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

I’m an Ape Man, I’m an Ape Ape Man, Oh I’m an Ape Man,
I’m a King Kong Man, I’m a Voodoo Man, Oh I’m an Ape Man,
I don’t feel safe in this world no more, I don’t want to die in a nuclear war,
I wanna sail away to a distant shore,
And make like an Ape Man

– Ray Davies

To AMG: 11 years gone, with all my love…

As I am in the habit of sharing private (often disturbing) sentiments — and given the odd pass at which we find ourselves, I thought I’d lay one outlier on y’all.

Every now and then, I feel the presence of invisible, opposable thumb toes — extending out from both of my feet.

Perhaps this is a latent solidarity with our long-departed forbears, who, once, long ago, could grab items with their lower-most extremities. But whether through divine purpose or Darwinian dynamics, we can no longer do so. And part of me – id, ego, and other cranial components – is clearly jealous of that long-gone era.

This much is, at any rate, clear: I am envious of the Apes. Because Apes are cool. They’re stronger than us; faster too. They appear to have a better time. They lack the useless, unsightly tails that are prominent in most primates, but retain those magnificent opposable thumb toes, which ease their path as they swing from tree to tree.

Their diet staple is bananas, which are more expensive than in days gone by, but not alarmingly so:

I’m not over-fond of bananas, and instead subsist on a wider array of human fare, including, perhaps, more than my share of bread. Which I may be forced to do without considering the alarming increase in the cost of its core ingredient:

Not on Wheat Alone, but FFS….

The Bible (Deuteronomy 8:3) must be on to something (see modified chart caption) here, because I’ve never, my friends, seen anything like this. And I been around the grain markets my entire life.

If there’s any good news, it’s that this latest round of Ursine monkey shine has taken a bite out of what has been a raging rally in meat products. Bovine Live Cattle markets have backed off, as have\ porcine Lean Hogs. But that benefit only applies to us carnivores, which, as a matter of biological construction, excludes my Apes. My hunch is that they don’t really care.

Meanwhile pricing pressure for those of us who cannot drag our knuckles across the terra firma is acute wherever on cares to cast an eye. Hard assets of every variety have been en vogue, and this was before the dude in Moscow decided to ruin the winter of everyone in the Northern Hemisphere. Corn, Copper, Soy Beans, Fossil Fuels, Microchips, heck, even Macrochips are vexingly dear and getting dearer.

Aside from wheat and other edible commodities, our main problems center, of course, in the Energy Sector. But here our policy makers are working hard to deliver relief. They are on the verge of striking a deal with the oil rich Iranian Ayatollahs. Who have called our country The Great Satan. Who openly and proudly use their export revenues to fund terrorist organizations. The deal is being brokered by the Russians. Who we are seeking to freeze out of the global economy. Except for their oil exports, amounting to 200M barrels a year of our energy supply.

And all of this to secure incremental supply of a product which many folks believe is rapidly heating the earth into a piece of charred, crumbling dust. To which I (and the Kinks) reply:

In man’s evolution, he created the city and the traffic rumble,
But give me half a chance, I’ll be taking off my clothes and living in the jungle,
‘Cos the only time, that I feel at ease, is swinging from the top of a coconut tree,
Oh, what life of luxury, to make like an Ape Man

But that, my friends, is, for the moment, just a dream. And, since I must, I will weigh in on the big, buzz-killing force that is driving all this misery.

A few observations come to mind. First, Putin will take Ukraine. ALL of it. Why? Well, for one thing, he can. I mean, we’re only two weeks into this sad monkey circus. It took Hitler 35 days to subdue Poland – with tanks locking horns against cavalry, and no international coalition to assist the poor Poles. So, anyone who thinks that the Uke resistance is sustainable long term should think again.

Beyond this, the strong global response tilts Putin’s incentives toward finishing the job.

The rhetoric is currently quite nasty. But even if they come together in Kumbaya chorus on the shores of the Black Sea, the world will want to extract retribution for what he’s already done — on a scale not much diminished from what he will face if he just grabs the whole thing. So, why not just take it all?

Finally, if he backs down, he will think of himself as a loser. And this, my friends, he cannot abide. So, most of what we are observing is, in my judgment, a morality tale that won’t have a happy ending.

Come what may, what has already transpired is likely to have two sustained impacts: 1) it will add force to the inflation punch; and 2) it will further impair commercial and capital economy activity.

Oh yeah, and one more thing: it implies the near certainty of higher interest rates, coming, to a lending institution near you, and quicker than you may currently imagine.

In result, I envision portfolio managers facing a “triple whammy” of acute inflationary pressure, rising interest rates – all against the backdrop of an increasingly impaired global economy.

I don’t necessarily believe this necessarily sounds the death knell for risk assets. There’s still a bid out there, waiting to pounce. One sees it particularly in the frenzied grab for Treasuries, some of which is a flight to safety, but which is also an outgrowth of the galactic amount of cash looking for an investment tree to grab onto – for our purposes this week, with clutching feet.

I think the safest market havens reside in the realms of long commodities (though the grains may be due for a pullback), and, at some point, short positions across the Treasury Curve. I’m not sure of the timing or ideal entry points respecting the latter. But interest rates MUST rise. And if (when) they do, it will transpire at a point when your portfolio of stocks, bonds and crypto is under extreme pressure. Thus, among other matters, short Treasuries is a great hedge.

But one way another, we managed to survive a very difficult January and February. Spring is nearly here. The politicians are finally unmasking us. Rumors continue to circle respecting a Kinks reunion, which we all sorely need. The Faces are in the studio as I type this, and planning summer tour dates, which is even better news.

All of which brings out my inner primate. And, even as I type these final words, my feet are reaching out for that big, fat, yellow banana sitting on my kitchen table.

I’ll be your Tarzan; you’ll be my Jane. I’ll keep you warm and you’ll keep me sane.

Yes, we’ll do this. As soon as we are able. Until then, let’s keep it tight. The fruit will soon be ripening on the trees. Juicy, and waiting to be plucked by our opposable toes.

Which we no long possess. Instead, we have generational global conflict, bi-generational domestic conflict, scarcity, diminished affordability of the things upon which we rely, worldwide viral viruses, and myriad other annoyances. Thus, if we don’t feel safe in this world no more, and we don’t want to die in a nuclear war, and we want to sail away to a distant shore, and make like Ape Men, we come by these feelings honestly.

Let’s hope that Vlad the Invader channels similar sentiments, some of these days, and soon.

TIMSHEL

So, what do you want from me? Sometimes you gotta reach for the glibly obvious (or obviously glib).

I won’t recount the headlines in detail. Y’all know the score. Putin went in. Hard. Told everyone to huck off.

We responded with sanctions.

But one sanction we haven’t – yet – pulled off comprehensively — is to bounce the Big Bear off SWIFT: The Society for Worldwide Interbank Financial Transaction(s). Lots of talk about this, but some members of the Society have objected (unanimity is needed), and, later, Wall Street itself came out of its chilled hibernation to express its disapproval of the concept.

SWIFT has hovered around the periphery of my professional awareness for, well, a long time. But I’ve never had to use it; they could kick me out and I don’t think I’d care.

And I’m not even sure that SWIFT rises to the dignity of being a Society at all. I suspect that it only calls itself one to lend an element of panache to its acronym. And let’s give them this: SWIFT is a pretty cool acronym – particularly for a generic (if essential) financial communications portal.

While we’re on the subject of names, I’ve often wondered about the Sir-name of Vlad the Invader. Putin. As in RasPutin. I once asked my favorite Russian History expert if the two could be related, whether that current headline grabbing KGB meanie might not even be a direct descendant of the Mad Monk himself.

A little context is in order here. My own last name – Grant – was a gift to my grandaddy at Ellis Island. He arrived as a Granovsky, or some variant thereto (yes, my friends, I carry some Russian blood). So, if my own people were subject to a nomenclatural truncation, might not the same also apply to Supreme Leader of Moscow? Even without the Ellis Island bit?

My friend assured me that I was wrong on this score. OK, fair enough. Putin bears no relation to Rasputin, but they do share some characteristics. Both are hard to kill; they shot, stabbed, poisoned, and drowned the latter, and he still wouldn’t die. And as for the former, he continues to annoy us and probably doesn’t need the Ras handle. He’s creepy enough on his own.

Because instead of pulling that tired old trick of ordering military action to protect his across-theborder constituents (kind of like the Nazis shooting up a radio station full of their own people and blaming it on the Poles as a pretext for starting WWII), he went straight for the jugular. Announced the whole smash: his intention to take over, subsume, the entire Ukraine, as his own.

Well, I didn’t expect this. And, admit it, neither did you.

But now we’re stuck with this mess. A mess, as it happens, on top of a mess, which rests on top of another mess. And so on, and so on and shoobie doobie doo.

Sort of like covid in 2020, this well-telegraphed assault on an already precarious global equilibrium took everyone by surprise. So, what, other than worry, do we do now? Well, I don’t want to state anything that might shock y’all, but I believe extreme caution in order.

There’s nothing nuanced about that sentiment; risks to our peace of mind, clarity of thought and portfolio returns have taken a great leap forward — in every direction imaginable.

By way of transition, the Great Leap Forward was a program instituted by Mao to effect dictatorial increases in agricultural production in the People’s Republic of China. Wherein Mao decided that, rather than letting folks alone, he would force them into communes, shove shovels, rakes, and implements of destruction in their hands, and order them to produce.

The result? No, not an Alice’s Restaurant Mass-a-cree. Instead, widespread, historic famine. He claimed it never happened, then blamed the climate, then the people, then profiteers.

(Gratuitous aside) Sound familiar?

Back in them days, we were all nearly certain that either Russia or China was gonna blow us up, and about the only comfort we could take was that they hated each other more than they hated us.

Now, they’s apparently in cahoots, which may be the biggest problem of them all, because they are in ideal position to help each other. China can fund a Russia that is cut off from Western financing. They can import Ural Region fossil fuel products, which: a) they need; and b) are the economic engine behind Putin’s program (whatever that ultimately may be).

There also – perish the thought – might be a quid pro quo in place between these historic enemies, under which China would surreptitiously support this Uke riff, and Russia would then do the same when (as is probably inevitable) they march in and grab Taiwan.

And they will be glad for the help. Because, just as Putin is finding out that the Ukies are not overly\ inclined to roll over and get stiffed on this here deal, Xi may just learn that the Taiwanese are also inclined to fight, and that oil may be needed to put down these, er, counter-revolutionary notions.

And nothing for nothing, but as I mentioned, published reports suggested a promise from Putin that he wouldn’t send his tanks into the former Soviet satellite until those magnificent Beijing Olympics had concluded. They ended on Sunday. Russian tanks began to roll towards Kyiv on Monday.

None of these musings are original, and mostly it’s all just adding spit to the biggest spit-balling cycle yet to emerge in this spitball year of 2022. But the threat to semis is worth a closer look:

Semiconductor Source Breakdown:

Many of y’all already knew this, but Taiwan produces most of the semiconductors that bring to life our smart phones, video game consoles, automobiles, and respirators. No semis; no Alexa. And what in heaven’s name are we gonna do without Alexa?

Also bear in mind that one company alone – Taiwan Semiconductor (The big outer ring on the left), is responsible for half of those silicon wonders. We’d be hard-pressed to lay an embargo on them as a newly repatriated protectorate of the People’s Republic.

And while we ponder such niceties, we may want to consider the contours of our laying down a big fat embargo on products issuing from PRC itself. I would be particularly about pharmaceuticals and other medicines. Available literature places their market share of antibiotic production above 90%, but these figures are in dispute. What is known is that they make ALL our Ibuprofen (upon which I live) and fentanyl (which I, but not others, can live without).

Our problems at present have shifted from China to Russia, and, to my way of thinking, markets, which have a great deal riding on the doings just above the Black Sea (among other vexing matters), should pay particular attention to several imponderables.

For now, investors don’t seem to have a clue as to what to make of it all. As the rockets flared, “risk off” was on. Then, improbably, they seemed to settle in. Bought themselves some stock on Friday, and, for good measure, sold off some commodities and other asset classes impacted by the action.

I’m thinking, come what may, that we just experienced an upward jolt in inflationary expectations. Lots of stuff was in short supply when Putin was simply threatening nastiness, but not acting upon it, but now it seems to me as though the pricing pressure on economic goods and services is not only more acute but will likely extend further into the future.

This puts the Fed in a bind of epic dimensions. It wishes to fight an increasingly ominous inflation scourge and can only do so through liquidity-draining interest rate increases. Growth, already elusive and now under additional pressure, may disappear altogether. Prospects for a soft landing – the taming of P without causing a recession — are approaching the threshold of infeasibility.

My guess is that the Fed praying for some price relief from unlikely, unreliable sources such as OPEC. I reckon we’ll see. It’d be nice if they increased production to help us out. But one way or another, the boundary conditions of plausible price levels — for products ranging from energy commodities to wheat and (see above) microchips — place our Central Bank at a locus where it may need to choose between the risks of deep recession and hyperinflation. It may get both.

Meanwhile, we’re through the earnings and quarterly macro data seasons, so all portfolio management eyes are likely to remain fixed on the psychodrama unfolding in Eastern Europe.

It’s not a good look. The Fed is certainly capable of using the crisis to yet again put off the inevitable – moving funding costs within Hubble Telescope visibility of rationality. I don’t think they will do this, and, if they don’t, portfolio managers must do battle in an environment of rising rates, slowing economic expansion (or worse), and “Code Red” geopolitical tensions.

We also appear to be no closer to an end to the MLB lockout but won’t cry no tears about this.

Meantime, what I can offer, by way of risk management guidance, is as follows. Strip your portfolio down to the basics. Focus with laser clarity on your best vetted themes. And nothing else. Expect heightened, bi-directional volatility regimes to continue. Don’t get cute on the short side, because this is a trap that has been set for you, and one you should seek to avoid. The short squeezers are out there, inviting you into their lair, whereupon, if you allow it, they will crush you.

Instead, if you’ve got access, send out a few SWIFT messages. It’ll do you no harm and may be good for the soul. Being 1/4th Russian, I’m not sure if I’m locked out or not, but expect to be soon.

And look on the bright side. Risks have taken a great leap forward, but at least it’s not The Great Leap Forward, which caused the death of > 50 million, due to starvation. Let us rejoice in this.

And now, if you’ll excuse me, I’m going to take some Ibuprofen. While I still can.

TIMSHEL

You wore out your welcome, with random precision, rode off the steel breeze…

— Roger Waters

Let’s throw one off to Syd (Barrett): enigmatic founder of Pink Floyd, memorialized, in song after song, by the brilliant but tiresome Roger Waters (don’t get me started).

Fair warning: I’m not moving in a straight line, here, people. Bear with me if you can.

Welcome, my friends, to the dead, dead deadliest part of winter (and not just from a temperature perspective): Presidents Day Weekend.

If you’re a like-minded sports fan, you are particularly feeling the chill.

The NFL season is over: a grim passage that kills me, by degrees, each year. Nothing now happens until the draft, which, for my team (The Chicago Bears) is their Super Bowl. Or would be if they weren’t perpetually trading away their top picks (including, of course, this year’s).

But that’s not until April, a month which also ushers in the maiden season of a newly constituted United States Football League (USFL). Which will play all its games in Birmingham, AL. At a venue named Protective Stadium. Which tells you all you need to know.

This three-day weekend: a shared celebration of Washington and Lincoln, coincides with the NBA All-Star Extravaganza – perhaps the most embarrassing, self-serving spectacle every conceived by mankind. It was Cleveland this year. At a venue named Rocket Mortgage Fieldhouse.

Which tells you all you need to know.

All of which leads us – in twisted path – to this week’s theme.

Because we just passed the scheduled (if pro forma) ritual of pitchers and catchers reporting for Spring Training duties. For reasons never adequately explained by anyone, “position players” arrive a few days later.

The battery squads of the thirty MLB teams were supposed to begin stretching exercises last Wednesday. But didn’t. Because there’s a lockout. The leagues’ Collective Bargaining Agreement expired ninety odd days ago, and, thus far, the billionaire owners and centimillionaire players have yet to agree to a framework to divvy up the ~$10B of revenue they extract from us each year.

Additional Disclaimer: they don’t get any of my cash. I used to like baseball but have found it unwatchable for more than a generation. Since lockout of 94/95, which extended so long that it cancelled the ’94 World Series.

As Ernest Lawyer Thayer informs us (“Casey at the Bat” you dolts), in the sport of baseball, “hope springs eternal”, so maybe they work it out. But I ask you, given the current vibe of distrust, animosity, fear, and greed, is it likely? Truly, I can’t think of a period in my lifetime where compromise and conciliation, in virtually all realms, were more difficult to envision.

So, I have a sneaking hunch that this here lockout extends well into the regular season, and, absent some divine intervention, that there may be no baseball season at all.

Since I wouldn’t have been paying attention anyway, I anticipate no personal hardship on this score. But I will cop to a happy vibe around this time of year, featuring mental images of fungo bats cracking, and, few weeks hence, stands full of the beer-swilling, hot dog munching proletariat, anticipating the action on the diamond(s).

But for now (and who knows how long), the diamond(s) will be empty.

And, therefore, unlikely to shine.

Perhaps for this reason (but probably for others) the markets are decidedly on their heels. Lots of “risk off” action out there – enough to take the glisten off any investment return-generating strategy.

It is impossible to miss the valuation threats out there – geopolitics, inflation, rising interest rates, and, in general, zero visibility as to how, in which far off galaxy, the capital economy can once again sparkle and shine.

I could go on all day about this, and others certainly have, but I’ll spare you the full range of my wretched thoughts and focus on what concerns me most for the moment.

The United States Government is now officially on record as anticipating a Russian invasion of the Ukraine. My guess is that if there were any doubts about this, Biden removed them at the podium on Friday. He talked tough; told Putin he better watch his ass. Putin’s gonna then back down? To a non-specific threat — issuing from a country that couldn’t, last summer, support an ally for even a fortnight after it withdrew its troops that had been there for twenty years? Not in this world.

No, we’re not gonna involve ourselves in a war over this, but the markets should continue to pay special attention, nonetheless. Particularly to the impact of the incursion on the Energy Complex (which, perversely, was flat to down this past week). The action is likely to push up Crude and Nat Gas prices, which will put enormous upward pressure – not only at the pump and through heating vents — but on inflation itself. And (by doing so) further force the Fed’s hand with respect to interest rate hikes.

The obvious kneejerk response is for the Fed to raise rates more aggressively than originally planned, and, in a gallant effort to outflank its competitors in hysteria, some of the strategists at JP Morgan are now predicting 9 (nine) consecutive monthly Fed Funds hikes – beginning in March and extending, by my count, about three months past Tisha B’av.

Other JPM prognosticators are predicting a recession for the back half of ’22. And, in aggregate, they’re probably right. Because history shows the near impossibility of counteracting inflation without setting off a recession.

It’s kinda like stealing First Base. Which is more unlikely now than in the recent past. Because MLB is locked down.

So, I’m keeping my most watchful eye on the Energy and Interest Rate Complexes – both of which are acting somewhat perversely in recent sessions. In the wake of the pending Russian adventure, and on the back of dismal, across-the-board Inflation data, Crude Oil sold off a bit, and longer-term Treasury Yields gave up important ground.

Plainly, investors are somewhat confused here, and their inability to cut through the conflicting signals is showing itself in heightened interest rate volatility:

I am among the flummoxed. So, I turned to my trusty Bloomberg and pulled up this here graph. I don’t understand what it is tracking; the closest I can come is that it depicts the time path of the volatility of one year forward swaptions on long-term Treasury instruments (See? I told you).

But it doesn’t take an expertise in macroeconomics or Differential Equations to infer that interest rate vol is on the rise, hovering at levels not seen since the Big Crash.

I suspect this confusion will continue and wish my rate trading droogies the best of fortune in unpacking this mess.

My gut tells me it ain’t good news, though, and that the great unwashed are beginning to catch on. Bloomberg also informs us that the put/call ratio is highest since the onset of the lockdowns:

Well, OK, but I don’t expect these puts to pay off. They never do. And, beyond this, I feel we are at the bottom of a range that is supported by the oceans of liquidity sloshing around the system, and resisted by, well if you don’t know by now, it’s pointless for me to explain it to you.

Yes, I’ve worn out my welcome with random precision, and will now ride off the steel breeze.

But I feel compelled to offer a more uplifting note of departure. Washington and Lincoln have drawn much shade lately, but still merit a national holiday. In San Francisco (home of the purloined from New York Giants), the School Board tried to remove the names of them guys from certain education facilities. They failed, and instead got themselves removed.

The 94/95 baseball lockdown ended in time for a full season the following year, and, shortly thereafter, Bonds, McGwire and Sosa were cracking out homers at a rate well beyond what had ever been evidenced in more than a century of preceding league play. All of them guys got busted for steroid usage, but, I ask you, isn’t that beside the point? The markets have been living off financial steroids for about 15 years now, after all, to the enrichment of most of my readership.

Baseball now rides clean (or portends to). The diamonds are dusky at the moment, but with hope that springs eternal, will someday shine again.

TIMSHEL