in retro fashion, into reclaimed NAZ 10K head toppers.

So, are equity markets broken? They certainly are not functioning like well-oiled machines, but they have arguably experienced worse intervals and survived to tell the tale. We should know a great deal more over the next month — as the earnings cycle unfolds. To be redundant, I’ll be more interested in forward guidance than the actual income figures themselves.

I reckon the likely outcomes range from outright disaster to “meh”.

Moving along, we arrive, inevitably, at the Energy Complex. Is it broken? Well, oil trading whale Pierre Andurand not only thinks so, but has said so. And he may be right. WTI Crude has experienced an approximate 100% range over the last nine months. Our own government has kneecapped the domestic industry.

Long-standing Middle Eastern import outlets are pulling back. Russia is in an arguably existential military battle, its feelings are hurt by its main export clients, and, as such, it not likely to pitch in helpfully. We have depleted our strategic reserves and have, with mixed success, come hat in hand to Banana Republics for assistance.

For of the above, Crude is trading >30% below its early summer highs.

The price of American and European Natural Gas has plunged in recent weeks – all in advance of the inexorable, seasonal mercury drop, and I can observe no trade with better risk reward than getting long the Nat Gas market at current prices.

More generally, energy markets do indeed appear to have decoupled from physical fundamentals and seem to be trading on little else but a wicked recession hypothesis.

Well, maybe so, but it sure seems to me like gas may be in high demand this winter – both here and abroad, that supply is constrained, and that given this combination, the pricing dynamics are, to some extent, broken.

Finally, there are the credit markets. At the end of the week, and with little fanfare, the benchmark basket of Investment Grade Corporate Debt broke through even pandemic pricing levels:

Investment Grade Debt: Not Lately a Great Investment:

Meantime, and more prominently featured, mortgage rates have careened to thresholds last seen a couple of years after G.W.B.’s ill-advised “Mission Accomplished” photo op:

It all makes me nostalgic for 2006. When liar loans ruled, and banks were happily issuing no-moneydown mortgages, approaching and topping seven figures, to blind grandmothers, living on Social Security. When financial engineers packaged these debts, rating agencies sprinkled them with Aaa ratings, and investment banks sold them to (U.K.?) pension funds that still carry the burdens of there losses to this day.

Yes, I pine for ’06 and wish we could turn back time, because, after all, what was better than ’06? Everybody got rich; everybody got laid (er, paid).

Though there were some clairvoyant warnings about what would follow, markets seemed anything but broken in ’06.

Now, it’s all a bit different.

But far be it from me to engage in gratuitous hyperbole.

Let’s thus conclude that markets are kinda broken, but not completely so.

Who broke them? Well, that’s hard to say. But somewhere in there, we bear some responsibility, because there is no one else to do so.

And, in result, while we kinda gotta buy ‘em, we also kinda don’t.

And, in fact, right here (except for perhaps Nat Gas), I kinda wouldn’t.

Buy ‘em, that is.

After all, the capital markets, while difficult to define, aren’t the Pottery Barn, are not, for instance, a wholly owned subsidiary of Williams-Sonoma, Inc.

But whatever they are, let’s hope their made of sterner stuff than porcelain, clay and other materials that can be shattered by an inadvertent flick of the wrist or elbow, and no one under heaven to write them off or take them back.

TIMSHEL

I am indeed a little ashamed of this week’s mash up theme. Truth is, well into the weekend, I was drawing a blank as to what (borderline unhinged) spin I would put on this note, particularly against the current/pending mad rush of data flows and attendant (potential) market impacts. Some weeks the thematic riff jumps out at me, and my madness leaps, of its own accord, off the keyboard. Others it’s a desperate struggle against the glib, the trite, and the flat out boring.

I am typically easy on myself when the latter construct is ascendant. I’ve been pumping out this tripe – week in and week out – for more than 16 years. Some notes were always destined to be better than others.

And so it goes this week. I’ll cut myself some slack and proceed accordingly. So here goes.

I am a child of FM Radio: a forum consigned during my early youth to the audio backwaters but which emerged as a commercial and cultural force some time in the early/mid 1970s. My own associated experiences emanate from the sonic streams over Chicago, which I like to believe was a pioneering jurisdiction. First, there was Triad Radio – almost too weird for even those of us determined to seek out the strange. Then came WXRT – a magnificent outlet which at the outset only broadcast for six hours a night, whose disc jockeys would often fill the dead air with internal silences, but which could be counted on to unearth untrammeled, unexpected delights – from Ornette Coleman to out-takes from the Abbey Road sessions. Such fare is now widely available, but – trust me here kids – back in the deuce, it was rare and magnificent. It made us feel like radio listening gods.

Inevitably, though, FM Radio expanded and commercialized. Cars (most of which, I kid you not, were typically limited to AM mono functionality) began to blare out deafening stereophonic acid rock. Advertisers soon caught on and the whole venue turned to algorithmic, commercialized garbage.

The shark-jumping moments were manifold, but my mind fixes on the programming gimmicks that emerged. Pretty soon, every station was featuring such programs as a Sunday Morning “Breakfast with the Beatles”. One October day, I knew it was over. It was a Tuesday, and I was driving my kids to school. The local FM station was in the midst of its “Rocktober” schtick, and it was a Two-Fer Tuesday (back-to-back songs by a single artist) to boot. Topping it all off was the scheduled, contemporaneous, smarmy, obligatory, Zep-inspired “Get the Led Out”. So, of course, we were treated to a sequence of “Whole Lotta Love” followed by “The Immigrant Song”.

Rocktober/Two-fer Tuesday/Get the Led Out – a triple whammy of the blindingly unsubtle. I pondered whether the moment to shoot myself hadn’t truly come

As should be apparent, I resisted the temptation, found Napster, then Sirius, then Spotify. I rocked steady with each; meanwhile, Standard FM Radio continued its downward spiral.

But it is now October, and, for investors, the month promises to be rocky. So, while the pokey Rocktober Radio orgy continues unimpeded,10/22 indeed looks to me, from a market perspective, like (R)Oc(ky)tober. The sequence began with the biggest rally/subsequent selloff since the onset of the lockdowns – much of it centered around anticipation and reaction to Friday’s Job’s Report.

The consensus in its aftermath was that it was good – perhaps too good – at least for those hoping to see a cooling of the Fed’s rate-raising jets, and everyone bailed. Except the Fed, which, its if published statements can be believed, has no intention of changing, slowing or reversing course.

But I personally didn’t see too much here to cause a pre-Halloween yield-boosting fright. The base rate dropped a titch, mostly owing to a reduction in Labor Force Participation. A few tens of thousands of folks voluntarily bounced from the workforce, and this, combined with a somewhat surprising > 1 Million reduction in Job Openings revealed on Tuesday, suggests to me some economic deceleration. But what do I know?

And this coming week, as almost pre-ordained by the Gods, we have an approximate Two-fer Tuesday, with a critical PPI release coming on the appropriate day, followed by CPI on Wednesday. Projections are sort of flattish, and, simply from a blood pressure management perspective, let’s hope that they come true. A surprise in either direction, but of course, particularly to the upside, is likely to cause a serious case of volatility overload.

We also must anticipate the formal commencement of the Q3 earnings season, the previews of which have been less than encouraging. Gallant 500 profit growth currently projects out to a meager 2.4%, lowest since the ’20 lockdowns. But there’s probably not much to fret about on that score. These numbers tend to drift up across the reporting sequence and will almost surely do so in this instance. I am more concerned about forward guidance, as there is always a seasonal Q3 incentive for Management to dump all bad news and dampen expectations in “3”, so as to engineer a “beat” in “4”, and, in the process, dazzle and delight their Compensation Committees.

More narrowly, it probably pays to be mindful of recent dreadful announcements issuing from key chip manufacturers Advanced Micro and Samsung. These entities are experiencing menacing decreases in orders for their silicon output, portending of weak demand for PCs, smart phones, cars, refrigerators and nearly every other product we actually use out here “in the field”.

It ought, one way or another, to be a high-drama, volatility inducing cycle, which won’t end until R)Oc(ky)tober winds down, and the fat part of the earnings season fades to blue.

As all the above unfolds, we also face a renewed, overwrought focus on Energy Prices, and rightfully so. As is widely known, OPEC delivered a major one finger salute – to the West in general and, maybe, to Biden in particular, by cutting production by 2 million bbl/day. The timing, from a political perspective, is unfortunate, but the Saudis probably understand this. In fact, they may still remember being called criminals by the occupant of the White House in the 2020 election, and, beyond this, may take a dim view of its “Green Energy” policy that features the crippling of domestic production, while cajoling, exhorting and begging foreign producers to pump away with abandon. They may wonder, as I do, how the planet is benefitted by simply shifting production to different portions of the globe.

My own view is that for political reasons, the Administration is desperate to keep a lid on energy prices – particularly during (R)Oc(ky)tober, as it justifiably perceives that it may impact their fortunes in the coming election. So, we toy with other imponderables: the full depletion of our Strategic Petroleum Reserve, cutting deals with bad actors in jurisdictions such as Iran and Venezuela, imposing export bans, raising taxes on energy companies, exhorting gas stations to patriotically cut prices. And so on and so on and scoobie doobie do.

I am especially concerned about “Hail Marys” here, and, while laying aside my frustration at the stupidity of it all, am fairly convinced that any aggressive move to create better energy optics in (R)Oc(ky)tober will only lead to Newtonian reactions of opposite impact once the month is behind us.

And this is to say nothing of what awaits us should the dreadful situation in Eastern Europe take a turn for the worse.

Thus, with huge interest rate agita, currency markets in disarray, never-ending Fed hand wringing, electoral outcome concerns reaching crescendo, menacing increases in Energy prices, and myriad geopolitical problems we have not even covered, it’s no wonder that cross-asset correlation financial market stress indicators (which I don’t even begin to understand) have surged to multi-year highs:

Not Sure What This Means But Most Likely It Ain’t Good News:

Whether or not all of this ends in a market tragedy of Hamlet-like proportions is in the hands of fate. But it certainly reinforces my assertion that this particular October stands to be one mother of a (R)Oc(ky)tober. And I suggest you gird yourselves for a continued wild ride. The current paradigm (hardly encouraging) could turn on a dime – for better or for worse. Portfolio flexibility, liquidity and fluidity, eternal heavenly virtues, will be of heightened importance.

It will, like all intervals, pass quickly, and we’ll be on to the next. Meanwhile, we’ll have to endure another 3+ weeks of Rocktober/Twofer Tuesday/Get the Led Out. All across the country.

I am happy to report, though, that ‘XRT – Chicago’s Fine Rock Station – still abides at 93.1 on your FM dial. It now features a 24-hour broadcasting cycle, and, while some of the original DJs remain on the air, the silent intervals are now gone, replaced by annoying, chirping, excess energy. They don’t (at least I don’t think) do Two Fer Tuesday. Or Get the Led Out. But they do have a nicely understated Breakfast with the Beatles. They retain a quirky playlist, which, if it’s not my particular jam, it will occasionally surprise. And delight.

It’s worth a listen. And if it helps you survive the recently commenced (R)Oc(ky)tober, well, all I can say is so much the better.

TIMSHEL

Probably, you’ve never heard of it, but we’re locked in on one of two films released in 1967 about idealistic teachers breaking barriers with difficult, disenfranchised high school students in lower class urban environments. UTDSC is set in New York, with Sandy Dennis as the pedagogic protagonist. The titular theme refers to the incorrect traversing of the unidirectional venue for vertical egress established by the school, as necessitated by overcrowding.

It’s thematic doppelganger: “To Sir, With Love”, features Sidney Portier and is set in London.

And that is all I have to say about that.

But it does strike me that in a broader sense, society, and more narrowly, the markets, have been travelling up a down staircase for several years now.

While not wishing to put too much grey matter into the topic, the wider the sequence may have begun on June 16, 2015, when carnival barking real estate man Donald J. Trump announced his improbable, and improbably successful, run for the presidency. In a moment now consigned to history, he did so with great optical flourish, descending the gilded escalator in his signature eponymous tower, lusciously accessorized by his arm candy wife, Melania.

We’ve been trying to climb those descending electronic stairs ever since, but, on the other hand, the markets lurched from one new high to the next in the ensuing quarters and years.

Until they didn’t.

One is thus tempted to turn to the lockdowns as an inflection point, and, for a short time, they were. Crude Oil flashed to negative prices in April of 2020, everything was going down, and nobody, including me, could visualize a bottom.

But then a gale force wind of Fed monetary stimulus blew in, and everything, and everyone, was blown upward. ‘Twas a strange interval indeed. For a while, we couldn’t go anywhere, and when we finally could, it was with tiny holes in our arms and flimsy, cotton germ blockers of dubious effectiveness affixed to our visages.

But by the time 2020 ended, everyone was rich. The Gallant 500 had more than doubled its hosts from the covid bugger lows. Captain Naz nearly tripled. More folks told me more times than I can count that they had cracked the stock market and had no more vexing problems than determining how to spend their fabulous retirements.

The upward momentum continued throughout ’21, but, clearly, market participants were getting winded by the climb. Our indices peaked out just after our most recently celebrated(?) New Year. It was like, well, school is out, and this here market staircase is now exclusively leading towards terra firma. The gravitationally aided stampede towards the exits was further catalyzed by Putin rolling his tanks where they didn’t belong (and facing a sustained rude welcome), and the attendant Inflation obsession which this evoked. Since that point, the Gall 5 is down >25%; the Nazzy Captain >30%.

I’m too lazy to research this, but suspect that any year, including the one we are currently in the midst, where market highs are registered on the first trading day, is bound to be one of significant frustration for investors.

Oh yeah, lest I forget, 10-year yields are nearly triple their late ’21 lows, as are mortgage rates, causing home buyers touring lovely colonials to abruptly reverse course and head downstairs.

(I can’t resist a personal anecdote here. When visiting what turned out to be the first home I ever purchased — in Oak Park, IL, a troublesome friend accompanying me insisted that I take a look at the attic. As she was pointing out something important feature, I stepped between the beams, onto the pink, flimsy Owens Corning insulation, and through the second-floor ceiling. My little daughter cried. A couple heading up the stairs and encountering my crashing sneaker – it was an open house – abruptly reversed course, descended the stairway and departed the premises. I broke the house, so I bought it and have no regrets. True story).

But let’s revert to our 1967 high school stories of deliverance. In 55-year role reversal, it looks like Ms. Dennis and Mr. Portier have switched roles, and that the upward traversing of down staircases is now mostly taking place in London. No sooner had Prime Minister Truss occupied her office at 10 Downing than she issued the blasphemous order to slash U.K taxes, thereby breaking the hearts of government revenue agents across the globe (none, presumably, more so than her sister in levies, our own Janet Yellen) — who are all conspiring to set a floor on what each nation gobbles up from the toils of our labor. Following upon the heels of the Bank of England’s dovish 50 bp hike and resuming of the purchases of their own paper, this sent the (once) mighty Sterling into a full-on swoon, and caused yields on the gilded (10-year) Gilt to more than double over just a couple of weeks:

The Guilty Gilt (BOE buys but everyone else sells):

More than one savvy macro fund with which I deal anticipated this, and – not gonna lie – it was the first time in more than a generation that I had even seen the once active but long-dormant Gilt futures contract on my risk sheets.

Those positioned in this market made a killing, which certainly lightened my step.

But I weep for Madame Truss, for whom, Tory that I am, I had such high hopes. Moreover, I think she’s on to something. Whatever ails the U.K., a tax cut is not likely to do much harm. But there is already talk that her coalition is fracturing, and that she may be bizounced in Usain Bolt record time. Let’s hope not; I’m (still rooting for her).

Across the pond, we enter Q4 with virtually every risk asset in the fundamental and technical subbasement – below, even, the room where that weird old guy who teaches shop sleeps. Nearly every investment instrument I can survey (even Crude Oil, FFS!) is trading below its 50, 100, 200 and 1,000,000-day Moving Averages. Growth is slowing. Inflation – including the just-released, Fed favorite PCE, is showing stubborn (if unsurprising) persistence. Credit markets, the biggest bugbear of ‘em all in my judgment, are beginning to crack.

However, since we appear to be fated, evermore, to traverse upward on the down staircase, our friends at the Atlanta Fed (who I tire to the extreme to reference) ginned up some surprising love for us last week:

Not often in my experience have Fed GDP estimates ever quintupled so quickly – much less in the final week of the quarter upon which they are reporting.

But these here folks is all trained economists, and therefore to be trusted unilaterally. Worst case, if they turn out to have misled us, perhaps we can send them back to school – to be trained by either Ms. Dennis or Mr. Portier.

And now, like it or not, the 4th Quarter commences, and, in result, our own, er, education continues. In trademark perversity unique to our species, our first sessions will be driven by attempting to understand the recent past. Monthly and quarterly economic data begin to roll off, and Q3 earnings are just around the corner. I’m not thinking either set of data flows will feel much like recess.

We’re also, dare I mention it, entering the final month of a gruesome election cycle, which will be beyond tedious to monitor but the results of which may be critical to the immediate subsequent fortunes of the capital economy. I have my hoped-for outcomes here, but so as not to offend anyone’s sensibilities, will keep my own counsel as to their precise nature.

September (always marking the sad end of summer break), as has so often been the case, was an unmixed market disaster, and October, given the forgoing, promises to be a wild ride.

The markets are migrating downward, and each of you must decide whether you wish to attempt to climb the steps that it is descending. My sense is that anyone attempting to do so might just get paid for their troubles somewhere down the road. But as for me, I’d wait a spell before heaving my ass upwards. Those hormonal high schoolers are still trampling down the stairs, and it might be best to wait them out. It also bears mention that we must take this journey without the divine guidance of the lovely Ms. Dennis or the perfectly formed Mr. Portier (both are now dead). Yup, we’re on our own.

But isn’t self-reliance the lesson they tried to impart to their students anyway? I think it’s enshrined somewhere — perhaps on a ‘67 blackboard, and, if we can either avoid or evade those trampling adolescent feet eager to embrace the freedoms of the urban underworld, perhaps we can still learn it.

It’ll do us no harm trying, at any rate, so grab them rails and head where you will.

TIMSHEL