Sometimes I live in the country, sometimes I live in the town,
Sometimes I get a great notion, to jump in the river and drown.

— “Goodnight Irene” by Huddie William (Lead Belly) Ledbetter

No, I’m not gonna lay a bunch of Lead Belly righteousness on y’all. Yes, he was The Man. But the work of even the maestros he influenced (Dylan, Zep, the Stones, etc.) is lost upon most of you, so why bother?

I will mention, though, the book that inspires our theme – Ken Kesey’s “Sometimes a Great Notion”. It’s an enormous, expansive, heart rendering saga of the demise of an Oregon logging family. Kesey, at the time, was not only stimulated by LSD and the Great American Songbook, but also by domestic literary giants such as Faulkner and Steinbeck. Slogging through it, like many masterpieces, requires some patience and discipline. To paraphrase a line in the book itself, you’ can’t force Kesey; you must let him force you. But the rewards are magnificent.

Few of you will even try, but that’s OK. The one I care about already has. And that is enough.

And, as for me, tempting as it sometimes is, I’m not thinking of jumping in the river. Nope, all I can offer is small notions. So, here goes.

My sightlines to market risk flows have been deeply blurred for many months now, but I will press ahead, nonetheless.

And what I predict, over the next several weeks, is a great deal of hand-wringing data flow, which leaves us pretty much where we are right now. With thoughts about tributary suicides, upon which we have no intention of acting.

And where are we now? Well, earnings have begun as a mixed bag. The banks are mostly in, and weren’t terrible, but were tagged by increased set-asides for anticipated loan losses. Which had been artificially suppressed by all that lockdown monetary stimulus but are now back at pre-viral levels. Let’s keep an eye on this, shall we?

Delta screwed the pooch, but can the difficulties in the airline sector come as a surprise to anyone?

Inflation figures came in hot. Way hot. Everyone knew they would. But as is widely speculated, I believe they will come down. Hard. It will be temporary. But it will descend visibly. Starting with the July statistics. Commodity prices have (I believe only briefly) plummeted. Everybody over-ordered everything. Inventories of products ranging from back-to-school clothes, microchips, personal computers and even used cars, are unacceptably high. All will be on fire sale by late Summer.

Six months ago, there was a chronic shortage of perhaps the world’s least needed commodity: (everyone say it with me) Investment Bankers. Deal flow has deeply diminished, is almost nonexistent. Demand for these services has followed suit, and one hopes that those impacted have not squandered the entirety of their beyond-generous 2021 bonuses.

But it is always unwise to underestimate the capacity of bankers to pay themselves. I just read a Bloomberg article about a new wave of banker-fee-rich single stock Exchange Traded Funds (ETFs) emerging on the horizon. What, in heaven’s name, is the point of this? They are billed to offer short exposure and leverage in a manner that is unavailable to investors through standard transactions – unless, of course, they choose to use these tools themselves. Which is not costless, but which will also be charged to the ETFs, with the only advantage I can identify being that said costs won’t appear as line items on brokerage statements.

All of which reminds me of an outdoor show I attended in Madison, billed as the world’s first-ever wind-powered concert (it was in the late ‘70s). OK; fair enough. But there wasn’t enough wind that day to power the Marshall amps. So? They plugged the windmills into diesel-fueled generators.

Meanwhile, next week should be dominated by the earnings reports of lesser god companies, with a few PMI releases to add some variety. The one that follows, though, should be a barnburner. On the Macro side, we obtain the windfall blessings of the next FOMC proclamation (July 27th), which precede by one day, and in divine, plot-thickening flourish, our first glimpse at Q2 GDP estimates.

One can either fear or hope that the members of the Federal Open Market Committee obtain a sneak peek preview of the latter and use it to inform their monetary policy choices. For what it’s worth, you can put me in the “hope” camp. Not that I place much faith in their present abilities to incorporate information flows into rational decision-making. But what the heck – I’d still prefer that they know – just in case there are any unpleasant surprises which have remedies so obvious that even they cannot fail to notice and act upon them.

I don’t expect any (surprises, that is) from either the Fed’s decision or the GDP release. As a point of reference, the current handicapping of these two important revelations is presented below:

The probability of a 75 bp rate increase thus predominates, while that of a full-smash 100 looms larger on the horizon than it did even a week ago. The Atlanta Fed is at -1.5% on GDP; the hopesprings- eternal Street estimates are a full 3% higher.

I figure the Fed takes ‘er right down Broadway, and, come what may, does 75. I further suspect that the Atlanta estimates are closer to reality than those emanating from New York, but please know that the spread in these estimates is menacingly wide, adding to the prospects of vexing volatility in its wake.

Whilst all of this is transpiring, the Big Tech Earnings Wizards will make their presence known. All of them. The whole GAMMA gamut (Google, Amazon, Microsoft, Meta and Apple) reports that week.

Now more than ever, forward guidance will be more important than the numbers themselves.

On a weary, wandering tape, all the above will be a great deal to process.

I suspect it will leave us in a big muddle. The Fed will obfuscate; the GDP numbers will contain ambiguous, sound-byte-inducing bits that render us unsure as to how bad the economy really is. Some of the tech earnings will contain a ring of hopefulness, while others will toll the bell ominously.

And it will be nigh-impossible to draw any definitive conclusions from any of it.

And that’s what I predict for the month of July. After which, if I’m not mistaken, comes August, during which time we can drown ourselves in cocoanut oil, ponder what comes from the end of earnings and monthly macro statistics, and seek to figure out how to make some post-Labor Day Chicken Salad out of this chicken droppings of a year.

It won’t be an inexpensive exercise, as, like everything else, a dollar don’t go as far in the chicken game as it has in years’ past:

Broiler Chicken Prices: Hot as a Poker

However, I personally will be looking for what clues I can derive — not so much from chicken coops as from the fortunes of the energy commodities market. Crude, Gasoline and Nat Gas are all down at least 25% since those hand-wringing days of Spring, and if they remain in those realms/migrate downward, it will be a great blessing for the Capital, Commercial and Consumer Economies.

If, on the other hand, these commodities, as I suspect they will, ascend towards recent highs, we’ll all be in something of a bind. The inflation respite will be over, and the prospects of investing into a rising price/higher interest rate/slowing economy will re-emerge in crescendo.

The hard slog thus continues. But I reckon we can leave off notions of jumpin’ in the river and drownin’ – for now.

Nope. Let’s stick to smaller notions instead. Like how we’re gonna muddle through this mess. I’ve some ideas and am fixin’ to acting upon them.

But that, my friends, is a story for another day.

TIMSHEL

I beg your indulgence here, as I share the details of my long-awaited “Warhol 15”.

Specifically, this Weekend Edition of the Wall Street Journal contains my photo. To the best of my knowledge, it is the first publication of my gnarly image in a recognized daily publication of any kind.

Those that doubt me can find me in the bottom-most shot in the following article. I’m the guy immediately next to the dude standing in green:

https://www.wsj.com/articles/the-life-lessons-of-summer-camp-11657292830?mod=Searchresults_pos1&page=1

What’s that you say? Don’t have a WSJ subscription? Well, first, shame on you (particularly if you eschew it in favor of the perpetually perfidious New York Times). But no matter, here I am:

When made aware of this unsolicited P/R, my first reaction was, of course: “Holy Sh!t! My moment has come!”

It’s the Senior Cabin of 1975/Camp Menominee (CM), Eagle River, WI. Of which I was a charter member. For better or worse, the article makes no reference to me – or the crew with which I ran back then. It was simply used as a visual aide for a piece celebrating the joys of camp, written by a best-selling author who is also a CM alum. He was a bit younger than me, and I didn’t know him at the time.

He has gone on to write bestsellers about rangy topics like the Rolling Stones and the Chicago Cubs. Which I haven’t read but mean to.

Well, at any rate, if your picture is going to be in the Journal, this seems as favorable a manner as any. It certainly beats one of those stipple portraits for which they are known. You know, those avatar-like images drawn with little dots?

(As your risk manager, I can state this much with certainty: if you wake up one morning and find yourself stippled on Page 1 of the Journal, it’s over for you. You are beyond my help. I therefore advise you to comport yourselves in such a manner as to avoid this outcome at all costs).

I spent several summers at CM. And from what I can recall, mostly enjoyed the experience. But not as much as my parents did.

They were both single at the time, and it has since occurred that when they were not handing off my brother and me between their separate residences in Chicago and Southern California, an eightweek, summer hiatus from us two obnoxious little monsters must have had irresistible alure and was perhaps one of the few topics upon which they could agree.

So, off we went.

I’d like to tell you that it was a simpler time, but if it was, it wasn’t by much. It was the mid 70s, so we were dealing with Impeachment, Inflation, Energy Crises, Foreign Wars, Rampant Urban Blight and Crime, etc.

Sound familiar? Thought so.

The geopolitical stage was then dominated by a hodgepodge of shady characters. Ford had just replaced a deposed Nixon. Brezhnev ruled the Roost in Moscow. Mao was in the last year of his seemingly endless reign of China. Someone named Harold Wilson was ensconced at 10 Downing Street. The (blissfully-ignorant-as-to-what-awaited-him) Shah lorded over Iran. East and West Germany were still a thing. L’ll Kim’s grandfather called the shots in North Korea. Chirac was in the midst of the first of his two runs in Paris. Pierre Trudeau ran things up North – even as his fetching wife Margret was moaning underneath Mick in the backrooms of Studio 54.

It’s quite interesting to contrast this list with the current Heads of State in associated jurisdictions, which are, respectively, Biden, Putin, Zhe, the lame duck Bojo, Khamenei, the non-descript/I-knownothing- Scholz in a re-united Germany, L’il Kim, Macron, and Trudeau’s kid Justin in Ottawa.

It’s hard to argue the roster – weak as it was — has improved much across the intervening 47 years.

All of which becomes prominent in my mind when I think of Abe, and the Japanese Navy vet who did him this past week. He had stepped down a couple of years ago, and his replacement don’t kick up much dust. In 1975, a forgettable guy named Miki held that spot.

I’m here neither to bury nor praise Abe, but I will say that he had a righteous plan for Japan and did his damnedest to execute it.

Of whom, in these troubled times, can the same be said? Not a single Western Leader (and probably Biden least of all) seems to have a clue. Putin and Zhe apparently aspire to take over the world; Kim to make as much mischief as possible. The Ayatollah? Merely to rid the planet of us infidels.

However, and fortunately, it would perhaps be a stretch to state that our problems, relative to ’75, have risen dramatically in terms of magnitude and urgency. But you would’ve had to have reached the age of awareness back then to understand this. My generation grew up wondering when (as opposed to if) the Soviet Union and/or Russia was going to nuke us to smithereens, with the only saving grace being that they hated on each other more than on us. Inflation and interest rates were well on their way to the mid-high teens. Then, as now, we were suffering humiliating defeat in the foreign wars with which we (unwisely) chose to involve ourselves. But at least back then, instead of handing our cash and weapons directly to our erstwhile enemies, we at least had the good sense to dump our helicopters into the South China Sea.

For what it’s worth the market was better back then. It was before Captain Naz was even born, and prior to the launch of futures on the Gallant 500, an index which only priced periodically.

But the G5 managed to gin up a >30% gain in ‘75, rising from a beyond quaint 68 to a (still beyond quaint) 90 across the year.

Informing you of what you already know, thus far in ’22, the G and the N are down >18% and 25%, respectively, and have had to rally to achieve this lofty elevation.

But I reckon risk asset prices, wherever they are, will be anything but stationary over the next little while. The Big Summer Data Dump is under way, having begun with a June Jobs Report, within which, one survey (Payrolls) showed surprising vigor and the other (Household) came in implying a decrease, due in large part to mismatches between bountiful inventories of open positions, and ranks of the able-bodied — available and willing, to fill them.

From some perspectives, the markets took it all in serenely, but the optically strong jobs report goosed the CME’s Fedwatch meter to an implied >90% probability of a 75 bp rate hike at the end-ofthe- month, with the only other contingence even registering a blip is that of a 100 bp move:

Madame X 10-year note yields flirtatiously dropped below 3%, but you had to move faster to catch this than, say, I was at chasing the girls at nearby Woodland in ’75. Crude Oil dipped below $100/bbl, but again, only for the briefest of moments. Yields now stand at 3.08% and WTI Crude closed Friday at $104.79.

Nest week’s drama begins on Wednesday with the June CPI report. On Bastille Day (Thursday) comes PPI and, after the close, the commencement of bank earnings announcements. From a volatility perspective, it should be off to the races from there.

Surveys suggest that neither measure of inflation will have abated, and there is widespread handwringing as to the earnings cycle. With respect to the latter, warnings of waning microchip demand, and excessive inventories of sundry commercial and consumer products loom cloudily on the horizon. If the latter dynamics manifest, Inflation numbers should indeed come down, as there will be fire sales of everything – except, perhaps discretionary items such as food and energy — before the summer begins to wane.

But I hate like hell to think of waning summers, as they bring about wistful memories of the fabulous innings I spent at CM. These sorts of things stick with you, and I still keep in touch with some of the crew from Cabin 12. My best friend went and bought the Camp. One guy runs his dad’s home product manufacturing business. Another is a doctor in Akron. The guy in green, a truly righteous fellow, followed his dream and became one of the most successful veterinarians in Chicago.

And as for me, the winding roads brought me to Wall Street. Where I was sent to warn everybody that the hard slog we currently face has not yet run its course. Buckle in, my friends, because what awaits us is anything but a cookout under the North Woods skies. We can get through this summer, but not without bringing our full focus and attention to bear.

And, God willing, we can also avoid the worst of indignities—the dreaded front page stipple.

TIMSHEL

Oh You Pretty Things, Don’t you know you’re driving your Mamas and Papas insane?
Let me make it plain: Gotta make way for the Homo Superior

— Bowie

With the first half of Terrible ’22 in the books, I’d like nothing better than to offer some hope for a brighter conclusion to the year’s proceedings.

But – not gonna lie – I’m having a very difficult time doing so. Equity indices closed out the first six months with the worst ytd performance since 1970 – the year the Beatles broke up. The year that both Jimi and Janis died.

Further, until an improbable, quarter-capping rally, Treasuries came in with the biggest losses since 1844, a year which featured the founding of the University of Notre Dame, Smiling Sam Morse’s first telegraphed message: “what hath God wrought?” (what indeed?), and the formation of the (immortalized five generations later by the Village People) YMCA.

It also marked the election James K Polk as the 11th President of the United States, who, among other achievements, brought The Republic of Texas into the fold.

Has anything remotely so cool happened in ’22? I’m waiting…

But a couple of late breaking news items captured, for me, the truly gruesome vibe that prevails.

First, as no one paying attention could have missed, the Big 10 Conference (B1G) announced the addition of two Angelino schools – UCLA and USC – to its numbers, bringing its tally of higher learning institutions (which for nearly a century was actually 10), to a tidy 16. Its reach now extends from Rutgers on the Atlantic all the way to Westwood, on the shores of the Pacific. I personally would’ve preferred the addition of Pepperdine, if for no other reason than that it’s in Malibu, but I reckon the Conference Brain Trust — in highly unfashionable Rosemont, IL, know what they’re doing.

When the B1G first expanded, it split into two divisions — along geographic lines, but with the dubious nomenclature of Leaders and Legends. The construct remains, but now under the more intuitive and utilitarian monikers of East and West.

In these troubled times, a new set of pairings comes to my mind. Though the breakdown is less than perfect (after all, every major university currently considers itself obliged to dictate our mores and modes of living), I recommend that we separate the college by ideological branding. One, in tribute to our newest arrivals, would be named the LaLa Land Division, and would be made up of urban and urban wanna-be institutions, with pretensions to paradigm-shifting global thought leadership. Its roster would include:

• UCLA (Natch)
• USC (Natch again)
• Michigan
• Northwestern
• Wisconsin
•  Rutgers
• Maryland
• Minnesota

The other cluster, which I propose to call the Landlocked Division, is comprised of schools that more exclusively concern themselves with the task of educating and training their attendees, and sending them out into the world as competent, contributing adults:

• Michigan State
• Illinois
• Iowa
• Nebraska
• Indiana
• Purdue
• Penn State
• The Ohio State University

And, just for the record, I checked my maps, and the Landlocked Division is indeed landlocked. The most respectable body of water adjacent to any of these campuses is the Wabash River, near Purdue (Please).

By contrast, my LaLa Land Division abuts, respectively, the Pacific Ocean (UCLA and USC), Lake Michigan (Northwestern), Fabulous Lake Erie (Michigan) the Atlantic (Maryland and Rutgers) and the Mighty Missisip (Minnesota). Finally, my beloved Badgers (which I must depressingly consign to LaLaLand) are on lesser watery bodies (regional lakes). But there are five of them within city limits. So, there’s that.

However, a couple of points before I move on. Of course, the main impetus for B1G expansion is money, and there’ll be plenty of that to go around. The TV advertising implications are themselves delectable. And those legacy, zaftig Midwestern alums travel better than any such group anywhere. I suspect they will be more than happy to make their way to the coast and spend their hard-earned pay at cheesy Los Angeles tourist traps each November.

But in terms of which division is likely to contribute more to GDP growth over, say, the next generation, my money is on the Land-lockers.

The other recent development which renders me more certain than ever we are staring into the abyss is the latest Bowie version of Mattel’s iconic Barbie Doll. It’s not their first rendering of a bad idea, but the arrow is clearly pointing in the wrong direction.

Yes indeed, she’s hot. But I find her offensive to the point where words fail me. And Bowie, having died in 2016, is not here to defend himself. That his estate agreed to such corrupting of his image is beyond me.

But the rendering on the left is no more Ziggy, no more Aladdin Sane, no more “Thin White Duke” than Purdue is known for its School of Film Studies.

I’m gonna stop short of calling for an all-out boycott of Mattel. But please – in the name of all that is holy, do not enable this nonsense by allowing one these monstrosities into your homes.

And, as we enter H2/22, the big question is – can we endure these indignities, rise above them to regain the best in ourselves? I’ve gotta say, at times like these, I have my doubts.

The next few weeks should be very informative in this sense. The rollout of quarterly earnings and macro data will commence, and then crescendo.

With respect to the former, there’s a more worrying ambiance emerging with each passing moment. I’m particularly concerned about critical signals deriving from the land of micro-chips. Even on Friday, as the broader-based indices were gathering themselves for a rally, two industry leaders – Micron and Advanced Micro, pre-announced weak demand for the back half of the year, rendering the sector SOX index perhaps the biggest heap of smoldering metal in this market pileup:

Nobody should be surprised here; we literally gorged ourselves on semis — all during the lockdown and beyond. The re-emergence of computationally intensive, chip comping crypto – now in a form of free fall — only added to the bloat.

At some point, we were bound to push away from the chip table. But declining semi demand is a very bad omen of what awaits us this earnings season, and woe betide us if this is an indicator of CEO tidings when they next take their walks (of shame?) to the podium.

And this is to say nothing of the Scary Monster (and Super Freak) Macro environment. In a breath of good news, many commodities have backed off and others have, for the moment, stabilized. But the June CPI estimates (release date 7/13) still clock in at 8.8%. Crude remains well-above $100/bbl, and: a) when the President informs us of our need to hunker down to preserve a “liberal world order”, only to be: b) slapped down by none other than Bezos, well, you can draw your own conclusions.

And as for GDP, if those krazy kids at the Atlanta Fed are right about their latest Q2 estimates, following on the Q1/now -1.6% tape bomb, we’re already in recession:

Yes, you read that right – they now are prognosticating a > 2% contraction. And if that weren’t bad enough, just take a read of the accompanying note:

After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, the nowcasts of secondquarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7 percent and -13.2 percent, respectively, to 0.8 percent and -15.2 percent, respectively.

Heck, I don’t even know what the bolded phrase means. But it don’t sound good.

I reckon we’ll survive, though. Just as we did 1970. The quality of music started to deteriorate after the breakup of the Beatles, the demise of Jimi and Janis. But it did so in gradual fashion. Pretty much all of Bowie’s best stuff, for instance, came after.

The post-1844 tidings are arguably a bit more problematic. Polk died in ’49 – barely six months after leaving office. His replacement, that crazy mofo Zack Taylor, is best known for having issued a beat down of a badass bunch of Mexicans. Which catalyzed, for better or for worse, the addition of California into the Stars and Stripes (1850). He didn’t live to see it. Sixteen months into his term, he met his maker, with the official cause of death listed as an overdose of cherries (fact).

After that, Millard Filmore was foisted upon us, followed by Franklin Pierce and then the singularly misanthropic James Buchanan.

Lincoln came next, and, while he wasn’t fighting of Rebels and getting himself assassinated, he signed the Land Grants that funded the creation of most of the founding Midwestern universities that formed the B1G Conference, now a nationwide conglomerate.

All of which gives me a change of heart. Go ahead and buy that Bowie Barbie if you must.

She’s a pretty thing, after all, but homo superior she ain’t.

And I don’t think she will help much in beating back the bears in the second half of Terrible ’22.

TIMSHEL

True, as we approach the mid-point of, ’22, I am combing through my back catalogue, but I have some justification for doing so. Or at least an excuse.

So, let’s return to a theme I last employed over 15 years ago, and celebrate the 40th Anniversary of the magnificent maiden (and also final) voyage of Lawn Chair Larry.

For the uninitiated, on July 2, 1982, San Pedro, CA’s Pride and Joy: Larry Walters, strapped himself into (yes) a Lawn Chair that was affixed to 45 helium-filled weather balloons, instructed his girlfriend to cut the cord that restrained the device, and ascended more than three miles into the heavens. He took with him, on his journey, some sandwiches, a CB radio, and (natch) a few beers.

Three quarters of an hour into his mission, he passed into a corridor directly under the jurisdiction of the Long Beach Airport, whose personnel were none-too-pleased to encounter him.

Presciently, he was also packing some heat – in the form of a pellet gun, and eventually the Long Beach tower guys convinced him to use it to shoot down a few of those orbs that were keeping him afloat. At some point he dropped the gun (presumably by accident). Gravity, inexorable but gentle, soon took hold, and Larry found himself floating towards terra firma.

The entire odyssey would have been an unmixed success, had not LL got himself entangled in some power lines, causing regional outages for well-nigh half an hour. He finished the triumphant trip a little frazzled, but physically intact, and was promptly arrested. One problem persisted – they didn’t know what crime to charge him with. Ultimately, he got off with a $1,500 fine, and was left to pursue his Andy Warhol 900 seconds.

And that was it. The world moved on. As the world will tend to do.

Now, four decades have passed, and it would appear that Lawn Chair Larry rides again – at least from a market perspective. But has anything changed? Have we learned anything from his wise example?

I suspect not. We took his righteous vibe and it them for quite a spell. At the point of Larry’s liftoff, the Gallant 500 was trading at under 100, and thus, at its recently registered highs, was an approximate 50 bagger. Madam X’s 10 Year Yield skirts were hiked all the way up past 12%, only to bottom out at around 0.5% in the Summer of Lockdown.

And of what stuff was the rise in equity prices, the drop in borrowing costs, etc., made? Well, particularly over the last 15 years, one could certainly argue that it was the financial equivalent of helium weather balloons – taking the specific form of galactic huffs of newly minted fiat currency.

Yes, we had a few laughs, consumed a vast quantity of beer, along the way.

But even the modest luxury of the latter is now much dearer than it was when Larry was wetting his whistle with Pabst Blue Ribbon, high over Orange County, CA.

Whether Larry would’ve fared better if he had left the suds back at home we can only speculate; perhaps he would’ve controlled his vessel in such a way as to escape notice by Long Beach Sonar and Radar. And, as this lesson partially applies to our current market mess, it can be argued that the asset valuations themselves flew too high/copped too big a buzz — in the process impairing judgment and drawing the unwanted attention of meddlesome bureaucrats.

If so, the tidings are measured by soaring inflation and the Fed’s attempts to attack same. Chair Pow and Company have indeed shot a few pellets at the visible monetary balloons, and, in result, one notices a downward trajectory of economic vigor. Separately, and taking the analogy to its extreme, our flying machine, even as it plunges earthward, is also caught in power lines, disrupting energy supplies of every sort, and (importantly) increasing their price.

And this includes helium itself, which is, by composition and usage, a natural gas. I can’t even source a price for the lighter than air element prior to 1997 – 1.5 decades after Larry’s moment in the sun. But over the ensuing generation, its value has risen from under $50 to over $300/million cubic feet.

However, in a blinding glimpse of the obvious, the capital economy is not Larry’s Lawn Chair, and as such, its path is much more difficult to ascertain, much less predict, than that of his makeshift chairway to heaven. This much was obvious over the last several trading sessions, during which investor focus was trained primarily on Powell’s Congressional testimony. It’s unclear to me the message he was trying to deliver, but let’s afford him some sympathy, shall we? He is obliged to call out inflation as his primary dragon to slay, but was impelled to temper his rhetoric — so as not to scare the sh!t out of an already skittish universe of risk taking capital allocators.

(And one may also wish to extend condolences to JPow — for presiding over an inventory of securities that lost > $500B in the last rolling quarter. A bigger reversal, over three months, than the entire market cap of any bank in the universe).

Investors, however, were less confused as to his intent. They seem to have taken a needlethreading interpretation that the Fed is going to do some wicked tightening, but perhaps over a shorter time and with less ominous rate implications, than was previously assumed.

We witnessed, in result, something of a frenzy of buying in the Treasury Market, as evidenced across the entire yield curve. In addition, the widely watched 5-year break-evens – risk factors that predict the path of inflation over the maturities in question, came careening down in a manner that evokes images of what might’ve happened to the Lawn Chair, occupant and accessories, had Larry not dropped that pellet gun and instead worked himself into a dubious frenzy of balloon blasting:

Commodities across most sectors (Grains, Metals, non-Helium Nat Gas), in unison and in sympathy, plunged dramatically as well. Crypto came roaring back.

And equities experienced a joyful, upward reversal. I’m not entirely sure what drove this, and there are several technical factors at play: short squeezes, the always iffy Russel Rebalance, the anticipation of tens of billions of dollars of Q3 pension fund inflows. In addition, and though I hate to mention it, there just may have been a little early tape painting in play, in advance of the conclusion of what, for most, was a very painful second quarter.

I reckon we’ll take what we can get. However, by doing so, we are impelled to embrace recession as a welcome antidote to inflation and higher interest rates. But that’s the way these things go. Larry, after all, must’ve been a bit freaked out about his ascent, but not particularly so in comparison to what his downward trip must’ve felt like.

And there is some justification for this abrupt reversal of our priorities. PMIs – in the United States and across the globe, came in wretchedly below expectations. Consumer Sentiment hit a new low – but not by much. So, there’s that.

I wish that I could see more clarity in market pricing flows than Larry presumably manifested in planning and executing on his journey. But I can’t. Stocks and bonds are rising in value, presumably because the economy is now more likely to stave off inflation (and attendant higher yields) by entering into a recession. This is all a form of logic that resides above my pay grade. But I suspect that investors will find occasion to re-think and re-think again before they begin to make sense of the current confounding configuration.

So, pack your Pabst and pellet guns. It looks like we’re in for a bumpy ride.

Just like Larry, who, during his brief period of existence, was certainly able to accomplish what the Good Lord had intended for him. Not much went right for him after that, though. People tired of hearing his story (or, at minimum, paying to do so). His girlfriend dumped him. And one sad day in October of ’93, he offed himself.

But oh, what a magnificent ride he had. And in addition to saluting him on the Ruby Anniversary of his voyage, I believe we have it in us to take appropriate instruction from him.

I’ll be delighted to share it with you – just as soon as I figure out what it is.

TIMSHEL

It was, most certainly, a pearl-clutching week, in a pearl-clutching month, of a pearl-clutching quarter — in a pearl-clutching year.

We can only now hope it doesn’t morph into a bodice ripper.

A strong argument can be made that entering last week’s proceedings, all ingredients for a full-on Heathcliff/Wuthering Heights crash were in place, which only wanted a minor, bothering plot twist to tear the delicate fabric of the current market into shreds. The Gallant 500 had retreated to ~3750 – almost precisely at the levels where it ended 2020 and prior to the >30%, largely joyless runup of ’21.

Down > 10% over a span of a few short weeks, scenarios for authentic capitulation were ascendant. Several important data points loomed — none of which felt like they would serve to increase risk assumption vigor. PPI dropped Tuesday. The Fed spoke on Wednesday.

The increasingly cryptic Bank of Japan followed suit, in short duration, on Friday.

Though nobody much discusses Japan these days, its CB faces a vexing portfolio management problem:

The BOJ Asset Bulge:

The BOJ asset ledger includes $0.5T of domestic stock, including, improbably, 80% of the ETFs issued in the Land of the Rising Sun.

When these figures are added to its gargantuan holdings of its own government bonds, the tally easily exceeds the GDP of the country. We think of ourselves as being naughty here in the States, but the Fed’s Balance Sheet topped out at $9T, a (by comparison) modest, approximate half of the Gross Domestic Product of this great nation.

Plus, while we’re not selling down, stateside, this very week. we are beginning to shed assets by allowing maturing securities to roll off without replacing them.

The BOJ, meeting expectations that puzzle just about everyone, did nothing. Kuroda ain’t gonna use his powers to tame Nipo-inflation. So be it.

BOJ Chair Kuroda-san also reaffirmed the Japanese version of QE – a process known as rate targeting (currently 25 bp).

When the rate reached the usurious level of 0.265%, the BOJ, reflexively, bought paper – in the process wreaking havoc on the cash/futures spread:

Japan is widely admired for its pearl production, which is among the best in the world, so the good news is that the ladies of that country had high quality materials for their pearl clutching – as manifested in the wake of the blowout of the JGB basis trade.

But as near as I can determine, this did little to salve the wounds of those unfortunate souls who trade this spread.

Such are the fortunes of the monetary wars.

Japan and the U.S. also have the following commonality: the special Repo facilities put in place by both jurisdictions to backstop liquidity in the wake of lockdown are now at double the peak utilization manifested during the crisis. But this is where similarities end. On the policy side, the Fed came through with a whopping 75 bp blast – largest since ’94.

But even that wasn’t the biggest pearl clutching moment issuing forth from the world of Central Banking. The Swiss National Bank (SNB), in a move that surprised everyone, raised its policy rate from -0.75% to -0.25% — the first move of its kind in seven years.

And by the way, those minus signs are no typo; the 50bp jacking merely takes the Swiss rates into more benign negative territory. Not sure exactly what’s going on here; the boys and girls in Zurich are notorious for discouraging full-scale conversions into their precious unit of account, but now, with the alluring prospect of only paying a quarter of a percent per annum for the privilege of parking cash at the SNB (vs. 3/4% a few days ago), the temptation for investors may be too great for them not to succumb to it.

Nothing that the Fed was gonna do was likely to redound to the delight of capital allocators, but, for a few fleeting moments, the markets rallied on the 75 bp news. Risk takers thought better of it by Thursday, though, which featured an all-out rout.

In result, the Gallant 500 and Captain Naz reclaimed their ignominious place at the bottom of the Bloomberg Equity Index league tables:

U.S. Equity Indices – Send ‘Em to the Minors:

The ladies faced further moments of shock and awe on Friday – in the form of a gargantuan $3.4T Quadruple Witch/Quarterly Options Expiration.

Nobody’s dead husband materialized therein, bearing family secrets he had blessedly taken to the grave. But – particularly on this type of tape – accidents can happen on the Q4 Witch, which the clutching of all the pearls rendered from all the oysters in all the oceans of all the world won’t counteract.

But we managed, if somewhat worse for the wear, to survive all that. However, just when we thought we was in the clear, what few pearls there are on the Great Plains were no doubt held tight to rural breasts – when 2,000 Kansas cattle dropped dead in a heat wave.

I tried to do some research on my Commadore 64 about this, only to learn that Microsoft had decommissioned its iconic Internet Explorer program. Oh well…

I own no strings of pearls, and probably wouldn’t clutch them if I did, but I was compelled to wrack my brain looking for silver linings in the dark clouds of the investment horizon to bring a shred of hope to my forlorn clients.

I came up substantially short.

The equity complex is in the midst of wicked multiple contraction, to the tune of approximately 1/3rd, and P/Es are now nominally below their 10-year average. So long as the denominator (earnings) holds firm, we probably can take some comfort. But the vibe out there is that earnings are at risk, and the truth is that I don’t know.

I dunno; maybe Q2 earnings drop majestically, maybe guidance will be docile. If not, though, we could be subject to the double whammy of continued multiple contraction against the backdrop of a declining earnings profile.

Won’t that be fun?

But earnings don’t drop for another month or so – after the Independence Day celebration.

Meantime, everyone I encounter is clutching her pearls at the thought of the economy plunging into recession, while inflation continues to rage like the villain in a Barbara Cartland novel.

I don’t have much insight into either plague. My economics training suggests that inflation, once unleashed, is a tough cat to bag. The best hope I can see involves the widely discussed “Whipsaw Effect” which posits that due to all those maddening backlogs, retailers have ordered too much inventory for delivery for the back half of this year and will be forced to slash prices. Like some rogue destroying the upper part of the garment of a fair waif he has encountered and must now have as his own.

This may be deflationary. But even so, it’s hard for me to see the specific contours of a recession emerging in result. It may be looming, but I think those who confidently prognosticate one are mostly spit balling.

Notably, though, the good folks at the Atlanta Fed, who are paid to make these calls, just lowered their Q2 estimate — down to 0.0%:

We’ve seen them hit and we’ve seen them miss with these tallies, but they were right last quarter, which featured a drop of 1.5%. If they are overstating growth now, we will officially be in recession by the end of July.

And we cannot expect much help from our elected officials. There may be some perverse good news in VP Harris being placed in charge of the recently shelved Disinformation Governance Board, where she is likely to do little harm to the cause of free and open debate.

Other Administration initiatives offer less promise. A recent trial balloon featured a windfall profits tax on the Energy Sector, with proceeds to be allocated in the form of gas debit cards issued to the unwashed masses. What better way to deal with rampant inflation for a vital commodity than to disincentivize production while artificially boosting demand?

But they scrapped that initiative because – get this – they couldn’t source the chips to create the specialized cards themselves. Which should tell you all you need to know about the economic issues that we currently confront.

In any event, global and domestic growth are, at best, slowing – at a time when upward pricing pressure is everywhere one meets the eye, and showing no signs of fading from view.

One other thing I can state with some certainty: the market is ill-prepared for any unexpected, incremental negative news. Like a REAL resurgence of the public health crisis. Or the Chinese deciding that now is a good time to cop Taiwan — once and for all.

So, the downside risks remain acute, and everyone is impelled to play defense. Protect the core of your portfolios. De-risk everywhere else.

Presumably, you will also want to locate and secure your pearls, and, if any of you ladies can take even the smallest comfort from grabbing at them and holding them tightly to your person, you’ll get no complaint from me.

And one last bit of risk management advice: make sure that they are linked by a solid string, so that when the handsome cad comes for your bodice, they don’t spill out onto the floor.

TIMSHEL

“The past is never dead. It’s not even the past”

William Faulkner – “Requiem for a Nun”

No, the past isn’t dead, nor even the past. At least according to Faulkner. But then again, there is no nun in “Requiem for a Nun” and, for that matter, not much of a requiem either.

Moreover, “Requiem” while counting as one of Faulkner’s minor novels, it isn’t even a novel, really. It’s written in the form of a play. Which was turned into a full-on stage adaptation by none other than Albert friggin’ Camus.

And that, my friends, is the type of world in which we live in (no grammatical error there). So, I thought it would be appropriate to write a non-requiem for inflation. Which is not dead. And not even past.

But will get to all that. A word, first about Faulkner, whose works I’ve been obsessed with of late. I am not aware of a writer who converted the contemporaneous living experience of a story more elegantly into words than he. His characters, see, and feel, and hear, and think. And then think again. We are there with them, as they amend their first impressions, and then their second ones.

And so on and so on and shoobie doobie doo.

I would say, more broadly, that one of my life’s greatest irritations is the failure of the masses to understand our thematic reference. Especially when they assume that any concept, idea, or attitude upon which they stumble is somehow something new. That nobody ever thought of it before, or tried it, or endured the running of its course.

Something truly novel happens, authentically, maybe half a dozen times in a century, and when it does, oh boy. Look out. But in a bajillion other instances, it’s all just a rehash of what’s already been tried. This, I believe, is some (but not all) of what Faulkner is referring to.

The other, critical, part is that what happened before (i.e. in the past) has somehow played itself out. It hasn’t. We are, in this country for instance, still living in the reality of September 11th. And, for that matter, that of the Revolutionary War.

And of the Great Financial Crisis (remember that?). Which is when we first tried the experiment of drowning a passel of economic pain in the simple expedient of printing money. But even that wasn’t new. The Germans attempted this after WWI (to pay reparations among other objectives), and though memory fades, my recollection is that it didn’t work out so well. For them or for us.

Upon its heels came the Great Depression and then a larger, more resolving World War.

But God Oh Mighty, our neo-money printing cycle worked well — for quite a spell. For well-nigh fifteen years, we created money out of thin air. And not just in this country. The rest of the world has chimed in – enthusiastically:

A ReQuEim for QE — Around the World in 15 Years:

My cipherin’ skills diminish at these magnitudes, but I count >$30 Trillion in the tally of these two charts. Note that the Emerging Market graph on the right ends in 2020 (presumably due to a lack of recent data), but it’s a fair bet that while the rest of the country was being locked and hosed down with anti-virials, the People’s Bank of China was printing away. In addition, though not represented pictorially above, the Bank of Canada is known to have printed quite a few loonies, and the Bank of Mexico hat-danced its way to same. As did Egypt, Argentina, South Africa, South Korea and of course (though dubiously rendered through an ersatz prince) Nigeria.

So, let’s round the number up to $40 Tril. Which exceeds the combined GDP of the United States and the Peoples’ Republic of China.

That’s a lotta jack out there looking for a permanent home, Jack.

Now, feel me here. On balance, I think it was the right thing to do – both in the wake of the GFC and then as them covid buggers multiplied fruitfully over the last couple of years. Sure, there would be consequences, but compared to the counterfactual scenario of fatal financial insolvency, I think the tradeoff was understandable. And – trust me – had the Central Banks not stepped in – twice (’09 and ’20), we’d all be more busted up than Berlin in the Spring of ’45.

I feel extra pleased to invoke the spirit of Milton Friedman in support of my arguments. Last week, I called him out, but this time I need his help. His seminal 1963 book: “A Monetary History of the United States” – co-written by his colleague Anna Schwartz and widely viewed as the definitive document on the subject, lays the blame for the Great Depression at the feet of the Fed – specifically for not printing money, buying securities from beleaguered banks, and, instead, allowing thousands of them to fail.

So, I think that taking the opposite tack – as Bernanke, Yellen and Powell did, was probably the proper course.

Unfortunately, however, it is in our nature to take matters to the extreme, and, in this instance, the fleeting success of the policy fostered such whimsical notions as Modern Monetary Theory, which posits that a self-contained financial economy, blessed with its own Central Bank and currency, can spend all it wishes, and simply pay for it with manufactured money.

All of which sets up my own theory about the current inflation that plagues us. I believe that in the period leading up to and after the GFC, the U.S. economy featured a deficient money supply. If this weren’t the case, we would’ve experienced hyper-inflation well before it began to form on horizon.

But from 2009 through 2020, we absorbed this excess liquidity like a galactic financial sponge. The economy grew. We had full employment. We were innovating like Edison. And exporting energy products to the rest of the world. However, it was always on the cards that we might overshoot the monetary mark, and the early ’22 returns suggest that indeed we have.

There’s just too much money sloshing around the system right now, and this, my friends, is inflationary. Moreover, the discontinuance of QE doesn’t assuage the problem; it simply, at least in theory, keeps it from getting worse.

The markets didn’t get the memo this week about how worthless their cash holdings are. But then everyone saw the CPI print, which I won’t recount. I do feel duty-bound, however, to remind everyone that PPI drops on Tuesday, with consensus expectations placing it at 10.8%. CPI surprised to the upside (surprise!). If PPI follows suit (and I think it will), then it’s more of the same for the misbegotten investor class.

All of which has the smart money betting on an even more aggressive round of Fed tightening. In a slowing, impaired global economy. Not a great environment for incremental financial risk assumption. I reckon will find out more when Chair Pow steps up to the podium on Wednesday and lays his latest wisdom on us. Oh boy. I can’t wait.

And, from my vantage point, evaluating anecdotally what is transpiring at the pump and checkout counter, the early returns for June are less than encouraging. Of course, Food and Energy are somehow excluded from what is colloquially referred to as “core” inflation. But I tell you this – the problems appear to be more widespread. I tried to rent a car in Stamford CT this past week and there were no offers. I found this alarming because Stamford is certainly one of the most car rentingest places on the East Coast, and maybe in the whole country. I did source one in Bridgeport, but in addition to the indignities associated with slumming it in that skanky metropolis, the price they quoted was one that I am unwilling to share in what, after all, is a family publication.

Luckily, I was able to crank up the old jalopy. The one I bought long ago. In the past. 2010 to be exact. And she got me where I needed to be.

So, the past is not, indeed, the dead. Or even past.

And we should remember this – particularly as we approach the anniversary of the signing of the document that formed the government which, for better or worse, we all operate within. Or when we stand in an endless security line at the airport, to ensure that nobody is carrying a box-cutter with intent to slash the pilot’s throat, commandeer the plane, and ram it into a building.

Or when we find that there are insufficient goods and services with which to rid ourselves of our increasingly devalued fiat currency that I believe was recently characterized by scarcity, but now, due to over-aggressive creation, is now in excess supply.

Thus, in closing, I bid you a good yesterday. Because, like it or not, it will inform all your tomorrows.

TIMSHEL

If the good times are all gone, then I’m bound for movin’ on,
I’ll look for you if I’m ever back this way…

Ian Tyson

Though I cannot verify its accuracy, someone recently relayed the following quip to me.

Jack Nicholson (yes, that Jack Nicholson), was once asked, given the abundance of nubile virgins and other passionate females at his perpetual disposal, why he continued to show a preference for professionals — in the realms of L’Affaires du Coeur.

To which he replied “I pay to leave”.

I think he makes a good point, but I ain’t gonna spell it out for you. Either you pick up what he’s laying down or you don’t.

It’s that simple. At least when it comes to L’amour, toujours l’amour.

The domains of investments, markets, and the capital economy, are, in my judgment, more complex. Here, it is difficult to merely conduct your business, execute financial settlement, and be on your way.

Because if you could, I suspect that many among you would choose that very option. Right now.

Even I – a lonely risk manager from outta town – have been sorely tempted to figure out how, and for how many ever shekels, it might cost me, to purchase my exit from the sorry morass of conditions that currently confront us.

But for me (and I suspect, for others among you), the strategy begs the question: “what then”? Because, you see, I still got bills to pay, and no other means for doing so than by plying my trade.

Maybe I just need a break – to brighten my mood, so to speak.

Which was not improved by a recent visit to an otherwise authentic bagel joint on Broadway, whereupon I was compelled to fork out twenty big ones for a raisin bagel with cream cheese (otherwise known among us stone cold ballers as a schmear).

My crack econometric team informs me that part of this financial abomination is owing to (yes) a large increase in the price of bagels:

Bagel Prices (aka Wallet Schmears):

And, largely because I must, I will cop to having asked the gentleman behind the counter to throw some smoked salmon and tomatoes on top.

But prices for those commodities are stable to down. There is a shortage of cream cheese, which – not gonna lie – is quite concerning to me.

But a full Jackson for a schmear? I’m telling you right now, the American Consumer Economy is not likely to survive such an outrage.

And I wasn’t even done yet. Because a $20 schmear is bound to make a guy thirsty, right? So, to wash it down, I next went to the local Dunkin’ Donuts, where I was compelled to cough up $5.25 for a large lemonade. I figure the wholesale cost of the juice to be under 5 cents. Same for the cup. I am a big consumer of ice, but what can that set back the franchise owner?

Yup. I reckon somebody made out pretty good on that there trade. But not me. I got took. Twice. So, then there was nothin’ left for me to do but the obvious: get outta town.

You can probably guess what happened next. My fuel gage was huggin’ the E, so I had to fill ‘er up. Which set me back more’n 90 large.

Talk about paying to leave…

I am further annoyed about this whole Depp/Heard thing. Not that I paid any attention to the details, but the whole thing seems so representatively sordid, so exemplary of the type of nonsense upon which we put all our time and energies lately.

But beyond that, after winning his judgment, JD promptly went on tour with the magnificent Jeff Beck. One of my heroes. And this hacks me off. Johnny is what I would describe as a competent amateur guitarist. However, I’m thinking, I can out-shred him considerably. But am I on stage with Jeff Beck? No. I. Ain’t.

Meantime, I took no joy in being right about the rally in risk assets failing to sustain itself. I think we’re right in the middle of valuation ranges, which, albeit with wide bands, are likely to prevail for the period that is visible on the horizon.

And it’s nearly an impossible environment in which to either trade or invest. And I don’t see what ends it. We’re now nearly 15 years into a market construct under which we could be nearly certain that any time the pain reached certain levels of unpleasantness, the government would bail us out. But that was then. I don’t see any bureaucratic cavalry anywhere on the current horizon. And even if there was, there’s not much they could do to save us.

Strike that. There’s plenty they could do. Like take the handcuffs off the domestic Energy Sector. Incentivize R&D. Cut regulations — such as those that catalyzed the recent and continuing Baby Formula shortage. Unleash the astounding technological innovations that have manifested out of the lockdowns themselves. Particularly those in Telecommunications and Biotech.

But instead, we’re begging the Arabs to dribble out a few more drops of the Bubblin’ Crude, and we are hamstringing these other sectors. Witness the halving of the value of the Benchmark Biotech Index, which is chock full of new products and, for practical purposes, infinite demand:

Biotech Index: Heal Thyself!

Matters have devolved so thoroughly that the HF GOAT of Biotech – perhaps the GOAT of the whole HF industry, is now taking capital on quarterly liquidity.

His fund had been closed to new investments for much of the preceding decade. For my money, with his benchmark down 50% in barely six months, now wouldn’t be the worst time to take a look at his offering.

But I’m here to provide enlightenment and erudition; not to hawk hedge fund offerings.

And the last thing the Government apparently wants to do is to energize the bleeding edge sectors of the American Economy. Clearly, they believe to do so would run against their political interests, but I’m not sure they have the political calculus quite nailed here. Maybe they should get their heads out of Davos and pay a visit to Davenport.

But instead, our leadership will hide behind the Fed as the agent to reverse the reduced Buying Power of the Almighty American Consumer. On Thursday, we’ll be forced to endure yet another set of inflation statistics – with CPI expectations substantially unchanged at recent thresholds of >8%.

But don’t worry; the Fed has the President’s blessing to raise interest rates – and take the blame when: a) this takes yet another slug out of economic output; with b) negligible impact on the pricing pressure we all feel.

Higher interest rates, for instance, are not likely to provide me much relief at the schmear counter. Or, for that matter, at the pump.

Plus, if the Fed gets real aggressive and engages in sufficient hiking such that it takes rates, to, say, 4%, that’s still only half of the current rate of inflation. But the political narrative will be such that the Fed will be blamed, nonetheless.

Along with Russia, which appears to be closing the circle on key regions of the Ukraine. Or maybe L’il Kim, who has now launched more missiles in early June than he did all of last year.

And, in terms of the markets, I find risk assets to be neither cheap nor expensive; probably I’m right on both accounts. Not many catalysts out there for a rally, but so much recently manufactured liquidity that….

But we’ve been through that a thousand times before. And, if the good times are all gone, I’ll be bound for moving on.

There’s really nothing else for the rest of you to do but stay and fight it out; paying for your exit is probably too expensive.

Except with respect to this column, which has blessedly reached its denouement. They don’t charge me for resting my keyboard – yet.

So, I reckon I’ll bounce while the bouncing is good.

I’ll look for you if I’m ever back this way.

TIMSHEL

Operator, can you help me make this call?
See the number on the matchbook is old and faded,
She’s livin’ in LA, with my best old ex-friend Ray,
A guy she said she knew well and sometimes hated
Operator, let’s forget about this call,
There’s no one there I really wanna talk to,
Thank you for your time, you’ve been so much more than kind,
You can keep the dime…

Jim Croce

Yup, you can keep the dime. I was gonna use it to make a call, but now I reckon not.

Because I read this past week that whoever decides such matters had removed the last remaining NYC coin operated pay phone from its HQ – as it happens, in Times Square.

Here’s the evidence:

My additional investigations (conducted on the ubiquitous, impeccably accurate Snopes.com) suggest that this is, as ad nauseum designation deems such matters, Fake News. That there are, apparently, any number of these buggers still functioning on Manhattan streets, and even more when those ensconced inside bodegas and other such commercial enterprises are counted.

And it certainly would be inaccurate to suggest that the city features no more pay phones of any kind. They have these new-fangled machines that hook into them fancified cell phones on nearly every block. I’ve never used one of these contraptions, but then again, there’s lotsa things I never done. Like making a TikTok video or operating behind the wheel of a speed boat.

I reckon I’m just too old to change now. But I kinda wish that the folks at Snopes wouldn’t have saw fit to call BS on this here story, because it is about the best theme I can come up with on this holiday weekend. On the other hand (so I tell myself), there is ample precedent in this space for bending the facts just a tetch — in the name of poetical license and all. So that’s what I’m gonna do now.

Leastways, I got no other use for dimes, because even before they bounced that last Superman Receptacle one outta town, it cost a federally mandated 4.94 of them to effect a telephonic connection. And, beyond this, there ain’t much a fella can do with 0.8 of a bit. I do own quite a few of them round near-worthless cylinders, though, gathering dust in various receptacles across my multiple residences, and with which I can’t bear to part. Because I like to see them, even if the image of Franklin Delano Roosevelt embossed on every one of them looks, to me, more like his successor Harry S Truman.

Roosevelt or Truman: I Can’t Rightly Tell

So, I reckon I’ll hold on to the ones I got – dimes that is. Maybe even shine ‘em up now and again. It don’t much matter, after all, if the guy on the left is FDR or HST. Plus, in my research for this note, I learned that the S in Truman’s name is just an S. He don’t have no additional letters in his middle name. And, that being the case, putting a period after it is a typographical error. It ain’t Harry S. Truman; just Harry S Truman.

I could swap any dime I have for a few hundred British Thermal Units of Nat Gas, but hey, it’s the official start of summer this weekend, so why bother? The commodity crossed $9 per 10 Billion BTUs earlier last week, nearly 4x where it was trading a year ago, so it’s safe to say they’s pricey. I also recently learned, to my infinite horror, that Canada, which I once assumed to be the producer of 100% of the world’s NG, is now a net importer of the stuff. It’s like Wisconsin sourcing most of its cheese from Vermont, or Mexico outsourcing poncho production. And it just ain’t right.

News is not much better in other realms of the Energy Patch. Friday’s WTI close of >$115/barrel is itself a triple from even pre-lockdown days, and a level that eclipsed our post invasion panic session of a couple of months back.

And ten cents won’t purchase much of anything else – not even the fleshy stuff that you’re BBQing this weekend:

From what I gather, the folks in charge in Washington are just as likely as not to celebrate this here graph. Maybe slide it in alongside the one indicating record prices as the pump, and proclaim a new era of vegetarian, bicycling Nirvana.

I have some sympathy for them, though. Not too much, after all, that the House, Senate, President or even Supreme Court can do to turn longstanding food consumption patterns on (I must say it) a dime.

Economists are hopeful that these trends will run their course. That pricing pressure has peaked. And maybe it has. But inflation is a tough nut to crack. And, while we’re on the subject, the financial press has recently been bandying about a quote from the magnificent Milton Friedman, that inflation is always and everywhere a monetary phenomenon. I LOVE Friedman, but is he right here? Are, for instance, the price increases in Grains, Meats and Energy simply a matter of too much money chasing too few goods? Or does the hostile disruption of these products from major supply sources factor into the equation? Is, for instance, the bird flu that is destroying our poultry population and rendering wings, legs and thighs a delicacy beyond the economic reach of the masses truly and exclusively a monetary phenomenon?

Just wondering is all.

Meantime, the market was droppin’ dimes all week. Like it was Peyton Manning or John Stockton. The Gallant 500 recaptured >6% of recent losses; Captain Naz >9%. The value of corporate paper spiked. Crypto stabilized. I reckon we’ll take it.

But rather than take a victory lap on my repeated “oversold” call, I’ll simply state that I was relieved to have been let off the hook. However, I must point out the obvious: bear markets don’t typically end in the types of V-bottoms manifested last week, which are more typically driven by short squeezes and poorly informed re-allocations of capital than they are evidence that the selloff is over.

On balance, market prognosticators are calling this a Bear Market rally, and on balance, I am inclined to agree with them. Valuations may hang in there for a stretch – if for no other reason than selling fatigue, but the underpinnings of the economy feature some ominous signs. To wit, the Almighty Consumer has spent down her covid savings and is increasingly relying upon credit to finance her purchases:

Not gonna lie: all of this makes me a bit jumpy.

One way or another, though, my dimes are buying less, and the images on the coins themselves are looking less like Roosevelt or Truman, and more like FDR’s predecessor: Herbert Hoover.

In earlier, happier times, I’d probably trek down to the corner with some change in my pocket and call someone.

But the coins will no longer work in the machines, and even if they did, there’s no one there I really wanna talk to. Certainly not my best old ex-friend Ray, nor his roommate. Likely, the feeling will pass, but in the meanwhile, I intend to proceed with extreme caution.

I suggest you do the same.

TIMSHEL

Have I really been describing risk assets as oversold? I hope not, because if so, God Oh Mighty, have I been off.

Makes me feel like a Bull in the proverbial China Shop – stomping about, uncaring, and unawares, and breaking all the fragile, porcelain dainties within my vicinity.

Affairs have devolved so badly that the Gallant 500 spent most of Friday in full Bear configuration, before gathering itself in the last hour or so to escape – for now – this ignominy.

However, those looking for an extra portion of Humble Pie might wish to glance at the front page of Bloomberg’s Equity Index Dashboard (BBG Code WEI), which, to save you the trouble (along with the ~$2,500 Monthly Subscription Fee), I will offer here:

A review of the right-most column indicates that the two worst performing indices in the whole friggin’ ’22 configuration are the above-mentioned Gallant 500 and its pal: Captain Naz. Both of which are currently being crushed by spitball jurisdictions such as Mexico, Brazil, Spain, France and even Italy.

Though they don’t merit a front-page listing, I’m happy to report that we are running ahead of Sri Lanka, Poland (barely) and (yes) Russia, and, if you want additional positive karma, the Ukraine is kicking of our ass.

In general, though, don’t know when the last time was that American indexes were bringing up the rear of this race, but I suspect it’s been quite a while.

Even Tiger Woods is running ahead of us on the Leader Board, and he was forced to withdraw from the PGA tourney on Saturday.

But as matters stand, we have no alternative other than to wallow in our global shame, with the only offsetting news being that the ’22 contest ain’t yet over — yet. We might surge forward from the rear of the pack — like the (aptly named) Rich Strike did at the Derby — and grab an historic win. On the other hand, we could fade in the manner of Summer is Tomorrow, who actually came out hot and was leading for about 1/4th of a mile, before coming in dead last in the field of twenty.

Financial prognosticators are now in desperate competition to call the most wretched bottom they can muster, with some legit strategists even predicting another >25% down before the debacle ends.

Truth, of course, is that nobody knows. It was a lonely crowd that was predicting a collapse a few weeks back, but now, of course, they’s multiplying like hobgoblins.

And, in these sorts of environments, investors cast about for clues of any kind. After Wednesday’s somewhat historic rout, what passed for good news (and caused our markets to open strong on Friday – before collapsing and then recovering) was an announcement from the People’s Bank of China that it was reducing the rate on 5-year loans by a big fat 0.15%.

Well, OK, says some of us, “now we can play”. But then they thought better of it. China is still in 0.00-vid lockdown. It just announced a double-digit decline in April Retail Sales, a 2.9% drop in Industrial Production and an Unemployment Rate of 6.7% — nearly double that of the levels most recently registered in the United States.

In a Command-Control economy, where both activity and statistics are under the complete mastery of the Ruling Class, them’s pretty bad numbers.

And I’m kinda wondering if they’s sustainable. Because, you see, I have this theory. It’s not a particularly uplifting one, but I believe that two forces drive all socioeconomic matters on this here planet: military might and economics. As a corollary, I’m convinced that the latter controls the former. More specifically, finances rule the field, first and foremost, because they are the engine behind all matters martial.

So, why does this Xi character control China? Because he controls the Chinese Army. But behind the curtain are all those billionaires who fund the Army. Who I believe are the real playas here. Who are not likely to continue to roll over and get stiffed so that Xi doesn’t get blamed for more covid. They’s losing money by the bushel basket at the moment, and, I suspect, are not shy about expressing their displeasure in certain sections of Beijing.

Are they gonna bounce Xi? I doubt it. But I do suspect that they are placing enormous and increasing pressure on him to remove his boot-heel from the national economic throat.

And, if he has a change of heart, if he opens for business again (inevitably claiming full, historic victory over the virus), it might just be the catalyst to turn all those investment frowns I see upside down, to convert all those Wall Street Strategists’—currently outflanking each other in hysteria to call the lowest lows, from Bears into Bulls.

It would certainly do wonders for those Big Tech Dogs, which investors have followed, recently lemminglike, into whatever valuation fantasies prevail at any given point in time. It would also, presumably, offer aid and comfort to the most recent authors of our extended heartbreak: Walmart and Target. Which buy virtually all their wares from the People’s Republic.

If the Big Tech Dogs (to say nothing of WMT and TGT) do indeed recover, whither our misbegotten indices? You can decide for yourselves.

Something like this is bound to occur sooner or later, but who’s to say if it’s at SP3.8, SP4.0 or S.P3.0?

Meantime, though, it’s a tough point in the calendar to gin up much optimism. We’re headed straight into the Memorial Day holiday slowdown, and one doubts how much additional risk that investors will wish to absorb into that cycle. Data flows are traditionally slow this time of year. The mainstream news headlines, such as they are, are unilaterally depressing.

I still think risk assets are oversold and poised for at least a modest recovery, but I struggle in vain to identify plausible alternative catalysts.

Perhaps it’s this. Naz P/E’s have come crashing to earth, and are now, improbably hugging their two-decade averages:

I must state, though, that multiple contraction is not typically the stuff – at least on its own – of which sustained recovery rallies are made.

So, maybe you’ll join me in hoping for a China in a Bull Shop rally.

Because the alternatives are frightening to contemplate, boiling down to either China in a Bear Shop, Bear in a China Shop, or the time-honored:

Bull in a China Shop.

Of which (I’m sure you’ll agree), we’ve had far too much of late for anyone’s liking.

TIMSHEL

“C’mon, c’mon down, ya got it in ya, uh huh.. …Got to scrape the sh!t right off your shoes”

— Mick and Keith

I must begin with an apology to Mike Mayo – a well-traveled banking analyst who, ostensibly due to his penchant for undertaking bite-the-hand-that-feeds-you downgrades of Wall Street firms, managed to get himself bounced from several of them. I’ve interacted with him once or twice. He seems a nice enough fellow.

About ten years ago, he published a book called “Exile on Wall Street”, detailing the episodes briefly described above. Mike landed on his feet, though. He now heads up Financial Sector Research for (the often misanthropic) Wells Fargo Securities, where he still takes shots at banks.

Like Mike, I have borrowed, glibly and titularly, from the Stones. My justification is as follows: next week is the 50th anniversary of the release of their magnificent double disc: “Exile on Mainstreet”, which many consider to be their masterpiece. Having pondered this for decades, I find myself more in the “Let it Bleed” camp. But: a) I’ve already written about LIB; whose: b) 50th release anniversary was 2.5 years ago; and c) it’s a pretty close contest between EoM, LIB and Sticky Fingers.

I note, in passing, that Exile’s Golden Jubilee coincides almost to the day with Apple’s announcement of its intention to discontinue production of its once-iconic I-pod device – that new millennium technological marvel that could store dozens of MP3s on a device that (get this) fit into the palm of your hand. Much has changed since its release; much hasn’t.

“Exile” was first released on vinyl (natch). Then on the fabulous 8-track, cassette, CD, MP3, Napster (God I loved Napster), YouTube and other internet frameworks. It is now available, of course, on Spotify, Apple Music, etc. It was the second album (after Sticky Fingers) manufactured and distributed by Rolling Stone Records, remembered (by me, at any rate) primarily for its yellow vinyl affixed labels with the band’s newly created and unmistakable tongue logo in the middle. RSR folded, indecorously, into a big conglomerate that is now Virgin/Atlantic in the early ‘90s.

So, the Stones’ big double album (recorded in a drug-hazed rented villa ensconced on the French Riviera) pre-dated the I-pod by nearly three decades, and now, surely, will outlast it – presumably by eons. It has already outlived the band’s own record label by a similar length of time. That, my friends, is something, at any rate.

From a lyrical perspective, I’m not even sure the band could release the record, replete with its scatological, borderline racist and sexually explicit references, into the current atmosphere, featuring, as it does, hypersensitivity to microaggressions of every vintage.

If I’m somewhat ambivalent as to whether Exile is the Stones’ best album, I am entirely clear as to its top song. It’s “Sweet Virginia”, which, if there’s a better tune ever recorded, I’ve not heard it. From the twangy, finger-picking opening, bleeding into Mick’s breathtaking harp intro, to Bobby Keys’ extraordinary R&B sax break, for me, it comes as close divine as anything my ears have ere experienced.

And then, most importantly, comes the harmonious hook line:

“Got to scrape the sh!t right off your shoes”.

All of which brings my disjointed themes into harmony. Because, from a Wall Street perspective, it sure seems like somebody – perhaps more than one of us, stepped in it.

From any proximate position, it would be difficult to have missed the olfactory unpleasantness. Though it wearies me to do so, I reckon I must begin with inflation. April CPI and PPI clocked in at high single/low double-digit levels respectively, thresholds that would be truly terrifying if – get this – they weren’t nominal improvements from March figures.

“Core” statistics, which oxymoronically exclude Food and Energy, were a bit tamer, but it’s not as though that nicety is likely to create music to soothe the public’s savage breast. As one manifestation of this, and in addition to the maddening upward pressure on Crude Oil (which even draining our Strategic Petroleum Reserve and begging the Ayatollahs to pump more and send it over don’t seem to cure), the refined petrol that we pump out is pricier than ever before:

Gas, Gas, Gas – It’s Jumpin’ Jack Flash (Album Source: “Get Yer Ya Yas Out!”):

And, entirely skipping over other real-world vexations such as the Baby Formula shortage and the leak of a draft of the Supreme Court’s overturning of Roe (feel free to connect these dots as you will), we must, I suppose, migrate to the dubious, hypothetical world of crypto.

I really don’t wanna do this. But duty calls. A Stable Coin collapsed, and, in result, took a huge bite out of the entire digital currency complex. Because Stable Coins is s’posed to be just that: stable, bringing, as such, an element of sobriety to what is (whatever other views one takes on the proceedings) an entirely speculative concept.

The culprit – a handy little item called Terra (nice, earthy branding, Terra) sought to maintain its stability against fiat currency through algorithmic processes.

And what could possibly have gone wrong with that approach?

Well, something did. We can hope for better fortunes with respect to Terra’s bigger rival Stable Coin: Tether, which claims to be backed by honest to goodness verifiable collateral. However, to the best of my knowledge, no one has seen an audited Tether Balance Sheet for several years. Sooo…

None of this was particularly constructive to more traditional risk assets, which now (but perhaps not for all time) are nearly 100% correlated – tethered, if you will, to crypto. Equities continue to be a wild ride and were in full collapse until they staged a much-needed relief rally in the last 1.2 sessions of the week. Didn’t save them from recording their 6th straight weekly string of losses, though.

The microscopic V-bottom that began on Thursday afternoon did not take me by surprise; after all, I’ve been arguing that the markets were oversold for > two weeks. And how has that worked out?

But for those with sufficient grace to afford me the benefit of the doubt, I continue to believe that there are probably reasonable entry points here. This is true not only for equities (FactSet reports that for the first time in several years, forward-looking P/Es are now below their 5-year average), but probably, also for credit. Aggregate spreads are soaring in harmony with other turn-tail signs of risk aversion – but with scant visible rise in actual default risk:

OAS Credit Spreads Widening All Down the Line:

As is my habit, I will argue that pricing the Gallant 500 at a 38 handle (which happened last week), or bidding bonds down to a near doubling of credit spreads, is no less conjectural than where these instruments were trading a mere month and a half ago (SPX ~46; OAS < 1%). Only now it is much cheaper to add risk than it was a month at that time. So it seems like they’s worse points to take a shot.

I don’t reckon that loading in here will be a pleasant journey. Quite to the contrary – in order to make it work, it will be necessary to avoid a pant-load of steaming piles all along the path.

And if you happen to step in one, so what? You’ll know what to do – just follow Mick and Keith’s instructions – issued two generations ago. I won’t beg it of you, but yes (I believe), you got it in ya.

To scrape the sh!t right off your shoes.

The only question is whether you will rise to the occasion.

I think you will, but, in closing, please bear in mind that these comments are issued by one who is an Exile of Wall Street.

TIMSHEL