Category Archives: Weeklies

All That You Dream

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“I’ve been down, but not like this before”

— Lowell George

As matters have evolved, I’m forced to make good on my threat to continue down the track list from Little Feat’s “Waiting for Columbus”. But not for reasons indicated in last week’s installment. There, I’d warned of such an outcome if I didn’t see a bunch of you birds hitting my twitter account. And it’s true that the response to this plea continues to be less than overwhelming.

But that’s not why I’m moving on to “All That You Dream.” The plain truth is that on Wednesday night, I actually had a dream – and I’m not kidding here – about Value at Risk (VaR).

I’ll spare you some of the more gruesome details of the fantastic journey upon which I entered while slumbering on 17 May, 2018. But a brief summary is perhaps in order. It involved an accusation of an incorrect calibration of the stepdown factor in the exponential decay function, causing an over-estimation of the 99th Confidence Interval estimate, and (as would be the inevitable outcome of such a misadventure) the loss of untold sums of wealth.

In the dream, I served as a bystander to these proceedings, which is only rational. I mean, after all, the mere prospect of someone such as myself committing such an amateurish blunder is beyond even the scope of slumbering fantasy. Rest assured, though, that I was in close enough proximity to understand that feelings ran high on both sides, and that matters were rapidly trending towards violence.

Then I woke up.

Perhaps I can ascribe some blame for the above-described fit of madness on the fact that it was Blockchain Week in New York (also known, alliteratively, as the CoinDesk Consensus Conference). Here, 8,000 delegates, along with their crews and side-pieces, descended upon the New York Hilton to pay obeisance to this newfangled techno-theology. Lamborghinis buzzed 6th Avenue on a ‘round the clock basis. Tchotchke bags of bling state not witnessed since the dot.com bubble littered the landscape. Parties, to which I was not invited. raged until dawn, and while I can’t say for sure, my guess is that many participants managed to make good on any short-term romantic escapades they were seeking.

The nerd revolution, like Douglas MacArthur to the Philippines in WWII, has returned.

Does it all mean anything, I mean, besides being: a) one swell party and b) an opportunity for some slick operators to stuff their pockets full of money and then exit stage left while the rest of us hang around to clean up the mess? Well, I reckon it does. Beyond all the blather, what we’re talking about is using newly available technologies to upgrade the manner in which commerce is conducted, and I believe that such concepts inevitably succeed. There’ll be some pushback, yes – particularly in the United States where economic rent-seeking agents living off the status quo will do all in their power to postpone their day of reckoning. But come it will. Perhaps more rapidly in regions such as Asia-Pacific, where, in the regions less developed nations, fewer than a quarter of the populous have bank accounts but All God’s Children have a smart phone, and will use it to conduct crypto finance.

Recent published reports suggest, for instance, that commercial agents in the People’s Republic of China are even at this moment developing a blockchain framework for the purchase and sale of tea. If they’re successful, it might create one of the most scalable business opportunities of all time, because, you know (and forgive me here) there’s a lot of tea in China.

But for the present, the masses are forced to contend with longstanding traditional markets, such as those for stocks, bonds, commodities and Foreign Exchange instruments. And it was indeed an interesting week in these old-school realms. To my considerable surprise, the US 10-Year Note not only traded above 3%, but retained that lofty threshold throughout. Its big sister, the 30 Year Bond, breached the unthinkably usurious level of 3.25% on Thursday, a 4-year high. Presumably in delighted solidarity, USD continued on the upward slope of a recently formed V-bottom and that rally looks like it has legs. Brent Crude hit $80/bbl – also a multi-year high — before backing off some on Friday.

It appear, in summary, that these most critical non-equity market factors have breached technical thresholds, and if the chartists have their day, will continue to run in similar directions for some time before they pause for a well-earned rest. But one never knows.

Fundamentals are also lending a hand. This past week, Industrial Production, the Empire State Manufacturing Survey, the Philadelphia Fed’s Business Outlook Survey and the National Association of Home Builders Housing Index all clocked in above expectations. The Atlanta Fed’s GDPNow tracker surged past 4% for Q2. New Jobless Claims – particularly population-adjusted — are tracking at an all-time low, and Continuing Clams are disappearing at an astonishing rate:

I’ll throw one more in for you – the above-mentioned Chinese are in a frenzied quest for the ownership of apples – apparently at the expense of their equity holdings:

If I didn’t know better, I’d say that the upward movements in the USD and domestic yields are rationally attributable to an exceptionally rosy economic outlook, which portends higher rates and a more attractive case for the conversion of other forms of fiat currency into Dead Prez. But one lurking question continues to vex me:

Why now?

The stone cold ballers with whom I roll have been anticipating just such a paradigm for many months, and, until just this week, have been more or less disappointed. And I’m just not yet convinced that we’ve suddenly entered a sweet spot, where the trends they teach in economic text books, ignored for so long, are suddenly to be followed.

Then there’s the equity market. I’m sentimental enough to believe that the narrative set forth above would carry forward to the stock-trading universe, but if so, I’d have been disappointed. Equities remain stuck in the narrow channel first formed after the recovery from the February debacle.

There are any number of reasons why the guys and gals on the stock desks are refusing to follow the script. They include justifiable worries that we’ve hit peak earnings, that the energy rally creates considerable negative offsets to Tax Reform, that Emerging Markets – particularly in the Americas, are showing signs of economic collapse, and that all of this trade brinksmanship is an ill wind that blows no good to any investors.

My personal favorite argument is the one that suggests the U.S. economy will quiver and perhaps crumble under the weight of > 3.5% yields on the 10-year note. The disappearance of “easy money” will cripple innumerable debt-sensitive enterprises, and the irresistible allure of higher returns on U.S. Treasuries will crowd out flows to the stock market. OK; I get it, but I’m a little leery of this hypothesis as well. We’re all in pretty bad shape if the economy can’t support nominally higher borrowing costs, but suppose we can’t? Well, then, stocks are likely to tumble, and, if the plot holds, investors will rush into the warm embrace of Good Old American Debt. If so, then yields will come back to earth, taking borrowing costs down with them, and giving a boost to equities. Then it will be lather, rinse repeat.

I suspect what ails the equity markets falls more under the heading of political risk – both here and abroad – and that there simply is very little justification for an upward surge (or, for that matter, a nasty reversal) at this moment. But I’ve been warned off getting too political here, so I won’t (get too political, that is). Suffice to say that equity investors are in “show me” mode, and the next opportunity to respond to the Missouri crowd won’t come until after the quarter is over, so I reckon we’ll just have to wait, and I’ll retain my call that the indices will hold to their narrow ranges for now.

Who knows? The wait might actually pay off. If so “all that you dream will come through shining/silver lining…”

But as for me, all that I dream about these days is VaR. And I’m doing something about it. In honor of my somnolent hallucinations, and given the fact that they transpired during Blockchain Week, I’ve asked my guys to develop a Value at Risk Module for Blockchain and crypto, and they haven’t disappointed.

We’d be delighted to show it to you if you’re so inclined.

It might come in handy – sooner than you think.

TIMSHEL

Fat Man in the Bathtub

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“Spotcheck Billy got down on his hands and knees

He said “Hey mama, hey let me check your oil all right?”

She said “No, no honey, not tonight.

Come back Monday, come back Tuesday, and then I might”

— Lowell George

Any of y’all remember a few weeks back when I invited my readers to be a good rascal and join the band? Course you do. But not many of you followed through. I guess being a good rascal, never an easily attainable objective, is now barely worth aspiring to. No musical knowledge was even required; only that you follow me on Twitter @KenGrantGRA, where my numbers are indeed up, mostly as populated by Bots. They have handles like @JonitaDouwood (Daffy Duck Avatar) and @YaniessyCruff (Homer Simpson/Tighty-Whitey Avatar) and their accounts were created in May of 2018.

Anybody know these cats? Didn’t think so. On the other hand, though I looked carefully, I did NOT see @InsertYourName/TwitterHandle on my roster. But it’s OK; I forgive you. Again. And now all I can do is carry on like the band that I am. That’s right. I. Am. A. Band. Just like the Black Eyed Peas, or, more pertinently for our purposes, just like Little Feat.

So, if it’s all the same to you, I think I’ll just go ahead and join myself.

But before I do, I must encourage you to give LF’s seminal live album “Waiting for Columbus” a listen, because: a) it pretty much captures to perfection the Feat sound; and b) it came out early in 1978 — just 6 short months before the release of the film adaptation of “Sgt. Pepper’s Lonely Hearts Club Band” starring Peter Frampton and the Bee Gees.

Historians, wherever else they may differ, are generally in agreement that the film version of “Pepper” marks the low point in the ~3,500 years of organized human civilization. And, to add insult to injury, it was produced by the magnificent George Martin, and featured performances from such legit rockers as Jeff Beck, Alice Cooper, Billy Preston and Earth Wind and Fire.

It came out that July, and is now mostly known for setting the Siskel/Ebert Thumbs Down Speed Record. But back in February, when “Columbus” dropped, we were blissfully ignorant of what fate had in store for us. So we popped on Side One, which opens with the “Join the Band” chant and then folds into an energetic “Fat Man in the Bathtub”.

And I have decided to follow the same sequence.

I’ll begin like Spotcheck Billy, getting down on my hands and knees and asking: hey mama hey let me check your oil, alright?

Because there is indeed a fat man in the bathtub, with the blues. If you listen carefully, you can hear him moan.

What ails thee, fat man? As one like you, I’d say that things are perking up for us adult males of formidable gravitational force. The large contingent of us who are investors can rejoice in the reality that our already-corpulent holdings are expanding further. The equity securities we own – and I mean anywhere in the world – experienced a noticeable valuation swelling about the belt this past week, and what’s bluesy about that?

Some of us pudgy types might even go so far as to take a victory lap, in celebration of the heroic recovery of some of our favorite names — each of which, including Facebook (attacked for cynically selling our data), Amazon (Trump Tweet victim) and Apple (myriad naysayers taking shots) suffered under recent threat by a series of diverse and nefarious forces.

How do you like ‘em now?

Fat Cat FB                                                                 Ample-Bellied AMZN 

Anti-Newtonian AAPL

Heck, even Tesla, the most hated enterprise this side of Enron, has recovered a good measure of its valuation equanimity:

Notably, this is a company that burned through a cool $1 Billion that it didn’t have in the first quarter, whose CEO refused to answer questions about incremental funding sources on the earnings call – because he found them boring, and who, on the same call, practically begged investors NOT to buy his stock.

But who could resist such a pitch? Not us fat men for sure. So, while my In-Box is assaulted on a daily basis by articles suggesting the that the Company will not, CANNOT survive, the stock that simply HAS to go to zero (and soon) has risen a cool 20% in Q2 alone. And we’re only half way through the quarter.

All of this action contributed to an increasingly rotund Mr. Spoo’s breakout — to ranges above it’s 50, 100 and 200 Day Moving Averages. He’s been fatter before (say, in January), and it’s now anybody’s guess whether he continues to gorge himself or backs away from the table and/or mixes in a salad now and then.

There’s a similar story to be told about zaftig bond holders, who, after suffering the early week indignities of a selloff into 3% yield territory, could not but be pleased about the subsequent rebound. Notably, these markets were able to incorporate the issuance of $75B of new paper and live to tell the tale.

3% on the 10-year still looks like an unbreachable wall, but Fixed Income bears could at least take some comfort in the continued selling activity on shorter-duration instruments, perhaps in part catalyzed by some truly tepid inflation statistics issuing from the Commerce Department this past week. These and other factors wedged the yield curve into increasingly narrow, and likely unsustainable “skinny jean” territories:

2s/10s – Looking Increasingly Scrawny:

Of course, even us obese gentlemen occasionally look beyond the financial pages as we digest our Grand Slam Breakfasts, and were not slow to notice that the U.S. is now out of the dubious Iran Nuclear Deal and gearing up for a potentially dubious summit with one of our own: Little Fat Man Kim Jung Un. These things mean something, but I’ll be switched if I can put my finger on what that might be.

One might hazard a guess that the risk premium has dropped in recent sessions, but I wouldn’t necessarily bank on its continued suppression. Trust me on this: just like everyone else, Mr. Risk likes to eat, and if we don’t feed him appropriately, he’s perfectly capable of gorging himself – at our expense.

But the plain truth is that across the back half of Q2, there’s just not that much to write, much less write home about, in risk-land. I’ve predicted quiet, and I reckon I’ll stick with that prediction.

And to my fellow fatties out there I say this: if the action bores you, go take a bath. And, for what it’s worth, I don’t see much reason for you to cry the blues. Spotcheck Billy is going to take another crack at that whole oil-checking thing — as soon as Monday, and, if you clean yourselves up and stop your moaning, perhaps you can do the same.

Alternatively, you can still join the band @KenGrantGRA. And be forewarned: if you don’t, then within a short period of time, I’ll be forced to continue down the “Columbus” track sequence and lay a little “All That You Dream” on everyone.

The opening line of that song says it all: “I’ve been down, but not like this before”.

Let’s not go there, OK?

TIMSHEL

Flying V Bottoms

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I hope everyone is recovering satisfactorily from a raucous Saturday: one that featured not only the Kentucky Derby, and Cinco de Mayo, but also the annual Ridgefield (CT) Gone Country Festival (replete with its BBQed Rib Contest and the 70s rock stylings of the local high school band).

But as for me, I’m still trying to gather myself from the shock we all received earlier in the week.

Specifically, on Tuesday, and in violation of virtually everything I consider holy in this world, Nashville-based Gibson Guitar Corporation, which has been pumping out its one-of-a-kind axes for approximately 5 generations, filed for protection under Chapter 11 of the United States Bankruptcy Code.

Though the blow was staggering, I hasten to remind my minions that all hope is not lost. Gibson did NOT opt for the full-smash Chapter 7 shutdown; it instead chose the Chapter 11 reorganization alternative. Statements from the Company suggests it took this action in order to protect its signature guitar line, by raising some capital and scrapping a few offshoot businesses in which they never should have been involved in the first place.

I’m praying for the kids down in Nash Vegas, because life on the planet will be unilaterally diminished if that shred machine factory ever goes dark.

No one should be surprised that the guitar business ain’t what it once was. Anecdotal evidence suggests that each year, fewer hormonal, acne-battling teenage males squirrel their lawn mowing money away to plunk down on a 6-string razor and appropriately distorted amp. And who can blame them? It’s not like that sort of thing gets you laid like it did in the old days (on the other hand – and trust me here – it never did). And this is to say nothing of the blow the Company received when Pete Townsend discontinued the practice of ending each show by smashing his instrument (almost always a Gibson) into smithereens.

But the Company’s real troubles began in 2011, when gun-wielding thugs from the Environmental Protection Administration (EPA) rudely busted in on their production facilities – as part of an enforcement action – and you can’t make this up – against violations not of United States environmental laws, but of those of the great nation of Madagascar.

So the trend has hardly been Gibson’s friend these past few years, and though I haven’t done much to support the enterprise lately, you should be made aware that my first legit guitar purchase was a Gibson SG, acquired from my much more talented high school mate (one John Zucker) in 1976. In elegant, bookend fashion, my most recent such acquisition took place in 2008 – about a month before Lehman went down – when, at long last, I managed to get my hands on the Companies signature product: the Les Paul.

I must point out though that I bought both of these axes used, so it’s not like I’ve done all that much to support the company myself. I am, however, dedicating this weekly to them and that’s something, right? In addition, I actually tweeted my outrage on the same topic earlier this week, which brings us to another topic: would it kill you guys to follow me and maybe tweet back once in a while? Didn’t think so.

Perhaps the only Gibson item remaining on my musical bucket list is the Flying V, a model that derives its name from its shape, a sample of which I offer below. I have thus far resisted the temptation to pick one of these up, because – let’s face it – If you’re going to rock a V, you’d better be ready to bring it all with you, and even after 45 years, I’m not sure I have it all to bring.

Again, for now, the Company will continue to pump out these bad boys, but it may need some help – both from its creditors and perhaps even from other enlightened souls on Wall Street. And I certainly encourage all of the fat cats within my range of influence to take a look here.

Surely the money is there. I mean, take, for example, the recent Spotify IPO, in which musically inclined investors shelled out sufficiently to manifest a $26.5B market cap. Due in part to a disappointing earnings release, it had a bad week, but is still holding a valuation of $1B above its IPO price.

And I ask: what are the users of Spotify listening to? Well, a goodly number of them, including yours truly, are cranking out Zep, Cream and other similar recordings positively driven by Gibson products and the Gibson sound. It would therefore make logical sense for Spotify’s underwriters to protect their investments by ensuring that the musicians that produce the sounds that stream across the program are adequately supplied with appropriate instrumentation.

Fortunately, there are at least symbolic indications that investors may be inclined to come to the rescue of the beleaguered brand. Here, I refer to the impressive V bottom registered by the Gallant 500 over the last couple of trading days. After a pretty lousy Thursday session, and factoring in some time for the markets to digest what on the whole was an encouraging April Jobs Report, the SPX three-day chart looks something like this:

Sharp-eyed observes – particularly rockers – are likely to notice not one, but two Flying V formations, in the chart. And I ask you, what can this possibly be but a financial tip to the hat to the Gibson Guitar Corporation of Nashville, TN?

It perhaps also is important to bear in mind that Thursday’s lows and subsequent recovery represent, by my count, the 4th time in the rolling quarter that the SPX touched the depths of its 200 day Moving Average, only to bounce enthusiastically in the immediate aftermath. All of which reinforces the notion that stocks want to remain in a narrow range. Intraday volatility is on the high end of what we’re used to, but at the end of the day, we’re ending up pretty much where we started. It does strike me that this stasis is likely to continue for most of the rest of the quarter. Earnings continue to wind down, and the numbers keep getting better and better. Forward-looking P/E Ratios have drifted back to their five-year averages, and, while projections call for some deceleration across the rest of the year, the prognostications remain highly encouraging. But the best that the market appears to be able to muster is a bounce-back from a nasty puke.

In addition to a Jobs number that fits tightly with the narrative (stable but short of Bonzo job creation, coupled with a similar dynamic on Hourly Earnings – all supporting the notion that the economy is doing pretty well, but is in no particular need of rude rate increases to cool it down), investors swooned over a marginally strong earnings report from Apple. Presumably this is due in part due to the Company’s buyback announcements and even more so that the Omaha Buffet now features an even larger supply of the biblical orb on the tray tables.

Yet naysayers persist on the stock, and to them I pose the following question. Best estimates call for 5G telecommunications protocols to roll out, in round numbers, within about a year. If this new network configuration follows the trajectory of its predecessors, then everyone will want 5G, and this will compel everyone to buy a new smart phone to avail themselves of its wondrous benefits. Does this not portend marvelous things for the world’s leading smart phone provider?

But while Apple, as has been the case across its long history, is given the benefit of the doubt by the markets, the same cannot be said about the broader array of large cap companies. As a record earnings growth season winds to a close, investors are reacting with what can be described only through generous interpretation as a collective yawn:

This, my friends, looks to me to be the financial expression of tough love. There seems to be little appetite to push broad-based valuations higher, but at the same time, the picture is encouraging enough to suggest that selloffs are socializing some bargains.

So equities as a risk factor aren’t doing much, and probably won’t for the next few weeks. Why? Well, there’s some continued concern that higher rates will crowd out equity returns, but these higher rates are nowhere to be found – at least as expressed in longer dated government securities.

Pretty much all developed jurisdictions are enjoying bids on their paper, and, while the short bond crowd may ultimately win the war, it appears to me that it will only be by attrition. They have many bloody skirmishes ahead of them on their righteous road to rate normalization. What my eyes see is continued evidence of an improbable shortage of government debentures, but I’ll leave that often-covered topic aside for the present.

I will continue to reiterate my belief that no much action is likely to transpire at the factor level – for the rest of the month – and perhaps bleeding into June. The Washingtonian Circus could change this with one snap of the high-wire, but otherwise, I’m kind of thinking we’re stuck in neutral.

All of this gives rise to the old adage “Sell in May and go away”. But I’m not sure that there’s much benefit to be had in doing this, or for that matter, in taking the opposite tack. I think instead I’ll stay right here, and maybe spark up that Gibson SG I’ve owned for more than 4 decades. It sounds sweeter than ever, perhaps because it’s just possible that my chops have improved; more likely because those Gibson guitars are just so well-made that once you own one, you can enjoy it for a lifetime.

I take my leave with the fondest wish that the Nashville Cats are successful in their reorganization efforts, and, to my minions: if you can’t float a few shekels in the form of capital, the least you could do is head down to your local guitar store and pick up a Flying V. Failing that, you can perhaps, at minimum, follow me, and therefore the saga @KenGrantGRA. Unless I’ve missed something, it’ll do you no harm.

TIMSHEL

Through the Looking GLASS

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Ladies and gentlemen, you have my apology, because somehow I missed it. Maybe it was the Cosby Trial, the NFL Draft, or the weather.

On further reflection, I’d have to say yes, it was the weather.

Given my borderline obsession with celebrating milestones, I am deeply ashamed of myself that I missed a big one: the 20-year anniversary of the functional end of the four segments of the Banking Act of 1933 – sections that are widely referred to as the Glass-Steagall Act. As most are aware, the key provisions of Glass-Steagall forced the legal separation of financial enterprises that accept deposits and issue loans (i.e. Commercial Banks) from those that engage in trickier activities such as stock/bond issuance, proprietary trading and the like (i.e. Investment Banks). The idea was to put a wall of sobriety around those institutions charged with the responsibility of holding customer cash balances and writing mortgages, while allowing the more energetic and creative among the Wall Street crowd to do pretty much anything else that they wished. At the time, it could be argued that this was a wise move – particularly given the widespread failure of nearly every bank this side of the Bailey Building and Loan in the wake of the ’29 Crash and subsequent Great Depression, and the valid concerns that their failures could be traced to their excessive enthusiasm for more speculative activities.

And for 65 years, it was the law of the land. But it was a pain in the caboose for those forced to comply. Investment Banks such as Goldman Sachs and Morgan Stanley suffered the indignities of needing separate subsidiaries just to compete in the frigging swaps markets, and banks had to jump through hoops if they wished to even approach sacred realms where stocks and bonds were issued and traded.

The legislative repeal of Glass-Steagall didn’t transpire until mid-1999 (giving me another year to pay obeisance to the 20th), but Sandy couldn’t wait that long. To wit: Sanford I. Weil, then in the midst of converting the prole-like American Can Corporation into the World’s Biggest Financial Colossus – one that just a decade later required taxpayer support to the tune of nearly $0.5 Trillion – was in a great hurry to add an Investment Bank to his portfolio, and wasn’t inclined to wait for the Wheels of Legislation to turn in his favor. So, in April of 1998, he went ahead and purchased venerable I-Bank Salomon Brothers, and that was it. GSS was dead and everyone went about his or her business. The regulatory wall between Commercial and Investment Banking had been shattered by Sandy’s Golden Hammer, and it was game on – even if it took another year to codify the removal of the restriction into the national legal register.

Of course, Sandy had some help. He was a Friend of Bill (Clinton), and, presumably, as homage to this alliance, he likely gave the guy tasked with executing the nation’s laws an amiable heads-up about his intentions (which I’m sure the latter appreciated). In addition, there was Treasury Secretary Robert Rubin, who, shortly after he greenlighted Sandy’s power move, landed at Citi’s Co-Chairman seat.

But everything ended up for the best, right? At least for most of the subsequent decade, after which, if memory serves, there were a few problems.

And this type of game of “Inside Baseball” is exactly the type of thing that I believe ails us most: a world where different rules apply to entities with different positioning on the Financial Food Chain.

It was ever thus, and perhaps ever it will be. At present, taxpayers support the whims and predispositions of corporate faves such wonder-boy owned electric car manufacturer, a Farming Industry in which the overalls crowd have long ceded ownership to the folks in Brooks Brothers suits, our gargantuan Energy Companies, and yes, our brilliantly run and ethically unimpeachable Banking Sector.

It seems that our system is generous to everyone but consumer/taxpayers, and recent data suggests that, while they shoulder on, they are arguably losing energy. This week brought a first look at Q1 GDP, which brought tidings of marginal weakness, as did the more obtuse Chicago Fed Index of National Activity:

Perhaps owing to these and other little glitches, the U.S 10 Year Note Yield, after having placed a trepid toe into 3% territory the prior week, has backed off to just under 2.96%. Ags were en fuego, and the USD lifted itself off the carpet a titch.

Most of the investor focus, however was on earnings, and here, somehow, my nearly impeccable prognostications failed me. Far from tanking the quarter, The Big Tech Dogs – particularly the two with the biggest targets on their backs (Facebook and Amazon) absolutely blew the roof off the joint. They also declined to heed my suggestion about the possible benefits of issuing muted guidance. Across the Kingdom of the Gallant 500, with more than half of loyal subjects now having dutifully reported, the blended earnings growth is beating even the rosiest of estimates at a somewhat astonishing >23%.

However, for all of that, it was a flat week for the indices, as investors neglected by and large to embrace the enthusiasm issuing forth from Silicon Valley and elsewhere. Maybe they should teleport themselves to the Continent, where (for reasons unknown to this reporter) a post-Lent rally continues unabated:

European Equities: The Destination of Choice This Spring:

But within these here borders, we’ll be through earnings for all intents and purposes, within two weeks. And all we’ve seen for the last month is a narrowing of the SPX channel to a skinny 100 Index Points:

So let’s for the moment dispatch with the notion that the barking volatility dogs have taken over the junkyard, shall we? Once the Retailers report, we’ll have nothing left to anticipate but some always dodgy macro numbers.

We get a taste of this next Friday, when the April Jobs report drops. It might be well to recall that March was something of a dud – so much so that many economists were forced to resort to the shameful ploy of suggesting we focus on the three-month moving average. As of now, this will require adding the fly 313K Feb number to March’s dismal 103K and whatever comes out Friday, and dividing the whole thing by 3 (glad I could help).

By that time, the Fed will have mailed in its latest Policy Statement (i.e. no Presser), and is not expected to have moved. But at the long end of the curve, hope for a price selloff/yield rise springs eternal, with the volume of speculative shorts in U.S. 10-Year Futures currently resting at record levels.

Maybe they’re right this time, but as I’ve written before, the mighty 10-Year Note has been a tough nut to crack. I reckon that some of these days, we will see higher borrowing costs at the long end of the duration spectrum. After all, I’ve lived through cycles when rates were off the charts and there seemed to be nothing under the sun that could move them in a downward direction. I do suspect, however, that for now,influential politicians who must go back to their districts to beg for money this summer would prefer to not have to explain away a sharp rise in interest rates, and you can place me squarely in the camp of those that believe said politicians have an important say in these matters.

But one way or another, what goes ‘round, come ‘round, and to paraphrase Jerry Garcia/Robert Hunter: “If your Glass was full, may it be again”.

Who knows? Someday they may even re-instate Glass Steagall, and if they do, they can perhaps count on the support of Sandy, who in 2012 said this: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Sounds like he’s now in favor of a reinstated GS, but, having made his money and gotten out of town before the bad hombres arrived, one can hardly blame him. Surely, he maintains substantial holdings in accounts at large financial institutions, and would be justified in wanting to ensure that they are not engaging in monkey business. As for the rest of us, I reckon we’ll have to take pot luck.

TIMSHEL

Mondo Fugazi

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Welcome to Mondo Fugazi, my friends, where Fugazis abound – so much so that some of the Fugazis are actually Fugazi Fugazis, and are thus actually the real thing. Look around. Stay as long as you like. Stay forever if you will. But stay on your toes, because in Mondo Fugazi, the bona fide and the implausible blend into a dizzying vortex, which, if you’re not careful, could suck you dry.

Fugazi, of course, is the Italian vernacular word for Fake. However, in general, I prefer the former, mostly because of the way it trips off the tongue. Try it yourself: say Fugazi out loud a few times. My guess is that you will never use the word Fake again.

We’re all tired of the English word anyway, right? Let’s begin, for instance, with the wearisome, dubious and oxymoronic concept of Fake News. I’m just sick of hearing about it, and, if pushed I’d go so far as to state my belief that Fake News is itself a Fugazi. Using the full-on Italian phrase: Notiza Fugazi – helps, but only a little. Besides, we’ve got Fugazi issues that extend well beyond Notazi. So let’s start to unpack them, shall we?

I wish to begin with Fake IDs, or, if you will, Identificaziones Fugazi. A long time ago, I was something of an expert on this topic. Wishing, around age 16, to prematurely join the adult world in those most meaningful of ways – purchasing alcohol and patronizing bars — my friends and I all thought it would be a swell idea to obtain identification suggesting we were older than we were. Our first sojourns in this realm took us to the iconic Maxwell Street, the open air marketplace on Chicago’s Near South Side (For the uninitiated, please refer to the Aretha Franklin sequence in “The Blues Brothers”). There, after making discreet inquiries, we were ushered to a beat up trailer, owned by a middle aged African American gentleman who had suffered severe burn damage across his face. He snapped our pictures and typed some information (including changing our birthdates) on to orange cards, ran them through a laminating machine, and charged each of us 10 big ones for the service.

We were ecstatic, but, predictably, the ruse didn’t work very well. A lot of bouncers laughed at us, and one actually confiscated our cards. So we were forced to move to Plan B. This took the form of surgically altering our driver’s licenses, by flipping the 9 (we were all born in 1959) into a 6. The strategy worked for a while, but eventually the bouncers got wise. They’d shine a flashlight on our official IL DLs, see the holes, and send us away to raid our fathers’ liquor cabinets.

At that point, there seemed to to do but wait out the unforgiving calendar. But then the unthinkable happened. Just as my 18th birthday was approaching, Illinois raised its drinking age to 21, adding 3 years to my hiatus. I took this very personally, and it was time for all-out war. I’m not particularly proud of this, but I was forced to resort to bona fide identity theft. Somehow, I was able, in addition to my restored driver’s license, to obtain an Official State ID (with my mug in the upper right hand corner) in the name of one Kenneth Costigan, a real guy whose birthday was sometime in September of 1956. Here, not only had I solved my most vexing longstanding problem, but I gained the added benefit of being able to walk into bars in my college turf of Madison, WI, and demand a free drink on my Fake ID birthdays. One Mad Town bartender was a bit stingy, and didn’t want to come across, but I insisted. So he poured me a shot of what I thought was standard (if bottom shelf) Vodka, which turned out to be 190-proof Pure Grain Alcohol.

I fell immediately ill and stayed in bed for the following week. And this, my friends, cured me of such proclivities. I have NOT turned back since, and had not even thought of the concept for many years. But recently, I have found myself the victim of a new form of Fake ID chicanery. Specifically, through the marvelous conveyance of CALLER ID (for which Verizon hits me for an extra couple of bucks), I can see, at the point of first ring, who’s trying to reach me. Unfortunately, a depressingly large number of my incoming calls are unwanted solicitations for such products as extended warranties on cars I don’t own, refinancing plans on outstanding student loan debt that I managed somehow to retire in 1992, and instant access lines of credit. OK; fine. I get it. I’m a capitalist through and through, and believe (albeit with some caveats) in the principles of caveat emptor. However, many recent calls show IDs clearly intended to deceive. Just in the last couple of weeks, my phone has been lit up with caller identifications that have included Fox News, New York Presbyterian Hospital, Music Mogul Clive Davis (who still owes me a major label recording contract) and even actor Lloyd Bridges (who died in 1998).

With respect to the last of these, when the phone rang, instead of Lloyd’s golden pipes, my ears were assaulted by the recording of a female voice speaking rapidly in what I am assuming was Spanish, but can’t be sure. I tested my theory by shouting Fugazi, but her only response was to hang up on me.

So Identificazione Fugazi has clearly entered the information age, and it strikes me that there’s too much of this type of thing going on lately.

***********

I returned from dinner on Friday night to a phone notification that the North Koreans had suspended large portions of their nuclear testing programs. Was this Notazi Fugazi? Only time will tell, I suppose. All the news outlets confirmed the report, so perhaps there’s something there. But I recognize that the next time a welcoming proclamation issues forth from L’il Kim or his forebears is followed up with constructive action will be the first, so I’m a l’il skeptical on that score.

I am wondering how the markets will react to these tidings, but it’s the weekend so I really don’t know. Certainly it shades towards the accretive, but in Mondo Fugazi, one never knows.

As we retired on Friday, the Equity Complex had bounced around over the preceding week with little to show for its efforts:

But one element, of the action, the technicals, has a strong ring of non-Fugazi authenticity. Over the past several weeks, the Gallant 500 has dropped twice to the menacing breach of the 200 Day Moving Average, only to bounce jauntily in the aftermath. Conversely, the index has clawed back towards the 50 and 100 Day thresholds, it has been beaten back like a little you know what.

This here looks like a tough channel to break. Equity Markets appear to like the 2650 – 2700 range, and despite the somewhat Fugazi-like concerns about excessive volatility, it’s unclear to me that it is likely to break out in either direction any time soon. On the other hand, we’re in the middle of a content-rich information cycle, so stay tuned.

After a long hiatus, however, there appears to finally be some action in other Asset Classes. Over the last several sessions, yields on the U.S 30 Year Note careened past the 3% threshold, and even those precious Swiss Bonds sold off back into positive rate territory. The USD enjoyed its strongest week of the year, and commodities remain in play – mostly on upside.

Seemingly out of nowhere, All God’s Children are now concerned about the slope of the Yield Curve, which indeed have flattened to Olive Oyl thresholds, at both the short and long end of the maturity spectrum:

The Long Short and Flat of It: 2s/10s: 

10s/30s:

Textbook economic analysis suggests that such trends are indicators of weaker economic conditions on the near-term horizon. However, here in Mondo Fugazi, I believe we may need to throw out the textbooks, and look to a new roadmap. Specifically, I feel that the relationship between short and long-term Treasury debt has decoupled, and that as such, we must look to each component separately.

It strikes me that with respect to the faster-approaching maturities, a number of factors should work to suppress prices and place upward pressure on yields. We begin of course with stated Fed policy to lift rates, and even they would tell you that all of their juice is on the short end. In addition, as the Fed goes about the righteous path of reducing its gargantuan Balance Sheet, its main tool is allowing shorter term notes to mature without repurchase, in the process removing perhaps the most important buyer from the near-term equation. Heroic efforts have been made in this respect over the last year, with the value of the Fed’s Holdings plunging from $4.48T to the current $4.38T. That may not look like much in percentage terms, and in fact it’s not; it’s just a little over 2%. But it is a divestiture to the tune of $100B, and to yet again paraphrase the late, great Everett McKinley Dirksen (R, IL): $100 Billion here, $100 Billion there and it all starts to add up to real money.

Almost all of this reduction has transpired at the short end, and, of course, we still have a long way to go, because, even those 30 year bonds whose maturities look like dots in the distance will someday become short-dated notes.

Finally, with respect to near term Treasury obligations, you should be made aware that Mnuchin and Company are planning to auction off $275B of freshly minted obligations this week – almost all of them with maturities of two years or less. By my count this will bring total 2018 issuance to the threshold of $1 Trillion, and we’re not even 1/3rd of the way through this infernal year yet.

If this bothers you, I suggest you write your Congressman or President who green-lighted our monstrosity of a budget, and, in doing so, if you invoke the memory of the fiscally conservative Senator Dirksen, you’ll get no complaint from me.

Moving on to the longer-dated end of the curve, we face something of a stickier wicket. Most believe that on balance, the economy would benefit from higher extended rates, but it has been nearly impossible to effect this in the markets. Reasonable minds can disagree over root causes, but clearly the opacity of inflation trends are a contributing factor. In addition, it is my belief that all of that global QE has created a financial dynamic where there’s more money sloshing around than low-risk places to put it. Thus, for what seems like eons, no matter how much long-term debt a given developed country wishes to issue, it gets hoovered up in ravenous fashion.

So I think there are divergent dynamics at play across the yield maturity spectrum, with multiple factors causing upward yield pressure on shorter term securities, while improbable supply shortages bring gravitational pull to bear at the longer end.

For what it’s worth, I also continue believe that, at 50,000 feet, there’s a shortage of stocks as well, but I’ve backed off on mentioning this in light of the heightened volatility manifested over the last rolling quarter. Stocks can be risky (or so I’m told), and therefore subject to more capricious pricing patterns. For now, the risk premium remains sufficiently elevated to counter the supply/demand imbalance. But imagine a world where our two political parties were not intent on blowing each other up, where our two historical adversaries (Russia and China) were not causing us untold aggravation and perhaps worse, where everybody minded their business and tried to do the best they could. Now take a look at the following charts:

Yes, Profit Margins are accelerating while P/E ratios are reverting to normalized levels. I dream of opportunity in these images, and I’m not the only one.

But unfortunately we must operate in the real world, which at least at present is a Mondo Fugazi. So take care. And now, if you’ll excuse me, I must take my leave. The phone is ringing and my screen says it’s Kenneth Costigan. I suspect that he wants his identity back, and, having no more use for it personally, I’d be happy to comply.

If only I could be sure that it was really him on the line.

TIMSHEL

Joining the Band

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Join The Band

Hey Lordy… (join the band, be good rascal…)

Hey join the band, be good rascal and join the band

Hey Lordy…

Join the band, be a good rascal and join the band

Oh huh oh ho ho ho

— Little Feat

Don’t you think the moment has come? To join the band, I mean? There are worse ways to spend your time, you know, and when Little Feat’s late and lightly lamented Lowell George asks, I believe we owe it to him to respond favorably – even four decades after the initial request.

So, even at this late date, I am inclined to take up Lowell’s invitation. However, one problem remains: which band should I join? It’s not as though I am flooded with offers; the plain truth is that I have had none. And believe me, this hurts, because these days I can really shred. In fact, I’d go so far as to say that I’d be a major asset to any ensemble fixated on the rolling decade between 1965 and 1974, and, in the right group (i.e. one that: a) narrowed its focus to 1968 through 1972; and b) let me do exactly what I wanted), I could be great.

But at my advanced age, I have learned that delusion is risky and even sometimes fatal, and this forces me to face the possibility that no rock and roll outfit will have me. However, there’s more than one kind of band to join, so I’ve chosen to take a different course, affiliating more assertively with that band of brothers and sisters that form the global financial blogosphere. It’s not as though I haven’t contributed to their catalogue; the consistent production of these weeklies, and subsequent posting to the web is, in itself a testament to my longstanding affiliation with the blog bros. But, my friends, like so many other matters, it comes down to a matter of degree. I’m going to be doing more with them, and whether I become a full-fledged member of the group, or, like Darryl Jones, who has ably managed the base lines for the Rolling Stones for a period longer than founder Bill Wyman but has never achieved full membership, linger as a side man, remains out of my hands.

Please know that I don’t take this step without due consideration. I am solemnly aware that, over the baker’s dozen years that I’ve been pumping out these weeklies, missing nary a one, through sickness and health, triumph and tragedy, that you (the reader) and me (the scribe) have developed a sacred, unshakeable bond. It would nauseate me beyond measure to think that any step I could possibly take would weaken, let alone sever, these ties. Please know that you will continue to receive these missives, under the same timelines, and based upon the identical format – one that as you know, features my often futile efforts to gather what remains of my wandering wits.

That being stated, the chattering voices inside my head have convinced me that a wider audience beckons, and that I must answer the call. So if you observe me blogging, tweeting (under the rather generic handle of @KenGrantGRA) you will have two choices. You can consider this an unacceptable betrayal on my part (I will love you no less if you do), or you can give me a pass.

Oh yeah, there is one other alternative available to you: you can join the band, the @KenGrantGRA Band, accompanying me on my virtual journey through soaring arena anthems, destroyed hotel rooms, mud sharks and other such delights.

There’s room for you (and any friends you might wish to invite) on the @KenGrantGRA Tour Bus, and Cowboy Neil (at the wheel) will pull over and let you off at any point of your own choosing. Do me a favor and think about it, OK?

*******************

Whether you believe me or not, the plain truth is that I hate to write about politics. I find it an unproductive, loser’s game. I tell myself that I have held more or less to the discipline of only doing so through the filter of political impacts on risk conditions. But you’ll have to make your own judgments as to how well I’ve actually adhered to this protocol, and how rigidly I’ll stick to the discipline going forward.

One way or another, I believe that politics hover over current market conditions in a highly menacing fashion, so this week, and perhaps for a spell going forward, I must at least move towards the borderlands of my pledge. By my judgement, Trump had by far his worst political week since he put his hand on that bible, amid so much protest, almost exactly five quarters ago. Let’s dispatch with the easily analyzed events first. Paul Ryan announced he’s stepping down at the end of his term, and, any way you look at it, this is not a positive development for the Administration. I’ve always liked my Janesville boy, and think he was one of the very few competent members of Congress. He did his homework, did his work, and, through a number of hits and misses, actually got things done. And I ask this to anyone in favor of any part of Trump’s legislative agenda: where we’d be now without his steady hand? But he’s riding off, taking the certified Republican House Majority down to a slim 22. Also, and, ominously (at least in a symbolic fashion), his departure means that nearly half (10 out of 21) Congressional Committee Chairs have now stepped down, and, given that it’s only April, that number could rise.

More chilling was the raid on Trump lawyer Michael Cohen’s office and home by those fluffy fellows from the Office of the United States Attorney Southern District of New York. Acting on a referral from Special Counsel Robert Mueller, they forced their way into Attorney Cohen’s private professional and personal lairs, and seized pretty much anything that wasn’t nailed down. Subsequent reports indicate that he’d been under investigation by the Southern District for criminal activity for several months, but the timing and the methods turn my blood to ice. Federal prosecutors have many methods to procure information from investigation targets, most notably their subpoena powers, and raids are the most aggressive of these tools. Typically, this type of thing is only justified when the target is either a flight risk (which Cohen clearly was not), or information suggests he was committing serious crimes on an on-going basis. So I hope for all our sakes, that whatever impelled the G-Men to give Cohen the Manafort Treatment be disclosed in short order. And it better be good.

Because, and I state this more in sorrow than in anger, attorney client privilege is so embedded in basic human rights as to not even require inclusion in the Constitution. It dates back to the Elizabethan Era, and is a core part of British Common law upon which our Constitution is based. We are now headed down a very slippery slope on the treacherous terrain of civil liberties, and however much you may be enraged by Trump, I urge you to bear in mind that someday, you yourself might need a good lawyer, who, if we’re not careful, may have his professional materials seized. At which point they won’t be of any use to you. If this ever happens (and I pray that it doesn’t), it’ll probably be lights out for your case. Of course, this won’t apply to everyone. If you happen to be very rich, powerful and aligned with the appropriate forces, not only will your private realms not be raided, but you will have the prerogative to respond to subpoenas by simply decided what, of the information demanded, you choose to share.

The deal struck between the Southern District and the Special Counsel is such that anything the former uncovers that might be useful to the latter will be referred back to them. And here’s where I can at least plausibly make my case of tying the political to the financial. Anyone who had a shadow of a doubt that Mueller is going for the jugular should disabuse themselves of this fantasy at the earliest convenient opportunity. There’s an end game afoot here, set to play out over the immediate months ahead, and I believe it behooves the risk sensitive to bear this in mind as they seek to navigate through these choppy market waters. Because I don’t think the markets will much like the action, however it turns out.

But equities, notwithstanding these and other worrisome events, gathered themselves in gratifying fashion this past week, with the SPX bouncing jauntily off of its 200-Day Moving Average yet again, and now resting in the friendlier confines of its 50 and 100 day equivalents. One might be tempted to ascribe the bounce to giddiness about earnings, and I’ve seen estimates of growth rise to the dignity of ~20%. But I’d be careful here. A large contingent of big banks reported on Friday (JPM, Citi, Wells, PNC) and despite ALL of them beating both profit and revenue estimates by a comfortable margin, EACH sold off in the wake of their announcements by >2%. This suggests that the bar is very high for a paradigm involving strong earnings being followed by shares being bid up.

Volatility has indeed risen in the equity markets, but perhaps a little perspective here is in order. The combination of renewed price action after the vol paralysis of last year, and a rally that has increased the denominators associated with percentage moves, may be creating the illusion that the Equity Complex is in hyper-volatility mode. However, statistics offer a different story. While February and April brought some truly noteworthy action, across the course of 2018, we’re still only looking at a standard deviation of SPX returns in the mid to high teens, which is about the norm in the modern market era. So the equity market has become more volatile, but not alarmingly so, and while it is likely to continue to rise, in percentage terms, it’s important to remember that we’re pretty much at historical norms. And in terms of options volatility, last week’s selloff in the VIX took this benchmark to under 17.5 – right about its median for the lifetime of this eccentric index.

However, in a continuation of a highly vexing pattern, non-equity asset classes remain stuck in the volatility mud. The following chart, coming to you through the courtesy of those dedicated public servants at Goldman Sachs, Inc., illustrates what it looks like when one asset class awakes from a winters-long hibernation, while others remain in blissful slumber:

I’m not entirely sure what this correlation drop implies, but it doesn’t strike me as the kind of breakdown that the ghost of Tom Petty could reasonably describe as being “alright”.

Meanwhile, as cross-asset class correlations have migrated to decade plus lows, the story is quite different within the equity complex. Here, correlations, have spiked dramatically, again as illustrated by those talented graphic artists in residence at Goldman:

Among other things, one might wish to review other periods when stock correlations took an abrupt leap forward, and the intrepid among you might choose to superimpose equity index graphs on the image. I myself am either to frightened or have too much sensitivity for my readers to connect the dots here.

It may be the case that the jump in stock correlations is more easily explained than the drop in the cross-asset class correlation metric.

To wit: there’s a great deal to worry us in current affairs that has little to do with the relative fortunes of individual companies. For one thing, us Yanks got together with the French and Brits to lob some bombs into Syria this weekend. I don’t know what impact this will have on the markets, and won’t know till at least Sunday night, so I won’t opine upon this development.

More visible is the trade war of words currently under way. No one knows how this will resolve itself, but let’s just agree that it’s a risky proposition. Certainly, the Energy Markets have taken notice, bidding up Brent Crude to a 3-year high, and even the long-suffering, ag-heavy Continuous Commodity index has shown indications of higher pricing:

Strong Trade Winds: Crude And Commodities

Thus, as anticipated, we are in what I believe to be the early innings of a high impact information cycle. My best advice is to temper your investment enthusiasm and add a healthy measure of reactivity. There are opportunities developing, but they will require all of your talents and energies to capture them. You may also wish to place an extra focus on risk management.

So maybe it’s as good a time as any for me to step up my whole blogging game. Lowell George asked for our participation, but he’s been dead for nearly 40 years, and we need to make use of the tools that are at our current disposal. Please, in any event, don’t judge me too harshly for my expanded electronic footprint. And, if the spirit moves you, be a good rascal and join my band.

TIMSHEL

Zook Suit

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I’m the hippiest number in town and I’ll tell you why

I’m the snappiest dresser right down to my inch-wide tie

And to get you wise I’ll explain it to you

A few of the things that a FACE is supposed to do

I wear zoot suit jacket with side vents five inches long

I have two-tone brogues yeah you know this is wrong

But the main thing is unless you’re a fool

Ah you know you gotta know, yeah you know, yeah you gotta be cool

So all you tickets I just want you to dig me

With my striped zoot jacket that the sods can plainly see

So the action lies with all of you guys

Is how you look in the other, the other, yeah, the other cat’s eye

— Peter Townsend

Plainly, and as anticipated, there is a great deal going down at the moment, so we might as well start with the most important developments. Topping the list is Zuck’s Capitol Hill testimony, scheduled to take place, not once, but twice, this coming week. On Tuesday, he will sit in front of a committee of the World’s Greatest Deliberative Body, and, given the latter’s historic and never-breached protocols of decorum, I don’t expect much drama. A better show is likely to take place on Wednesday, when he faces the wilder and woolier Lower Chamber. But on the whole I don’t see much intrigue in the pending exchange between our duly elected representatives and the world’s most high-profile Hipster/Nerd. Committee Members will look menacing, issue superficially difficult queries, and appear less than fully satisfied with the responses. And Zuck is sure to stick to the well-scripted, obsequious and cloying replies which, even as I type these words, his legion of overpaid lawyers is preparing on his behalf. I have a hunch that not much more will transpire after that, and that at least for a time, the entire episode will be dispatched to the level of focus now drawn by, say, the Las Vegas shooter investigation.

But all of this begs the most important question: what will he wear? I can’t remember an event with so much sartorial suspense this side of the Academy Awards. Surely he will shed his trademark vaguely blue/grey tee and chinos getup; in all likelihood he will shoehorn his way into a suit. But which suit?

One option will be to bust out his Bar Mitzvah ensemble, images of which I have helpfully sourced through a search from FB Frenemy enterprise Google:

Zuck’s looking pretty sharp here, but I find this choice unlikely for a couple of reasons. For one, he’s probably not going to be able to roll jacketless. Beyond this, it’s entirely possible that either: a) Mrs. Zuck (nee’ Priscilla Chan) has done the wifely thing and thrown these threads out; and/or b) trim as he may remain, he may no longer be able to comfortably wedge himself into this holy, historic outfit.

Thus, in all probability, he will have to bust out some new, or, at minimum, seldom seen, garments. And as someone who wishes him well in his astonishingly successful quest for global hegemony, I humbly suggest that he consider showing up in a wide-lapelled, high waisted Zoot Suit, the uniform of choice for the hep cats of the Roaring ‘20s. As many of my readers are too young to remember much of this high-flying decade, the getup looks something like this:

In addition to I believe setting the proper tone for his grilling, such a choice might help effect greater political balance — away from the measurably left-leaning vibe that Zuck has long exuded. To wit, careful pic observers will note the prominent presence of pinstripes that clearly bring to mind the wardrobe stylings of newly-appointed Director of the National Economic Council: former Cable TV sensation Larry Kudlow.

So formidable and terrifying are the Zuck’s powers of influence (or were, until at least a couple of weeks ago) that should he adopt my advice, he could set off a global fashion sensation. Soon, everyone from Paris Hilton to the Dalai Lama might be compelled to rock the Zoot, and that, at least from my vantage-point, would be pretty cool.

However, as important as this high-drama debate may be, we must move on, leaving the outcomes to Zuck and his tailor. Across our last couple of installments, I made the proclamation that the market’s already expanded volatility bands would further widen, and in a very real sense I was correct. Unfortunately, though, said widening has applied, well, quite narrowly, to the Equity Complex. Not much else is moving at all. The U.S. Treasury Curve does little but flatten, albeit at a glacial pace. In the wake of a somewhat garish late January selloff, The U.S. Dollar Index has wedged itself into a depressing/suppressed 3% band. Similar somnolent patterns have plagued the Energy Markets.

With brouhahas of varying configuration raging everywhere one cares to cast an eye, the question is: why? I met with one of the smartest and most successful macro traders of my wide acquaintance on Friday, and he was ready to pull his hair out at the stasis he observes across the risk factors upon which he is most focused.

And his beefs were not just limited to the price action in underlying instruments; he notes an absolute obliteration of options volatilities in this realm. He asked me what I thought, and I didn’t have a good answer for him. I did, however, agree that given the opacity that plagues the global capital economy and the rapid-fire stream of news bits (many blindingly irrelevant; others not so much), that: a) prices outside of equities should be more migratory; and b) some of these here non-equity options, instead of operating under fire-sale conditions, should actually be being bid up. I told him I’d look into it and revert back to him.

Anybody have any ideas for me? I am desperate to look smart and well-informed to this guy.

Still and all, there are some developments outside of the obsession-inducing world of individual stocks and associated indices that have caught my eye. One was that, with trademark anonymity, the Swiss 10-Year Note managed to slip below the Maginot Line of 0.0%, and now trades, somewhat improbably, at a negative yield:

Thus, a country which produces cheese, chocolate, watches and little else, an economy which is dominated by a deeply impaired, arguably insolvent banking industry, is actually paid by market participants for the privilege of lending to them. And the trend towards easy financing has spread to the neighbors they refused to fight – with or against — in either of last century’s world wars: yields in France, Germany, Italy and even freaking Sweden have declined materially over the last couple of weeks.

But if you’re hunting somewhere outside of equities for volatility, you may want to take a look at the Agricultural Complex, which has anyway shown something of a pulse this year:

As the graph’s caption explains, a good deal of this action is probably catalyzed by the Trump Administration’s well-thought-out, nuanced and impeccably executed trade skirmishes. I am supposed to be something of an expert in these markets, and, to the best I can discern is that the Chinese import a lot of Soy Beans from us, and feed them to their similarly imported Hogs. So the escalating tariff rhetoric is good/bad for Soy Beans/Hogs, as is reflected in the price action. I hope that I’ve made myself clear.

One way or another, the continued war of words on international trade and other pertinent matters is clearly driving investors somewhat batty. I truly wish that this cycle would end, but hold out little hope for this miracle any time in the foreseeable future. After all, it’s not as though we don’t have a great deal of other information to process and seek to monetize. Case and point, just this past Friday, after a somewhat surprisingly tepid March Jobs Report dropped, and just as investors were catching their collective breaths and maybe even trying to look on the bright side, Chair Pow took some questions from a reporter, and his answers offered scant comfort to anyone seeking it in that quarter. Perhaps owing to this end-of-week double whammy, the Atlanta Fed’s GDPNow tracker exhibited some renewed gravitational pull:

On the whole, however, I am inclined to believe that equities will continue to drive the risk pricing train. Last week, they rallied hard early and then sold off even harder, and Q1 earnings have not even begun yet. They start in earnest next week with the banks, which, in eerie consistency with the bizarre paradigms currently vexing us, have all scheduled their releases for Friday the 13th. I will be watching these tidings with a careful eye, and in particular for any hint of what Lloyd, Jamie, James and the rest have to convey about prospects for the rest of the year. The action will be fast and furious from that point onward, and here there is some good news to report. Not only have growth estimates retained a lofty 17% handle, but according to the infallible FactSet, positive pre-announcements have clocked in at a record high:

The chart further shows the skew of these happy tidings towards the recently beleaguered Tech Sector, but I have my doubts about the final outcomes there. Soon after Zuck gasses up his smoke and bids goodbye to Washington, he, Bezos, Serge/Larry and TCook and the others must face their own investors. If I were any of them, I might check in with my CFOs and see if I could possibly defer some revenues and/or accelerate some expenses. Given the horrific P.R. onslaught that has assaulted each of them lately, I think it’s a sound strategy for them to sandbag their numbers. Their stocks will sell off further, to be sure, but they can catch up later, and I just don’t think this is a good time for them to announce earnings moonshots.

One way or another, I expect their guidance to be particularly unpretentious. It’s just hard to imagine someone like Bezos stepping up to the podium and saying something akin to “me and the boys were poolside in Pacific Heights and we’re feeling pretty strongly that we can take our share of the NDX valuations from 50% to 90% this year”.

Guidance beyond San Jose will be especially important – given the looming and growing political risk — about which I have been expounding for the last several weeks. I continue to believe that these matters loom large on the horizon, and our fearless leader does nothing but fan the flames of his potential demise – through his trade tantrums, his attacks on companies like Amazon and – perhaps even worse – his more recent tweeting down of the markets in general. Again, all of the above portends a continued upward trajectory of volatility for the foreseeable future – at least for equities.

As for the other components that comprise the broader market, I reckon we’ll just have to see. My guess is that vol will spill over into the other asset classes; perhaps soon, but one thing is certain: until it does, it won’t.

But all of this is small potatoes. When all said and done, the only thing that truly matters is that you follow my example and make sure at all times that you look fabulous. I expect Zuck to act accordingly, and, my dear readers, you could do worse than bearing this mind yourselves.

TIMSHEL

I AM A MAN

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He did not want to return to Memphis. Of this I am certain. He had other fish (and perhaps some loaves) to fry. He was fully engaged in the planning of the Poor People’s Campaign/March on Washington, intended to be the largest-ever nonviolent demonstration against wealth/income inequality and general economic injustice. Maybe it’s just me, but this theme has a vague ring of modernity about it, no?

But on balance he felt he had no choice. There was an all-out crisis ‘a-brewing on Beale Street. The City’s entirely-black sanitation force was on strike. On February 1st, two of their own had been crushed by a truck, just the ghastliest episode a seemingly never-ending string of serious mishaps on the sanitation line. Their average salary was approximately $1.50/hour, and workers finally reached the limit of their patience. They walked out in demand for higher wages and safer conditions. Henry Loeb, the newly elected, somewhat reactionary mayor, declared the strike illegal, and ordered the men to return to their jobs. As always, Hoover’s FBI had its meddlesome eye on the episode.

History confirms the inevitable and let’s just say Mayor Loeb’s stance did not produce his desired outcomes. The workers stiffened, and the image of hundreds of them, each carrying a sign with the words “I AM A MAN” is, to my thinking, one of the most poignant in the history of American Social Justice.

On March 18, 1968, the Reverend Dr. Martin Luther King travelled to Memphis, and addressed a crowd of 25,000. At the time, he was struggling mightily to prove to his followers, skeptical global observers, and perhaps even to himself, that he could hold his movement together under the protocols of nonviolent protest. But it all went wrong that early Spring on the banks of Big Muddy. Tensions mounted, and then mounted some more. Ten days later, the thugs started looting and the police brought out the clubs/tear gas. A 16-year-old boy was killed.

King escaped out of town, but the situation did nothing but deteriorate. No, he did not want to return to Memphis, but he felt the need to restore non-violent order to the proceedings. So he came back. At 6 pm on April 4th, he stepped out on a hotel balcony and somebody took him out.

And, as of Wednesday, 50 years have gone by since that horrible night.

MLK passed into history, to my way of thinking as one of, anyway, the five greatest Americans ever to have ever lived. If he died before achieving complete solutions to the problems he attacked, it was not for lack of effort on his part. And the task needed to be undertaken. And we are all better for his works. The path he chose took vision, diligence and a holy measure of courage. And it’s abundantly clear to me that the Good Reverend Doctor knew that he was testing the prime-evil forces of nature, much as did, say, John Lennon, and knew that by doing so, he was likely to come out on nature’s losing end.

No greater proof of this prescience presents itself than his final “Mountain Top” speech, delivered at the Mason Temple, the very night before his assassination:

“Well, I don’t know what will happen now. We’ve got some difficult days ahead. But it really doesn’t matter with me now, because I’ve been to the mountaintop. And I don’t mind. Like anybody, I would like to live – a long life; longevity has its place. But I’m not concerned about that now. I just want to do God’s will. And He’s allowed me to go up to the mountain. And I’ve looked over. And I’ve seen the Promised Land. I may not get there with you. But I want you to know tonight, that we, as a people, will get to the Promised Land. So I’m happy, tonight. I’m not worried about anything. I’m not fearing any man. Mine eyes have seen the glory of the coming of the Lord.”

Breathtaking.

I suspect it is more than mere coincidence that the 50th anniversary of King’s death coincides more or less with a rare, contemporaneous celebration of Passover and Easter. His final speech is clearly allegoric to the to the Book of Exodus – the story of the liberation of the Children of Israel and the latter’s subsequent delivery to the Promised Land. But as far as I am concerned, it was an intervening event that stands out as the true miracle of the tale. It is Moses going to the Mountain Top, and returning with maybe the greatest gift of all – the living laws codified in the 10 Commandments. They have stood the test of time, and remain just as they are, just as they were written by the Hand of God, some 3,500 years ago. In the intervening ~150 generations, no one has thought to expand them, reduce them, or amend them in any way. Indeed, no one, to the best of my knowledge, has ever even legitimately questioned them. And that, my friends, is both remarkable, and yes, divine. How sad it all stands – particularly in contrast to the petty moral and ethical squabbles that assault our senses, 24/7, in the present day.

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Some years ago I wrote what I hoped was an entertaining piece entitled “The 10 Commandments of Risk Management”. I’d love to share it with you but I can’t find it. There, I covered my usual repertoire, risk more when you’re up than when you’re down, pay attention to the small things, set objectives and constraints and live by them, yada, yada, yada. But my 10th risk management commandment was my favorite: obey the real 10 Commandments. Don’t steal. Don’t lie. Don’t kill. Don’t tale the Lord’s name in vain. Don’t covet your neighbor’s wife. I felt at the time that following these eternal rules of life would be accretive to returns, and that failure to do so would have the opposite effect.

As we close the chapter on Q1 ’18 (and I for one am glad it’s over), it is my sense that these righteous rules for the road may be more critical than ever, because we’re about to enter a very trying season, and the prospects of our reaching the Promised Land are a matter of some doubt.

After a rollicking start to the year, investor wrath emerged, seemingly out of nowhere, right around Groundhog Day, when Phinancial Phil most certainly saw his shadow. After the first frosty winds of early February, the SPX has bounced around, but remains, at the point we went to press, a wintery 10% below its recently manifested all-time highs.

My sense is that we’re entering Q2 in true jump ball configuration. With respect to virtually every risk factor/asset class, plausible arguments can be made for rallies, selloffs and stasis. However, by, say, Memorial Day, I believe markets may have a very different look and feel from that which prevails today.

I feel that the main cause of the current opaque conditions is the potential impacts of public policy, and the maddening inability for rational beings to unpack all of the mixed messages emanating from the halls of government. While I’ve made these points before, I urge my readers to be aware of the following two hypotheses: 1) whatever side of the political spectrum one chooses to plant one’s feet, certain policy paths will unleash a significant incremental rally, while others may catalyze a truly nasty selloff; and 2) whatever the outcomes of 1) the results will set a strong tone for the rest of the year and perhaps beyond.

To resume where they left off in late January, the markets need a number of factors to break their way, all achievable but each littered with doubt. They require strong earnings and quarterly macro numbers. Encouraging forward guidance from corporate chieftains is equally (if not more) essential. But perhaps above all, what is needed is some sense of stability emanating from the banks of the Potomac.

If one casts a tunnel-vision eye on private economy dynamics, there is ample reasons for optimism. Current Q1 earnings growth estimates have risen strongly over recent weeks and are clocking in at an eye-popping 17.3%. And, given the lower valuation elevations that currently prevail, on paper, there’s a tantalizing combination of profit traction and multiple contraction:

But even these, or so say the soothsayers, are in large part an artifact of a tax reform effort which, in retrospect, was arguably a heavier lift than it should’ve needed to be. The odds on likelihood is that once Easter is over, the governmental powers that be will need to have pulled some rabbits out of their collective hats to continue the happy corporate vibe.

And I’m just not sure this is in the cards. As someone who would prefer not to write about politics, and as a guy who was and is hoping that Trump will succeed, I will admit to increasing fear that he won’t hold this together, and if he doesn’t, it’s look out below. His inability to resist placing himself, virtually every moment at the center of whatever infantile psychodrama captures his wandering attentions is starting to wear thin — among even his most ardent supporters. And, while I believe investors are begging to have the opportunity to interpret policy trends as being accretive to business and markets, every time another key advisor quits (or is pushed out) under dubious circumstances, every time he tweets out an ad hominin attack on a perceived enemy, or worse, a public corporation that has gotten under his skin, I believe it further undermines confidence in the prospects for the capital economy.

If the sobriety of the proceedings further deteriorates, I don’t see how the capital markets, which should be feeling the first green shoot benefits of tax cuts and regulatory reform, can avoid losing some of their vigor. And you can look this up: Q2 economic trends in a mid-term election cycle are perhaps the most important determinant of electoral outcomes. It’s clear as day to me that if the mid-terms go badly for the Administration, a Democratic Congress will bring Articles of Impeachment to the floor. And they will pass them. They really don’t need more than a one-vote majority in the House to take this step, and I believe they will move on even the thin gruel of evidence that exists at the present moment. Because impeachment is a political, not legal process, unless something truly nasty emerges, they won’t succeed in removing Trump from office – a quixotic struggle that requires 67 senatorial votes. But I don’t think that will matter much to the markets, who will not one bit like the spectacle of impeachment.

The funny thing is, I’m not even sure that the Democratic Leadership wants to go down this path. Like Pelosi to the GOP, Trump is probably the Dem’s best political bludgeon at the moment. But they will have no choice but to proceed, because tens of millions of their constituents are out for blood, and will accept no less.

Surely the best hedge against all of this (again, from purely a market perspective) is a strong showing in the markets and in the economy in the middle part of the year. And it seems to me as though instead of acknowledging this and acting accordingly, the current Administration prefers to undertake an endless sequence of circular firing squads, taking such forms as trade wars, grandstanding attacks on individuals, entities and concepts, whose sins, whatever they may be, are best adjudicated in non-presidential forums.

Maybe Trump doesn’t know this, or maybe he doesn’t care. After all, if worse comes to worst, he can simply hop on his smoke to Mar a Lago and forget the whole sorry mess. But investors should and do care, and this is why I believe that they may read more into the gargantuan string of data points coming our way over the next several weeks than they do when the stakes aren’t so high. On the whole, I think it’s about as important a time as any in recent memory for risk-takers to remain on their toes.

If anyone has a copy of my “10 Commandments of Risk Management”, I ask them to kindly forward it to me. I think the time has come to move Commandment 10 up to the top of the list, and re-issue it. In doing so, I’d hope and expect for the blessings of both Dr. King and Moses. After all, someone has to carry the torch that they pass, and at least with respect to l’affaires des risks, it may as well be me.

Besides, I (too) AM A MAN, and, as this season of prayer and reflection winds to a close, I don’t think that this would be too much to ask.

TIMSHEL

Pathos vs. Bathos: March (‘18) Madness Edition

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Yes, my friends, the eternal debate (is it “Pathos” or is it “Bathos”?) rages on. Moreover, the question applies not only with respect to individual events, but to human existence writ large. In this installment, we will focus on the former, because, in terms of the latter, how can we possibly arrive at a conclusion other than through impact-weighted aggregation of individual experience?

Noah Webster’s Arc (OK; dictionary) defines Pathos as “an element in experience or in artistic representation evoking pity or compassion”. Its usage, however, dates back to Aristotle’s Rhetoric (soon to be made into a major motion picture), and rightly so, because those Ancient Greeks – what with their wars, sacrifices political intrigue and endless, droning debate, seem to have been bathed in the stuff.

Bathos, by contrast has more recent origins, and is perhaps as a result, more ubiquitous in our usages and in our imaginings. After all, are we not all intimately familiar with its original source, the 1727 Alexander Pope essay Peri Bathous, or The Art of Sinking Poetry, which many of my readers can recite, word for word, from memory? However, for the less erudite among us, let’s simply define it as a humorous shift in the contours of an enterprise – to the common/vulgar, from the sublime.

Both pathos and bathos are indelible components of the human equation, carried with us as we first crawled out of the primordial ooze, and are almost certain to be present when our species’ grand purpose has fully run its course, when, presumably, back into the ooze we will sink. Moreover, each concept bleeds into the other – in both visible and opaque fashion – often in the process obscuring the lines of demarcation between the two. This has always been the case, but at various points in our history, said lines become even more blurred.

It appears, my friends, that this is one of those times, and I’d like to take this opportunity to offer some opinions as to which side of the line certain pertinent events predominately fall.

I start on a personal note, wishing a heavenly rest for my friend Tony Glickman, who died suddenly this past Monday. I called Tony “Rabbi” because: a) everybody called him Rabbi; and b) that’s what he was: an ordained minister to the Children of Israel. He went on to attain the lofty position of Rosh Yeshiva (aka, the rabbinical equivalent of capi di tutti capo) at Yeshiva University. For my money, Rosh Yeshiva at Yeshiva is about high on the foothills of Mount Sinai as any mere mortal can hope to climb.

But for all of that, the Rabbi spent most of his career in Finance. Across his storied professional experience, he served as Treasurer of Canadian Imperial Bank for Commerce, Head of Risk Services at both Globe-Op and Northern Trust, and, most recently as a Senior Advisor to the global consulting firm Oliver Wyman. He was a prolific writer and thinker, and though I only jammed with him a couple of times, I can attest that he had some legit chops on the keyboard. He could sometimes overwhelm you with his presence, not everyone “got” him, and I don’t think he’d quibble with me for stating that if you wanted Rabbi Glickman, you got all of him; no partial or smaller serving of Glickman was available on the menu. He and I grew quite fond of one another, and I will miss him. But what saddens me most is that he wasn’t done. Not by a long shot. He remained fully engaged across his wide spectrum of interests and activities until the very minute that the Good Lord took him. So, to the Rabbi I offer a heartfelt “aleha ha-shalom” (may peace be upon you) and render, for the purposes of this installment, the following verdict: 100% Pathos. 

Moving on to (though not entirely) less personal (and entirely more uplifting) realms, I wish to share my satisfaction with U.S. News and World Report Magazine, which, for the first time since it got into the academic rankings game, has listed my alma mater: The Booth School of Finance at the University of Chicago, as the nation’s top MBA program. Yes, I’m pleased about this, but must offer a couple of caveats. First, the paleoanthropic era during which I studied at Chi-U began and ended many years before David Booth stroked in a maharajah’s ransom for naming rights to the program, so, technically, I attended not Booth, but U of C GSB. Second, us Maroon finance types had to swallow the indignities associated with the reality that listings actually showed a first-place tie with our intellectual enemies at Harvard. But I’m going to do my best to forget that part of the story, and offer the judgment that this development is bereft of both Pathos and Bathos.

In the wider world, I note that on Friday, the United States Congress passed its 2018 Budget Bill, and that the President (with a show of trademark bluster) promptly signed it into law. Its record $1.3T of projected outlays implies an incremental annual budget deficit contribution on the order of $300B to $400B, but hey, we’ve got children and (in my case) grandchildren to deal with that, right? The consensus among the talking heads is that the Democrats took their opposite numbers to the cleaners here, shoving in a cornucopia of discretionary bling in exchange for a much-needed increase in military spending. It seems, though, and as stated by others, that the outcome is a win for everybody – except of course American taxpayers. Still, I suppose we needed a budget, and, while I suspect that some of what has transpired will come back to haunt America and its well-wishers, I will shade this towards Bathos, while reserving the right to revisit the call at a later date.

Earlier in the week, and just for additional yucks, the Administration laid about $60B of tariffs on China and the latter has responded in kind. The markets didn’t particularly like this stunt, and for what it’s worth, neither did I. I have read widely the encouraging reassurances that this is all part of a grand negotiation strategy that will ultimately redound to our unilateral benefit. Well, maybe, but I say it’s a risky approach. This thing could spin out of control, in what I fear could be a financial redux of the events that started WWI. There, a rather obscure Archduke from a back-benching, dying empire gets assassinated in Sarajevo, treaties are triggered in domino-like fashion, and the next thing you know, the Western World’s military spends years blowing each other to bits in trenches dug not 100 meters away from each other. That conflict led to a stalemate; the Russians bolted and became the Soviet Union, the free world suffered a crippling depression, and the whole thing had to be settled yet again on the same battlefields, a generation later. I’m not saying that we’re in store for anything so dramatic with respect to this here episode, but then again I’m not saying we’re not, and I am in any event going to give the nod here to Pathos.

Last week’s other earth-shattering event involved the revelation that the Heavenly Walls of Almighty Facebook had been breached by nefarious forces, in the process violating the personal electronic space of 50 million users (including, presumably, yours truly). I was under the mistaken impression that everyone knew, or should’ve known, that this was coming. The core premise of Facebook is that it lets you communicate, creatively and effectively, at no charge, in exchange for allowing them to hoover up your private information and sell it to the highest bidder. This type of thing runs much deeper than what has been reported, and extends well beyond Facebook. I, for one, shudder to think of what type of data mining is taking place in the 3rd sub-basement of Google’s sprawling corporate campus in Mountain View, CA. To whom the content is being distributed, and for what purpose, is a matter I prefer not to contemplate at all. Further, I suspect that although the tying of this episode to the endless stream of nonsense about 2016 election interference was inevitable (not to mention ridiculous), it is instead best interpreted as the first salvo in an unfolding battle that will attack the galactic and accelerating power of a handful of U.S. Tech companies over virtually every aspect of our lives. I won’t elaborate here, but if I’m right, then the action will be both fascinating and terrifying to observe. For now, though, I think the FB thing a pig in a poke, and am going to place the sequence squarely in the camp of Bathos.

Investors, however, found little amusing in the episode, and were dumping FB shares – to the tune of about 15% loss – all the way up to Friday’s close. Between this and our burgeoning Trade War, it was a tough week for the Galant 500, which, largely through a sequence of angry closes, ended the week down a round 6%. The Facebook-heavy NAZ fared worse, down 7.3%. All broad-based indices are now in negative territory for the year.

Please know that I weep at anyone’s financial reverses, most notably those accruing to the holders of the common stock of this nation’s great corporate enterprises. That these losses are manifesting at a particularly inopportune moment – the quarter’s penultimate week (and therefore a matter of mere days before CEOs and fund manager must report results to what we can confidently expect to be a wavering group of investors) – only adds to the pathos I’m feeling. However, I’m not ready – just yet – to call the election and hand the victory to the P camp.

For one thing, I view the latest selloff as being driven more by risk reduction prerogatives than by an emerging consensus about valuation levels. Investors are nervous here, and one can hardly blame them. The non-stop assault on our sensibilities emanating from the shores of the Potomac are enough to un-nerve even the steadiest among us. Here, I blame Trump. He may not have started the infantile set of quarrels in which he is perpetually engaged, but it is he who sets the tone. And now, one never knows, from one minute to the next, whether the government is going to shut down, who is running what department, and whether we will go to war first with Russia, China, Iran or North Korea (just to name a few). The preceding administration was headed up by a guy they liked to call No Drama Obama, and I thought of this as an offensive misnomer. However, 14 months into the Trump Administration, #44 is starting to look like Tom Landry on the sidelines at Texas Stadium.

And if you’re an investor, it’s kind of tough to load the boat under these conditions. But I hasten to remind my minions that economic conditions have not changed dramatically from where they were in late January, when our friend Mr. Spoo was sitting some 285 handles and precisely 10% higher than the levels that prevail as this publication went to press. I see very few signs that the earnings harvest has been cancelled or even deferred. Borrowing costs remain stubbornly low, and we’re in the earliest of innings with respect to the widely hailed bennies from regulatory reform and tax cuts.

None of this is to say that the selloff was in any way irrational, or that it won’t continue. I just think that we’re basically looking at substantially the same world that we inhabited a couple of months ago, when it seemed like the “down” button on the equity elevator was damaged beyond repair. As such, somewhere in here, buyers should re-emerge, and I recommend that, at minimum, investors prepare for such an unthinkable contingency. As for now, I’ll deem the equity election too close to call.

However, there is one development which could decide the outcome at any minute. The SPX is now perched directly on its 200-day Moving Average, and I promised you that it would hold this threshold:

If it breaks through on the downside, from a technical perspective, it has some good ways more it can fall. But that’s not really what’s at issue; I’m much more concerned about this chart making a monkey out of me.

As you know, this is something I cannot abide, even during the wild and wooly days of March Madness. Right now, my bracket reads Pathos and Bathos tied at 2, one withdrawal and one contest undecided.

Given the way the NCAA Basketball Tournament has unfolded, I suspect I could have done a lot worse. Since Round 1, I’ve been warning anyone who would listen not to sleep on my Loyola Ramblers, but almost everyone did. And now they’re on their way to the Big Dance in San Antone. And now I’m advising this same crowd not to sleep on equities, at least not yet, but I fear many of you will. To ease my frustration, I keep telling myself, March ain’t over, and Madness is likely to outlast this and many subsequent turns of the calendar.

There’s both Pathos and Bathos in this, so stay on your toes.

TIMSHEL

A Brief Time of History (or: The Theory of Nothing)

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Perhaps for lack of other “forum-suitable” alternatives, I am dedicating this column to recently passed Professor Stephen Hawking. Please understand, it’s not as though I don’t admire Hawking; it’s just that I’m ambivalent. Among his other accomplishments, he was a miracle of modern biology for having lived out 3x lifetimes under the heartbreaking burdens of ALS. He should’ve died at 25 – at least according to his (presumably highly qualified) doctors, but made it to 76. During the 3 penultimate decades of his life, he held the Lucasian Chair of Mathematics at his Alma Mater: Cambridge University, and was only the 15th so-honored academic — dating back to Sir Isaac Newton, for whom the post was created in what I remember to be the somewhat raucous year of 1669. In a stunt you can file under “stranger than fiction”, the University forced him to step down 10 years ago, because he had reached the mandatory retirement age of 65. He carried on though, albeit as a somewhat controversial figure, and to my mind detracted from his legacy in his final years by spewing out a fairly unhinged leftist socioeconomic philosophy. I prefer that practitioners in other fields – from Charlton Heston to Roger Waters to Colin Kap – refrain from laying their righteous cross-discipline political thoughts on the masses. However, on this St. Patrick’s Day weekend, I’m willing to give Ulster Steve a Mulligan. Let’s just agree that in the Brief Time of His History, he had an improbably magnificent run.

To be sure, Professor Hawking had a flair for mathematics, but when all is said and done, Physics was his game. Here, he went both big and small, adding significantly to the world’s understanding of the ordering of the Universe (the behavior of Black Holes, the dynamics of the Big Bang, etc.), but also studying the equally fascinating world of atoms and sub-atomic particles. Alas, he never found his Holy Grail: the above-referenced Theory of Everything, which seeks to reconcile Einstein’s Theory of Relativity with the attendant misbehavior of both sub-atomic particles, and celestial objects travelling at velocities beyond the Speed of Light. The latter set of miscreants operate under a concept called Quantum Mechanics, and, thus far, no matter how much intellectual capital we allocate it, humanity has failed in its quest to harmonize General Relativity and Quantum Theories.

Beyond his heroic endeavors to overcome a disability that proved to be too many for the likes of even Lou Gehrig, he is perhaps best known for dumbing down his work for consumption by the masses, as embodied in his 1988 book “A Brief History of Time”. It was an international sensation, but was ironically panned by some critics for being too pointy-headed, and by others for not being sufficiently so.

I read it many years ago, and enjoyed it. And my main takeaway was the remarkable similarities between the behavior of the Universe as we observe it, and those of every single cell that exists therein. I may have misinterpreted something somewhere (nobody would ever accuse me of being a physicist), but when I completed the reading exercise, I took its main message as being that every cell that exists in the cosmos is its own universe, and that the Universe itself can be thought of as behaving like an individual cell.

To me, a such a sublimely symmetrical concept, if not precisely accurate, ought to be so.

And it got me to thinking (natch) about analogues to the markets. And here I will posit a corollary: the entire global capital market can be viewed from certain perspectives as behaving like a single security, and each such security has strong behavioral similarities to the global capital market itself.

As is the case with Hawking’s “Time” theme, I feel that if this isn’t the so, then it ought to be.

But let’s not dismiss thing out of hand, OK? I believe I’m on to something here. Think, if you will, of the world’s markets as being a single financial instrument. Like many existing securities, it has a lot of moving parts. But then again, so does (or did) General Electric. And so does Berkshire Hathaway. Its Balance Sheet contains an impossibly complex mix of privately held assets, collectively held assets, receivables, payables, commodities, real estate, foreign exchange holdings, embedded derivative structures, and even, perhaps, a smidge of Goodwill. This complexity, however, in no way precludes investors from asking the fundamental question: is the market something that I’d want to own at prevailing price levels, or is it not? Across the span of time and conditions, when they have answered in the affirmative, markets go up, and vice versa.

Similarly, one can view every single instrument as an entire macro economy. Whether it be a stock, bond, commodity, physical asset or unit of account (Foreign Exchange) it bears elements of all human endeavor within it. Just as (according to Chaos Theory) a single butterfly flapping its wings in Brazil can cause a tornado in Texas, so too can a default of a Small Cap widgets manufacture in Singapore cause a collapse of the entire American Cotton market.

Across our quixotic journey through the heavens and inside the mystic universe of particles, Newton’s (old school) Second Law of Thermodynamics, which holds that an object at rest or in motion will remain in said state until it is acted on by a material force, seems, by and large, still good to go. The Law still applies pretty well to Quarks, Higgs Bosons, Black Holes, Super Novas and the like.

In addition, it appears to retain its validity in terms of market pricing behavior.

Over the past couple of installments, I have suggested that as Q1 winds down, not a great deal of price movement would be observed in any asset class. So far so good, but why? Well, if we analogize economic information to the “material force” component of Newton’s 2nd Law, then it may very well be that, as I assumed, the information calendar slowing to a seasonal crawl has frozen the majority of current prices in an “at rest” state. After a little bit of two-way movement early in the week, the Wed-Fri range on the SPX was all of 20 handles. The yield on the U.S. 10-Year note hug snugly within 5 basis points. Ditto in terms of for the FX complex price ranges. On a relative basis, there just wasn’t much going on, and this is reflected in the flat-lining of a whole bunch of price graphs.

Yes, there were a few data nuggets to digest. Industrial Production was a blowout – highest in seven years. But Retail Sales and Housing Starts were absolute duds. Let’s call it even.

Elsewhere, our Washingtonian version of “Being for the Benefit of Mr. Kite” (“full of men and horses, hoops and garters; lastly through a hogshead of real fire”) carried on in full swing, and continues, if not to the delight, then, at least not to disappointment, of observers everywhere. A soon to be eliminated Pennsylvania Congressional District slipped, improbably, into the hands of the Democrats. Tillerson was fired on a tweet; Kudlow brings his pin-striped cable TV personna to the West Wing office most recently held by the less telegenic Gary Cohn. McCabe got his butt canned, ostensibly to deny him his estimated $1.8M pension package. Here’s hoping (and expecting) that some private sector coastal fat cat will scoop him up, stash him into a cushy spot, and make him whole. Meanwhile, the rest of us will continue to suffer through cross-fire emanating from both the Left and the Right.

The trade war of words continues unabated and is likely to further devolve before any subsequent igration towards the Heavens.

Some of the above is sending signals that threaten to disturb our temporary state of blissful economic equilibrium. Q1 GDP estimates have come careening downward in a rather alarming fashion:

I’m not entirely sure that anyone saw this coming. And about the only root cause I can identify is the already unfolding consequences of the tariff policy, along with general uneasiness regarding international relations.

If one wishes to look for signs that any of this matters, one should point one’s attention to Fixed Income markets. But here, as is so often the case with respect to the cosmos in general, one may be left with more questions than answers.

Consider, for instance, that the Treasury’s latest extended frenzy of issuance has simultaneously acted to flatten the yield curve, while causing some immediate mark-to-market losses for patriotic purchasers:

But that’s the type of tape we’re in. Perhaps next week’s FOMC Policy Statement – the first ever to be issued by Chair Pow, might bring some clarity; but more likely not. I just don’t see him doing anything but raising rates by 25 bp, while uttering some ambiguously pleasing and platitudinous words about the upward trajectory of our economic fortunes.

However, as is the case with everything in this here universe, current conditions won’t last forever. Once the calendar turns to April, the magnetic flow of data should be sufficient to cause investor types to rethink their hypotheses, and to effect attendant material price movement.

But for now, very little is discernable to reconcile the General Relativity of the markets with its befuddling tendency to engage in quantum-like calisthenics. If ever this riddle is solved it will, enable us, as Hawking wrote in “Time”, to “know the mind of God”.

By all accounts, though, Hawking was a wandering agnostic, sometimes placing his faith in divine purpose; at other moments rejecting it on conceptual grounds. Maybe, at the time of his demise, he leaned towards the path of righteousness. I mean, after all, he was born on the 300th anniversary of Galileo Galilei’s death, and died on Einstein’s birthday.

The latter calendar date: 3/14, is known among the egg-headed as Pi Day: as it corresponds with the constant that will give the area and circumference of every circle for which a radius can be supplied.

If there’s an over-riding message here, it’s that markets, as the universe itself, travel a circuitous path, and we’d be well-advised to remember this truism in our risk-taking endeavors. This is not a Theory of Everything, but neither is it a Theory of Nothing.

TIMSHEL