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

I’m writin this here note awaitin the arrival of my fourth grandson. And I wouldn’t a reckoned on that. Four grandsons! God oh mighty!

The still to be named little Feller (yup, his surname is indeed Feller – owing, so I’m told, to some of his forebears bein’ in the business of fellin’ trees) should be droppin in any time now; almost certainly before any of y’all receive this note. Henceupon, I reckon I’ll fill y’all in on the good news as soon as it come to me.

Grandson #4 is all I’m likely to git. No granddaughters; no more grands of any kind.

I’m not complainin, though.

Some (I hear tell) never git no grands at all.

Lord knows, he’ll be entering the proceedins at an interesting pass, with less visibility into the future than his two oldest brothers – born, respectively, in 2015 and 2017.

The one right before him come two years ago this past Friday – on Cinco di Mayo ’20. When we was all in lockdown, with no notion of when they’d turn us loose.

I reckon them last two got something of this nature in common.

Because there’s a passel of uncertainty at the moment. You might even call it LOCKDOWN level uncertainty. As one example (somewhat random and owing in part to a nasty round of Bird Flu makin’ its way across the land), the price of chickens is more than double the level that greeted any of his three older brothers:

Chicken: Finger Lickin’ Expensive?

I reckon it don’t matter much for now. He’ll be on his mama’s milk for a few months, and then subsisting on that mush (now in terrifying short supply) that passes for infant food.

On the other hand, if current trends continue, by the time he’s ready to dig into The Colonel’s Original Recipe, it might not be economicly feasible for him to do so.

His fokes, after all, have other expenses to consider, and may need to be a little parsimonious in dishing out them wings and thighs.

They could, of course, take out a secondary mortgage for these luxury victuals.

But I can’t hardly counsel that.

Mortgages – More Expensive than Chickens:

What I can’t figure is where this here chart tops out. The base case is that it goes higher, what, with the Fed not only not buying, but actually selling, this paper and all.

Leastways, he’s got a solid roof over his head, mostly paid for with the rest at monthly outlays his daddy can (trust me) afford.

Other little fellers enterin’ this world mayn’t be so lucky; even tumble-down shacks in Bigfoot County are trading at levels so’s which regular fokes can’t afford them:

And this is all afore the big jump in mortgage rates embedded in the rightmost portion of the precedin’ graph. Meantime, you’d think that this would take a bite out of housing prices, but it hasn’t – so far. I’d show you the most recent official housing data, but instead will just tell you that the benchmark index (Case-Shiller) is trading at 10x its ’19 lows.

So, generally speaking, my boy is entering into a hard slog of financial environment. Interest rates rising in a slowing, deteriorating economy, forcing those of us who, with picks and shovels in hand, toil in the market mine, to grind away in the dark – either without lamps, or, having lamps, lacking kerosene (the price of which, by the by, has more than doubled in the last year) to light them:

Kerosene – Now You See It; Now You Don’t…

All of which points to the real-life, as opposed to theoretical, impacts of inflation on the world’s activities. They’s a lot of chatter about inflation these days, including by the Fed, which, late risers thought they be, appear to be at last attendin’ to the problem.

But nobody – including the Fed theirselves – has much of a notion about what to do about it. Lots of them over-schooled-in-the-economics types says that rates must rise above the level of inflation in order to have a chance to tame it at all. And I reckon we’ll see what that looks like this coming week, when the next round of data drops (is it just me, or does it seem like there’s inflation numbers commin’ out these days most every day?).

CPI and PPI are expected to have backed off a titch in April, and I wouldn’t be surprised if they had, what, with commodity prices retreating from post-invasion shock levels.

But commodity prices is back on the rise in May. And not likely to be driven down in the short term by obtuse actions such as 50 bp hikes in the Fed Funds Rate and promises of Central Bank Balance Sheet reductions.

Nope, chickens don’t give much of a care about that. And, just to be sure, I went out back and aksed them. Whereupon they ignored me and kep on peckin at the dirt – jes like they was doin’ before I come.

And last week, while we was hooeying around with Chairman Pow, the Commerce Department, to little fanfare, announced a 7.5% decrease in Worker Productivity — comprised of 5.5% increase in wages, combined with a 2.4% drop in output (the math here don’t quite add up, but I was never none too good at cipherin’).

*****

All of the foregoin’ has got risk assets actin a bit peekid. I won’t recount the specific carnage, but the Naz is in full Bear Market config. So too is Investment Grade Credit (High Yield not fur behind). And jes for good measure, them new-fangled modes of swappin’ goods, which are supposed to replace them dirty bills the missus keeps in her coffee can (for the obtuse: Crypto), is down by half since Thanksgiving:

Crypto Carnage: Money that Ain’t Money

Now I’ll admit that all this is a bit beyond a fella what’s about to be a grandpappy for the fourth time to figure. I hear tell that these here money forms reside strictly on computers, which I don’t understand none too well.

I did notice that some dude from Nebraska who everyone seems to follow like a tent show preacher said, at the annual Omaha BBQ he throws for a buncha city slickers from New York, that he wouldn’t pay more’n twenty-five dollars (about a quarter of a tank on my John Deere) for the whole shootin’ match. And from what I can decipher, he may be right.

(I should also inform y’all that my tractor has four on the floor, which is more than can be said about them ‘lectric vehicles and other doodads on the road these days).

So, I reckon them dirty bills and coins in that there can that grandma has buried where she think I don’t know where it is might just be worth perservin’. Not only agin crypto, but also agin’ the that funny little currency they use in Japan, where I am informed the whole crypto thing got birthed:

Nope, them dollars ain’t worth a damn agin chickens, kerosene, or new dwellins’. But it do buy more Yen, stocks and bonds than it did jes a while back.

And all jes when I have to set up a new nest egg for grandbaby Number 4. I reckon they’s worse times to dive in, and, on the whole, I figure that these here stocks and bonds may fetch more sometime before he’s of age, and we take him out into the fields, with his daddy and grandpappy, to learn him some risk management.

But we’s a still waiting on him. And I reckon I’ll wait to build his book of stocks and bonds. I’ll keep y’all posted.

In the meantime, keep ‘er tight.

TIMSHEL

Somehow, we’re through the first trimester of the great campaign of ’22. From a grading perspective, it’s one that most of us are not particularly fired up to sprint home to show our parents.

What passes for good news here is that we still have 2/3rds of the year to go, that our calendarbased cups runneth under — to the tune of 67%.

Is that a measure of our capacity to drink deep? Or is it an indication that we are unlikely to slake our thirst to the point where we’ve had our fill? I reckon we’ll find out.

A current read is, of course, anything but encouraging. And, unfortunately, it devolves to me to inventory the carnage – a bleak exercise through which I will seek to pass as quickly as I am able.

On the economic side, the tidings are grim. The economy contracted by >1% in Q1 – an outcome that came as a surprise to everyone – including me. Notably, this is a measure of nominal, er, growth. Thus, when one overlays the associated measure of inflation, which, within the same release, clocked in at 8.0%, we’re looking, in real terms, at a significant contraction. I read some of the gibberish about how this ain’t so bad because it is driven by inventory adjustments, trade balance changes, and so on and so forth. But I know this:

It ain’t good.

Meantime, critical prices continue to surge. Heroic efforts notwithstanding, nothing – short of the (morally unthinkable) prospect of removing the shackles from our own production capacity – appears to beat back rising energy costs.

Other than perhaps filling our tanks with Corn. Which we are doing through E15 Ethanol, but which might not even work, as the latter is now at its highest price level in more than two generations:

Corn Prices: Higher than an Elephant’s Eye

In Europe, the divorce proceedings, by mutual consent and owing to irreconcilable differences, between the Russian Energy Industry and Continental consumers, ensue unimpeded.

China, of course, is in zero-covid lockdown, and feeling significant economic pain in result:

Now, I’ll stop short of busting out the tired cliché that when China sneezes, the rest of the world catches a cold. More accurate would be to state that the rest of the world takes their remedies, through the form of pharmaceutical exports, upon which we deeply rely.

We also import other sh!t from them. Like machinery and technology equipment. If they’re indeed slowing down, no matter how we otherwise may feel about their leadership, it’s something of a problem for us.

Transitioning to the markets, the (1/3rd) good news is that China is allowing its currency to devalue a significant amount relative to the USD, rendering the goods we import from them more than a smidge cheaper. But this also implies that our exports to them are more expensive. Which could be a problem – particularly for those Big Dog/Sell-Everything-to-China Tech companies, who, on balance, broke our hearts with their earnings releases this past week (more about this below).

The same can be said about Japan and the USDJPY exchange rate, which crossed the 130 mark (highest in about a generation) last week. Time was, we would buy virtually everything from the Japanese. But no more. We do purchase their cars and entertainment hardware, which is now cheaper, purely on a currency exchange basis, by more than 10% this year. Yes, their imports from us are pricier, but that doesn’t matter, because they never much liked buying our stuff anyway.

As mentioned above, earnings, while respectable on balance, are a dumpster fire across most of the Park Avenue section of the Equity Complex. Particularly problematic was Amazon. They reported a loss for the quarter – which itself is not much of an issue – owing to the creativity of the folks in the Office of the CFO that produce the numbers. However, FactSet is reporting that their massive whiff took three full percentage points off the earnings growth tally for Q1, which, had they simply reported “flat” (which I believe it was in their power to do), would reach a respectable double-digit threshold.

But we have lived with the earnings of these ruling class corporations since before I can remember, and so, with their earnings, do we die. Except for the now-fully-ensconced-in-an-alternative-universe Meta/Facebook, these names are down ~30% from their highs — registered just a few weeks ago.

And, in result, our beloved Equity Indices are all in free fall. You can read elsewhere about how this was the worst April for the Gallant 500, General Dow, and, most dramatically, Captain Naz (now officially in Bear Market territory), in several decades, about how our stock market is off to its worst start since WWII…

And so on, and so on, and shoobie doobie doo…

I also remain beyond worried about credit markets, who, in tail-wagging-dog fashion, are, for once, following the lead of their less erudite opposite numbers in equity-land. Both Investment Grade and High Yield instruments are approaching lockdown level valuation reboots.

And Credit Spreads are, of course, not the only source of worry in the Fixed Income Complex. I may not need to inform you that interest rates are going up, that the 5s/10s Treasury Curve is inverted, and that all of this comes to us in advance of Thursday’s FOMC wingding, which is setting up to be a rager. The Street is pretty locked in on a 50 bp increase in Fed Funds, and we’ll probably hear more saber rattling about Balance Sheet reduction. And, on a separate but related note, we learn this week how much paper the Treasury Department is fixing to dump on us thus quarter. It’s probably a lot, and just when the long-ravenous Fed is pushing away from the table.

So, our Central Bank is gonna get all in our grill one week after a surprise negative GDP print (here’s an early prediction – a couple of weeks from now, we’re likely to learn that the Commerce Department miscounted, and finds, miraculously, that GDP is revised upward into modest, positive territory), against pretty clear evidence of (at minimum) a slowing domestic and global economy. Contemporaneously, the Treasury Department is likely to announce a series of massive offerings to lay on a Fixed Income market that: a) is showing scant enthusiasm for these investments; and b) will feature the Fed not as buyers, but rather as sellers.

What could possibly go wrong?

Far be it from me to complain, though. We’ve been in a Bull Market for about 90% of my adult life, and Bull Markets don’t function effectively without an occasional culling of the herd. Now in particular would be a good time for a washout: a painful but finite-in-magnitude-and-time reboot down to more rational valuation levels, where a fella could look around and maybe find some good names to buy.

Problem is, I don’t think this will happen. There is (yawn) too much cash sloshing around and looking for a place to go. Big investment capital pools are flush with liquidity. As are corporate treasuries. With respect to the latter, seeing as how now does not appear to be an opportune time to invest in growth: plant, equipment, R&D, etc., what better way to serve their investors than seeking the best entry points for the repurchase/retirement of their own stock?

Those big capital pools are looking for buying opportunities here as well. And if you doubt this, just look online (if you haven’t already done so) at the highlights from Buffet’s just-completed annual “aw shucks” gathering in Omaha. Buffet (while not scolding the rest of us for our patent stupidity) is buying.

So, I reckon, as the second trimester of ’22 gets underway, we’re looking at more of the same, piled, as they say, higher and deeper. Lots of bouncing around at the index/factor level, significant downside pressure that never quite completely manifests, and unspeakable carnage with respect to specific, misanthropic individual names.

It makes for a helluva quagmire for the professional investors who comprise the lion’s share of my readership. I wish I had better advice for them, but I continue to counsel portfolio simplification, sober focus on key themes (based upon Socratic re-underwriting of same) and the intestinal fortitude to endure as difficult a set of investment conditions as ever I canrecall.

If it all makes you want to grab a drink, I’m with you. I’m reaching, in fact, for the one in front of me right now.

Naturally, my glass is only 1/3rd full and thus 2/3rds empty.

But for now, I reckon, I’ll take what I can get.

TIMSHEL

“Civilization on Earth planet was equated with selfishness and greed; those people who lived in a
civilized state exploited those who did not. There were shortages of vital commodities on Earth
planet, and the people in the civilized nations were able to monopolize those commodities by reason
of their greater economic strength. This imbalance appeared to be at the root of the
disputes.”

— Christopher Priest “The Inverted World”

This one goes out to Shan. Who just left us. Who would’ve understood. Or at least have pretended to do so. To humor me. Which he would have done with respect to the following statement.

We live in an Inverted World. We order our activities in ways that outrages logic. It wasn’t always so (or didn’t seem to be), but however much we have done so, surely, we’re doing more of it now.

Thus, the wisdom of the time-honored idiom: “measure twice; cut once”, which has worked to such effective purpose — for lumberjacks, homebuilders, plastic surgeons, and, indeed, anyone in the “measure/cut” game, is turned inside out.

There is no economic realm more exemplary of this than inside the marble, columned halls of the United States Federal Reserve. Those paying attention are aware that our Central Bank has spent the better part of the past 15 years cutting that which is within its direct jurisdiction to cut – the Fed Funds Rate. Which it has cut not once, not twice, but, by my count, no less than twenty times over the last fifteen years.

Did they measure? Even once? The answer is less than clear.

Eventually, they were bound to produce a condition under which they had hacked away so dramatically at borrowing costs (to say nothing of the oceans worth of new money/liquidity they have manufactured over the same time period), that there would be shortages of vital commodities, which those with economic strength would seek to monopolize. And this, arguably, is where we’re at:

Bloomberg (Vital) Commodities Index:

One can justifiably wonder if this here index is a true measure of the price of vital commodities. And, relevant to the debate is the reality that its largest component (>12%) is Gold. And who, outside of Flavor Flav’s mouth, needs Gold?

The next three principal constituents are energy products, which I believe can still be described as vital. They are followed by the three grain staples (Corn, Wheat and Soy Beans). These also make my V-list, Mayor Mike’s (Bloomberg) unfortunate comments that they magically grow by throwing seeds in the ground notwithstanding.

The Index is surely illustrative of the inflation that now plagues us, and would be even more so if Gold, which is substantially flat over the last two years, was not at the top of the allocation list.

But who, other than the founding members of Public Enemy, needs Gold?

In any event, the Fed is now reversing course, is undertaking what promises to be an extensive series of anti-cuts – the immediate next of which on the docket (early May) is now expected to clock in at a whopping 50 basis points. There is even some talk – mostly by curmudgeonly St. Louis Fed President James Bullard — of going 75.

All, however, is not lost in the cut/measure universe, as our policy-setting bankers are also telegraphing the likelihood of a series of cuts to its bloated $9,000,000,000,000 Balance Sheet.

So, more cuts, albeit of a different flavor, are in the offing. But have they measured the potential impact upon economic activity? Not as clear.

One aspect of this – to which they may wish to attend – is the impact of all this on the lowlife debt instruments that comprise the junk bond market, particularly the runts of the litter – securities with a CCC rating – one notch above D. Which stands for Default:

Beware the Triple Hooks: The Most Menacing Cutters of All

Legit credit market types refer to CCC bonds as “Triple Hooks”, bringing about images of gruesome cutting destruction. Yes, you can cut (with) Triple Hooks, but typically not without making a bloody mess of everything in proximity.

And often, when portfolio managers seek to hack away at their juicy-yield-but-uber-risky CCC paper, the bleeding can seep upward on the credit quality ladder. Something akin to this happened back in ’08 — when the rate cutting began. Hemorrhaging of the riskiest securities migrated to instruments of purported better construction, and the next think you know…

There are also pertinent developments in the cutthroat universe of Subscription Streaming. And none of it is good. The headlines events were Netflix’s report of having, for the first time in a decade, lost subscribers (causing its stock to crater by more than 1/3rd), and the abrupt, ignominious shuttering of the recently launched CNN+ service.

These tidings speak, more than anything else, of a consumer who is still inclined to cut the cord but is measuring with more discernment the inventory of content that replaces it.

One may also care to cast an eye towards the housing market for such discrepancies. 30-Year Mortgage rates have cut through the ominous 5% level like a knife through butter:

This, of course, implies dramatic increases in the already-astronomic costs of purchasing a home. But did this deter our intrepid home builders from ordering up the measured, cut timber and commencing construction on new dwellings?

It did not:

It can be hoped this is all for the best and I reckon we’ll find out. But not gonna lie: I find myself confused to the brink of madness.

And this, my friends, is not good, because your risk manager and everyone else will need full command of our wits to navigate the next few trading sessions, which feature earnings drops from the Big Barking Tech Dogs, our first glimpse at Q1 GDP estimates, and God knows what else.

So, yes, I pine for the days when multiple measurements were precedents to solitary, calculated cuts. But in an Inverted World, this may not be on the cards. We take the consequences as they come, but if I were you, I’d do what I could to invert the inversion: I’d be carefully measuring my risks, and be prepared to cut them if matters spin out of control (as well they might).

If Shan were here, he’d agree with me. But he’s not. So, I’ll never know if those were his true sentiments. Or whether he would have been, as was his habit, merely humoring me.

But in this Inverted World of ours, that’s just the way it goes.

TIMSHEL

“I’m. An. ORDinary. Guy”

— David Byrne

Yes (like the extraordinary David Byrne) I’m. An. ORDinary. Guy.

So ORDinary, in fact, that I have a lifelong affinity with ORD – known more expansively as Chicago’s O’Hare International Airport. Though I lived in that metropolis for (by my own estimate) for only 1/3rd of my interminable existence, I’d say that more than 50% of the airport hours I have logged have been at ORD – particularly during those boyhood days when my SoCal father and Chi-town mother would paddle me back and forth like a ping pong ball.

And I always took some partially perverse pride in ORD’s longtime status at the World’s Busiest Airport (which I thought was pretty cool). Until it wasn’t. Atlanta’s Hartsfield-Jackson (ATL) surpassed it about twenty years ago. And, just this past week, I find it has slid further – now also trailing Dallas-Fort Worth (DFW) and Denver International (DIA). ORD is now an ORDinary #4.

What in the blazes is going on here? I do wonder who among the airborne are passing in such great multitudes through Atlanta. Dallas, I sort of understand; at least it’s in the middle of the country. But Denver FFS? Way up in the mountains? With that terrifying blue horse out front?

DIA’s Mustang Menace:

Those iridescent red eyes ought to be enough to scare any god-fearing soul– not only away from\ DIA, but from the City of Denver, the State of Colorado, and maybe even the entire expanse of Lower 48.

And if that wasn’t bad enough, the whole complex– airport, horse, etc., is associated with a rather obtuse curse, the contours of which I struggle to understand. But I will say this: if a given civic landmark is to be subject to a hex, it would be better for all concerned if the venue wasn’t an airport.

Meantime, ORD lags behind, finishes, at least for the moment, out of the money. And it devolves to me to accept this with equanimity. But really, this is less of a hardship than I make it seem, because (I’ll let y’all in on a little secret), I have come to hate O’Hare.

This, I believe, reflects a maturity gifted to me late in life, because there’s not much to like (and a whole bunch to detest) about O’Hare. Impossibly long security lines. Nonsensical gate labelling — rendered even more maddening by incessant gate switching. Ridiculous drop off/pick up protocols. Bad food.

Nope. These days, I’ll take Milwaukee (MKE) every time. With its quirky used book shop in the central terminal, and Rent-a-Car facilities a pleasant, 20-meter walk from Baggage Claim.

Now, if only I had a reason to go to Milwaukee…

And as for O’Hare, passes into the realm of ORDinariness, leaving, for investors, only its handle as a redeeming feature. Because ORD is also the abbreviation assigned to ordinary stocks – foreign shares that price in indigenous currencies. By contrast, ADRs – American Depository Receipts – are securities domiciled abroad but priced in good ole USD.

ADRs are a handy little item, particularly, of late, for those investors with a bent towards, say, Japanese stocks. The JPY has taken a pounding against the sawbuck, and now commands < 0.8 of a penny – a twenty year low:

The good news here is that those with a yen for Nippy stocks who have gone the ADR route are down just over 6% — as compared to the > 14% pasting implied in the Japanese Ordinaries.

(If you’re thinking about a translation function involving outperformance using American ADRs, please discard this notion. Because: a) they don’t exist; and b) if they did, they’d be trading precisely where our ordinaries are currently positioned (Gallant 500 -7.8%; Captain Naz -14.7%)).

It’s small wonder that our Equity Complex is under pressure. Among other matters, PPI clocked in at an eye-popping 11.2%, year-over-year. Crude Oil prices, Washingtonian sleight of hand notwithstanding, are edging up back towards invasion shock levels. Natural Gas is now at a gravitydefying 7.3/10MMBtu – more than double the level registered when this fast-unfolding year began.

Corn (thanks in part to the cynical, temporary approval of E15: Gasoline featuring a robust 15% Ethanol contingent) is up by half in six months.

Inflation, alas, appears determined to hang around for a bit.

Meantime, The Street and the Atlanta (where else?) Fed have converged, pegging Q1 GDP at a tepid 1%. But we won’t obtain corroboration of these ever-infallible prognostications until the Commerce Department drops its first estimate on 4/28.

Interest rates have risen faster than at any point in several lifetimes, with 10-Year yields having doubled in just over four months. The Yield Curve has flirted with inversion for several weeks, and this, according to conventional thinking, evokes fears of a recession in the immediate offing.

I’m not sure this is on the cards, but a recent conversation with a client got me wondering. Recession is defined as two consecutive quarters of negative GDP growth. But if we take inflation into account, all things being equal, it should goose output by an equivalent amount. Thus, if a recession does indeed materialize, it means that the economic slowdown is of sufficient magnitude to offset the upward pressure of associated price increases.

This line of thinking also implies that at current inflation levels (no matter how one cares to measure them), GDP growth, in real terms, has been negative for several quarters — a concept too gruesome for further elaboration, I judge.

However, come what may, we must press ahead. The flow of earnings reports accelerates this week and will approach crescendo by the end of the month. The Bulge Bracket have mostly reported: a mixed bag at best. Their Investment Banking Divisions are sucking water, and deal flow is, at the moment, putrid.

The SPAC craze appears to have run its course.

Musk made his move on those tweeting birdies, who responded, on cue, by seeking to fling a Poison Pill down his gullet.

About all of which I have the following wisdom to share: _________________________.

And, overall, we are impelled to operate in an extraordinarily complex environment – with redlining risks, but (as I keep pointing out), entirely too much liquidity sloshing around the system to conjure any prospects of a rationalizing reset.

If it’s all too much for you, I empathize. I’ve been pushed to my limit as well. I took a week off but find, upon my return, that matters continue to be no less complex (and perhaps even more so) than when I buggered out.

I didn’t go nowhere during my absence, so maybe I should just jet off, and hope for the best when I (yet again) come back.

But no matter how I attempt to do so, all roads seem to lead back to ORD. My flight is delayed, and they’ve changed the gate on me four times – so far. Worse yet, my trip is now scheduled to re-route through Denver, where the Mustang Sally hex is certain to train its evil eye directly on my person.

Perhaps, on this holiday weekend, that’s what the Good Lord intended.

Because, after all, I’m. Just. An. ORDinary. Guy.

TIMSHEL

I ain’t missing you at all, since you been gone, away
I ain’t missing you at all, no matter what my friends say

— John Waite

Not sure if y’all noticed, but in an historic breach of protocol, I abandoned my post last week — failing to deliver my weekly note – upon which so many of you so deeply rely – for comfort, erudition, and, of course, as an infallible guide path towards investment riches.

It’s only happened once before — across more years than I count. And that on the worstest, most horriblest week ever, just over 11 years ago.

I’m able to offer neither plausible excuse nor suitable justification for this alarming betrayal of your trust. On the other hand, I’m not sure anyone even noticed.

Strike that, I did receive a note from my great pal and erstwhile book editor Pam, asking me if I was OK. And then there was Ben. Who inquired in person.

God Bless Ben.

Even though you don’t probably care, I can tell you that I spent a fair bit of my “week off” singing. Singing what, you may ask (even though you don’t care)? Well, before I tell you, please know that it wasn’t “a Capella”; I accompanied myself on guitar (which for me is sort of the whole point).

And, in terms of the set list, it tilted towards American Standards: “Over the Rainbow”, “Moon River”” (the fabulous Audrey Hepburn arrangement), “My Favorite Things”, “Raindrops Keep Falling on My Head”; and also selections from my more regular repertoire: Neil, The Stones, Bowie and Dylan.

Along with, of course, Paul Simon’s “April (Come She Will)”, which, in time-honored fashion, I’ll be playing all month.

Because A-a-pril is not only upon us, but is, somehow, nearly half over. From a market perspective, I anticipated that she would flutter in daintily upon us. And, while this in no way excuses my indecorous absence, I felt the markets would be in a state of Q2 pre-animation. Data flows were light, and it seemed like it would be a week that would serve little purpose other than teeing up the now-imminent bonanza of valuation-critical information.

I was wrong.

My most recent recorded sentiments indicated a preference to remain short the Treasury Curve and long Commodities (I’ve more or less given up trying to track the path of equities). In terms of accuracy, the results were a mixed bag. Treasuries continued their downward path, but Crude Oil — owing in large part to the brilliant decision to draw down a still-larger chunk of our dwindling strategic reserve (even as we aggressively restrain our own formidable production capacity) — retreated like a little bitch.

Like April herself, I expect she’ll be back.

However, the rest of the Energy Patch is a much different story – nowhere more so than in the realms of Natural Gas, the cost of which, if one dares to look, is now a 2.5 bagger in little over a year:

Jumpin’ Jack Gas:

Sugar is on a similar trajectory, and, channeling the Guess Who, if there’s very little of the sweet stuff tonight in your coffee, given current price trends, your java stash may also be light:

Sugar and Coffee: Lonely Feeling. Deep Inside….

If it’s any consolation, tea prices are pretty much where we found them a year ago and are in fact lower than where the reposed in 2018.

But one way or another, my sabbatical did not transpire against a market backdrop of calm serenity. But do they ever?

Things get interesting Right. About. Now. Banks report this week, contemporaneous to the release of March Inflation figures. And won’t that be fun?

We of course also have a hot mess of a domestic and foreign policy condition with which to contend, and my viewpoints (not that you care) are summarized below:

• The Eastern European War settles into a longer time frame conflict, drawing fewer headlines (in our ADD-laded world, even another Smith-like smackdown may wipe it from our awareness), but continuing to cause enormous disruptions to the global capital economy.

• Inflation plagues us well through the summer (and likely beyond). It may even accelerate.
• Having little other choice, the Fed amps up the heat on the Treasury Complex, jacking shortterm rates and beginning to sell down its balance sheet at the longer end of the curve.

• Credit markets, already feeling the pinch, will remain pressed, with heightened risk of default – particularly emanating from borrowers who rely on short-term paper that they must periodically roll.

• In a blinding glimpse of the obvious, it pays to keep an eye on the housing market here. Affordability – as measured in terms of percent of median pay required to cover; a) (skyrocketing) monthly mortgage payments (30-year fixed rates brushed up to 5% on Friday); against celestial (and still rising) home prices, is plunging by record amounts – just as we are entering peak selling season.

I therefore judge that upon my return, the market economy remains in a quagmire, with the irresistible forces of inflation, credit impairment, supply shocks, geopolitical uncertainty, and other risks, meets the immovable object of the still-galactic level of liquidity manufactured over the past several years.

I anticipate continued bi-directional volatility, accompanied, of course, by that vexing paradigm under which price fluctuations for individual securities are much more acute than what is registered at the index/factor levels. Capturing returns in this environment will remain as challenging as any construct that falls short of an all-out crash. I wish I could return with better prodigal gifts than this, but unfortunately, as I see it, fatted calves are in short supply.

Maybe I should just go away again. Nobody except Ben and Pam (and you) are likely to notice, and perhaps, upon my return, I’ll find some semblance of rationality has returned to the proceedings.

But: a) I doubt it; and b) I wouldn’t do that to you. At least not again.

So, you’re stuck with me, and, as long as you are, I hasten to advise you that the investment game is even riskier than it appears at the moment, and that the condition is not likely to dissipate any time in the foreseeable future.

Of course, if you banish me, I’ll offer up no resistance. And I wouldn’t blame you if you did. Because I have been bad.

But if you do so, know that no matter what my friends say, I will be missing you. More than I can express.

And that, so help me God, is the truth.

TIMSHEL

Before I begin in earnest, I must say that this Putin character is really starting to get on my nerves.

I hope I’m not the Lone Ranger here, but either way, I’m happy to have unburdened myself.

Meantime, and on a cheerier note, it looks and feels like Spring. Those eternally elusive “green shoots”, are swelling out in every direction. The air is warmer, and, on my home turf of Manhattan, the human flies and bees that populate the place are buzzing away. I got full corroboration of this while strolling down 6th Avenue midweek, and encountering the following image:

To me, this was the most authentic signal that NYC is back, as nothing says “Gotham” (OK; maybe Essa Bagels) more than an Inflatable Rat. I hadn’t seen one gracing the streets of the city since immediately prior to the lockdown, but now the old mixer is back in action.

I have written about this before, but if I hadn’t taken the dubious decision of a career in risk management, I might’ve enjoyed getting into the Inflatable Rat game. There’s sustained, unlimited demand, and quite unlike other “durable goods” industries, the value of the inventory actually increases with age, wear and tear.

I mean, nobody particularly wants to see a shiny, new Inflatable Rat. Quite to the contrary, the grimier, the gnarlier the condition of the mock murine monster, the better. To wit, if its rubbery skin features a gash that can requires a duct tape patch, it only adds to the meant-for menace of the messaging. They are easily stored, and only require jets of hot air to be rendered operational.

Yup, ya gotta love those Inflatable Rats. And even though I gain no direct benefit from their presence, seeing them gives me a warm, fuzzy feeling inside, and I hope it does for you too.

To me, their re-emergence is especially poignant at this particular pass, as exemplary of a capital and commercial economy that is none-too-tidy, and, arguably, full of hot air.

And our Feature Rat embodies these traits with uncanny precision, save for one omission: his owners failed to construct him with a proper tail. This runs in contrast to my thematic analogue because whatever else can be said about this here market, it certainly has a fat, nasty and potentially lethal tail.

The week’s action featured, perhaps most prominently, the continuation of the most abrupt selloff of longer dated Treasuries in history – taking Madam X’s yields — almost — to the shockingly salacious threshold of 2.5%. I hate to do this, but I am compelled to remind y’all that I implored everyone to hop on when her hems were dangling at ~1.7%. Her younger sister, that capricious Vixen VIX, has swooned down to a supine 20 handle – barely half of where she reposed as those Russian tanks were crossing the Ukrainian border.

In somewhat counterintuitive fashion, commodities across every asset class resumed their surge. Soybeans are now at a shocking >$17/bushel. Nat Gas is at an all-time high. As is Cotton. But I wouldn’t trouble myself on any of these scores, because, as I have asked before, who needs Soybeans, Nat Gas or Cotton?

We do, by contrast, occupy dwellings, and rents are surging – particularly in rat-infested NYC. And as for aspiring home purchasers? Well, take a look at this if you dare:

All the above projects out to an Inflatable Rat of a pricing picture. I don’t yet have a read on how bloviated March inflation numbers will be, but given what I am able to anecdotally discern, it looks like a blowout.

Maybe this is a good thing, though, because inflation is about the only expedient for what I believe to be the biggest menace facing the economy at the moment – the truly terrifying level of indebtedness we’ve managed to accumulate over the last several years:

What’s Owned to the Man: Consumer                                And Corporate

And this is to say nothing of what is owed by Washington, in the fifty state capitols, and by the nearly twenty thousand municipalities that dot our national landscape.

As I have repeatedly stated, I believe that this is what’s killing Powell by degrees. He needs to demonstrate the stones necessary to impose and sustain higher interest rates, and, meanwhile, we are in hock up to our noggins. If he hikes aggressively, it devalues of the paper held by The Man, who will not be particularly pleased with these outcomes. If he is more docile, inflation will surge, borrowings will accelerate…

…and so on and so on and shoobie doobie do.

Meantime, Friday marks the roll from Q1 to Q2, and raise your hand if you’re giddy about the prospect of reviewing and acting upon Q2 data flows.

And then there’s that whole Eastern European mess, about which I have little unique insight. I do, however, believe: a) that the situation is fluid (mostly to the downside); and that: b) even a tidy, unrat- like, negotiated solution will fail to offset the political reality that we’re gonna have to ice out that annoying (did I mention how annoying he is?) Putin for at least a couple of years.

In turn, this will cause sustained economic disruption and virtually ensure that inflation will continue to plague us all the while.

But God bless those equity investors, who have taken it all in with touching equanimity. General Dow (Ret.), The Gallant 500, Captain Naz, and even Ensign Russ have climbed back to levels last breached around Groundhog Day, when no one actually believed that rat bastard Putin would pull the sh!t he has since pulled.

Yes, he’s getting on my nerves.

But I deem it hardly helpful for the President to call for his removal, even if his staff scrambled to arrange a tortured walk back of the former’s clearly articulated statement to this effect. Spin away, my spin-meisters, and feel free, as you no doubt will, to operate as though the meaning of any statement and action can be re-engineered to suit domestic political agendas.

But know that Putin took the message in its original intent. The Commander in Chief of the United States has called for his removal, which can only be achieved by coup, assassination, or some combination thereof, and he will act accordingly. Not much constructive emanates from this sequence, I judge.

But what the heck. It’s Springtime. Baseball is back. And so are the Inflatable Rats.

In my giddiness to snap the above-supplied image of same, I failed to discern precisely what the beef was that summoned its presence. I do know that it was some sort of labor dust up. And though my heart and wallet reside with Management, I will wish the sponsors Godspeed on their efforts.

But I hope they have it in them to bear in mind that for us filthy, rodent-like management types, the effective allocation of capital and other scarce resources has seldom, if ever, been more challenging.

TIMSHEL

YYUR,YYUB,ICUR,YY4ME

— Time Honored Acronym of Unknown Origin

This here “poem” dates back to my childhood, and, perhaps, to an even more ancient era (if one exists). For all I know, its original author might’ve chiseled it into his or her cave dwelling.

Maybe you are familiar with it. If not, hopefully, your inner cryptographer can help you to decipher.

For those deficient in these skills, I offer the following hint. Convert the YY to “two Ys”, and then to “too wise”. The meaning of the rest of the string should then become apparent for even the most obtuse among you.

I landed on this path while following (what else?) the news out of the Ukraine, and its magnificent leader: Volodymyr Zelensky(y). One hears a great deal about him lately, and, those (like me) who obtain their news mostly from the printed (rather than the spoken) word, could hardly fail to notice that the numbers of “y”s at the end of his last name varies from publication to publication. The fabulous Wikipedia awards him two, while much of the mainstream press sticks to one. My crack research team informs me that there are as many as a half-dozen spellings available – including those that add an “i” in the middle of the last syllable, and various apostrophe-laden configurations.

The pedestrian reason for this is the less-than-fluid translation function between Cyrillic and English spelling protocols. But, in trademark fashion, I prefer my own narrative: he was born Zelensky and was awarded (by whoever is responsible for such matters) an extra “y” in result of his recent, undeniably heroic, leadership.

At the risk of stating the incrementally obvious, the “yy” tail might also be a nod to the masculinity (in a quaint, colloquial sense) of a leader who chose to stay home and fight rather than bounce — when a big ole army from the north and east rolled in — with a stated objective to annihilate him.

(If I’m right on this score, perhaps this is why (y?) his first name, a variant of Putin’s, also contains 2 y’s, while Putin’s doesn’t even have a single one).

And, in my judgement, no one should underestimate the degrees of difficulty associated with the attainment of the second “y” – to achieve “2Ys” configuration. Because wisdom, to say nothing of excessive wisdom, (not to mention the chromosomal benefits of the YY which I believe, on balance, to be beneficial to society — except in the NCAA Women’s Swimming Championship – and don’t get me started there), appears, at the moment, to be in particularly short supply.

All of which provides the jumping off point for the probing market analysis for which this publication is famous. “YY” investors judged last week a good time to muster sufficient intestinal fortitude to gin up the best Mon-Fri equities sequence in about 16 months. One which catapulting key indices to elevations last encountered when: a) the Russian Army was merely menacingly massing on the Ukrainian border and not blowing up maternity hospitals; b) the name of Zelensky(y) was only known in these parts as the recipient of a call for which Trump was impeached; and c) no one particularly cared about the spelling of b).

Was this wise? Was it too wise? I reckon we’ll see. We should, perhaps, remain mindful, though, that the rally comes against the backdrop of a shooting war that may represent the biggest threat to date of an always-unstable, post-WWII geopolitical equilibrium, a double-digit PPI print, the beginning of a likely extended era of higher interest rates, lingering and perhaps re-emerging pandemic threats, and sundry other annoyances.

Credit markets also rebounded a titch, and for that I judge we should be grateful. Because if they continue to wilt, we’ve got a big mess on our hands. Investors in these realms are, at best, a 1.5Y, and, over the last several weeks, have bailed out of the strategy class at a pace that might give Lia a 500-meter run for her money:

Nothing for nothing, but these funds are the cozy lair of innumerable pension programs, 401Ks, IRAs, annuities, insurance pools and even non-tax-sheltered retirement accounts (if there is such a thing).

When custodians of these capital pools hit the redemption button, fund managers themselves must sell their holdings, placing additional pressure on the entire asset class. Bankers begin to get happy feet. Paper is called in.

These trends feed on themselves, and what happens when they reach escape velocity is too gruesome to describe in this family publication (hint: 2008 redux).

Commodity markets were a bag of mixed nuts. Yes, the energy and metals sectors calmed down a bit, and Wheat is no longer a luxury only available to billionaires (centimillionaires can now plausibly afford a few bushels). But we’re far from out of the woods here.

To wit: Cotton is now priced at a multi-generational high:

The Land of Cotton: Look Away, Look Away, Look Away:

Not much cause for concern here, though. Because who, this side of a few Santa Monica hipsters, uses Cotton?

On the other hand, one could argue that the Fed is paying attention to these tidings.

Interest rates, as foretold in this space, rose acutely across the Treasury Curve last week, but rather than measuring the wisdom of this move, I will deem it a Pavlovian reaction to the FOMC Policy Statement, the attendant 25 bp hike in the Fed Funds rate, a d warnings of its resolve to jack up yields at every meeting until at least some time in 2024.

Near as I am able to determine, they also announced the immediate discontinuation of asset purchases (QE) and offered vague prognostications about reducing their ~$9 Trillion Balance Sheet. All of which should serve to maintain interest rates at still suppressed but elevated (by recent standard) levels, for the foreseeable future.

I cannot nominate, much less award, the Fed a YY for its policy judgments, as I adhere to a consensus that they should’ve taken these steps more than a year ago. Had they possessed the Ys to do so, markets might’ve absorbed the current traumas with more clarity and less uncertainty. The Housing Complex might’ve been more rationally valued. Stocks and bonds might’ve been trading at lower thresholds but would also have been less susceptible an all-out rout.

But as it stands, the Fed is raising interest rates into a deeply disrupted capital economy, which portends slower growth, and, perhaps, recession. Moreover, the new policy offers, at best, dubious prospects for effectively counteracting the increasing menace of runaway inflation. Its economists (the best, by credential, in the land) are maddeningly sanguine about it all. Their models show a downward trend to price increases, beginning in the back half of the year, with headline inflation numbers dropping daintily to a 2-handle in ’23 through ’26.

Not gonna lie: this gets my blood up. The inflation trends themselves hardly suggest organic correction, which, in any event, almost never happens. And this is to say nothing of the looming risks that prices will, in fact, spiral out of control.

These, in no particular order, include, but are not limited to, the following:

• Continued supply disruptions emanating from covid-land.
• An escalation of the current Eastern European hostilities, featuring additional sanctions, tariffs, etc.

• The prospects of renewed, redistributive fiscal stimulus, which may simultaneously hamper supply and boost demand.

• The possibility that hostile (Iran) or increasingly indifferent (Saudi Arabia) energy producing countries will fail to support our strategy of tapping their inventories while we continue – for political reason — to hamper our own production capabilities.

• Incremental strategic alliance between Russia and China (to say nothing of the disasters that await us if China takes this as an opportune time to expand its own control over Asia-Pacific economic affairs).

• Droughts, floods, continued worker shortages/wage pressures…

And so on and so on and shoobie doobie doo.

In result, on this Vernal Equinox, we are perhaps impelled to train our objectives somewhere short of the 2Ys threshold. It would, after all, behoove us to be wise rather than too wise.

I can state, in support of these more modest efforts, that I lack trust in virtually every price print I C. I certainly wouldn’t jump on the back of last week’s equity rally but playing for a pullback might just be 2Ys.

Interest rates are likely to continue to trend upward, but the timing, in my judgment, is highly uncertain.

Commodities are either wildly over-valued, criminally under-valued, or both.

The tactical answer is to operate nimbly, while, from a strategic perspective, preservation of your most beloved assets is essential.

It strikes me that our boy Zelensky(y) is doing precisely that. And he, after all, is rapidly working his way into history(y).

But neither you, nor I, am Zelensky(y). Nor should we wish to be. Because the migration from Zelensky to Zelenskyy must be driven as much by fate as anything else. If we seek to unilaterally grab that second Y, we stand a disproportionate chance of failing, and losing not only our first one, but all the other letters we possess.

But IC I may be overstaying my welcome, and ICUC it too.

And, if all of this is YY4U, I promise you I will understand.

TIMSHEL

First off, happy 2nd anniversary of “14 Days to End the Spread”, which transpires, I believe, on Tuesday. I was at a UWS Health Club (I like to live dangerously) when the alarms sounded, and I was summoned home. With a daughter in the third trimester of her third pregnancy, I didn’t leave the compound until August. The baby arrived, healthy and happy, on Cinco di Mayo. I have always believed that he will share a lifelong bound with those born during those early lockdown months — as “covid babies”. I very much hope this comes to pass.

I don’t wish to be premature here, but if the current trend of diminished corona-threat (or, at any rate, of our willingness to respond by disrupting all our activities, for dubious, and, at best, marginal, gain), we should plan a nation-wide mask-burning bonfire. From Spokane to St. Augustine. From Bangor to the border of Baja, CA. Omaha and Orlando.

Out with you, Omicron! With this light, we banish you! Bowie’s “Cat People” (putting out fires with gasoline) is blasting over enormous loudspeakers in the background. That, my friends, would be a sight to see, and, maybe, just maybe, would launch the end of an era of aggressive self-injury, of striving mightily to put up points against our own, er, squad.

British footballers, with trademark elan, refer to these episodes, where a player scores into their team’s net, as “own goals”.

And, as I was casting about for this week’s theme, I encountered a clip of a rare NHL “own goal”, wherein Detroit Red Wings goalie Alex Nedeljkovic tried to sweep away an approaching puck – which, inadvertently and unfortunately, found its way his own net. Whereupon he collapsed in a puddle of his own humiliation.

For the “read ‘em and weep” contingent among you, I offer the following link to the Detroit Free Press summary, replete with videos from several angles:

https://www.freep.com/story/sports/ftw/2022/03/10/alex-nedeljkovic-detroit-red-wings-goalie-owngoal/49919655/

I am less of a hockey fan than I am of baseball (i.e. I don’t care at all), so I Wiki’d this poor Nedeljovic guy, and find out that he’s: a) from Ohio; but b) is of Russian ethnic descent.

A Russian-American ginning up an “own goal” in Detroit. How very exemplary of our current vibe.

Because both countries are engaging in a veritable “own goal” orgy. Let’s start with the Russians. What in God’s name are they doing over there? I reckon the Ukraine is a nice piece of property, nestled as it is on the shores of the Black Sea, rich with agricultural and mining assets, and fought over since pre-historic times. It ranks 5th in grain exports, coming in behind, well, Russia, the United States, Canada, and France. Labor there is deliciously cheap; the poor souls who produce this natural bling, earn, on average, $500/week.

It is 27th in the World Hockey Standings but has never been known to give up an “own goal’. Russia and the United States, by contrast, rank 3rd and 4th, respectively. Team Canada is Number 1 and France clocks in at 15, leaving me to wonder whether there is a causal correlation between grain exports and success on the ice (probably not).

But Putin appears to have shot at his own net, at least insofar as: a) the Ukes have not, as yet, chosen to roll over and get stiffed; and b) the rest of the world is not only mad as a hatter at him, but is looking to extract mad retribution.

It is, however, conceivable that Vlad the Invader has his stick trained precisely where he wishes it to to be. He KNOWS that he can take down the Ukies, even if they are putting up pain-in-the-ass resistance. For all the bluster surrounding sanctions, the most cogent analyses I have uncovered suggest that he took them into his calculus, and that beyond this, he has multiple hacks around them.

And America (land that I love) may be playing right into his hands. The United States, after all, occupies the top 17 spots on the “own goal” league tables, and may just be living up to this impossibly high standard with respect to this here dustup.

Let’s consider our less than energetic responses in the realms of fossil fuels. We imposed heavy sanctions on Russian banks and financial institutions but have put those pertaining to energy finance “on ice” until June. We’re going hat in hand to the Iranians – sworn enemies of the U.S. – to replace the output. Moscow is brokering the deal for us, and those always-reasonable mullahs added some spice to the negotiations this past weekend – by blowing up a regional embassy of ours.

Meantime, we have not lifted a finger to spark up our own energy complex, which, until we decided to hog-tie it, was the most formidable in the world.

The Saudis have told us to pound sand, and, given the topography of that nation (the joint is NOTHING BUT sand), this tells us all we need to know about that.

And don’t even get me started on that whole MiG jet transfer fiasco with Poland (Hockey Rank 22).

Meanwhile, as was inevitable, inflation is beginning to run rampant. Y’all saw the Feb print of 7.9%. Government types are cheering the modest drop in recently hyper-charged used car prices, but doesn’t that just mean that everything else went up even more?

And, to offer a blinding glimpse of the obvious, these are February figures, deriving from a simpler time — before Russia was bombing maternity hospitals, before the world began to embargo this largest supplier of (yes) grains, but also industrial metals such as Nickel. Now, you don’t have to tell me how little a nickel is worth (7.9% less than it was a year ago).

But metallic Nickel (which comprises only 25% of the coinage accumulating on our children’s mason jars; the rest is copper) is a different matter. It’s used in a lotta important shit. Including the batteries that everyone is so spoony about.

It is now trading at about 8x where it was a little more than a year ago (by contrast, Copper is only up by around 10%), in part owing to a short squeeze last week that cost investors billions, and, beyond this, impelled the vaunted London Metals Exchange to do the once unthinkable – DK $4B of otherwise valid transactions in the commodity.

Beyond Nickel, Russia is also the leading exporter of Palladium, and makes the league tables in Platinum, Tin, Coal and Iron Ore – all of which are in the midst of a raging rally.

This is stuff that we use, that we need, people, so, obviously, inflation is destined to get worse before it stabilizes (much less gets better). Tuesday brings the PPI print, estimated at a round 10% — again before the impacts of the Russian Invasion and our Paper Tiger response.

All of which puts the Fed in one helluva bind. As the fates would have it, the FOMC meets this week and, on Wednesday, will drop the most-anticipated Policy Statement in quite a while. A 25 bp rate increase – the first in four years — is largely in the bag.

The drama, I suspect, will focus more intently on their thoughts on The Taper.

I can’t think that the Fed is looking forward with joyful anticipation to the removal of its click-a-mouse liquidity –from a financial system that is most characterized by an exceedingly elevated risk premium. But it would seem they have little choice in the matter. Following closely on the heels of the above-mentioned lockdown anniversary, comes the two-year mark of the Fed printing “own goals”– to the tune of $120B/mo, which they have used to purchase securities issued down the road at the Treasury.

Now, you can count me among the minority that is sort of down with all that monetary creation in the wake of The Big Crash, and even with their having revved up their engines anew to counteract the early menace of them little covid buggers. But they should’ve quit when they were ahead. About a year ago, when the economy was clearly in robust recovery, and might’ve economically (if not politically) weathered a rate normalization. Had they done so, inflation might be tamer as I type these words.

But instead, they kept printing, and, in an inflationary sense, running up the score of “own goals”. To the point where tighter money mitigants are not likely to achieve victory – defined here as the cooling of price pressure without causing a recession.

And a recession appears to me to be on the cards, virtually inevitable. Prices are going up, real wages are going down. Most of the free monetary cheese distributed by the government has been spent by the masses. Consumer, corporate and municipal credit amounts are surging from one record to another and will continue to do so while real rates remain in deep negative territory.

Obtuse investors may finally have caught on to the notion that all this money must be paid back, and that it might not be so easy for borrowers to do so:

Investment Grade, High Yield and Municipal Bond Prices: “Own Goals” Abound

These are big bites being taken out of what are euphemistically referred to as “Fixed Income” investments, and I think they are the cause of the deepest wrinkles in Chair Pow’s increasingly furrowed brow. Because these are the investments that power the portfolios of pension funds, endowments, insurance pools, annuities, and structured notes. A plurality (or more) of these capital pools feature mandatory sales triggers at certain levels of loss. Thus, the risk of these selloffs feeding on themselves.

For a variety of reasons, higher interest rates will also feed this fire (like truckloads of H-95s), and, by doing so, put additional political pressure on our always-political, currently hyper-politicized Central Bank. Voters will notice the negative marks on their IRAs, and Former Chair Yell is likely to come knocking on Current Chair Pow’s door, looking for explanations.

I don’t think he will have pleasing answers, so Yell will bring bad news to Paymasters Biden, Pelosi and Schumer, who will pass it on to the rank and file, who will then message as best they can to an increasingly frustrated electorate.

And so on and so on and shoobie doobie doo.

And even the always-slow-on-the-uptake equity markets have started to take notice of it all. But I don’t need to tell y’all about that. Because you read the papers.

It’s very difficult to assess the (multi) directionality or (undoubtedly elevated) magnitude of the risks — on the slick, frozen surface of the global capital markets. They’re out there, appear quite menacing, but are exceedingly difficult to track.

In result, believe we should channel as much empathy as we can for one Alex Nedeljkovic. Like him, we can see the puck coming at us, but don’t have clinical control as to how best we can divert it away from the cages we are paid to protect.

*******

With tragic but perhaps inevitable irony, the Red Wings lost that game to the Minnesota Wild. (Who shouldn’t even exist. Because the North Stars should have never relocated to Dallas).

The final score was 6-5, in an overtime/shootout.

If this doesn’t impel you to keep your eyes, at all times, on the puck, then I fear nothing will.

TIMSHEL