All that is gold does not glitter, 

Not all those who wander are lost; 

The old that is strong does not wither, 

Deep roots are not reached by the frost. 

— J.R.R. Tolkien 

I lifted this poem from Tolkien’s “Fellowship of the Ring” – the first volume of voluminous and the now-ubiquitous “Lord of the Rings” Trilogy. But as has been consistent with the protocols of this forum, I have this rather startling and embarrassing confession to make. I’ve never read Tolkien, not even the Trilogy’s widely-considered-more-accessible prequel: “The Hobbit”. And no, I’ve never seen any portion of the film sequence. Not one minute of it.

In the days of my youth, Rings was all the rage. I even knew a couple of particularly erudite brothers who were part of a Tolkien Club, which analyzed and re-enacted scenes, etc. In solidarity with my betters, I bought these books, but could not get through them. Then Tolkien disappeared from the scene for about a generation, but was resurrected, around the turn of the Millennium, in (it must be said) glittering, fashion by those crazy kids in Hollywood. JRRT had been dead for about a generation by then, but boy oh boy, had he lived, would he have been happy. And rich. The Rings Trilogy not only copped an astonishing 17 out of the 31 Oscars for which it was nominated, but generated a box office gross that places all 3 in the top 50 takes of all time.

So clearly there must be something there, and our little poem, which appears twice in the text of “Fellowship”, reinforces this notion. But the glitter/gold thing does not originate with Tolkien. Indeed, it had been used, in various forms, by stone cold ballers ranging from Chaucer to Shakespeare. And even them guys took poetic liberties. Some references in literary history trace the glittering gold reference all the way back to Aesop, who did most of his writing about 600 years before the birth of Jesus.

So, while that more famous line does not strictly belong to Tolkien, it should be noted to his credit that he cleverly inverted it, advising his readers that all that is gold does not glitter. Moreover, the next phrase in the sequence, the elegant, thought-provoking observation that not all who wander are lost, appears to belong entirely to him. However, it strikes me that this phrase also lends itself to inversion, as it may very well be the case that all who are lost do not wander. 

I can cite my own experience in support of the foregoing. Though I have often felt lost, perhaps out of laziness, I seldom wander. 

And I’m not alone in this practice. To wit, it can be argued that the inverted version of the phrase applies to current market conditions. Consider, for instance, our equity indices, which we observe as being in single-direction motion, namely upward. Their refusal to diverge from their set course takes various forms, but let’s consider a just this one. As of Friday’s close, the SPX achieved a record set of consecutive sessions (241) during which the index has failed to yield as much as 3% of valuation ground.

A determined march in an identifiable direction is arguably the antithesis of wandering. If my theme has merit, though, this doesn’t mean they aren’t lost. So are they?

A lot of smart folks with whom I deal would answer in the affirmative. They observe in frustrated awe the unfolding rocket ride of our equity complex, click their collective tongues, and darkly suggest that wherever Mr. Spoo and General Dow, Captain Naz and Admiral Russ are headed: a) they will be unaware of their precise coordinates; and b) they may be impelled to reverse course when the reality of a) hits them.

Unfortunately, I’m not in a strong position to predict with certainty whether or when these darker hewn prognostications will come to pass. However, I can state with some confidence that if they do, then the equity complex, though not wandering, would fairly be described as being lost. 

Further, if said complex is in fact missing, it might be due to a trend illustrated in this handy little graph making its way across my Linkedin feed over the last few days:

Now, I’m not sure the source of these time series, but the numbers appear to be approximately correct. And if so, the solution to our problems is obvious: the markets need more hedge funds! Maybe lots more! I mean, if there are only now two fund platforms available to hunt down each listed equity security, then how are we supposed to find the little buggers? Perhaps, if the ratio increased to, say 3:1 or even 4:1, we’d stand a better chance.

But setting aside the troubling flatness of the hedge fund growth curve over much of this decade, one might do well to train one’s eye on the disturbingly diminished number of listed equities available to buy and sell – a figure that has dropped by nearly half over the last couple of decades. This trend reinforces one of the main themes of my most recent written rants: an increasingly alarming imbalance between the supply of, and demand for, marketable securities.

For me, the problem begins in the bond markets, with the persistence of global QE serving to catalyze the hoovering up of all govies – immediately upon issue (if not beforehand). As such, if you wanna trade something, it’s almost gotta be equities. But with low borrowing costs and miniscule yields that have characterized the debt markets for several years, the appropriate response – particularly for large conglomerates has been to borrow, acquire and bury incremental available float inside corporate treasuries.

I will stake some proprietary claim on this hypothesis, and, if pushed, can back it up with evidence, but the idea is catching on. Over the weekend, I read something pithy by some hedge fund dude which points out that stock buybacks account for 40% of post-crash earnings growth, and that in 2015 and 2016, public corporations spent more than their entire aggregate operating income buying their own stock and issuing dividends.

If I’m making myself less than clear, perhaps the following chart will reinforce the point:

There’s some other stuff in this note that I found less than compelling, but I don’t think one can misinterpret the implications of reduced of supply on equity prices.

I foresee no imminent end to this technical imbalance, but clearly, it cannot go on forever. On the other hand, it could continue for quite a spell, and, as long as it persists, I believe that so too will the rather perverse immunization of equity securities (and, for that matter, bonds of all forms) from price effects created by risk-enhancing or downright negative news flow.

This past week’s annoyingly predictable climb to yet again another set of all-time record valuation levels was catalyzed in part by the custodians of our government policy. Surprisingly, and again against the consensus smart thinking, the members of the World’s Greatest Deliberative Bodies managed to actually come close to passing a budget framework. In turn, or (so the thinking goes) this sets the table for that swell tax cut we’ve been promised by the ruling party.

The mere hint of these tidings caused equity investors to swoon with delight, and then buy up every available share of every stock in sight on Friday. Consider, for example, the case of General Electric Corporation, the stock of which has been perhaps the hottest dumpster fire of this improbable year (it’s underperforming the SPX by nearly 40% this year: down 25% vs. up 13% for the index). On Friday morning, newly anointed CEO John Flannery strode grimly to the podium to announce the Company-that-Never-Misses’s first earnings disappointment in 10 quarters, along with plans to divest of some $20B in business lines. For a brief moment, investors showed their ire, actually selling of the stock down by a little more than 1%. By mid-morning, however, they had returned to their senses, and GE actually closed up by an equivalent amount.

And as for those tax cuts, well, I reckon we’ll see. I suspect that the Pachyderms will indeed push something through, especially with their increasingly alarming election prospects now looming just one short year on the horizon. But we’ve seen these guys soil themselves before, and come what may, I expect the final product – if we ever get there – to look much different than and diluted from what is being described to us. Good luck with that removal of mortgage interest deduction kids, and (while we’re at it) with the elimination of the state and local income tax offsets.

In the meantime, next week marks the busiest section of the Q3 earnings sequence, with nearly 200 companies reporting. On Friday, we’ll also get our first glimpse at that mulligan inducing GDP print. I don’t see any of this knocking the indices off of their determined path.

But I will admit to remaining a bit lost. This is nothing new to me, but it is getting increasingly bothersome. Perhaps I should knuckle down and read some Tolkien. Or at least dial up the movies. But given the length of these writings and film Hollywood Blockbusters, this could keep me distracted for months, if not years.

Let me know how you make out.

TIMSHEL

Financial Types, Risk Takers, Classic Rockers, lend me your eyes. I come to bury Petty, not to praise him. For the good in men’s catalogues bombards our playlists, while their drek is oft interred with their bones. So let it be with Petty….

And that’s about as far as I can go to mash up Willy Shake and TP.

I noted Petty’s passing with mixed emotions. Of course, it was sad that he died – for the heartbroken Heartbreakers, his family and his fans. I will also give him his props for his visceral understanding of the difficult-to-define-but-unmistakable-when-you-encounter-it rock idiom, and for doing his best to pay it forward.

But, perhaps (nay, almost certainly) unfairly, I hold him accountable for rising higher in the rock pantheon than I believe he earned. Some of this is quite personal, so bear with me if you can. For me, the allure of music of all types (and perhaps rock and roll as much as any other genre) begins and ends in the composition phase. I fell into a lifelong state of obsession because of the songs. And, having written a few myself, I have recognized the supreme challenge of achieving success in this regard. To write something original, astonishing, and yet pleasing to the finite vocabulary of the human ear, is akin to being a consistently successful NFL QB. From this perspective, rock exploded to divine altitudes over a brief period between, say the mid-60s and the early 70s. As long as our aural cavities remain useful receptacles, we’ll be rocking to the sublime output of the period, as produced by (yeah, you guessed it) the Beatles, Dylan, the Stones, Hendrix, Janis, the Doors, Zep, Pink Floyd, the Who, the Dead, the Kinks, etc. But that once in many centuries era of discovery ended as quickly as it began. The Beatles broke up in a hissy fit. Jimi, Jim and Janis all inevitably perished. Zep and Floyd had topped out by the mid-70s, and they and the rest of them geniuses (here, of course, I’ll carve out Dylan, but I AM talking to you, MICK) have spent the subsequent decades mailing it in.

Not to worry, proclaimed the musical press. The torch has been passed to a new generation, and they will carry on like never before. The group designated to lead the charge included Springsteen, U2, Bowie, Queen. And Petty. Of these, I believe that only Bowie (and perhaps Queen) lived up to this promise. But Petty, as much as any other performer, grabbed the spotlight. And though it would have been, particularly in retrospect, a ridiculous demand that he or his peers create sonic pleasures on the order of, say, “Blonde on Blonde”, “Abbey Road” or Neil Young’s “After the Goldrush”, they clearly fell short of this standard. After Petty died, I conducted a little mental experiment and came to the conclusion that there aren’t more than one or two songs in his catalogue (“Refugee” comes to mind) he ever recorded that would’ve been good enough to be included in, say, Goldrush alone. I took this personally, because these failures denied me the delights afforded to our older brothers and sisters, whom I envied for the unexcelled pleasure they must’ve experienced when they purchased “Sticky Fingers” on the day of its release, and placed it, for the first time, on the turntable. By the time I got hip to any of this (and I was an undisputed early adopter), all I got was the accessible but deteriorating stylings of “Goats Head Soup”. And it was all downhill from there. We carried on as best we could, but guys like Petty let us down. I’m not done yet. Petty also kind of irritated me because of his elevation to the status of peerage by his
betters, most notably Dylan, Jerry Garcia and especially George Harrison. Oh George, you know in your heavenly heart of hearts that he wasn’t your equal, but you treated him as one. And while he not only benefitted but did the best he could with this gift, he (and by implication, you) he never merited this status.

And now he’s gone, and the world cries its crocodile tears (meanwhile, the death of a better songwriter/guitar player: Steely Dan’s Walter Becker, passed largely unremarked by the world at large). Something tells me we’ll survive the blow. This is the worst I have to say about Mr. Petty, and I beg your forgiveness for having said it. I do wish him a sweet and blissful rest, and will do my penance by using his lyrics (which rarely demanded much thought on the part of his listeners) to set our theme for this week.

We can begin, as Petty might’ve wished, by offering the observation that whatever else can be said about Mr. Market, for the time being at least, it won’t back down. Nay, it continued its heavenward climb, with each of our favorite indices setting four consecutive all-time highs last week. Year-to-date, domestic and indeed global equity benchmarks, while reaching never-before-manifested elevations, are doing so at improbably high Sharpe Ratios of >2.0 and gravity defying Sortinos of ~5.0. At the moment, you can stand them up at the gates of Hell, and they’ll stand their ground; won’t be turned around. Then came Friday morning, and the mixed tidings of the September Jobs Report. Investors had dampened expectations due to the storm drenching experienced in our southern realms, but the number came in below the bottom end of the range: Private Payrolls actually declined by around 40,000 gigs, the first drop in this metric in 7 years. U.S. equity investors did indeed take notice of this, and actually ginned up a decline in the index – to the tune of 0.01% — 1 basis point – on the Dow Jones Industrial Index (the Naz, true to its name, actually closed up). It might be fair to state that thus far the selloff fails to rise to the dignity of either the ’29 or ’87 crashes.

Now, one might surmise that a weaker than weak jobs report might catalyze a bid in the interest rate complex – which, unlike equities – has been under what passes for some pressure of late. But one would be wrong on that score. Govies sold off modestly, adding nearly a big fat basis point to yields on the 10- year note.

The logical inference is that the “risk on” regime continues to dominate the proceedings. And there is some justification for this. While investment markets are nothing if not frothy, this here geriatric economic recovery appears be gathering steam. Other elements of the Jobs Report (Base Unemployment Rate, Average Hourly Earnings) brought tidings of labor market tightness. The Q3 Earnings Reporting cycle begins next week, and in addition to an encouraging sequence of positive pre-announcements, the likelihood is that investors will be in a hurricane-induced forgiving mood in terms of both results and forward guidance.

Here, I hasten to mention that the upcoming CEO recital series is what us ballers like to describe as the Kitchen Sink Quarter. Big shot Biz Executives often use the Third Quarter to throw the wettest blanket they can find on their proclamations, so as to look extra-good in Q4, when their compensation is set. Similarly, with just over 10 weeks left in this improbable year, professional investors are not likely to hazard the negative performance implications of divestiture of key holdings. The confluence of these dynamics leads me to believe that investors will be in a generous mood when they evaluate the words of wisdom issuing forth from corporate podiums across this great nation.

So what will make this market generate the Breakdown that Mr. Petty so plaintively requested? Well, my answer for the moment is: nothing on the visible horizon. If one can turn one’s eyes away from the horrors of Vegas or the hypocritical chicanery of one Mr. Weinstein, there are some fairly menacing but obtuse comments issuing forth from the White House lately. While short on details, they imply assertive action in some remote quarter of the globe – perhaps Iran or North Korea for instance. If so, perhaps investors won’t like what they hear, but I wouldn’t bet the ranch on it.

What I do think may be on the horizon is a more politically sensitized tone to the markets. After having whiffed entirely on Health Care, the Republican Caucus is turning its attention towards the Big Enchilada: Tax Reform. The early returns here look anything but promising. And though this is only my opinion, it appears to me that the chances for passing anything meaningful and/or accretive in this realm are about the equivalent of those tied to Health Care a few months ago.

Further, I feel that Wall Street is the main culprit here. Having for many months ignored or put an unjustifiably positive spin on all data flows, investors are incentivizing political actors to do — exactly nothing. If the current paradigm remains in place, come the holiday season, members of the 114th Congress will return to the welcoming arms of their constituents bearing the gifts of full employment, absence of inflation, and yes, record asset valuations. If anyone thinks that under these circumstances, our timid legislators will come together for any action bearing even a modicum of risk, they should think again.

Conversely, if investors were to band together and actually sell a few stocks, it is my belief that those lovable guys and gals in the Senate and the House would gather themselves in a manner reminiscent of the 73rd Congress, ushered in with the first inauguration of Franklin Delano Roosevelt. Within 100 days of convening, they had set the framework for the New Deal, created the Securities Act of 1933 (which still governs investment to this day), established the Federal Deposit Insurance Corporation and implemented Glass Steagall – a separation of banking from securities business that lasted until the ‘90s, when Sandy Weill found the law inconvenient to his plans to merge Citibank and Salomon Brothers, and convinced his pal Bill Clinton to strike it down.

That kind of presidential loving is hard to find – at least this side of Monica Lewinsky. So whatever else might be said of Sandy, perhaps we can all agree that he got lucky, babe.

But absent any kind of breakdown emanating from Tehran, Pyongyang or (scariest of all) Washington, I expect that the markets will remain in “buy” configuration, and encourage you to act accordingly. Investors aren’t likely to screw up the rest of the year, and it’s anyone’s guess when they belatedly wake up and send appropriate signals to Washington. At that point: a) it may be too late to salvage the market-friendly opportunities afforded by the results of the 2016 election; and b) investors are likely to overreact to the downside when, at long last, this reality hits them.

So, for those looking to capitalize upon such a downward reset, it is my duty to remind you of Mr. Petty’s glib admonition. The current free rising market paradigm cannot last forever, but the waiting is indeed the hardest part. For Tom, the waiting is over, but it did indeed last quite a while. The last time he recorded anything to which anyone paid any attention was 25 years ago. For the rest of us, the waiting continues. Markets continue to defy gravity, and every day we draw one more card.

Let’s play them wisely, shall we?

TIMSHEL

Yup, that’s my advice – at least for the time being. If you got ‘em, the time may have come for you to smoke ‘em. I’ll elaborate shortly, but first, a little historical context in order. The origins of the phrase reach back to WWII, as a middle 20th century variation on the command: “At Ease”. During those infrequent intervals when our boys were not forced to contend with the likes of the German, Japanese (and once in a blue moon) Italian armies, their field commanders would suggest that they kick back by issuing the following order:

“Smoke ‘em if you got ‘em”.

Approximately a generation later, the progeny of the Greatest Generation inverted the phrase into the form I have selected for our title, and it took on an entirely different meaning. Suffice to say it was embraced enthusiastically by Baby Boomers as an anthem of sorts. For a time at any rate, they always had them, and, having, they smoked them.

Fast forward to more recent times. In the high flying world where I roll, a Smoke is now vernacular for a Private Jet – perhaps the most unambiguous symbol of elevated status that exists today. If you’ve really hit the big time, you fly your Smoke to places like Davos to discuss global warming. But even one level down, where you mostly use your Smoke to fly you between your bi-coastal residences, and (if the spirit moves) to the Super Bowl, you have scant cause for complaint.

But I do. Have cause for complaint, that is. Because though it pains me to admit it, I do not, at the present time, nor have I ever, owned my own Smoke. And given that the season of atonement is upon us, I may as well disclose that while I’ve ridden on a few Smokes, I’ve never even had routine access to one.

Neither, apparently, had (now former) Health and Human Services Secretary Tom Price. Until recently, that is. As a stone cold member of the Trump Cabinet, he managed to rack up about a million bucks of travel charges – in less than six months – using transports known among us players as Government Smokes: Smokes that are owned by taxpayers and funded by their dollars. Thus, whatever else one wishes to say about Flying Tom, one cannot accuse him of having ‘em but not smoking ‘em.

It should be noted, however, that Flying Tom was not the first government official to roll like this. Among those that blazed the aeronautical trail before him, at least according to published reports, are Former Attorney General Eric Holder, and current Special Counsel Robert Mueller. Presumably, though, even they weren’t the first to smoke on the pubic pipe. Here, I’m thinking Smoking Joe Biden (who never seems to have two nickels to rub together) and maybe even former Chairman of the Federal Reserve Board William McChesney Martin. Moreover, though they didn’t have Smokes back in his time, one can envision that if they did, T.R.’s Secretary of State Elihu Root might’ve been a likely candidate for this type of flying, five-finger discount.

As for Secretary Price, though, once caught with his fingers in the gravity defying cookie jar, he not only quickly owned up to his sins, but has tried to make amends – by reimbursing the government an amount equivalent to the cost of a single seat on a commercial. But it wasn’t enough. Trump bailed on him in lightening quick fashion, and, by Friday, he was gonzo. The post of HHS Secretary remains open at the point of publication of this column.

I tend to agree with the pundits who have suggested that the President might’ve done more to stand by his man across this episode, but I do find some irony in Mr. Price’s having flown too far on the public dime, using the world’s most elite form of transportation, and then being thrown by the President under the most proletarian of travel modes – the proverbial bus.

But I’m not sure anyone should be laughing here – particularly the members of, and those sympathetic to, the current administration, which just experienced one of the worst weeks in its short history. Big Don backed the wrong horse in the Alabama Republican Senatorial Primary, who may have been better off had the big fella not thrown support his way. In annoyingly trademark fashion, he has waged an unwinnable battle with the players in the NFL, in the process distracting from the entertainment value of what I believe to be the world’s leading form of commercial amusement, and confusing everyone about: a) what the issues are; and b) who’s on which side of the argument. Not content with this, he entered into an even more futile cat fight with the Mayor of storm-savaged San Juan.

He released details of a tax reform plan that must travelled a tortured path indeed if it ever is to be enacted, and, at best, is likely to look entirely different when (if) it comes to his desk for signature. And if it fails, it may seal the status of 115th Congressional session over which he presides (and in which his party holds majorities) as one of the ineptest in history. The 116th may look bear very little resemblance to its predecessor.

The week also brought the latest breakdown in what the mainstream press repeatedly calls the “last gasp” of ObamaCare repeal efforts. And just as this defeat became manifest, he forced out of office the Secretary of the Department that is tasked with the execution of the laws that oversee the concept.

But not much if any of this, appeared to trouble the investor class, which managed to bid up domestic and global stocks to yet another record, in the process closing them at their dead highs – all at the end of the 8,637th consecutive quarter of gains. Meanwhile, the VIX closed at a record low of 9.59, but that hasn’t stopped investors from piling in on the short side of this trade, as short interest for VIX futures continues to set daily records. It perhaps bears further mention that this incremental crushing of index volatility is transpiring at a point in the calendar that typically generates the greatest amount of price dispersion.

Like I say, if you got ‘em, smoke ‘em.

Most other asset classes are showing more bi-directional volatility. The USD has gotten off the schneid a bit, and bonds are selling off across the globe. The bubbling crude had a big week, and the confluence of activity across rates, FX and commodities suggests that somebody out there is expecting some sort of action.

With respect to these and other imponderables, I hasten to remind you that the fascinating year of 2017 is now 3/4ths over (a pessimist might describe it as 1/4th incomplete), but that what type of year it actually turns out to be may well be determined over the next month and a half. Next week is data-light until Friday, when the September Jobs report drops. By all indication, the BLS will be given a statistical mulligan, as last month’s unfortunate storm sequence is expected to dilute the outcome. Shortly thereafter, the earnings reporting cycle begins, and for the first time in a dog’s age, the bar is actually pretty high.

On balance, I continue to like ‘em here. Equities, that is. Maybe Bonds too. I simply believe that the current upward trend will continue until it is impelled by outside forces to reverse course, and I don’t see these forces gathering anywhere – at least for now. Yes, they’re out there, but until we can see the whites of their eyes, well, you know.

In addition to the foregoing, as Q4 unfolds, we’ll bear witness to incremental Washingtonian statesmanship, further developments in the Mueller investigation, perhaps some shenanigans from Pyongyang, and, if we’re lucky, maybe an extension of the fabulous Hillary Clinton “I take full responsibility but everyone else is to blame” Book Tour.

All of this (particularly the last item) indeed makes me want to smoke one, but the plain truth is that I haven’t got one to smoke. Hopefully you do, and if so, I reiterate my belief that now’s the time. If the spirit moves and you get in touch, perhaps I’ll join you. But one way or another, I encourage you NOT to let the opportunity pass you by. It could be quite a spell before another one comes your way.

TIMSHEL

Amid the crescendo of athletes and entertainers heroically using their highly paid platforms to lecture the less informed among us on topics of morality, the time has come for me to join the chorus. As everyone presumably is aware, I’m known throughout the world – primarily for my singularly tasty guitar chops, but the truth is that I occasionally sit down at the keyboard bench, and hope for the best. Here, I face the following problem: I can only play songs in the Key of C. The main reason for this is that on a piano, the C Major scale features all white, and no black key notes. And though I’m not proud of this, I am forced to admit that those pesky black keys throw me off. So when banging away at the 88 finger machine, I tend to stay at home. In the Key of C.

All of this got me to thinking: is the Key of C racist? 

I sure hope not, because (trust me on this) C is an important key – particularly for Rock and Roll. Without it, some really good songs either disappear entirely, or need modification away from their current state of perfection. A small sample of the types of compositions impacted (and likely not for the better) would include (in my judgement) C King Bob Dylan, whose Hard Rain”, “Like a Rolling Stone”, “Just Line a Woman” and “Blowing in the Wind” reside in C-space. In addition, there’s the Stones’ “You Can’t Always Get What You Want”, “Let it Bleed”, “Brown Sugar” and “Can You Hear Me Knockin”. The Beatles use C for (among others) “Across the Universe”, “Let it Be” and “The Continuing Story of Bungalow Bill”. And the list goes on and on. There’s the Allman Brothers’ “Whippin’ Post”, Jerry Jeff Walker’s “Mr. Bojangles”, The Eagles’ “Take it to the Limit”, Bowie’s “Space Oddity”, Blue Suede’s “Hooked on a Feeling”, and of course, Brewer and Shipley’s “One Toke Over the Line”.

I could go on, but presumably you get the idea.

I should also mention that one of my all-time heroes (and no, I don’t care what you think about this): Former Secretary of State Condoleezza Rice, a virtuoso pianist in her own right, once famously said that all music eventually converges back to the Key of C. As a sharecropper’s daughter who rose to great heights, one would have a difficult time accusing her of racism, so for the time being, I think it would be wise to get of the Key of C’s nut.

If we can do this, perhaps in these touchiest of times, we can cut each other some slack on a broader range of subjects. Maybe, for instance, we can stop calling each other nasty, hurt feeling names. But I don’t hold out much hope on that score. Especially with the news flow dominated by two military chieftains derisively calling one another Rocket Man (original song in the Key of G) and a Dotard, respectively. I could even live with this if there weren’t the small matter of nukes being involved. But they are. Involved, that is. Nukes, that is.

In fact, as the clock moves inexorably forward into Autumn, this Trans-Pacific lack of civility is perhaps the biggest risk factor that we as investors face. And it would not be wise to discount it, because, of course, this is serious business.

Deadly serious.

And I’m having a hard time envisioning how the world avoids an unpleasant showdown here. By all appearance, we’re a hair trigger away from a full blown military confrontation, and unless one side backs down (unlikely) that’s where we’re headed – perhaps sooner rather than later.

But presumably, you’d prefer to obtain geopolitical insight from other sources, so suffice to say that from a market perspective, other looming, vexing hazards appear to be on the wane. The government didn’t shut down – yet. The White House appears to be adopting at least a marginally more adult-like demeanor. Two horrible storms hit our southern shores in terrifying sequence, but both storm centers appear to be constructively starting the slow process of rebuilding and recovery. Political unrest appears to be at least marginally on the wane across the globe.

QIII/17 ends this Friday, and shortly thereafter, we’ll be looking at earnings, GDP and other metrics that present themselves at routine 3-month intervals. With respect to the former, it would appear that the perky trends of preceding quarters may continue. As of now, positive pre-announcements are coming in at the fastest pace in, well, in quite a spell.

In fact, they are clocking in at record levels:

In general, I think that the risk environment has improved materially as we enter the 4th Quarter, and I wouldn’t be surprised if some of our favorite markets start on a small tear. Of course, I make this proclamation after a flat week for the SPX, but this bothers me not at all. After spending four full months within the 24 handle, the Gallant 500 is likely to move somewhere, and I don’t think the direction is going to be down.

Some of my thinking derives from a strengthening belief that the global shortage of marketable securities is becoming more acute with each tick of the clock. There are simply too few stocks and bonds available to meet incremental investor demand. If you doubt this, consider the reality that on Wednesday, the FOMC did indeed announce the beginning of its long-anticipated divestiture process. Think of this as a reverse QE. To wit, just as the Quantitative Easing process involves creating new currency to purchase existing securities, so too does Balance Sheet Reduction destroy currency (in the form of Central Bank Reserve reduction) for the purpose of selling existing securities. QE drove rates down dramatically; the announcement of Balance Sheet Reduction drove them up – to the tune of 3 whole basis points!

But life is pretty sweet if you’re a Central Banker these days. You own assets and carry liabilities at rates of your own choosing, so you can do pretty much what you want with impunity. If the spirit moves, you can print new units of your own currency. Perhaps this is why there was such a wild bid on the stock of maybe the Central Bankiest of Central Banks: The Swiss National Bank. It is the only organization of its kind that trades on public markets, it borrows at negative rates, and its stock has doubled this year:

I’d say that even at ~CHF 4,000, the stock is still a buy, but good luck getting your hands on any. There are only 100,000 shares outstanding. Compare this to, say, Fifth Third Bank of Cincinnati, OH, the 15th largest bank holding company in America, which has 736 million shares on the open market.

But as to the broader market, again, all signs now point upward to me, and if it weren’t for the looming Rocket Man/Dotard throw down, I’d say that we might be poised to go on a major ripper.

Yes, stocks are overvalued by many metrics, but absent some paradigm shift (which will have to transpire eventually), they are likely to stay that way for the foreseeable future, and if I’m correct on that score, then there’s no reason they can’t climb considerably higher before the inexorable forces of gravity set in.

I’d also remind you that next week, holiday-impeded by Yom Kippur, may feature a tape painting cycle designed to squeeze out a few extra basis points of performance at the end of a deceptively difficult quarter.

It should be game on after that, and I see good opportunity to put a nice cherry on top of this Soggy Sundae of a year. But not on the short side.

So I’d ask everyone to keep their collective chins up, and if we can be a little nicer to one another, that would be a good thing as well. Let’s start by eradicating the claims of racism against the Key of C Major, which I do not believe discriminates against any racial, ethnic or social cohort. And just to show you how important C Major is, I’ve saved the best for last. The Abbey Road Medley – the last recording ever made by the Fab 4, while modulating here and there, makes its home in C. We’d do well to heed the final phrase the group ever sang: “In the end, the love you take, is equal to the love, you make”.

But even this doesn’t capture its essence as well as the following sublime chord sequence:

Amaj/Gmaj(add A)/Fmaj/Dmin7/Cmaj 

And then, in painfully poignant denouement: 

Cmaj/Cmaj(add 9)/Dmaj/Cmin7/Fmaj/Cmaj 

It’s true that to play this lick on piano, you’ll be forced to utilize a few black keys (particularly that tricky Cmin7). But trust me; it will be worth it, because it simply doesn’t get any better than that

TIMSHEL

All that is now, and all that is gone, and all that’s to come, 

And everything under the sun is in tune, 

But the sun is eclipsed by the moon 

— Roger (#%&%$) Waters

I don’t know about you, but a part of me is eager for this madcap summer to end. Oh, I’ve had some seasonally pleasing moments – playing with my grandsons, working in a little shuffleboard, and engaging in other age-appropriate behaviors. But a review of doings outside my increasingly narrowing personal sphere, the interval allotted to denizens of the Northern Hemisphere to bask in bright skies and warm temperatures is starting to grow long in the tooth. I won’t waste much space reviewing the events that led us to this pass; I choose, rather, to focus on the present and even more so on the immediate future.

This week’s note draws reference from one of the all-time-top moments in rock and roll history: the sequence of Brain Damage/Eclipse that marks the end of Pink Floyd’s astonishing magnum opus: “Dark Side of the Moon”. Now, hard-core Floyd-heads might argue the point – placing efforts like “Atom Heart Mother”, “Piper at the Gates of Dawn” or even, dubiously, “The Division Bell” at the top of the Pink Catalogue. From some perspectives, I might even agree with them. But what is (or should be) true for all concerned is the following: “Dark Side of the Moon” is a perfect record. Not. A. Wasted. Note. So even if you’d rather listen to “Meddle”, “The Wall”, “Wish You Were Here” or “Animals” it’s important that everyone gives “Moon” its props.

For the purposes of this presentation, I have plucked out the final two songs of DSOTM, due to their relevance to our current conundrums. Moreover, I have reversed them, for reasons to be made clear below. So let’s get to it, shall we?

While reasonable minds can debate whether the collective id of our visible community is suffering from Brain Damage, it is a matter of near-certainty that an Eclipse – a mother of an eclipse, is headed our way. Tomorrow, in fact. Astronomers are describing it as a once-in-a-century event. It is expected to cast us into temporary darkness as it makes its way along the jet stream, arriving in Oregon mid-morning and reaching the East Coast around tea time – all before, presumably, continuing its celestial path over the Atlantic Ocean. I’m not an expert on these matters, but as a risk manager, it is my obligation to warn you, as it passes overhead, not to look at the sun. I’m willing to cop to being a bit nervous about this, because: 1) I’d very much like to take a peek myself; and 2) I’m utterly incapable of constructing one of those makeshift devices that offer a safe visual image. And it’s not as though I haven’t tried. Several of my grade school teachers tried to assist me, with sorrow, horror and amusement, as they reviewed the many cereal boxes I destroyed in the effort. These weren’t among my finest academic moments. In fact, they rank among my worst, surpassed only by my solo attempt (others were in groups, but no group would have me) to dissect a starfish in high school. After inspecting my, er, handiwork, my elderly Greek biology teacher saw fit to pick up the smallest corner of my misanthropic sea creature with thumb and forefinger, and shriek, multiple times, and to the entire class, that I had mutilated the poor thing.

And that’s all I have to say about eclipses. Just don’t look at them directly, OK? Let’s turn to the topic of Brain Damage, and here we must start with the author of the piece: one George Roger Waters. Nominally, he’s one of my favorite musicians. And now I must avoid him. Almost never in the history of popular culture has an artist lived such a charmed life and ended up so nasty and so angry. In addition to bearing witness to the timeless genius of his output being proved across the decades, he’s made perhaps more money over the last few years than maybe any performer this side of J and Bey. His wandering Wall tour brought in a cool $450 Million (eclipsed only by U2 and the Stones, each of which who had to split their boodle, while Roger grabbed the entire gate). And now he’s back at it. Again.

But he’s very angry. At the establishment in general and at Israel in particular. In fact, he’s outraged, so much so that he has spent some of his hard won ticket proceeds to construct floating pigs with the Star of David affixed on their shanks. Classy, Roger. He bullies other musicians into boycotting Israel, and, while some have caved, others have told him to pound sand. The Stones, for instance, reacted to his demands by adding extra shows in Tel Aviv. Bravo, Mick and Keith. Seldom in my awareness has a more elegant message been sent from one artist to another to respect his betters.

So I’m here to confirm what Roger so beautifully conveyed to us in 1973: yes, Roger, the lunatic is in your head.

But there are other lunatics out there. For instance, there are, indeed, lunatics on the grass. Witness the insanity taking place at statues residing in parks across this vast national expanse. Much, of course, has been made of these episodes, and I’ve got little to add to the discourse. Undoubtedly, those involved are remembering games and daisy chains and laughs, but for heaven’s sakes, let’s take Roger’s advice and keep these loonies on the path.

The lunatic, in fact the lunatics, are also, by all accounts, in the hall. In fact, in our hall. One only has to peruse the corridors of the White House, Congress and the Court System to verify this reality. In this electronic age, the paper no longer holds their folded faces to the floor, but now it’s not every day, but every minute, that whatever passes for the paperboy brings us more.

All of which brings us back to the lunatics in our head. Oh they’re there alright, including, specifically, the lunatics of the investor class. But the past couple of weeks appear to have brought brief episodes of lucidity to their thoughts and actions. Improbably given recent market paradigms, they are actually reacting to troubling news with rational sequences of risk reduction. These cycles have been most evident on each of the previous two Thursdays, and I believe they portend some much needed incremental volatility in the coming weeks and months. This past week began with almost a full recovery of the preceding Thursday’s losses, but shortly thereafter, the recently suppressed but ultimately inexorable forces of gravity set in. By Friday’s close, equity indices had given back this recaptured ground, and a little bit more for good measure. And, while it is likely that the ten-odd trading sessions that remain to us between now and Labor Day will be characterized by a lack of liquidity, I see the following signs of a risk normalization cycle on the horizon:

• Earnings season is substantially over and cannot provide further tailwinds.

• On a related note, in the back half of the quarter, the data skews towards macro, and this is not necessarily accretive.

• August ranks 12th in terms of historical equity performance; September ranks 11th; October is 10th.

• Though bonds still catch a bid, there were some palpable holes in demand in recent auctions.

• For the first time in many months, investors seem to be reacting to negative news, be it domestic unrest, international terrorism, Washingtonian dysfunction, or other buzz killing dynamics that seem to come our way in never-ending sequences.

• I’m watching some of this Bitcoin nonsense, and while I don’t think that these types of instruments can withstand the inevitable political onslaught they face (hard for me to believe that the world’s leading countries and central banks will cede one of their most powerful governance tools to the private institutions that seek to compete with them), I do think that recent surges are in part driven by an increasing disgust with fiat currency regimes.

Post Labor Day and particularly in September, we’ve got a bunch of catalysts coming down the pipe, the balance of which, in my judgment, skew negative. The upcoming budget and debt ceiling standoff is beginning to look menacing. The likelihood is that Special Counsel Mueller will stir the pot further at some point in the next few weeks. While one can perhaps take some comfort in the arrival of General Kelly and the departure of Mr. Bannon, the Trump Administration has little time to get its act together and a lot of rope with which to hang itself. If any of the core senior appointees that retain a shred of credibility (Cohn, Mattis, McMaster, Tillerson, Hayley and very few others) decide they’ve had enough: a) it would be a dire political setback; and b) the markets – unlike the case over the last several months – are likely to react. We’ve had a blissfully (on a relative basis) quiet week with respect to the Korean Peninsula, but with our annual joint military exercises with South Korea set to begin on Monday, there is also considerable hazard in that quarter of the world.

Beyond all of this, we face the entirely wearying prospect of the annual Jackson Hole gabfest beginning later in the week. I will not elaborate here, but may have more to say about it in next week’s installment. Given the lunacy epidemic that is plaguing the entire planet, I’d prefer that they cancel this year’s tribute to the brilliance of the glib and powerful, but they don’t listen to me, so the event is likely to take place as planned. There’s not much accretive that can come out of this, and a reasonably likely set of outcomes that will be bothersome or worse. But like its Alpine equivalent (the possibly more wretched Davos confab, held each January) the show, high in the Teton Mountain range, will go on.

In light of it all, I end this piece by begging someone to raise the blade, to make the change, to rearrange me till I’m sane. Further, I wouldn’t mind if that same person or persons locked the door and threw away the key, because there’s someone in my head and it’s not me.

Roger first wrote these words about his much-lamented bandmate/mentor: Syd Barrett, who went certifiably crazy early on, and never regained his sanity. The band that Syd formed and for a time led did indeed start playing different tunes, and reached global superstar status, while Syd faded away and died. So maybe Syd’s on the dark side of the moon. But if so, we won’t see him, at least not tomorrow.

There’s this eclipse thing coming, don’t ya know?

TIMSHEL