You who choose, to lead must follow,

But if you fall, you fall alone,

If you should stand, then whose to guide you?

If I knew the way, I would take you home

— Jerry Garcia and Robert Hunter

Why, for the umpteenth time, did Jerry subcontract the lyrics out to Hunter? It’s the one question I would ask. Plainly, he had a bunch to say for himself, and magnificent melodies for the conveyance of such expression. But in terms of the verbal message, he let Hunter speak for him.

I wonder why.

I reckon, now, we’ll never know.

It’s not that Hunter wasn’t a good lyricist; he did indeed write some timeless verses, and “Ripple” certainly stands out among his finest.

And I figure that on this here holiday weekend, busting them out is about as good as anything I got.

We’re now halfway through the agonizing slog that forms the 2020 narrative, with much, absent a dramatic reversal of fortunes, to vex us in the six months that remain.

But, returning to Hunter’s “Ripple”, halfway through the year, I have the following question: Is your cup full or empty?

And at this point I ask, nay, demand, that you who choose, to lead must, if not follow, then at least show your faces. Masked or otherwise. Because I honestly can’t see them at all. Not in the White House. Not on Capitol Hill. Not in any basement in Delaware. Not on Wall Street. Not on Main Street. Not in Hollywood. Not on the coasts. Not in “flyover country”.

I’m pretty sure you’re out there you but choose to keep hidden. I suspect you have your reasons for doing so. And one of them may very well be that, contrary to Hunter’s prognoses, if you fall, you have no intention of falling alone. Nay, I have a hunch that you intend to take the rest of us down with you.

You may very well succeed.

But since you remain hidden from sight, it devolves to the rest of us (mere mortals) to determine whether our cups are full or empty.

The markets, as always, give clues. But they are, at best, ambiguous ones.

At the turn to the second half, the Gallant 500 has yielded abo is up double digits and, as of Thursday, has yet again captured new high ground. Treasury Yields reside at a little over 1/3rd of where they were when the ball dropped in Times Square. For the last time? Whose to say? In terms of this year’s Times Square festival, I’ll take The Under.

And, for what it’s worth, I’ll also still take The Under on the forward path of Treasury yields.

Lean Hogs are trading at half of what they fetched when we slaughtered them, stuck apples into their mouths, and roasted them, last Christmas.

As Othello said of an encounter with his falsely accused wife “t’was strange; t’was passing strange”.

And, one wonders, how did we get here?

Well, to begin with, the worst Public Health crisis in a century snuck up on us – I’d like to say unawares but the truth is we had a measure of warning. It idled >30 Million workers and >25% of the economy. Whole industries were crippled (c-rippled?) and some may never fully recover.

And it ain’t over yet.

The paymaster/string pullers in Washington responded, with nearly $10 Trillion in relief: fiscal, monetary and credit based. The markets (except for the Hog buyers) liked this very much.

Then, just when we thought that maybe, just maybe, we could sneak by as a nation, a heinous murder in Minneapolis sent us into full-on emotional tailspin. Call it a national nervous breakdown. Cars, buildings, entire neighborhoods went up in flames. The politicians, in perhaps justifiable fear of the angry masses, by and large looked the other way. Police forces across the country are being disrespected and, in some cases dismantled outright. What could possibly go wrong?

As July 4^th comes and goes, Mount Frigging Rushmore is under attack, as is the owner of its least prominent visage (Teddy), the guy he lost to when he tried to recapture the White House in 1912 (Woodrow), and (among others) that long-maligned voyager (Christopher) who sailed in the wrong direction and stumbled on the Americas, opening them up to those evil, well-established European empires that spawned this country.

The custodians of Ohio’s capital city, now the nation’s 13^th largest with a population greater than Cleveland and Cincinnati combined, is moving towards a name change. Popular consensus points towards Flavortown – in homage to the jurisdiction’s status as the pre-eminent location for consumer product testing. You know, those new creations of criminal, exploitative capitalist enterprises, which, if they pass muster in what is still Columbus, are rolled out to the greedy delight of the nationwide masses?

Back to Othello: “T’was pitiful; t’was wonderous pitiful”.

And as for Mount Rushmore, it is now a symbol of our felonious imperialism, resting, as it does, on indigenous ground. And I ask: indigenous to whom? Was it not fought over for centuries among native factions, before we even arrived? Answer: It was. So, who do we give it back to after we explode Wash, Linc, Jeff and Roos off its façade? More importantly, who gets to decide?

And, in general on this holiday weekend, the noisy consensus is that we should feel, not pride, but shame, in this country’s history and heritage. More than this, anyone who suggests otherwise risks outright ostracism (or worse) in many quarters.

Make of it what you will; the din of words, to my ears, fail to glow with the cold of sunshine, but rather resonate like those tunes played on Hunter’s harp, unstrung.

However, all things considered one would have to concede that under the circumstances, markets are holding up pretty well. Equity and credit securities are enjoying a sustained bid; companies are raising capital of all forms– in record amounts, and investors are greedily hoovering all this paper up. We’re still in a form of virus hell, but the markets seem to neither know nor care.

So, at mid-year, is the cup empty, full, or somewhere in between?

Well, in my judgment, this is one of those situations where the answer will only be visible in the rearview mirror. My highest conviction clairvoyance (such that it is) suggests that the landscape will, impossibly, alter as much in the second half of 2020 as it did in the first six months. Come New Year’s Eve, an empty Times Square may be the least of the noticeable changes with which we will have been compelled to contend.

And, given this, what in heaven’s name, is a risk manager to do about any of it?

If I knew the way, I would take you home. But I don’t, and my best advice is to view your exposures as myopically as you are able. Every month, every week, looks different than the last, and this inertia of opacity is, in my judgment, likely to sustain itself. Get ready to move your books around, and to do so in a hurry, because, more than once, more than twice, it may become necessary.

And it won’t be easy. Any more than moving houses is. Or saying a stern, final, goodbye to someone close. But we must look to the future and the promise it holds. I know you can do it. Again, and again.

I will help you any way I can. And I won’t be alone.  As I’ve stated repeatedly in recent weeks, the Fed has taken ownership of this market, has plenty of dry powder, and cannot, politically or rhetorically, allow it to collapse.  Their tools are vast but finite, and, while they can alleviate the symptoms, they cannot cure what ails us. But they can and will help us feel better, and maybe even capture some incremental return – for a time. We should seek to do so.

I do believe that we’re near the top of the range – in terms of equity and credit – and that the risks, for the moment, tilt to the downside. But there is so much cash waiting to pounce – even without further Fed largesse — I don’t think markets will fall far on any downdraft. For now.

It will be easy, though, to get carved up pretty good in these riptides.

So, let’s instead, though, call them ripples. The waters are not still, and while no pebbles are being tossed, there are boulders aplenty. And the wind is blowing up gales.

And, in conclusion, I encourage you, like Hunter, to reach out your hand, if your cup be empty. More than this, I hope that if your cup was full that it may be again.

But therein lies the problem. I have no idea, at this strange mid-year, what the cup holds, or, indeed, if it holds anything at all.

And with that, I take my leave, offering, as always, my heartfelt wishes for…

TIMSHEL

I hear some people, tryin’ to talk me down, bring up my name, pass it ‘round,

They don’t mention, the happy times, they do their thing, I do mine…

Oooh baby that’s hard to change, I can’t tell them how to feel,

Some get strong, some get strange, Sooner or later it all gets real,

Walk on……

— Neil

This week’s note is not, per se, about Neil. And not at all about Bob.

But I got so much love from the teeming millions that comprise my readership for last week’s tribute, we’re on such a Neil roll, that I figure we may as well pick up where we left off.

The lyrics supplied above are from a song that served as Neil’s salvo — in a gentlemanly, rock and roll throwdown between him and that flaming, gone-but-not-forgotten ensemble: Lynyrd Skynyrd.

Neil started it, albeit in a very non-ad hominem way, by throwing shade at denizens of the South. He did so, twice, in fact, via “Southern Man” on “After the Goldrush” and “Alabama” on “Harvest”. In each case, he did not, could not have, intended any offense to Skynyrd itself, because, at the time, the band had yet to be formed. But Skynyrd came back at him bigly, with their first massive hit: “Sweet Home Alabama”, which admonishes Mr. Young to remember that southern man don’t need him around anyhow.

So, Neil responded, in a pseudo-apologetic manner, with “Walk On”. And it all seems to me like nothing more than good fun. From a simpler, civiler time.

But this note isn’t about that. Instead, it references the soul-crushing announcement, released earlier this week, that on July 15th, Chinese manufacturer Ninebot will discontinue the production of that ubiquitous, essential, iconic mode of transport: the Segway. Our cold war with China just went nuclear.

If you’re like me, it’s hard to remember what life was like before that two wheeled-locution machine arrived on the scene, and equally difficult to imagine how our existences will be transformed once the last of them bad boys rolls of the Assembly Line, on Bastille Day +1. How did we, how will we manage to get from Point A to Point B? I reckon we will be compelled to rely upon our ever-fallible memories, and, if mine serves, it seemed as though most of us traversed short distances by pushing off one leg after the other, in unidirectional sequence – a concept which is referred to by us rustic rubes as walking.

Well, America, what goes ‘round comes ‘round; what’s old is what’s new. And yes, it’s time to walk on.

And, using, perhaps for the last time, my Segway as a segue, markets will also need to get their walk on.

Only lately, they’ve been walking backwards. And not just some, but in fact most, of them. Last week, the Gallant 500 yielded an ignominious 3% of territory in the wrong direction, as did its comrade indices. The Fed Balance Sheet contracted — to the real-money tune of nearly $100B. 10-Year yields plunged across the globe. The Slovakians and the Swedes (yes, the Swedes) are again paying their governments for the privilege of funding fiscal operations (i.e. negative yields). And as for rates in the U.S.?

They are in fact at three-month lows, down an astonishing 27 bp from where they traded during those more hopeful times earlier this month; positioned a skinny 0.08% above where the depths to which they plunged during those terrifying days around the Ides of March.

I myself had in recent days walked back my call for negative rates here, mostly because I had been wrong. Right at this moment, though, I’m thinking it may be time to walk back my walk back.

Live Hogs? Well, you didn’t ask, but as I have shown the poor taste to bring them up, I regret to state that even after last week’s loving tribute, the commodity dropped another 10%.

Now, as everyone knows from the two decades that we spent rolling our Segways, if one wanted to retreat, all that was required was to lean backwards. Walking backwards, it strikes me, will requires some serious retraining.

But one might legitimately inquire: why should the markets be doing it at all? Walking backward, that is. Published reports point to a resurgence of the covid buggers, and, likely, this is indeed among the causes. But: 1) the spikes were always inevitable as attendant to more testing and re-openings; 2) the loci of the surges feature relatively low denominators; and 3) there is undoubtedly a great deal of political manipulation of the trends (Cuomo quarantining visitors from Texas and Arizona is a particularly rich example; all Cuomo-quarantine target states combined have lower case/death rates than NY).

So, I think other factors may be at play, and perhaps as good a place as any to begin is in the earnings dynamic. It’s all quiet on that front, but shortly after the 4th, when >320M patriots set off legal fireworks to celebrate the true greatness of this country, the silence will move to crescendo. And the trends, from a guidance perspective, are far from encouraging. A record number of companies have begged off on these projections, and those with the stones to actually offer their thoughts overwhelmingly shade negative:

However, this information is not incremental from, say a week ago, at which point valuation trends suggested that investors were in a generous, mulligan-granting mood with respect to Q2 earnings, and, perhaps, for those of the entirety of 2020.

Thus, while I hate to set foot in these realms, my gut tells me that investors may well be starting to prepare for the possibility of an election outcome, which, whatever one’s views may be, and whatever righteous benefits it may bring, will be devastating for the capital economy.

Again, I truly hate to do this, but my pledge to you, my readers, is to call ‘em like I read ‘em. And I think these fears are more than justified.

Because under certain voting outcomes, we’re looking at an all-out market rout.

The “reasonably reliable” betting markets now project out not only a Biden victory, but also a recapture of the Senate majority by a Democratic Party that is increasingly co-opted by a progressive movement bent on reshaping affairs in a manner that is not likely to be accretive to most portfolios. Some of what they wish to do will be highly unpopular (more about this below). They know this, and therefore will act very quickly – putting in irreversible measures at a frenzied pace, to ensure that the (under normal protocols, likely) rout they will face in 2022 cannot undo the changes they contemplate.

Their first move will be to kill the Senate filibuster, bestowing upon themselves a super-majority by virtue of as little as a one-vote margin in the Upper Chamber. Anyone who doubts that this is on their minds should read recent comments from (historically) moderate Senator Chris Coons (D, DE), who now seems eager to lead this assault on this 240-year construct of checks and balances.

Once this action is complete, it’s pretty much open season for the progs, and already there are strong foreshadows of the contours of their strategic plans. Just this past week, Democrats in Congress passed a bill granting statehood (and two new Senate seats) to the District of Columbia. The Bill, of course, is DOA in the current Senate, but if the Dems sweep and eliminate the filibuster, it will be a turkey shoot.

There are few jurisdictions anywhere in the galaxy whose constituents are more over-represented than D.C. They pretty much get anything they want from the Federal Government, much of which is denied to the rest of us. The two Senate seats are not, per se, for their benefit, but rather intended to buttress a permanent majority that their (politically aligned) paymasters are targeting. Puerto Rico may be next.

Imagine, then, next spring, a political environment where the Presidency, the House, and the Senate (as enhanced by 4 newly created seats controlled entirely by one party and the removal of the filibuster) are all in the hands of the Dems, who then can enact any and all elements of their P/L-dilutive agenda.

Their next move may very well be to pack the Supreme Court. Add, say, six seats, which will eliminate that most important check and balance: Separation of Powers. Grant immediate citizenship and franchise to millions of beholden immigrants. Expand entitlements, so millions more voters are incrementally reliant and obliged to their (taxpayer-funded) largesse. Enact a wealth tax? Sure. Reparations? Slam dunk. Wall Street Transaction Tax? Oh boy, when do we start and how much can we ding them for? Expand regulations broadly? Natch. Kill the Energy Sector? Socialize Health Care? Done and done.

If this plan (which may or may not work but is certainly out there) goes into effect, then the U.S. will be no more of a two-party country than California is as a state. Or New York is as a city. And, if all goes according to script, there’s nothing – in 2022, or 2024, that the rest of us will be able to do about it.

And markets will crash – perhaps permanently – in the wake of this. I’m not gonna lie: these contingencies worry the stuffing out of me. Yes, I’m paid to fret, and to make sure that everyone else (at least occasionally) does the same. I’m just asking my readers to consider my view that that this scenario is both realistic and concerning.

Because trust me on this: if anything along these lines transpires, you’re not going to want to own stocks. Or bonds. Or Real Estate. Not with the country and the world in a massive debt bubble, contending with a cryptic and stubborn pandemic that has shown few signs of having run its course, and which has already taken a huge bite out of the global capital economy. Overlay higher taxes, redistribution, punitive regulation, etc. and you should get the picture.

To top it off, we won’t have our Segways to motor us away from the mess.

And I suspect that some of this agita may be working its way into the markets, in the form of elevated risk premiums. Moreover, if I’m right on that score, then market conditions will surely get riskier ere they becalm themselves.

But I reckon all of that is in the hands of the Good Lord, who acts in mysterious ways. Skynyrd never did respond back to Neil, but perhaps that’s because half of the band died in a plane crash not long after “Walk On” was released. I don’t think that there were many hard feelings anyway. If you google images of Ronnie Van Zandt, you will often see him wearing a Neil Young “Tonight’s the Night” T-Shirt.

When that plane went down, it was on its way to a show in Baton Rouge that I had reservations to attend (no lie). Everyone said to save the unused ticket, as it would be worth a lot of money someday, but I didn’t, and I was wrong not to. Because in 2008, the surviving members of the band held a show on the LSU campus — to commemorate the 30th anniversary of the crash, and in doing so, chose to honor those original 1978 billets. I otherwise occupied at the time, anyway, attending to (among other matters) the fallout from the last market crash.

The original owner/designer of the Segway, Jimi Heselden, drove one of his machines off a cliff and to his own death, nearly ten years ago.

But all may not be lost. At least not yet. On a brighter note, while the Fed has indeed contracted its balance sheet, what shrinks can certainly grow back, in even larger proportions, as needed. There’s a boatload of cash on the sidelines, a growing shortage of investible securities, and (who knows?) come November, the election outcomes might at minimum yield a measure of balance.

And balance is what we’re gonna need, because sometime later this summer/fall, we will all be compelled to learn to walk again. And I’m gonna insist on walking with you. Maybe we can start with a stroll on Greenwich Avenue. But we won’t stop there. Someday, we’ll learn how to walk together – and for life.

But in recapturing our stride, we must learn to step carefully. There are an uncountable number of potholes and other nasties to avoid, and they are ever-increasing in magnitude and severity. We will need to focus our attentions on navigating this terrain. But come what may, we will, we must, walk on.

Ooh baby, that’s hard to change. I can’t tell them how to feel. Some get strong; some get strange. Sooner or later it all gets real.

Which is nothing more than stating, in a different language, our time-tested blessing of farewell:

TIMSHEL

This one goes out to Bob. And Neil. With gratitude and admiration.

So alike; so different. But both stand at the pantheon of much of what makes life worth living these days.

The songs. Yes. The songs. Where would we (I) be without them? What, for instance, would I play you?

Miraculously, both dropped albums of original music this past week, and oh boy did we/I need that.

First, Bob. “Rough and Rowdy Ways”. His 39th LP release. Routine readers know my boundless admiration for him, and I cannot extend a better review than to state my belief that somehow, impossibly, it lives up to his sublime standard. The material on this album is also all new. So there’s that.

But I’ve written too much about Bob, so let’s move on to Neil, shall we? This week, after a wait of 45 years, he put out a record called “Homegrown”, fulfilling an urban legend that takes me back to my boyhood. I was then, as now, obsessed with Neil (and Bob), but back in them days, us unhinged fans of what is now (not then) referred to as “Classic Rock” were starved for information. Which stands in sharp contrast to now, when we are overwhelmed by it. Today, if one chose to (and who’s to say this would be unwise?), one could spend all waking hours studying a guy like Neil, and still not get through it all.

But back then? Not so much. So, we hung on to every little tidbit. And one of the juicier morsels involved published reports that Neil’s BEST material remained locked in a vault, not intended to be released during his lifetime. The mind raced. Didn’t think this was even humanly possible. Better than “After the Goldrush” (my personal fave)? Better than “Harvest”? Well, now “Homegrown” has been released, and while Neil is still with us. As I’m typing these words, I’m giving it my first listen.

When I’m done, I’ll let you know what I think.

But let’s revert to “Harvest”, from whence I derive this week’s theme. Another urban legend about Neil (there are many, but this one is confirmed) is that after he finished making the record, he invited Graham Nash over for an early listen. Being Neil, this did not involve the then-ritualistic sitting on the sofa, sparking one up, and popping the disc on a killer sound system. Instead, they rowed into the middle of a lake on his ranch (“Broken Arrow” in Redwood City, CA). At Neil’s signal, the album resounded off the water, as emanating from two enormous speaker sets: one inside his house and one inside his barn. Shortly into the first strains of “Old Man” (the record’s sublime opening track), Neil gave the signal to switch it off. He then shouted the following words to his landlubber engineer:

“More barn!!”

And on this Summer Solstice/Father’s Day, transpiring, as it is, in one of the strangest years in living memory, I’m suspecting that Neil had been right all along: we do indeed need more barn. Not just in music, but in life. Not just in life, but in the markets.

For the latter, “more barn” implies a greater focus on the grittier elements of our capital economy. Not those quantum-quick semiconductors, not that slick, righteous social media. Instead, the stuff with the pungent smell, that gets under our fingernails.

So, with the increasingly fancy pants Gallant 500 and other equity debt benchmarks doing, in my judgement, just fine, I thought I’d take a look in the barn, and, as I suspected, its extra gamy in there:

I started with those kings of the barnyard: Live Hogs (where else?):

Hogs: Rolling in the Mud

I love this market; always have. But I have a confession: it historically took a backseat in my heart to its sister commodity: Pork Bellies, traded mostly by my kosher-keeping co-religionists, during the entirely civilized hours of 10:30 – 2:00 (Eastern). But Pork Bellies were delisted a couple of years ago (a pox on whoever made this call, the fact that he is one of my best friends being irrelevant. FWIW, I forgive you).

And this left me with no alternative but to transfer my porcine amorous attentions to what I will call the pre-belly/not-yet-frozen pigs.

They’ve barely been able to catch a bid in what seems like forever, and in fact, at ~$52.6 per 40,000 lb. unit, are trading at their lowest level in at least five years. And to the best of my knowledge, they are not even covid super-spreaders. If you’re looking for what ails us, this may be a sound spot to start.

The other edible commodities markets are doing a better job of holding their own, but could also, in my judgment, use some incremental barn love.

But I don’t really expect any of you to assist me here. So, let’s turn our attention to those entirely more elegant equity markets. Following is a breakdown of the rolling one-year SPX performance by sector:

It doesn’t take much close examination to determine that anything that zings or blings (IT, Communications, Consumer Discretionary) is vastly outperforming those elements of the economy that produce products you can touch, taste, and yes, smell.

I reckon this will continue on for a spell, and maybe that’s what the Good Lord intended.

But I can’t help myself; I pine for “more barn” in our return profiles.

Meantime, as I expected, risk assets picked up some ground previously yielded this past week. Bond spreads came in or held their ground, $1T of new issuance notwithstanding. Perhaps this is owing to Chair Pow (as expected) backing up his FOMC rhetoric and buying some corporates. Our equity indices, while fading towards the end, had a reasonably strong week of action, and I am delighted to report that Captain Naz, after alarmingly yielding the 10,000 ground, has recaptured this critical foothold.

I’m not sure how much upside there is in any of this, but I repeat my warnings about being short. There are tons of private cash on the sidelines, and this is laying aside the Fed and other Central Banks, who have created for themselves, like magic, the biggest checkbook in history. By all accounts, they have their pens loaded and ready to sign at the first indication of trouble.

So I expect the good times to keep rolling (at least after a fashion) –due to, as I wrote a few weeks back, the miracle of Modern Monetary Theory, which posits that a baller central bank like our own Fed can print as much money as it wants, lend it to whomever it pleases, and, by doing so, suffer few consequences. MMT is being tested before our very eyes, and so far, so good. The economy has ample access to cash, banks are lending, borrowers are borrowing, mortgage applications are soaring, as are metrics like Retail Sales.

True, our monuments are toppling, and our cities are burning. Even George Washington, the FATHER of our country, finds versions of himself facedown and full of flames, (among other places) in the historic city of Charleston, SC – just a couple of days before Father’s Day, for chrissakes!

And anecdotal reports suggest that city life is just getting too difficult for a lot of urban dwellers. I even heard a report that if you want to move your stuff from San Francisco to El Paso, your U-Haul charge is $2,500. By contrast, if, somehow, you’re headed in the opposite direction, the cost is $500. Because who in their right mind would move from a fly place like El Paso to a cow-town like SF? So, trucks are scarce in NoCal, while reposing in unloaded abundance in West Texas.

Still and all, barnyard creature that I purport to be, I nonetheless pine for the City. I can think of nothing better than taking a stroll with you on the Upper West Side, grabbing a slice, and sitting on some shady bench to eat it. Together. Hell, I’ll even buy. And we’ll make plans.

So maybe it’s not ALL barn that we need, but I’m still gonna put in my claim for MORE barn. Jesus was born in one of these, you know.

But he hasn’t been around for >2,000 years. We still have Bob and Neil, though. Which is about as close as I reckon we’re going to get in these troubled times. And we should all take a moment to appreciate their continued presence/output. Because they won’t be around forever. And when they go, we will be sad. Because who on earth will to replace them?

And as for “Homegrown”, after first listen, I give it about an 8. “After the Goldrush” it ain’t. Or “Harvest”. I’d also rank it below a few others, including “Tonight’s the Night”. It has a sublime ‘70s feel to it, but then again, that’s when it was actually recorded. By contrast, “Rough and Rowdy” is all new.

But it was only one listen, through my I-phone earbuds. I think doing Neil’s “barn” thing would help.

First things first. In order to get to “more barn”, we’ve got to have at least some barn to work with. Right now, we have none. And, like I stated above, maybe that’s the first problem we need to address.

TIMSHEL

Yossarian: Sweden?

Arfy: Orr

Yossarian: Orr?

Arfy: Sweden

OK so I lied. Not only are we back to this Catch 22 riff, but we’re with Orr. In Sweden.

Stockholm to be precise.

But don’t you fret now, because there are worse places to be than Sweden. Like, for instance, Central Greenland – a locale that has always terrified the living daylights out of me. Don’t ever wanna go there; don’t even like flying over it on the way back from London.

So, let’s revert to Sweden, shall we? First, if you weren’t aware of this, it’s a Kingdom (just checked Wikipedia). It has a King. Moreover, in addition to its status as the host country for the Nobel Prize, it is itself the birthplace of seven Nobel Laureates of Literature that aren’t, unfortunately, named Bob Dylan.

It is also the home of Abba, but please don’t make me write about Abba. I don’t actually dislike them (love, for instance, “Take a Chance on Me”). But. I. Just. Can’t.

And I reckon that’s all I have to say about Sweden.

Except for this. Sweden also features its own Syndrome, and how many countries can make that claim (China and maybe a few others)? It’s an important Syndrome, but The Kingdom is so fly that its Syndrome is named not even for the entire country, but only for its Capital City of Stockholm.

And that is where this week’s theme comes in: Stockholm Syndrome, or, as I have rebranded it (with rhetorical flourish, natch), Stock Holm Syndrome.

For the uninitiated, Stockholm Syndrome is defined as a condition where imprisoned individuals come to sympathize with, empathize with, and ultimately passionately embrace, their captors.

And where is such a dynamic more at play than in today’s stock market? Let’s face it: when it comes to stocks, we’ve all got a case of Stockholm Syndrome. It captivates us; we cannot escape it. We sometimes hate it. But in the end, we are sympathetic/empathetic to it, and, ultimately, passionately embracing of it.

I believe that this form of the Syndrome plagues no one more than Chairman Jerome Powell and his crew on the Federal Open Market Committee. Some of y’all may have been too distracted to notice, but the FOMC held its regular meeting/presser this past week, and the market reaction was, in my judgment, wild, wooly and arguably Stockholmian.

Powell was not, per se, the bearer of glad tidings. He used terms like “not out of the woods yet”, and “considerable risks over the immediate future”. But on a happier note, he came bearing gifts. Set a floor on Fed asset purchases — to the dainty tune of $120B/month. Announced his expectation that overnight rates, currently fixed at 0.00%, would remain there, or lower, for the next several quarters.

Now, believe it or not, $120B is a lot of paper to cop every month, using newly born fiat currency. By way of perspective, consider that the record shattering QE3, announced at the 2012 Jackson Hole yukfest (to the astonishment of monetary theorists across the globe) topped out at $85B for each lunar cycle.

But since those little Covid buggers arrived on the scene, the Fed has managed to up its game a lot, pumping out $3T in the space of little more than a quarter. The chart is a thing of beauty to behold:

Stock Holm Jerome Buys $3T of Govies:

This translates into a QE pace of approximately $1T/month, so one could argue that Powell is not now pumping, but rather jamming pretty hard on the brakes. But on the other hand, the action in April was sold to us as Electroshock Therapy.

So, it took everyone a bit by surprise when Chair Pow took to the podium to announce his intention to top off his work – at an annualized rate of at least $2.5T.

The markets did not like it; not even a little bit. From the point of the presser (around 2pm EDT Wed) through Thursday’s close, our gallant indices dropped about 8%. I myself was less than pleased with this development, as it added to the dismal score of my 2020 market clairvoyance – particularly insofar as it transpired after my having finally (like Kubric’s “Strangelove”) stopped worrying and embraced the rally.

But now I’m doubling down on my prediction that the rally is not over – first and foremost because of Powell’s acute case of Stock Holm Syndrome (as well as my own). Ride with me here for a bit and I’ll explain. Consider, first, the glide path of the Gallant 500 over the past 6 or so quarters:

Recall, if you will (or can), that brutal selloff that culminated in the ~2370 low on Christmas Eve, 2018. At the time, it was pretty clear that a significant amount of the agita was owing to some tough talk on Powell’s part in the weeks leading up to the holiday. It was time to raise rates, or so he informed the New York Economic Club in December ‘18. Thus, as I made ready for Santa’s visit, it was my conviction that: a) the economy was not in a position to accommodate a hawkish assault on interest rates; and b) since Powell was on record as being committed to a), we had not likely seen the worst of the selloff.

It seemed at the time that Powell hated the equity markets, but then the calendar turned, and, remarkably, his Stock Holm Syndrome kicked in. Specifically, on January 4, 2019, Stock Holm Jerome walked back everything he said the preceding fall. Pushed all his chips into the middle of the stock (holm) table. The markets swooned with delight and remained smitten all year – resulting in a fairly astounding >30% gain for that magical interval of 2019.

Gosh oh mighty, I wish it was still 2019. Don’t you? It was all so life changing for me, and in the best of ways. And I made a commitment in 2020 to build upon its miracles.

But as I wrote about across the entire period, Powell had at that time adopted a “you broke it, you bought it” attitude towards stocks, and the market made sure that he was as good as his word. He was by all accounts terrified of a selloff, and investors kept their side of the bargain. He must’ve still sometimes hated stocks, but passionately embraced them anyway. This, my friends, is Stock Holm Syndrome in its most magnificent glory.

And as for Powell, his condition carried over acutely into this (entirely more problematic) year. Not that it showed much — until, that is, those annoying little viral cells traversed the mighty oceans. According to the charts presented above, right at the point that the markets went into Covid Collapse, Powell pumped $3 Trillion of new money into the economy.

At least in a Stock Holmian sense, it worked, so much so that somehow, earlier last week, the NDX actually reached an all-time high. But then came Wednesday’s presser, and it all came tumbling down.

But as a guy who has learned to wear his own case of Stock Holm Syndrome with pride, I still think we’re going up. And here’s a few reasons why.

Wednesday’s FOMC comments were, to my ears, eerily reminiscent of that fabulous moment in January 2019. It’s “you broke it, you bought it” time again. Now, if I’m correct on that score, with any sustained selloff, as a matter of near certainty, the Fed will be compelled to step in with a passel of money printing and securities buying.

There’s already another $3T of this paper sloshing around, and much of it has yet to be deployed.

I further suspect that the next string of important economic data, most notably Jobs and GDP, will follow on in the same motifs of May’s upside employment surprise. The pent-up demand is anecdotally palpable, and I think it will manifest in greater force in June than even in May.

Investors are looking past currently stretched valuations and are likely to continue to do so for at least a spell into the summer. In fact, nearly every element of the investment universe showing signs of chronic Stock Holm Syndrome. One of the most improbable, stranger than fiction, examples of this is as follows. As has widely reported, the Hertz Corporation, which filed for bankruptcy earlier this month, thought it might be a good idea this week to seek to raise capital through the issuance of a tidy $1B of equity securities. Even more improbably, the Bankruptcy Judge approved the request. And finally (as was perhaps inevitable all things considered), Hertz’s stock rallied >30% on the news.

I’m at wits end explaining this, but when a public company files for bankruptcy protection, it’s because it cannot pay its bills. And if it cannot pay its bills, its equity is essentially worthless. How in the name of Benjamin Graham can it then issue stock and actually, by doing so, manifest a gain in its valuation?

If your answer is Stock Holm Syndrome, then, like Crap Game told Fischer in “Kelly’s Heroes”: “you win a cookie.

So, to summarize, we’re looking at a galactic amount of cash yet to be deployed, with potentially more on the way (as needed), in an economy that should at least optically continue to revive, on a very forgiving tape, with the Fed and other Central Banks all in to support the fun and games.

I’d also point out that it is my experience that when the Fed goes “hard dove”, the first reaction in the markets is often to cry out: “holy sh!t, the Fed’s worried, we’d better sell”. Which is usually followed by a moment of “holy sh!t, the Fed is giving away money, we’d better buy”.

We saw some of this on Friday.

But all of this, admittedly, is likely my Stock Holm Syndrome brain taking over.

What could go wrong? Well, as it happens, any number of things. First, if the virus regathers itself and gets its mojo fully on, then all bets are off. I don’t see this yet and think increases in the states that have reported them are to a large extent inevitable. But if the Covid Count turns ugly in jurisdictions such as New York, New Jersey, Florida or California, it’s another story.

And I won’t lie: I’m also worried about domestic politics. A leftward sweep in November, no matter how righteous it may be, will NOT be good for the markets.

I’m not expecting much in the way of a happy ending to any of this, no matter what. And it’s likely to be a bumpy ride come what may. But this, mes amis, is what we signed up for.

And in the meanwhile, I will live the truth of my Stock Holm Syndrome. Just like Powell. Just like Orr.

Though he’s nearly 100 now and no longer flies, I am told that Orr is still living large in Stockholm. Occasionally (or so I am informed), he logs into his Fidelity account and spitballs a few stock trades. He is in fact rumored to be among those who bid up Hertz stock on Friday.

I’m thinking of joining him. But maybe I already have.

Stock Holm Syndrome is, after all, a tough cat to kill.

TIMSHEL

Police and Thieves in the street, oh yeah,

Fighting the Nation with their guns and ammunition,

Police and Thieves in the street, oh yeah,

Scaring the nation with their guns and ammunition,

From Genesis, to Revelation, the next generation will be, hear me,

And all the crimes committed, day by day, No one to stop them anyway,

And all the peace makers, turn war officers, Hear what I say

— Junior Murvin via the Clash

I feel compelled, yet again for this edition, to channel Joe Strummer and The Clash. Because if there was ever a moment where we needed Strummer, it has indeed arrived.

Our title song is a cover, penned by the otherwise-obscure reggae artist Junior Murvin and immortalized by Stummer and the Clash. But one way or another, Police and Thieves are indeed in the streets, and yes, they are scaring the Nation with their guns and ammunition.

From Genesis (the first book of the Old Testament) to Revelation (the last book of the New): from A to Z, first to last, beginning to end, Alpha to Omega. This is the Word of the Lord. More specifically, Revelation 22.13: just a few sentences from where Chapter, Verse and in fact, the entire bible, comes to an abrupt end.

Like so much in this mystifying world we inhabit, it leaves us with more questions than answers.

But with all the crimes committed, day by day, and no one to stop them, anyway, we should probably do our best to come up with a few. Answers, that is.

I know I could use some, but I have none. All I have are questions. Maybe you can help me out here.

Like, first, what is the end objective of the nationwide protest? And I’m sorry, I won’t accept the generic platitude of “racial and social justice”. If that’s all you got, well, good luck; we’ve been striving for this utopian ideal, with finite but nonetheless visible success, for eons. But I think, as we smash windows, loot stores and cap cops, a little more specificity would do us a world of good.

For instance: how will we know when it has arrived? Racial and social justice, that is. And who will decide? When income and wealth are redistributed according to someone’s idea of fairness? Whose? With Reparations? When entire Boards, Managements and workforces of the companies that comprise the S&P 500 better reflect our core values (as determined by noisy consensus)? When governments adopt the same motifs? When police forces (a staple of EVERY civilization since mankind was still sporting tails) are dismantled and replaced by some completely undefined form of law enforcement, that is, if there is to be law enforcement at all?

Well, I’m here to tell you that these things won’t save you. Or us. Not in this world or the next one. Nor, for that matter, will the shutting down/burning down of municipalities across the lower 48. And, in general, my question is this: you have made sure to identify what you are against, what you hate. Specifically, it is an embedded socioeconomic structure, which for all of its faults, is responsible for many of the good things we all enjoy. In the last century alone, it dismantled Nazi Germany and the Iron Curtain. It brought us Picasso, and the Beatles, and Miles Davis, and The Clash.

You hate this construct, but what do you love? You should think on this, because what it looks like to me is that at least some of you want to tear everything down and build anew. Fair enough, but know this: tearing down is relatively easy. Building up? Not so much.

Not to press the point, but the system also created the very tools which you are now using to dismantle it. Your I-phones, your near-flawless Verizon connections, by which you are organizing. Facebook and Twitter, through which so many of you, heroically and from the comfort of your homes, express undying solidarity with those in the streets seeking some form of redress. You order everything from Amazon Prime. And when you return from your nightly vigils, you flip on Netflix. All of these blessings derive from a construct you now seek to destroy, and, in destruction’s wake, it may difficult to cherry-pick.

Careful what you wish for; you just may get it. And it may make you nostalgic for those pre-2020 days.

At the root of the unrest is an enforced acknowledgment that this is a racist society. Well, maybe. I’m not gonna say no. But this here set of episodes is most reminiscent of the conflicts that transpired two generations ago, which, somehow (impossibly) I was around for. I remember Selma. And when George Wallace stood with the NATIONAL GUARD on the steps of Foster Auditorium, at the University of Alabama/Tuscaloosa, to deny the admission of African Americans Vivian Malone and James Hood.

Wallace, it should be remembered, went on to run for president in that benign year of 1968, and won over 14% of the Popular, as well as approximately 9% of the Electoral, Vote. At the time, that pre- Woodstockian era of Peace, Love and Understanding, there was an active, aggressive, adamant White Separatist Movement. Their numbers counted in the millions. They were everywhere.

It seems different, at least to me, nowadays. My sense is that pretty much everyone, except for the unhinged few, now believes strongly in racial equality. Nobody is counter-protesting (at least yet). Barely a peep is heard from anyone disputing that that the more color-blind we are as a society, the better off everyone will be.

But at least in ’68, the music was better. Police and Thieves were in the streets, But the Buffalo Springfield was still jamming like nobody’s business, as were Miles and Hendrix, laying down sounds in multi-racial ensembles that nobody had ever dreamed of before.

But I reckon we’re destined to repeat this same cycle of violent dysphoria, with a lot of destruction, and, often, not much to show for any of it. The most prominent historical precursor that comes to mind is the French Revolution (which was not brought to the masses by Facebook). Them folks had legitimate beefs. A degenerate queen and oblivious king. No constitution. Little food. It took a revolution to advance their cause, and, while they did manage to depose and ultimately behead the Royal Couple, within a matter of months, all of their leaders also found their own heads severed from the rest of their persons.

We can move on from there to the dainty Russian Revolution, which left only on leader standing — in full on dictatorship mode. The same can be said of the Spanish Civil War: a righteous cause, which at the end, placed Spain for several decades, under the iron rule of Generalissimo Francisco Franco (still dead). In one of his most brilliant pieces of work, Strummer summoned the ghosts of the Iberian Uprising, and expressed them in divine parallel to the struggles of the good folks of Northern Ireland, then and still harassed to breath under the yoke of those Ulster cats:

Spanish Bombs in Andalucía, the shooting sights of the days of ’39,

Oh please leave the Ventana open, Fredrico Lorca is dead and gone,

Bullet hole in the cemetery walls, the blackguards of the Guardia Civil,

Spanish bombs, on the Costa Rica, are flying in on a DC 10 tonight

Then:

Spanish weeks in the disco casino, the Freedom Fighters died up on the hill,

They sang the red flag, they wore the black one, After they died it was Mockingbird Hill,

Back home the buses went up in flashes, The Irish tomb is dripped in blood,

Spanish bombs shatter the hotel, my senorita’s rose is nipped in the bud

And finally:

The hillside rings with “free the people”, or am I hearing echoes of the days of ’39?

With trenches full of poets and ragged armies, fixing bayonets to fight the other line,

Spanish bombs rock the province, I’m hearing music from another time,

Spanish bombs, on the Costa Brava, I’m flying in on a DC 10 tonight

Has a ring of familiarity, now, don’t it? Well, as for me, I am indeed hearing echoes of the days of ’39, with its poet-filled trenches and ragged armies. Like I said, we could really use a dose of Strummer right now. But I reckon he’s still with us. If we would only listen for him.

I suppose, though, that seeing as how this is a market commentary publication, I should mention a few things about the doings in those realms. As fueled by a shockingly strong (if imperfect) May Jobs report, the Gallant 500 surged forward, recapturing ground that many of us, including yours truly, felt would be lost for a significant period into the future. Captain Naz particularly distinguished himself (somewhat like Buonaparte in the French Revolution) and is now in positive territory for the year.

My guess is that this improbable rally notwithstanding, there’s still a strong bid out there. Particularly if there’s a pullback. Which there will be. Maybe, impossibly, we will even evade the clutches of that credit bear that has socialized so much terror in me. Meanwhile, those corrupt corporations have already issued over $1T of IG paper, in this pandemic-filled, protesting year. They have all been hoovered up easily.

And if you want my apology, here it is. I’m sorry to have been so wrong about the markets. Not for being who I am, or even for having the forebears that I do, but for thinking that what has transpired over the last few months would have taken a more menacing bite out of the markets than it did.

Just remember, though: this moment will also pass, and it will take courage to make something heavenly out of it. This is true whether you are an investor, or a protestor in Brooklyn, Chicago, Minneapolis. Or maybe all of the above. I myself am trying to screw up my courage to turn matters that are complicated and sometimes sad into something divine. And permanent. So, my sympathies are with you.

Police and Thieves are in the streets, and Spanish bombs still shatter the hotel. Maybe there won’t be Police in the future, but there will be Thieves. Guns, ammo and fear are also likely here to stay. The market rally may last, but will ultimately wither, along with all things. Fredrico Lorca is dead and gone. As is Joe Strummer. And these, mes amigos, are the Genesis to Revelation, Alpha to Omega risk management thoughts I have to share with you today.

TIMSHEL

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