Ay, my lord: and fear

We have landed in ill time: the skies look grimly,

And threaten present blusters. In my conscience,

The heavens with that we have in hand are angry

— William Shakespeare: A Winter’s Tale (Act III, Scene 1)

Its ubiquity and over-accessibility laid aside, for what I hope are valid reasons, I have titled this piece after perhaps the best-known stage direction in the history of theater.

Because I do think there is a bear out there, a cold grinding grizzly, which Jim Morrison once described as being hot on our heels. In fact, there may be more than one. Bear, that is. In pursuit of us.

And if I’m right on that score, he’s hungry and cranky, and in no mood for anything other than taking care of bear business. He’s not among the progeny of those amiable, ursine minstrels that form the ensemble of Disney’s (now idled) “Country Bear Jamboree”, cajoling us into a chorus (led, of course, by Liver Lips McGrowl) of “Mama Don’t Whip Little Buford”. He’s more like Khalil Mack – working up a head of steam towards Aaron Rodgers after being schooled by the latter on the previous series.

He comes by his anger honestly at any rate. His hibernation was deep but not restful. He came out briefly in the fortnight around the Vernal Equinox (more about this below), and ravaged everything in sight, but then went back to his rest (in part because the government compelled him to do so), with the blessings of neither a full belly nor a relaxed frame of mind.

And now, in the waning days of May, he must get his move on, and I think he’s livid about the task that awaits him.

So, too, are the rest of us. Angry and hungry that is. The vibe over the past week was of course dominated by images of one of the most heinous acts of institutional abuse and oppression that I can remember in many a year. Nobody doubts that the dude with his knee on Floyd’s carotid artery will burn in hell. I weep, like everyone else, for Floyd himself, but I also kinda feel sorry for his assassin’s family: for the mother (presumably he has one) who spawned him and might even love him still, for his wife that is now divorcing him, for his kids (if he has any), who must carry this burden for the rest of their lifetimes.

And I feel sorry for the rest of us. It’s not as though we didn’t already have more problems than we could count, and now the streets of cities from Bangor to San Diego, from Spokane to Miami, are burning with anger. A rage that has been simmering to a boil for months; maybe years. It didn’t take much to stoke the fires, which may be just a prelude to a full-on explosion.

The broadcast and cable networks are of course featuring the riots on an around the clock basis. It almost, but not quite, makes one pine for those serene days gone by, when every electronic screen in existence was dominated by the Covid Death Track Counter.

And of course, our ills extend out from there. Our friends in China just completed the comprehensive annexation of Honk Kong, 27 years before schedule. The world barely noticed. Government officials are now in an infantile pissing contest with social media platforms. A quarter of the national workforce is out on the street, or, to apply a happier, more woke lexicon, “furloughed”.

No wonder, then, that we feel the presence, hear the footsteps, of those thick, furry claws. But perhaps the realms where they remain the most muted are those of the investment world. Our intrepid indices charged forward pretty much all week, as led of course by the Gallant 500’s seizing and retaining of >3,000 ground, and as followed by virtually every equity benchmark around the globe (with the justifiable exception, of course, of Hong Kong’s Hang Seng Index).

Other risk factors join in the serenity as well, and I am particularly touched by the heroic recovery of the high yield debt market, transpiring, as it is, even while bankruptcies are in full surge with, no indications that it will end anytime soon:

What’s Wrong with this Picture? High-Yield Spreads Tighten as Bankruptcies Explode:

Shakespeare, when he wasn’t sending theatrical bears after Mariners in “A Winter’s Tale”, once advised the world: “neither a borrower nor a lender be”. I think he had a point. But at this particular pass, and as indicated by these charts, you’re almost certainly better off aligning with the former class than the latter. Because the latter looks to me to be paying up big-time for the privilege of rolling over and getting stiffed.

Meanwhile, with the sun warming up and almost everyone shedding at least a titch of their cabin fever, maybe the time has come to stretch our legs a bit. Some are squandering these gifts by taking to the streets and burning down local businesses.

For us, I believe there’s a better path. Perhaps we can meet at the beach? What’s that, you tell me that it is closed except for local residents? No worries; we can have a fine time at the harbor just down the road, watching the boats go by.

A magnificent time, in fact.

But I’m not going to be able to set aside all that vexes me at the moment. Our visit, no matter how long it lasts, will be too short for my liking.

And, beyond this, I doubt I will be able to shed my concerns that the equity bear is after us. As indicated above, he came out for a spell in late March, and nobody could’ve much enjoyed his visit. I doubt he’s red enough in tooth and claw to roll over like Baloo in the Disney version of The Jungle Book (Kipling’s characters are much more complex and darker) and playfully ask Mowgli to scratch his belly. If he roars with hunger, we won’t need to ask the reason why.

Among other reasons, the raw meat that he felt belonged to him was unceremoniously snatched out of his jaws as March turned to April. He’s aiming to take it back, and thinks he stands a fair chance to do so.

How? The unemployment payments that are soothing the savage breasts of the idled workforce run out in a few weeks, and many of these folks are already rioting in the streets. Just wait until those govy checks stop coming, presumably in the heat of the summer. Millions of businesses remain in hibernation, and my guess is that a large number of them won’t be returning. To paraphrase Churchill, so much money is owed by so many to so many that I don’t see a way it can be organically repaid. But investors keep buying up stocks, and, while I hope they’re correct in their judgments, I have some questions.

Mostly, is the market accurate in its assumption that it does indeed have the Bear Necessities to survive, or even thrive? I have my doubts. And they distract me in our best moments, because even if the investment class retains and expands its wealth, I think the masses will be rendered worse off for an indefinite period. The former group won’t mind paying more for airfare, for tables at less crowded restaurants with pricier menus, or to flunkies to wait in line to deal with life’s now more annoying annoyances. But everyone else may be in a position where they must function with less money, to operate their daily lives at greater inconvenience, and pay more for the privilege of doing so.

It all brings to mind one big circle jerk (not that I myself have ever attended one of these elegant affairs). You’re in the company of friends, you find a way to get off, and are, arguably, no worse off for the experience. But don’t pretend that this is sort of thing is either uplifting, or that it is going to satisfy your needs forever. Eventually, maybe sooner rather than later, you’re going to require something more real, more divine, than this, and here’s hoping you can find it.

Just remember that the bear is still out there. And I can’t close without returning to our theme and evoking a well-worn but nonetheless a propos anecdote. An anecdote, it might be said, for our times.

A bear is detected in the vicinity of a campsite occupied by two friends. Both hightail it out of there at top speed, with the bear (natch) in pursuit. At some point one of them asks the other “why are you running so hard; you can’t outrun a bear”.

To which the other replies “I’m not trying to outrun a bear; I’m trying to outrun you”.

It was a fair question. The bear is not only speedy but has great stamina. Particularly when he’s on a hungry hunt. He’ll eventually catch his prey, but the resourceful and fleet-of-foot may, through patience and discipline, elude his grasp.

This, my friends, is about the best of what passes for risk management advice in these troubled times that I can offer.

And, on that note, I feel it’s best if I take my leave (maybe you shouldn’t dawdle too much after me). So, see you further down the trail, and, as always:

TIMSHEL

“It looked like rain, so I took the liberty of rolling up your car windows”

— Eddie Haskell (Leave it to Beaver)

Welcome to a special, Multi-Media Memorial Day Edition of our weekly musings, featuring not only the written word, but references to both the small and big screen — from days gone by.

And our titular advice is worth heeding, especially in light of an article in this week’s Barron’s, suggesting day trading has replaced sports betting as the national pass-ime, and expressing doubt as to whether the latter can sufficiently sustain the (in my view elevated) valuation of risk assets.

While I am unable to corroborate the above-mentioned trend, I will express my concurrence with the subsequent sentiment. Day-trading, while if done with proper social distancing protocols, may help bend or even crush the curve. Sustain this improbable rally? I fear not.

But one of the men behind the keyboard (to whom you should pay scant heed) is me. No, I’ve not been day-trading (just typing away in MS-Word as always), but I am nonetheless hiding behind QWERTY. And, given my recently dismal risk prognostication performance, it would be wise to ignore me as well.

Know that I’m putting forward neither excuses nor justifications, but in terms of root causes, it seems that one of them is that MY ever-changing world in which we live in (thanks Paul) is rapidly melting away.

And if I’m right about this, then the week just ended was one of a melt acceleration. Though everyone knew this was coming, I took the formal announcement of Johnny John discontinuing sales of its iconic baby powder as a particularly crushing blow. My mother literally slathered me in the stuff, so much so that my longtime family doctor informs me that no less than 20% of my (recently dwindling) body mass is, and always has been, Johnson and Johnson’s Baby Powder.

Then came the passing of an above-reference idol of mine: Ken Osmond, who played the snarky, misanthropic Eddie Haskell in the 1950s masterpiece sitcom “Leave it to Beaver”. He crushed this role as the scheming cynic whose attempts to charm the local girls and parents always fell hilariously flat. Finally, I’d be remiss in not making reference to the postponement of the Indy 500, which normally takes place on Memorial Day Sunday, but is now (we’ll see) rescheduled for some time in August. I actually don’t really give a sh!t about the race. Not a fan of the sport in general. It did used to amuse me to try to convince my mother to attend a NASCAR event with me – preferably one that would involve an extended road trip to a rural track. She never agreed, and she’s been dead for 3.5 years. Her race is run, and the annual Brickyard ritual has been postponed. No wonder I’m off.

Since this here pandemic began to transform the economic landscape from a colorful (if scary) Land of Oz motif — into the black and white Kansas plain right before the tornado struck, I have anticipated further market carnage, and I’ve been wrong. I wasn’t overwhelmingly surprised to see a modest snapback of valuations — once it became clear that we weren’t ALL gonna die, but I didn’t think it would hold. It has. But even while the pandemic numbers can be interpreted as nominally encouraging, the economic fundamentals have fallen into full on collapse, that must, or should, look to investors like the scene Brad and Janet first encountered when they walked into Dr. Frank N Furter’s castle on that stormy night.

And the numbers keep deteriorating. A quarter of the work force idled. Profits disintegrating. Bankruptcies and delinquencies soaring. Broad swaths of the economy still in full-on shutdown.

But against this gruesome backdrop, the market music keeps playing. Let’s do the Time Warp again, shall we? Apparently, we shall. For the last several weeks, it looks like we’ve timewarped back to 2019. And it certainly begs the question as to how long this improbable dance can continue.

Well, maybe for a little while at any rate. The Gallant 500 and Captain Naz closed on Friday at levels significantly above their 100/200-day moving averages, and the futures even rallied, patriotically, on Memorial Day. Vixen VIX reposes at a still- elevated but less than fully provocative 28 handle. Investment Grade debt, with issuance and inventory continuing to shatter all know records, is trading at spreads reminiscent of that simpler time, when no one in the world gave a rat’s ass about the internal cell structure of Asian bats.

And it all has me continuing to worry my fingers off about the risks out there. So much so that I have chosen, as an act of public service to fallen soldiers, to delineate them. In brief, the following set of potential market hazards are all: a) flashing red; and b) overtly correlated on the downside:

Pretty impressive list, is it not? And I’m not even sure it’s complete. I may, in my haste and distraction, have neglected critical items that should be included in this inventory. But what strikes me most acutely is, as indicated above, the correlated downside I see for these risk factors. If any of the above manifest, one can make an argument that ALL will in all probability follow suit. If so, it’s “look out below”.

And while I certainly want to reinforce my main theme here and encourage you to ignore the words that I type, I can envision scenarios where the economic world looks and feels significantly more dismal than it does even now. When tens of millions are unemployed. Where children are denied the lifeblood of education and socialization. Where businesses, colleges and even hospitals are being shuttered, perhaps permanently. Where loved ones are experiencing such a perpetual state of blissful proximity that they are on the verge of killing one another.

Where we can’t move forward with our dreams and can barely even get together to plan them.

But pay no attention to me; I’m behind the man behind the keyboard.

My hunch is that our fates may be rendered much more visible this summer. The disease looks to be on the wane. This must continue. Or else. The impacts of the fund flow failures should hit with full force over the next couple of months. The state of the economy as of Labor Day, if history is any guide, will likely go a long way to determine the outcome of the election.

And, with respect to the last of these, I encourage you to take a look around you. Whether you prefer the type of governance currently in place in New York/California/Illinois/Pennsylvania, or shade towards the Texas/Florida model should inform your voting preferences. It’s pretty clear which side of the ledger my sentiments lie. But in case anyone is unclear, I’m completely in the camp of freedom of individual choice as opposed to living by diktats issuing from government bureaucracies. Come what may.

But you are free to form your own judgments, ideally without my input or influence.

By now I’ve probably exhausted my allotment of verbiage which you should ignore. With a couple of exceptions, of course. First, I will stand firm on my warnings that the markets are in unprecedented risk ranges here. Also, while I do think that you should pay no attention to me and my keyboard, I will nonetheless beg you to hang tight and trust me.

Otherwise, maybe we could just disappear, out of the spotlight and into blissful oblivion. Like the late Ken Osmond, who left show biz to become an LA cop. For a long time, rumors floated around that he turned himself into Alice Cooper. But he didn’t. And that’s probably a good thing. I won’t become a cop, but I wouldn’t mind becoming a recording artist. If so, I’d prefer to be a rocker, but busting out my rap game is another option.

G-Money anyone? Naaah. Given my recent market calls, it just doesn’t work.

And besides, none of you would or should be listening to me anyway.

Just be careful out there. Roll up the windows on your ragtop (even if you keep the top down). And (chaka boom, chaka boom)…

TIMSHEL

Lest anyone form a different idea, I’m carrying forward with my Catch 22 theme — largely due to the overwhelmingly gratifying response I received from the teeming millions that comprise my readership, to last week’s note. And, as everyone is aware, I’d be the last guy to stop a party while the juices are still flowing, and the music is still pumping. Even if I risk running it into the ground.

Besides, the C-22 well runs deep. Shall we call it infinite? Perhaps not. But I reckon I can squeeze one more round out of it at any rate. We (I) can at least try.

So, for now, we’ll let it ride. And this week’s episode features tribute to Milo Minderbinder, the titular Mess Officer for Yossarian’s squad. He is, more specifically, the novel’s quintessential, caricatured capitalist, whose deal-making escapades play a prominent role across the entire narrative. He is, for instance, on record with his opinion that the war effort would be best served if government got out of the business altogether, yielding command and operational details to Private Enterprise. And he may have a point. One way or another, he spends most of his service trying to achieve that precise objective.

Among his many convoluted deals, the most mysterious of all is how he manages to purchase eggs from the government at 7 cents, resell them at 5 cents, and still turn a profit. However, other exploits bear mention as well. In one uncharacteristically unsuccessful trade, he corners the market on Egyptian cotton, and, being unable to sell it, he coats it with chocolate and tries to serve it up to the regiment as dinner. Also, inevitably, he contracts with the Germans to supply weaponry, and then bombs his own squadron.

So, hats off to you, Milo. And to your philosophical progeny, such as Jobs, Gates, Musk and Zuck. But, in the meanwhile, what does any of this have to do with Numerical Catches?

Well, consider the reality that this past Friday, the Bureau of Labor Statistics released April unemployment figures, and a Base Rate that came in at a better-than-expected 14.7%. The equity markets rejoiced, taking the weekly gains to a tidy 3.5% (half coming in Friday’s post-Jobs Report session). Captain Naz, leading the charge, is now in positive territory for the year.

But there is, as always, a catch.

Specifically, in what I’m pretty sure is an unprecedented move, the BLS release included a footnote which indicated that because a significant portion of the workforce had been furloughed (as opposed to being formally and finally being kicked to the curb), the rate is arguably understated by as many as five percentage points. If so, then the real unemployment rate is 19.7%, which (of course) rounds up to 20.

Let’s designate this CATCH 20, shall we?

But for many a year, us smart market professionals have ignored the Base Unemployment Rate and have chosen, instead, to pay slavish tribute to the Non-Farm Payrolls figure, which came in at an elegantly precise 21.500M. In a spirit of hope, and in order to avoid landing squarely on 22 (a number that within this context, belongs entirely to Joseph Heller), we’ll round this down to 21.

So, in this instance, instead of rounding up, we’re truncating. Call it CATCH 21.

And, again, the markets loved it. I will cop to wondering what the catch is, but unfortunately, I’m out of them (catches, that is), so perhaps you can tell me.

Because this week, the equity markets crossed a significant milestone, insofar as they manifested a P/E ratio in excess of 20.0, for the first time since two thousand freaking two (2002):

Now, of course I’m sorely tempted to designate this Catch 20.4, but that would be rather obtuse of me, now, wouldn’t it?

But one can only marvel at the relentless enthusiasm of the investor in American equities. Milo, if he was only here, would no doubt be moved to tears at this show of profiteering patriotism. Of course, the rally itself is kind of concentrated, with substantially all of it deriving from the performance of a handful of companies whose performance is analyzed, ad nauseum, across the financial wires. I can only add this: God help us if these names begin to suck wind.

I do hope the bulls are right. I really do. And not just because our interests are aligned (contrary to a longstanding urban myth, when you do better, I do better). But I do kind of wonder, setting aside killing it in the markets, how we’re going to pay our bills. I’d also draw everyone’s attention to the extraordinarily tight correlation between labor markets and aggregate solvency:

Thus, unless there is a break in these thirty five-year trends, we can certainly expect a surge in both payment delinquencies and bankruptcy filings. Maybe Milo would have some ideas as to how to turn this mess into an investment profit, but he’s not here; never was. He is, after all, a fictional character.

I did see a titch of rationality enter the late week proceedings, when, albeit for a brief time, 2-Year Treasury futures traded to negative yields. I’m not gonna lie: this pleased me. Because Treasury yields across the curve remain too high. But I’m not particularly inclined to yet againlay out those arguments.

And Milo has a problem. As does Colonel Cathcart. As do we. And that problem is Yossarian. Having in my own way brought about this dilemma, I truly empathize. Because, as recently as 2 weeks ago, there were no Yossarians in anyone’s field of perception. And now they’re multiplying like hobgoblins.

And the problem with Yossarians is that they stubbornly take in all the information that is presented to them, and then act according to their own lights. It should surprise no one that I myself aspire to be a Yossarian, and the inputs I see suggest a major disconnect – one that is not by a long shot factored into current market paradigms.

The unemployment rate is soaring to depression level thresholds. Borrowers are unwilling or (more broadly) unable to make good on their galactic obligations. And they continue to add to these debt loads at record velocity. Enormous swaths of the economy are in sustained, comatose condition. Air Traffic, Hotels, Restaurants, Auto Dealerships, General Contractors, Casinos, Retail Outlets, Manufacturing, etc.

States and Municipalities – those always sober custodians of public funds – are spending a lot more and taking in a great deal less, Heck, hospitals are even going broke – during a frigging pandemic – because the government has shut down the portion of their operations that actually are designed to turn a profit.

I suspect the patience of the public is about to dissolve at an accelerated pace. And a couple of dynamics aren’t helping. I’m telling you right now that the ~$6T of fiscal and monetary offsets applied to the economy by its elected and appointed officials is a mere drop in the bucket relative to the hole created by the shutdown. And it’s far from over. The shutdown, that is.

More will be needed, MUCH more. And let me ask you this. How much is going to be forthcoming while the investment class is booking fat profits? And how long will the beleaguered citizenry, led by the ~35M of newly unemployed (not to mention the MILLIONS of other poor schlubs whose jobs are hanging by a thread) put up with this nonsense?

Not long I say. And as to equities, you can have them here; I’m out.

And if you sense my dour mood, I will offer my best mea culpas. I’m jonesing for you, baby. And if I don’t see you soon, I think I’m gonna die. I’ve got plans. We’ve got plans. And the clock is ticking. I know that. But with snow in Mid-May, and everything shut down, I’m well-nigh is driven to despair.

Plus, Little Richard has died, and this is a big blow. And I’m pissed because instead of devoting an entire column to him, I’m forced to relegate him to a note about his passing in the 12th paragraph. Rest well, Rich. You came. Kicked up quite a fuss. We’re all greatly enriched by your having done so.

And I think, as such, all of us need to find both our inner Yossarians and our inner Milos. I do wish that we could call on the wisdom of the latter. However, I’m afraid that even the greatest capitalist of all time might be flummoxed by the current proceedings. I mean, you can cover the entire, rotting capital economy with the finest of the fare produced by Hershey’s, and I don’t think we’d be inclined to choke it down any better than the Catch 22 crew was able to digest chocolate-covered, Egyptian cotton.

And for those who care to know, the egg mystery resolves itself as follow. It was one big arb. Milo generates positive P/L by first buying the commodity for 1.5 cents in Malta. He then sells it to the military at 5 and buys it back at 7, booking 3.5 on the original trade and giving up 2 at a later stage, presumably for optics sake. There’s something like this going on at present (e.g. our pathetic efforts to borrow our way out of debt) but I doubt it will cure our ills. Bombing our own squadrons may be a more lucrative answer; may very well lead to better financial outcomes.

But I reckon, even here, there’s a catch; after all, there always is.

And now, with great reluctance, having thoroughly run through my Catch 19-21 scenarios, I think it is probably time to give this theme, and this note, a rest.

Fair warning, though. If, in subsequent weeks, you receive a note from me entitled Catch 23, you can safely conclude that we’re all in REAL trouble. Happy Mother’s Day, and, as always…

TIMSHEL

Yossarian: That’s some catch, that Catch 22.

Doc Daneeka: It’s the best there is.

The intent of this essay is an attempt to frame the argument as to whether or not the good doctor’s statement, set forth above, still holds. Certainly, though, we can all agree on this: Yossarian’s comment remains good to go. Catch 22 was quite a catch; still is.

For those unfamiliar with the source – Joseph Heller’s seminal, 1961 novel about the exploits and tribulations of an overworked, overflown WWII squadron, the premise of “Catch 22” is as follows. It most specifically follows the thoughts and actions of principal character Yossarian (whose first name is never revealed. Nobody in the entire book seems to have a first name): a bombardier in an Air Force unit that is asked, due to the misplaced ambitions of its commanding colonel, to fly an impossibly cruel number of combat missions. Yossarian perpetually seeks a way out, including repeated requests to be declared insane under Section 8 of the Air Force Code. Doc Deneeka (who must decide these matters) is always impelled to turn him down, because, according to the rules: 1) the applicant must first ask for said relief; but 2) by asking, proves himself not to be crazy in the first instance.

Like Yossarian said, that’s some catch.

And, for nearly 60 plus years, Doc Deneeka’s reply has never been called into question. But then came the coronavirus, Covid 19, and with it, a new catch: call it Catch 19. I really shouldn’t have to explain myself here, but I’ve got nothing better to do, so here goes.

A wildly contagious virus spreads across the globe. Economies, including this here one, are forced to shut down in order to slow its spread, which, left unchecked, could certainly overwhelm the health care system, and might, under certain circumstances, kill us all.

So, everybody checks out for a stretch. Business flows stop. Millions of jobs are lost. The economy goes into a tailspin. But the strategy, at least with respect to its stated objectives, is successful. The health care system is stressed but is not completely overwhelmed. The curve flattens, and then even declines. Thousands upon thousands of entities race for a vaccine/cure. I think, despite all of our finger pointing and hand wringing, we can look at our behavior here with a sense of pride.

But the virus, stubborn bastard that it is, remains a threat, an enormous one. Meantime, with everyone broke and going crazy, a consensus emerges that society must begin the arduous process of re-opening. It cannot do so without enormous risk: taking the form, in the extreme, of a combination of a resurgence of the medical menace and a disappointing economic relaunch: one that does little to mitigate the financial carnage created by the shutdown itself. Again, let’s call this Catch 19.

That’s some catch, that Catch 19.

But is it the best there is? Does it supplant Catch 22? The answer lies above my paygrade.

And yet this is the dilemma that we now face. At this point, pretty much everyone this side of the Governors of Maine and Michigan understands that we kinda/sorta gotta get rolling again. I certainly feel that way. But how? For the most part, I think we’re taking rational steps. Wyoming is good to go. Hudson Yards? Not so much. We still don’t know much about how it will all turn out on either front (economic or medical). Whether or not those nasty Covid cells regroup and stage a renewed assault on us, and/or if those millions of jobs and businesses dealt mortal wounds by the crisis can lift themselves, in Lazarus-like resurrection.

This is how matters stood at the end of April. Which was Thursday. And when the books closed for that cruelest of months, it showed the strongest gain for equity indices since 1987 (also April). It ended on a bit of a sour note, though, and there was follow-through selling on Friday, May 1st. Perhaps this was a show of sympathy, on International Workers Day, for the millions that have lost their jobs this year. How many? Well, we’ll get a better idea next Friday, when the April Employment numbers are released. Current consensus calls for Non-Farm Payroll losses of 21,500,000, and for the unemployment level itself to have risen to 16.0%. Think about that for a moment.

In general, this best month since I scored my MBA came across the backdrop of an economy that had been decommissioned in a manner never even contemplated over the last few centuries. We have barely yet seen data deriving from April, but whatever it is, it ain’t good. Still pending, in addition to the Jobs numbers, is information about what rents and loans were not paid to creditors, which, by the way, are gargantuan. And what impact these payment impairments will have on the overall capital market

However, anyone who believes that the burgeoning credit bubble is showing any since of impeded expansion did not fly with Yossarian in Colonel Cathcart’s squadron (asked to perform 80 raids when no other crew in the entire Air Force had done more than 25). Estimates suggest that those enterprises still fortunate enough to (temporarily?) carry an Investment Grade rating issued a new record of nearly $300B of fresh paper in April alone. The Fed Balance Sheet has increased approximately 50% — from ~$4T to $6T since we’ve all been cooling our heels at home.

There is a longtime adage ‘round these parts that takes the following form: Don’t fight the Fed. On balance, I am a strong adherent to this wisdom. But the current base of incremental borrowing, even if Team Pow snapped up every single bit of this new paper, would cover only about six months of our historically impressive, still-surging credit binge.

And then there’s earnings. Most of the big dogs have now clocked in. Many have lacked the intestinal fortitude to issue forward guidance, so the analysts do it for them, as depicted in the following chart:

As a risk manager, I’m trained to worry about the divergence between the broken line and the solid one. Feel free to ignore it if you so choose. But at your peril. Be aware, though, that while we were all enjoying that April laugh riot, Q2 P/E ratios surged by an impressive 30%.

And there’s really not much more to add at this point. I did hear of an Orange County barbershop flouting State law and opening back up this week, while a restaurant in Maine did the same. I am sorely tempted to patronize both establishments, but I have no practical way to transport myself to the OC. And as for the latter, well, according to a time-tested idiom from our Northeastern-most state, if anyone is asked how one can get to Bah Habah (Bar Harbor, ME), the only appropriate answer is as follows: you can’t get theyah from heeyah.

So I reckon I’ll bag it and come around to see you instead. I intend it to be a surprise, but I have forgotten your address, so don’t be alarmed if I call you from five minutes away and ask you for it. I hope and expect you’ll be glad to see me. I’m looking a little scruffy these days, but I know that you will nonetheless welcome me with open arms. It may be a tearful reunion, but it’s one that I anticipate with great joy.

And, with respect to the markets, it looks like we’re destined to fly our missions, amid heavy fire, come what may. That Section 8 is probably out of the realm of possibility, because: 1) we’re all asking for it; and 2) we’re all crazy at this point.

SPOILER ALERT. Yossarian managed to beat Catch 22 by following the example of his seemingly incompetent roommate, a pilot named Orr, whose planes crashed on every mission, in what turned out to simply be a successful cycle of practice runs for his effort to go AWOL. Since we have the space, I will relate one final Catch 22 sequence:

Yossarian: Orr?

Arfy: Sweden

Yossarian: Sweden?

Arfy: Orr

Yup, that’s right. Orr bailed to Sweden, which of course is a jurisdiction that is hot in the news due to its controversial, yet at least superficially successful, handling of the Covid crisis. Maybe we’d all like to follow Orr to Stockholm (lovely this time of year), but like Bah Habah, you can’t get theyah from heeyah.

And even if you could, at least for the moment, they’d probably just send you home anyway.

So, on the whole, and with great regret, I’m gonna throw it out there that Catch 19 Trumps Catch 22. And will proceed with attendant caution. However, you can make your own judgments, which, as always, I trust implicitly.

But know this: as you take to the air, myriad anti-aircraft missiles are loaded and trained towards your trajectory.

Even if you can’t see them.

So please take care of yourself, and, as ever….

TIMSHEL

For those of you driven to bored distraction by all of this shelter-in-place folderol, might I recommend something in the way of sublime diversion?

OK then. Dial up your preferred streaming service and check out the film celebrated in our titular theme: the 1964 Jerry Lewis classic “The Disorderly Orderly”. Trust me here; you won’t regret it.

It is, among other matters, the quintessential JL vehicle, unleashing his singular site gag brilliance in ways not seen before or since. Trust me again. Hilarity, indeed, ensues.

A brief synopsis of the plot is as follows. Lewis plays a med school dropout who takes a position as an orderly at an upscale (pre-Covid) nursing home. Due to a confluence of factors (DNA, academic failures, and, alas, unrequited love), he manifests a condition under which he inadvertently adopts the symptoms and mannerisms of his patients. Particularly those of the unforgettable Mrs. Fuzzibee, who prances, stutters, flails and the like. Jerry isn’t making fun of her but cannot stop himself from aping these traits.

Like I said, hilarity ensues.

But the sad part of all of this is that I too have fallen into this trap of late, a condition akin to that which the person whose opinion I value most calls folie a deux. Probably, it lay dormant in me these sixty years, and, if so, what no doubt triggered it was this week’s trading action. In particular, that transient but positively surreal interval on Monday, when Crude Oil traded at a negative $40 to the barrel.

In other words, for an (albeit) brief instant, , holders of petroleum were paying big bucks for anyone willing just to take the stuff off their hands, presumably, never to be seen again.

This. Cannot. Happen. But it did, and we’ll discuss the implications a little further down the page. In the meantime, something inside me went a bit bonkers, and I started to act out the most outlandish pathologies of those individuals and events I have recently encountered.

First, I grabbed my face mask, hose and funnel, hopped into my car, flagged a couple of passersby, and offered $100 for them to transfer the fuel in my tank into theirs (no takers). Then I signed up a couple of clients under terms involving me paying them for me providing them risk management advice.

Next, I bounced over to the local Kohl’s and bought out their entire supply of toilet paper, the fact that I have been in a condition of full on constipation for nearly two months notwithstanding. To be more specific (if less elegant), I haven’t dropped a deuce in more than a fortnight.

I then went home and realized that my financial portfolio did not have nearly enough risk for my liking. So I bought some stocks when Neiman Marcus declared bankruptcy. Bought some more when the Weekly Jobless claims number clocked in at 4.4M, bringing the 5-week tally to a tidy 26.2M. Really loaded the boat when I learned that the Mortgage Bankers Association announced that 3 million homeowners had applied for forbearance over the past week.

Why? Because Crude Oil cannot trade at a negative price. Any more than rain can fall upwards, or the Brandenburg Concertos can be played wearing boxing gloves. It cannot happen. But it did. So my inner Jerry-Lewis-Disorderly-Orderly syndrome kicked in, and I was unable to stop myself from, just like so many around me, from hoovering risk assets at a point which, in my judgment, is the riskiest interval in modern market history.

Being a nuanced observer of the markets and all, I began to examine root causes, and I would like to take this opportunity to inform you of my hypothesis as to what is really going on out there. Why not? Everyone else is doing it, and no one wants to hear their opinions. This, combined with my Disorderly Orderly/folie a deux condition, renders it entirely fitting and proper that I do so.

And what I really think is this. You can draw a straight line from this current mess all the way back to the mortgage bubble that transpired last decade. Before the (last) crash. And to everything that ensued from then on. So, stroll with me, if you will, back to the aughts (00’s), when, at some point, the last blind grandmother in Mississippi had been talked into signing on for the last million-dollar mortgage. When said mortgage got packaged into a complex security, which received a “money good” grade from the Ratings’ Agencies and was sold to institutions as a sound investment. We don’t know which one it was, but this mortgage was the straw that broke the capital market camel’s back. The securities defaulted. And the banks needed a baller of a federal bailout, lest they go under themselves.

But they didn’t. Go under that is. The Fed bailed them out, and then started to print money like it was going out of style (which it is). And it worked. The economy recovered, roared. Facebook went public. Tesla started cranking out electric cars. Our smartphones became true gateways to the world. Cannabis began its journey to legalization/normalization. Jobs were created and stayed available in abundance. Due to in large part to reduced price information costs, stuff got cheaper.

All of this was something of a miracle, but it couldn’t last forever. And there were unintended consequences, notably a veritable orgy of borrowing, as catalyzed by artificially suppressed interest rates. Recognizing the problem, the Fed tried to turn off the spigot in late 2018. That didn’t turn out so good. So, early in ’19, it unplugged the stopper and let it ride. Asset prices soared. As did our indebtedness.

As 2020, began to unfold, it looked like we could keep the party going for quite a spell. But then the virus came, causing an historic collapse in demand, and an attendant plunge in incomes and cash flows. And what has happened to the pace of borrowings in the wake of this mess? Of course, they are accelerating. According to the oracles at Morgan Stanley, Investment-Grade debt issuance is clocking in at a record-shattering >$700B through April, projecting out to an impressive $2T for 2020. All of which tempts my JL side to pollute my currently pristine balance sheet and float some IG debt of my own. Except for this: no one has ever accused me of being an Investment Grade rated cat. So I’ll give it a miss.

One way or another, there’s an indisputably problematic amount of debt out there. And I’m not sure how many times I have to explain this, but when an economic agent owes a lot of bread to The Man, and the money flows stop or slow to a trickle, said agent finds him/her/itself flat busted quicker than you can say “Bob’s your uncle”.

Maybe an analogy will work. Up here in sleepy, quarantined Fairfield County, there are a lot of houses on the market, some listed for what seems like eons. As I drive by them, I envision a narrative under which a guy (Joe), now in his forties, embarks on a Wall Street career with his newly minted Wharton degree in tow. He lands a nice gig, and each year, he makes more than he did the previous one. He expects this trajectory to last a lifetime and is somewhat justified in this thinking. Pretty soon he’s got a wife and a couple of kids, whom the missus is tired of toting around Gramercy Park. So, they decides to bail for the burbs. Joe can probably comfortably swing that Mississippi granny $1M mortgage, but the wife of his bosom, his partner in all things, has her dear heart set on a dream house that (in addition to the indignities he faces in the form of hitting up his parents and in-laws for that fat down payment) requires him to borrow $2M. As long as he keeps climbing the professional ladder, he’s OK. But then his job gets eliminated, and he is offered, in tribute to his supreme competence, a position in Salt Lake City at 40% his current comp. What’s my boy gonna do?

Whether he takes this gig or not, Joe’s got to dump his dream house. And he’s not alone in this predicament. There were dozens of such houses on fire sale in my hood – even before the virus hit.

And, writ large, I submit that the American economy is in this same fix. It cannot afford to meet its obligations, much less to sustain the lifestyle to which it has grown accustomed. This is where the unintended, unforeseen, unforeseeable consequences start to kick in. Joe’s wife divorced him, and his former in-laws are hitting him up for a return of their portion of the down payment.

The financial markets analogue is an improbable, impossible sequence of negatively priced Crude.

And I’m thinking that this might be just the beginning of our dubious adventure — involving market action that cannot happen but does. It’s anyone’s guess, but I personally doubt that hilarity will ensue.

But across it all, the Gallant 500 and their comrades in arms managed to gin up a modest rally for the week, and one has to admire their intestinal fortitude. The corporate bond market held in there nicely as well, above-mentioned issuance binge notwithstanding.

One set of investors has less celebration fodder: the holders of the Baltic Dry Index:

Unless my lying eyes deceive me, this benchmark of shipping costs is down ~75% in the space of less than six months. On the other hand, there’s nothing to ship anyway, but perhaps we can all take some perverse comfort in the reality that if we ever did want to send cargo across the Baltic Sea and into, say, the Atlantic, we can arrange to do so at a deep discount. Be that as it may, though, my understanding is that those Baltic shippers live and die on borrowed funds, so the question remains whether, when we indeed are ready to ship, there will be any ships to do the shipping.

For now, though our rather empty boats have many knots to travel over rough seas. The FOMC meets this week and what else can they do but bring us further delights? Another gargantuan stimulus package is visible on the watery horizon, this one intended to bail out states and cities. Like Illinois. Forgive me for descending into the madness of politics here, but you could transfer every penny ever created to the Land of Lincoln, and, within a single year, they’d be broker than they are even now.

So, what do you do about all of this? My best advice is as follows: slow your roll. You have done so before and lived to tell the tale. It’s not the easiest thing to pull off, but, as always, I have faith in you.

And if you slow your roll, I’m almost certain to slow mine. Because I have this nasty Jerry Lewis syndrome still plaguing me. Here, I’m pretty certain that hilarity will NOT ensue, but maybe we can strive for something better. Something more lasting. We can at least try. And, trying, we will prevail.

Case and point: Joe now works for me. His wife has returned and is expecting. They’re doing fine.

In this disorderly orderly world, I hope and expect a similar happy ending for us.

TIMSHEL

Oooh, I need a dirty woman, Oooh, I need a dirty girl

— Roger Waters/Young Lust

Y’all been ridin’ dirty before. But it doesn’t matter. Because we’re talking about now.

And, now, y’all dirty. ALL y’all.

Chinese wet markets and their customers. Those nasty little Covid buggers themselves. The willfully ignorant spring breakers. Public servants who ban the sale of tomato seeds and solo motorboat rides.

Lori Lightfoot: The Lady of the Lake.

Dirty. Dirty. Dirty.

However, seeing as how this is a financial publication and all, let’s turn our focus to matters pertaining to the capital economy. The Fed is certainly riding dirty, fueling its engine with noxious junk paper. As are the elected members of the Washington ruling class, inexorably politicizing everyone’s misery (alas, it was ever thus). Selectively withholding relief funds to those in need, while contemporaneously lighting up favored constituents who are not (in need, that is). The Russians and the Saudis (until recently) pumping oceans of Crude into an impossibly glutted energy universe (more about this below).

The algos, for playing games with their models at what may prove to be a tragic time to do so.

But dirtiest of all may be the body of investors bidding up risk assets at this most irrational moment.

I know y’all dirty, but what, in God’s name, are y’all thinking right now?

Equity market action started off slowly this week, but then bidders gathered themselves, heroically, to goose valuations by nearly 4% — most of it in the wake of Thursday’s Claims numbers that told the somber tale of an economy that has shed >22 million jobs in the space of four weeks. Nearly 15% of the nation’s Labor Force thrown out into the streets in the space of a single rolling month.

Let’s lay aside for the moment the shocking lack of decorum involved in jacking up stocks at a point when so many of our great, deplorable unwashed are being forced into the indignities of joblessness (didn’t they teach y’all better at Phillips/Exeter?).

Can anyone tell me that these numbers won’t continue to grow? That the applications are not understated due to backlogs? That many employers, hanging by a thread a couple of weeks ago, have not now gathered to the dust of their forebears and sent their payroll flocks out to fend for themselves?

And then there were those monthly numbers released last week. Retail Sales: -8.0%, Industrial Production: -5.4%, Empire Manufacturing: -78.2%. Please, I beg you, bear in mind that these figures reflect activity in the month of March. When the scope of the nightmare was just beginning to unfold before our eyes. Surely these metrics have devolved since the calendar rolled. Estimates for April are still rather opaque right now, but wherever they come in, put me down for a large bet on The Under.

I’ve tried, albeit with limited success, to explain to my clients the dire threat that the economic shutdown imposes on equity valuations and have done so in the following manner. As portfolio managers, you spend a great deal of your time analyzing financial statements, right? Well, let’s look at the Gallant 500 as a whole, starting with its debt obligations:

Unless one is willing to ignore one’s lying eyes, there’s been quite a jump in these figures over the past couple of years.

To complete the picture, compare this trend to consensus estimates of earnings (-27%) and cash flow (-46.6%). Is it just possible that the ability of the 500 to repay, under these conditions has been incrementally compromised?

And, at least according to the way that these things unfold as I was taught, when rising leverage meets impaired earnings and cash flow, Ground Zero of the economic explosion is something called Enterprise Value.

I’m here to tell you that the Enterprise Value of our economy has taken a massive downward boot of late. And publicly traded equities are just the tip of the iceberg. I truly shudder to contemplate the damage done (a little part of it in everyone) to privately held companies, their investors, states, municipalities, pension funds, insurance companies… …I could continue, but won’t.

Also riding in a dirty, counterintuitive direction are the government bond markets, which seem to have lost their mojo — even as their equity counterparts have managed to recapture theirs. Here, I must return to earlier arguments about deflation and real interest rates. The stalwart among you may recall my scenarios involving the price paths of Crude Oil, Equity Indices, and US 10 Year Notes. Four weeks ago, as both equities and crude were crashing, I enumerated an actual rise in the value of the former expressed in the latter. Between mid-Feb and mid-March, the SPX/WTI Crude ratio rose from about 66 to over 100.

Now, with the Gallant 500 climbing so valiantly to 2875, and Crude collapsing to lows seen only once since WWII (18.32), it takes 157 barrels of Texas Tea to purchase one unit of the SPX. Thus, if you bought stocks in Feb and used Crude Oil to do it, you’re looking at a 2.5-bagger over about 8 weeks. To press on this rather filthy point, so overstocked are the depositories with petroleum that, according to published reports, some of those ballers in Texas are offering up their inventories at $2 a barrel, taking the above-mentioned ratio to a tidy 1,437.5.

The smartest folks with whom I reason are pretty certain that the crude collapse will catalyze a rapid depletion of excess inventories, and that, within a handful of quarters, we’ll be looking at a price for the commodity in the 70s. And isn’t that pleasant to contemplate, when so many out there are struggling to make ends meet? A big jump in cost/push inflation to rub salt into our wounds?

But right now, that’s not our problem; deflation is. Prices are dropping everywhere but yields on the 10-year remain stoically around 65 basis points. How can Madame X not still be the bargain of a lifetime?

Because investors are riding dirty; that’s why.

I am finding myself increasingly weary of making this argument, but if anything is going to destroy us, it’s that dreaded credit leverage. We will learn a great deal more about this over the next week, when that adorable (if unkempt) couple — Fannie and Freddie — publish their monthly Remittance data. Again, however ugly these numbers are, they can only get worse in subsequent correspondences.

But investors continue to buy up stocks, corporate bonds and other financial instruments which, whatever one can state about their merits, are not likely to perform well if my unsanitary, unsavory economic fears prove out. Again, I think the Armageddon scenario is one that involves impairment of Money Center Banks, as cascading defaults burn through their reserves and threaten their capital bases. Their Q1 earnings are substantially in the books now, and, on the whole (in part due to trading), they could certainly have been worse. I think they will have a harder time in Q2, as this somewhat obtuse chart illustrates:

Not entirely sure what this line measures, but whatever it is, it’s worse, by orders of magnitude, than it was before the last crash.

And I only have one explanation for the unhygienic behavior of the investment community: they are expecting a massive, ritual cleansing from the agents of government. The Fed Balance Sheet has already blown out to over $6T, with its most recent components almost unilaterally taking the form of dubious, grimy, impaired debt. It is not enough and will certainly soon grow to a 10 handle. Congress dithers on an SBA program that ran out of funds in two weeks. Ratings agencies are bringing down their fearful hammers and the problematic payment triggers they portend.

And about the only hope I can see on the horizon takes the form of Modern Monetary Theory, an economic concept which I would have never dared to mention during my days at University of Chicago, lest my professors gather to forcibly wash my mouth out with soap. We’ve been through this before, but the premise of MMT is that a capital economy like ours has the ability to spend whatever it likes, extend credit, in whatever amount, and to whomever it chooses, and then paint over the problem through a simple retirement of our obligations through money printing. My guess is that we need our MMT sequence to climb to about a year’s worth of GDP (~$20T) to hope to climb our way out of this mess.

Conditions are hardly surgical for making this move; more, in fact like those in a back alley. In an economic sense, we can only pray that this will be the dirtiest ride we will ever have taken. But I don’t see any better alternative. And to my investor friends I say this: you were riding dirty anyway; way dirty. So, let’s not stand on hygienic ceremony at this troubled moment, OK?

Most importantly, I want you to ride with ME. I want to be YOUR ride. It won’t be a clean one, but you knew that, have experienced that, long before we came to this pass. Dirty is how I have always ridden.

But with you by my side, I feel sure we can joyfully reach our dream destination.

Wanna hope on board? Just give me a minute to clear off the passenger seat.

TIMSHEL

Here, I refer not to Cleveland, which is on Lake Erie. But rather to Chicago, nestled on Lake Michigan.

And not to the City itself, which I don’t consider a mistake. I lived there for 25 years, and, on balance, am quite fond of the place.

Particularly the waterfront. When I was just a little guy, I used to think that my maternal grandfather owned Lake Michigan. In my mind, he had a key for a cover that he’d place atop the water each winter and remove when weather conditions called for it. I remember accompanying him on these errands, so long, ago. Was it just a dream? It seemed so very real to me (stolen from John Lennon).

And when I got a bit older, I thought that the lake belonged to me. Lord knows I spent enough time there to claim, at any rate, squatter’s rights. All seasons. In blistering heat and subzero, blustery frost. I swam there, ran there. Got wasted there. Lots. Was arrested there. At least twice. Maybe more; can’t remember.

But my favorite times on Lake Michigan were late afternoons in the Summer (natch), when, each day, hundreds of percussionists would gather on the Fullerton Rocks, and knock out rhythms that would bounce off the water, kiss the skyscrapers, and sing to the heavens. The sun would beat down like it does on the Hudson River (near which I currently reside) and explode into a splash of sound – all against the backdrop of the best damned urban waterfront that I’ve ever encountered.

So, if I believed, in a long-gone, substance-induced era, that Lake Michigan was mine, I came to this honestly. But now I find that I was deeply mistake(n). It actually belongs to the City’s current mayor: The Honorable Lori Lightfoot. And if anyone doubted this, she settled the issue definitively when she shut down the waterfront for all recreational activities. Until. Further. Notice. This happened on March 26th, so I’m a little late to the pile-on party.

But here goes nothing. All hail Lori Lightfoot. LL. The Lady of the Lake. Like her forebear in Thomas Mallory’s “Le Morte D’Arthur”, she wields the power of the sword and, of course, the water. Wizards and Kings kneel at her feet.

I should also remind everyone that her predecessor, Rahm, was a childhood chum of mine. We spent many hours together up in the general vicinity of Foster Beach. He famously warned against letting a good crisis go to waste, but that was long after our carefree innings at the water’s edge had ended. To my knowledge, he has yet to weigh in on LL’s decision, and I’d like to think, if for no reason than auld lang syne, he’d have gone in a different direction.

So why did Lady Lori shut down one of my fave spots on the planet? Probably because she could.

And the same can perhaps be said of Lord Powell, Royal Executor of our National Bank, who astonished and delighted the masses by announcing his outfit’s intention of diving into the murky waters of ETFs, Junk Bonds and other financial instruments of dubious construction – up to >$2 Trillion of them.

I’m not sure how well this will turn out, but there’s an argument that the action will save more lives than, say, the lockdown of the Chicago lakefront. Thus far, the State of Illinois has registered just over 500 Covid deaths, as benchmarked against an average annual influenza mortality rate of approximately 3,500. On the other hand, the baller $2T Fed move should probably be measured in proportion to the $75T of private debt that American individuals and institutions are carrying. It’s bound to help, but will it cause enough of a dent to have justified the silencing of the conga players on the Fullerton Rocks? I reckon we’ll find out. And yes, I’m going to continue to beat my own, er, bongos to the tune that: a) there’s a galactic amount of risk out there; and b) that if it manifests as losses, they are most likely to materialize in and around the credit markets. You just can’t shut down a levered economy like we have (however necessary the step might have been) and expect the boys (and girls) to keep the beat.

Increasingly, there is a focus on the ratings agencies, and how the catastrophe will impact their scoring of credit worthiness. There are some early returns here, which, if not surprising, are nonetheless alarming:

Notably, over 80% of these downgrades apply to paper that is already below investment grade, much of it featuring payment triggers that kick in when the ratings agencies drop the hammer. What could possibly go wrong?

I’m glad you asked, because the answer is that many of these borrowers have either been shut down or forced into deep curtailment as a result of the crisis. They may not, probably don’t, have the means to fork over the required cash. So the banks get stiffed, call in the loans, call in others. Welcome back, 2008! Can’t say we’ve missed you, but what the heck? You’re back, you crazy knucklehead.

Now, though I’m not proud of this, I’ve got a bit of a soft spot for ratings agencies. They and I share the common burden of earning our keep by assessing risk. But know this: they are conflicted. The only reason anyone pays them is for the purposes of facilitating their desire to sell debt – ideally at favorable prices. It thus follows that the purchaser(s) of these services are likely to be happier camper(s) when they are treated kindly, or at minimum, Moody’s/S&P/Fitch Justice is tempered with Mercy.

And now they face quite a conundrum. By any objective measure, the default risk they are paid to assess has taken a quantum leap upward. But do they really want to bring out their ratings axes right now? Will they? How can they not? What happens when the do? Truly, I don’t wish to think on it.

And then there are those forlorn enterprises that have already reached the depths of pre-default ratings purgatory – the CCCs, or, as we in the biz affectionately refer to them: The Triple Hooks:

If you’re a 3-Hook, the only downward migration that exists is to the Dreaded D. Which stands for Default. In these realms, no one but the bravest and greediest will lend to you – even during good times. Which these ain’t. And you don’t join this club without having made your bones by already stiffing creditors.

This here chart tells the story of Captain Hook being entirely shut out of the credit markets. He’s got no cash but what he can borrow anyway. So it doesn’t take much imagery from Peter Pan to envision the unpleasant fate that awaits him – one which spills over to employees, investors, customers and the like.

But it does make one’s timbers shiver to contemplate the risks that hover over the entire capital market – debt, equity, the whole shebang. Meanwhile, the Gallant 500 and their fellows just clocked in with their best week since 1974. Remember ’74? Ignominious Vietnam retreat? Watergate? If so, kindly refresh me, because I spent most of that year chugging quarts of Miller on the banks of Lake Michigan.

Bear in mind that this rally transpired as Weekly Jobless Claims hit a horrific 6.6M, bringing the three-week total to a handy 16.8M: a number that is, once again, almost certainly understated due to the practical logistical problems of processing these applications in the era of social distancing.

So why are investors hoovering up stocks? (say it with me) Because they can. But you can color me skeptical about these actions. At ~2800, the Gallant 500 has recaptured nearly half of the ground it yielded during the brutal Month of March, and another couple of weeks like the (holiday-shortened) one just completed, and we’ll be in full Emily Litella “never mind” mode.

Well, maybe, but I am rather inclined to think that we’re more likely to test the lows than the highs over the next few weeks. On the other hand, I’ve logged into Bloomberg the last two Sunday nights expecting futures to open limit down. So, who’s the schmuck? It’s me, but I’ve been called worse, you know.

And this schmuck says that markets are as risky as he’s seen them. And he’s seen a lot of risky markets.

With that, I reckon I will begin my leave-taking ritual. Please know that I miss you terribly and would be with you if I only could. But we will be together soon, and then forever.

And if I had my way, this summer, I would take you with me to the Fullerton Rocks, to be serenaded by its indigenous tabla players. But first Lady Lori of the Lake will have to open the joint for business. And even then, if I’m not mistaken, the percussionists were long ago chased off of the premises, residing now, only in our memories. Local boy John Prine checked out this week as well, and, on the whole, it’s been a tough spell for my homies in the Windy City. But it’s been tough in NY as well; almost certainly worse.

So maybe, instead, we can take a stroll along the Hudson River. It’s still open for promenade, and I know a place we can walk. In fact, I know of two such spots. If it rains, we can talk in the car.

I bounced from Chi some time prior to the removal of the rhythm section, but, Lady Lori, I nonetheless implore you to do the right thing and open the gates to the Chi-town waterfront. It is an obligation passed down to you from civic leaders of the past, including Daniel Burnham, who once said: “The Lakefront by right belongs to the people. Not a foot of its shores should be appropriated to the exclusion of the people.”

I think you should heed his words, but if they don’t ring true to you, do it because you can. And I don’t want to insinuate anything here, but you should perhaps bear in mind that Mallory’s Lake Lady met with a rather nefarious end.

But if my entreaties fall on deaf ears, I can always recall the spirit of Irving Manaster, my maternal grandfather, who, as his one legacy to me, bequeathed the keys to the cover of Lake Michigan to my keeping. Now, if I can only just remember where I last set them down.

Happy Easter, and, as always…

TIMSHEL

Strike that last part. Make it NoBid 20.

Because, though memory fades after all these crazy weeks, I vaguely recall that there actually were bids in ’19; (as I remember it) lots of them.

At first, I thought that I’d originated the first of the handy phrases I use in my title, but of course, that couldn’t be. In fact, I now find that the term econovirus has entered that pantheon of pithy expressions otherwise known as The Urban Dictionary. The entry is dated March 30th: six days before this document went to press. I thus missed claiming my place in nomenclature immortality by less than a week.

However, amid other worries. I choose not to dwell on this lost opportunity.

On a brighter note, I’m pretty sure that I’m the first to bust out the phrase NoBid 19/20.

Funny thing is, though, there actually have been bids – even in (so far) Terrible 20. Even in March. Even in April (come she will. And has). To wit, from those dismal Middlemarch horrors to the end of what was one of the longest lunar cycles in recent memory, the Gallant 500 ginned up a nearly-double-digit rally. Custer-like Captain Naz and his forces recaptured nearly 15% ere that month was over. And our sea-faring hosts in both Investment Grade and High Yield, attempting, as they are, to navigate to safe port over an enormous, stormy ocean of credit, showed similar happy progress. Markets have since backed off a bit, but not by much, and not, in my judgment, sufficiently to reflect underlying economic conditions.

And even this past week, when the virtually inescapable reality of an unprecedented collapse in the jobs and broader capital economies became a statistical actuality, the 500 managed to retain all but 2% of the valuation it sported coming into the five-day cycle. To put these dynamics into further perspective, on Thursday, after the BLS corroborated that over the past two weeks, approximately 10 million new souls had been forced into the indignities of the unemployment lines (a number that is surely understated because the regional offices were overwhelmed with applicants), equities actually rallied — to the tune of >2%. The next day, when the March Monthly Jobs totals dropped, and the count told of the worst results since the teeth of the (last) crash (and these figures only covering the period through March 12th), investors mostly yawned, selling off (going into a weekend sure to be chockful of negative news) so benignly, that our indices are actually ~70 bp to the good across these two dismal sessions.

From whither these bids have derived, and based upon what investment hypothesis, is something I’ve been trying to puzzle out.

Who knows? Maybe they persist.

But I strongly believe that anyone who digs this sort of thing (bids, that is), should enjoy them while they last, because my hunch is that bids are going to be in rather short supply in the coming weeks.

And, returning to the first half of our titular theme, I myself have come to firmly embrace the viewpoint that the econovirus risks we now confront are greater than those associated with the dreaded Corona.

Now, I wanna be precise in my messaging here. First, I’m not referring to outcomes; only risks. I don’t know what’s gonna happen out there: when, how and to what extent we tame this King Tiger (no, I haven’t watched the show yet; probably won’t). And I can’t get a true handle on how devastating the economic impact we will have suffered in the effort.

Moreover, I point no fingers here at anyone. I am convinced, given the previously unimaginable level of contagion embedded in these little CV buggers, that the steps we have taken are necessary and unavoidable. Moreover, I believe that whoever was running this here show, we’d be doing pretty much the same things. We’d have isolated ourselves, shut down broad swaths of socioeconomic activity. Albeit with only partial effectiveness and a lot of sh!t slinging, we would’ve marshalled all the forces of the public and private sectors in a race to figure out who was sick, how to care for them, how to immunize the population, and the best way to cure the disease.

But as I have stated repeatedly, even if all of those nasty little viral cells were to beat an immediate, unilateral retreat, never to show their spores again, the economic damage will have been unprecedented. There’s simply no roadmap here. Quarantine aside, it’s eerily quiet out there. But we’re starring in the face of 1933-like unemployment, and maybe an even worse set of conditions from a GDP perspective.

So, let’s fess up; we have a raging econovirus on our hands. Like nothing we’ve ever experienced. From this perspective, it is indeed novel, and, it is viral. Maybe on the whole, maybe I’m due that phraseology victory lap after all.

Again, all of this would be so much more manageable if we weren’t so deeply in the pockets of The Man. But we owed him so much green that even before this here catastrophe hit, whether we could pay him back, or, alternatively, were destined to have our legs broke, was very much in question.

And now, because of deflation, we owe him more. A great deal more. Allow me to explain.

When you owe The Man, and your earnings just took a hit, your ability to cover the nut contracts considerably. You have more debt, without taking in an extra penny. With broken legs, it’s harder to put out, much less, collect upon, your Shy. And this puts the hurt not only on you, but on your Capo as well. Because he owes the vig to the big bosses, who don’t like getting stiffed. So, multipliers abound.

Yes, I’m a connected guy (though not a made one) but let me put this in Chevy Suburban terms. Let’s imagine you are a working stiff (say, a pharmacist with two beautiful daughters and a lovely wife), taking in $90K a year, and with $10K of credit card debt, a $1500 mortgage, etc. Before Covid, you were scraping by. Your boss is a nice woman, but she herself is getting crushed by this whole thing. She doesn’t want to lay you off but needs to put you on half time/half pay if she’s to survive at all.

Well, buster, your debt load, in terms of your ability to honor it, just doubled.

Now let’s extrapolate this to the entire economy. Which just took one baller of a pay cut – right at a point when its indebtedness had been hitting one new unthinkable peak after another:

Now, I’m not sure who this FRED character is, and maybe I don’t want to know. But whatever books he’s keeping show us into him for $75 Tril, and that’s only as of the end of (No) Bid 19. This was unfortunate, arguably unmanageable. But now we just took one whale of a compensation haircut, and, in real terms, we may actually be compelled to fork over something more on the order of >$100T.

But we can’t. Fork it over that is. And it’s not as though the collectors of our debt are just cashing our checks and spending them. They are using our scrips to pay their own debts – most likely to entities who themselves are in hock. Stopping this cycle of payments is akin to arresting the blood flow through the veins of the economy, which thus faces the threat of cardiac arrest. So what we gonna do?

A couple of steps come to mind. First, we gotta print money and hand it out. Yes, to individuals but also to corporate enterprises, in order to minimize the count of folks on their payrolls who otherwise will end up on the street. A few weeks back, I estimated that any effective policy response would be on the order of $10T. At the time, I thought I was being extremist, but now I think that the number may be on the low side. Of course, the combination of a Quantitative Easing that will make the magnitudes of that exercise a decade ago look like Chump Change, combined with what will ultimately be a fiscal stimulus >3x what was just enacted, and credit relief of similar magnitude, will only be a partial solution. It will be messy, sleezy and only of limited mitigation value. But it is needed. And it is coming.

The economic wages of these sins, at least according to the economic textbooks, take the form of hyper- inflation. But I’m here to tell you that hyper-inflation is off the table at the moment; it’s the least of our worries. What we have now is hyper-deflation, and, while there will be a toll to pay somewhere down the road, inflationary policy actions should: a) help reverse the slide; and b) do so at a cost that is astonishingly benign compared to the carnage we can expect if we fail to take these actions.

We’re also, I hope, gonna stop worrying about missing the next rally and reconsider our yearning to load up on some additional risk. Because we have not, cannot have seen the worst of this yet, marketwise.

And most assuredly, we’re going to be forced to defer our fondest hopes and dreams for a spell. Maybe not for long; but at least for a little while. This, to me, is the unkindest cut of all.

I do hold out hope that we will, reasonably soon, have parameterized and started the path towards containment of the novel coronavirus. But the novel econovirus is even more novel, more viral. And our work here has just begun. My fear is that in terms of our most cherished resource – the limited number of heartbeats that each and all of us are allocated – the EV may take a greater toll that the CV.

And my beating heart only beats for yours; you know that, I hope. I do think we can endure; maybe even thrive. Let’s just understand what we’re up against. Alright?

And do me this one favor. Let’s make NoBid 20 something of a reality, shall we? There will come a time when we can safely infer that risk assets are cheap and worth the risk of owning incrementally.

That time is not now.

Instead, let’s protect what’s precious to us, tuck in, and live to fight another day.

And with that, along with my best wishes for the upcoming Passover and Easter festivities, I once again wish everyone a heartfelt…

TIMSHEL

It’s one of my favorite words in the English Language. And it’s not even English.

It’s Arabic. And it looks really cool using Arabic script. So much so that I feel compelled to share it:

It sounds cool too. And I think that we should all say it together. On three: INSHALLAH.

It translates into our native tongue as follows: “If God wills it”. Muslims everywhere use it at the end of statements of hope. And so, too, should the rest of us. I think.

It offers no assurance of outcomes; only a hope for same. Every language and culture features something of this nature, and often the way it is worded says a lot about those that speak in that particular tongue. In Spanish, the term “que sera, sera” comes to mind: “what will be, will be”. On these shores, we tend towards “it is what it is”.

Like I said, it tells you something. Because I’ve been thinking about this, and what I’ve determined is that America is like humanity on steroids. The good, the bad, you know, everything. So, when we say: “it IS what IS”, we really mean it. We live in the present and act accordingly.

Spain? Mexico? The French-speaking French or the Italian-speaking Italians? Not so much; prefer, in general to just roll with it. They kind of figure, well, “what will be, will be”.

But Muslims say “Inshallah” – if God wills it, which also reflects the life protocols of that religion. And the phrase, it strikes me, is particularly apt at the moment for all of us, because whatever happens next – good, bad or horrible, no one would be faulted for ascribing it to God’s Will.

At times in these pages, I have shared the sentiment that the period from the end of WWII to the present day, has, for the Western World, been one of unprecedented peace and prosperity. 75 years without a major war, famine, plague or depression. Yes, there have been hard times. I, for instance, in the 70s, myself suffered through the unspeakable indignities of wearing largely unbuttoned silk shirts and hitting the discos – because that’s where the girls were. But in general, we’ve had a pretty good run of it over the last 7.5 decades. An unprecedented one. Consider, for instance, the preceding three generations (1870 through 1945), or the three before that (1795 through 1870). I hope you get my point.

And my fear has always been that it’s unsustainable. And maybe, just maybe, now is the time that our magnificent innings in the sun have come to a close. The truth is, I just don’t know.

At the moment, we arguably face a stone-cold Hobson’s Choice. Shut down an entire economy to stop a virus or let both of them ride and hope for the best.

The answer, of course, lies somewhere in between. And the outcome, under any strategy, is anything but assured. Maybe we thread the needle. If not, well, I don’t even want to think about that.

As of now, all concerns in my mind are dwarfed by the need for clarity as to how broad, deep and menacing a path the virus itself blazes. I just can’t get a clear picture. And we need to know, because it is this reality that will determine how much damage awaits us. not only medically, but in the markets.

Can anyone enlighten me here? The news flow of course shades to the negative. But I will confess to feeling last weekend that the final days of March would tell an important tale. I couldn’t shake the fear that this past week and next, the numbers could go truly parabolic. So far, they haven’t, and I’m gonna choose to view this through a positive frame.

I’ve also, albeit with a jaundiced eye, been looking to the markets for clues, and have found this to be a mixed blessing at best. Presumably, the investment world is modelling the path of the disease in real-time and allocating its capital accordingly. Could these sage custodians of assets dare to load the boat without fairly strong conviction that this whole CV thing was contained, or, at minimum containable?

Well, we have our answer, now, don’t we? Our resilient indices registered their best week since 1931, one that featured the greatest single day rise in market history. But think about that. Nineteen friggin’-Thirty-One. The dawn of the Great Depression – one that would last, several false bottoms notwithstanding, until the, er, miracle of WWII snapped us out of our fog and set the stage for that magnificent 75-year run referenced above. Things could’ve turned out differently, you know. What if Hitler hadn’t invaded Russia, adding maybe the most badass army in the world to his foes and forcing him to fight on 2 fronts?

But I reckon that this ain’t 1931. Yet. The markets don’t think it is and have reacted with unilateral glee to the latest set of baller moves out of Washington. The Fed’s all in – INSHALLAH. The >$2T stimulus bill was certainly needed. I doubt it is sufficiently large to plug the economic Corona Corn Hole.

Meanwhile, we move along in our eerily and terrifyingly altered lives as best we can. I haven’t seen you in what seems like a lifetime and I doubt if I can carry on like that much longer.

Bob Dylan released his first original recording in eight years – a >17-minute dirge about the capping of JFK. It’s melody-light, but of course the lyrics cut deep. Fair warning: it won’t improve your mood much. But I’m certainly glad to get some new material out of my favorite artist of all time.

And as for the markets, I consider them a hot mess, and my best advice remains to give them a fairly wide berth at the moment. I was glad to see Friday’s selloff, if for no other reason than to bring some sobriety into the proceedings. In general, I think, and almost hope, that the next leg is down. Gun to my head, however, I wouldn’t mind if the descent was deferred until Wednesday, after the close of what was certainly an historic quarter. This would be beneficial from a couple of perspectives. First, at least this time ‘round, I am all for tape-painting of quarterly performance over a three-month span that is unlikely to gladden the hearts of even the most forgiving of capital allocators.

I also feel that a non-disastrous print on 3/31 will go a long way towards staving off a wave of default triggers. You’d think we would’ve learned something from that whole Enron fiasco, but it looks to me like a significant amount of corporate obligations are tied to the retention of certain equity valuations. And trust me on this – we do not want these levels to be triggered, because even worse financial disaster ensues in the wake of them.

All of which brings to mind images of what is likely to be one of the most surreal earnings reporting cycles of all time, set to commence in a handful of days. The numbers for Q1 won’t be the feature act; now more than ever, forward guidance will tell the tale. I see two perverse and diametrically opposed incentives coming into play. For companies sufficiently insolated from the carnage, there will be great temptation to “kitchen sink” the quarter, emphasizing all of the negative contingencies that loom for them, in the confident hope of looking like heroes when worst-case scenarios fail to materialize. Conversely, and particularly for highly levered enterprises, the incentives may involve some gilding of the lily, so as to avoid scaring off their creditors and bearing witness to the full-scale evaporation of their liquidity and funding sources.

All of this reduces the valuation-based signal to noise ratio to levels of statistical insignificance. And in the meantime, we don’t know what damage the virus will have caused. But we do know this: the galactic policy response is insufficient to counter the economic carnage it has created, even if it withers and dies right now (it won’t).

So, I ask: why by ‘em here? I do take some comfort in the fact that no fewer than two dozen of my investing-savvy comrades are begging me for the moral sanction to load up. Moreover, this is the attitude of most of my clients. I have shared my views with them. And the substance of them are that there is no edge at the moment, that risk levels remain beyond elevated, and that anyone inclined to step in there should, at minimum, do so with the full expectation that it is likely to be a bumpy ride.

Oh, and then there’s this. Yields on the long end of the U.S. Treasury Curve still must continue to plunge into the netherworld. I won’t rehash my arguments again, but will gently ask my readers, when the 10-year yield does go negative, to remember that I told them this would happen.

“They also serve, who only stand and wait”. So once wrote English poet John Milton. He was right, you know. I’ve used this before and I’m using it again now. The present moment is hardly the time to make any bold investment moves in any direction.

So that’s where I’ll leave matters off for now. I think investors best serve, on balance, by standing and waiting.

So much uncertainty; so much idle time to fret about it. So little time, on the other hand, to make important decisions regarding our future. It’s not what we envisioned or hoped for now is it, my love(s)?

But it is what it is, and what will be will be. Some of it is indeed only as God will’s it. That’s what the Muslims are conveying when they utter the phrase Inshallah. But I’m not Muslim; I’m a Jew, and we’ve been quarreling with them about trivial issues for many centuries. Maybe this is a good opportunity to set some of these squabbles aside.

Moreover, with the holy season just around the corner, it may bear mention that the Jewish religion takes a starker view of these weighty matters. We have our version of our titular theme – embodied the following phrase: TIMSHEL, which translates into “Thou Mayest”.

It’s the blessing that God gave to Cain after putting His mark on him. Like Inshallah, it offers no promises; only chances. As a gift from above, it is decidedly finite, but, in my judgment, no less divine.

For what seems like ages, I’ve used TIMSHEL as my tagline. And I have my reasons for doing so. But as I dwell in my own quarantine, hoping and praying for good outcomes, and wondering when oh when we can be together again, I think it shades a little too negative for our purposes.

So, I close with best wishes for health, safety and whatever, in these troubled times, passes for a little peace of mind. Plus, at least for this week, a heartfelt…

INSHALLAH