“A Horse is a horse, of course, of course”

— Theme Song from Mr. Ed

“I’m going to catch that horse if I can”

— Chestnut Mare: Roger McGuinn and Jacques Levy

“The story is told that when Joe was a child his cousins emptied his Christmas stocking and replaced the gifts with horse manure. Joe took one look and bolted for the door, eyes glittering with excitement. ‘Wait, Joe, where are you going? What did ol’ Santa bring you?’ According to the story Joe paused at the door for a piece of rope. ‘Brought me a bran’-new pony but he got away. I’ll catch ’em if I hurry.’ And ever since then it seemed that Joe had been accepting more than his share of hardship as good fortune, and more than his share of shit as a sign of Shetland ponies just around the corner.”

― Ken Kesey, Sometimes a Great Notion

Good Christmas, y’all. Even though it’s over. Like John Lennon once crooned, I hope you had fun. I hope, also, that you didn’t have to travel far, for it weren’t no weather to be travelling.

I tried, this year, to arrange a Secret Santa sequence with my partners, but there weren’t no takers. I reckon pro forma escapades like Secret Santa have moved beyond passe’ into the realm of the mortifyingly futile. I lament this as being another sacrificed superficial blessing.

Yup, I always had a soft spot for Secret Santa. Perhaps this is because once, an anonymous version of the game conferred upon me the bounty of a single long-necked bottle of Budweiser. Like the one Jim Morrison is holding in the inside cover of the Doors’ pseudo-eponymous “Morrison Hotel” — to me the SS equivalent of a winning Powerball ticket. I think I drank it, warm, in a single gulp.

In a slightly early nod to auld lang syne, I offer the last of our titular quotes as a unilateral, anonymous Secret Santa gift to my readership. Thanks for putting up with me all the way through this tedious, troubling, fast expiring year.

It comes from what is certainly at least a co-favorite novel of mine – Ken Kesey’s “Sometimes a Great Notion”. It is an enormous, sprawling book, weaving threads of man versus nature, wildcat capitalists versus institutionalized unions, brother versus brother and even father versus son, in a narrative reminiscent of Steinbeck and a cadence worthy of Faulkner. The subject of our quote is a prominent, but non-central character. A simple, optimistic, authentic soul, known more routinely across the pages as Joe-Ben.

I got to thinking about Joe-Ben as l contemplated conditions this Christmas, perhaps not the merriest in anyone’s recent memory – particularly for those that toil in the financial markets. Investible assets of every stripe are down, some dramatically. Even my mother-in-law lost money this year. Fund performance is putrid, deal flow is non-existent, Wall Street bonuses are unthinkably light. SBF’s erstwhile side piece has rolled on him.

Metaphorically, the stockings of many of us are stuffed with horse sh!t, which begs the following question:

Is this a harbinger of scatological scenes yet to come, or of glittering equine ecstasy awaiting us just up the road?

I reckon we’ll find out, but as we shake the dust off from this holiday, my fear is that it may be a while before we rope that pony, and, meantime, we might be impelled to satisfy ourselves with the content of the stocking as we have found it.

Our once thoroughbred economy is showing signs of having been ridden hard and put away wet. It could gather itself, and who’s to say it won’t?

But I wouldn’t be playing the Exacta on that outcome.

A guy I once worked with recently summed up our current economic condition in the following four charts:

I won’t venture so far as to call these trends unsustainable, but I sure don’t like the way them arrows are pointing.

In a fit of frenzied pre-holiday largesse, the folks in Washington delivered up a ~$1.7T Omnibus Spending Bill, with a Secret Santa flair – insofar as its page count clocks in at more than ten times that of the (seasonally appropriate) New Testament. There’s something for everybody contained therein – including the obligors of this unintended bounty – the American Taxpayer – who was last seen running down the road with a stocking full of sh!t, with aspirations that (s)he will soon be mounted on a Chestnut Mare.

There is a bid on longer-term Treasuries, but it comes at the expense of a Tim Burton/Nightmare Before Christmas Yield Curve Inversion that will almost certainly sustain the globulins currently plaguing the Equity Complex and its technology leadership.

The Housing Market is collapsing:

Retain Sales, Industrial Production, Durable Goods Orders, PMIs all are cracking like walnuts. We have yet to complete our mission-critical busting of the Inflation Bronco.

FactSet projects a > 2% decline in Q4 earnings. But we won’t know for sure for more than a month. Meantime, the Gallant 500 (’22 Vintage) has declined more than 19%; Captain Naz to the tune of a third.

And thus we enter ’23.

Perhaps the time has come, though, to channel our inner Joe-Ben, who (Spoiler Alert) laughed his way to a tragic demise.

We might nonetheless do well to benefit by his example. Horse sh!t, after all, is a by-product of horses, which we may catch if we can. And if we do, perhaps we may find that, like Mr. Ed, they speak our language.

Perhaps, then, we can ride him through the desert, but if we do, we will be compelled to either name him, or acknowledge our inability to do so.

But during this holiday season at any rate, I find that three steed analogies is quite enough, so….

Happy Holidays, and, as always….

TIMSHEL

SOFR away, doesn’t anybody stay in one place anymore?
It would be so fine to see your face at my door,
Doesn’t help to know, that you’re SOFR away

With apologies to Carol King

Not much love for Stanley last week, but that’s OK. He’s long gone. As we all must go. Perhaps it is well that this is so. You don’t need me to tell y’all that nothing lasts forever, but I will anyway.

Nothing lasts forever.

Case and point, this month, in addition to the other opportunities and challenges we have encountered, marked the passing of an era. The once-mighty Eurodollar futures complex, long-time alpha dog of not only the short-term interest rate markets, but indeed, of the entire futures universe, has been eclipsed in both Volume and Open Interest by a lesser-known aspirant: Secured Overnight Funding Rate (SOFR) futures.

SOFR, so good, as the man says. The Eurodollar had an extended star turn, but over its history, the fates gave many signals that its reign would be finite. It began with what appears, in retrospect, to be an unfortunate nomenclature choice. Eurodollar is kind of a cool name, but the actual underlier was the London Inter-Bank Offered Rate (LIBOR). So why not just call it that (I’ve often wondered)?

Then, in 1999, came European Monetary Union. As a matter of necessity, this created a new currency pair, called, well, called Euro/Dollar. Which led to immediate confusion, as there were thus, and ever since, two critical market benchmarks of nearly identical appellation.

The second, much larger problem began to unfold about a decade ago, when some slick bank guys manipulated the auctions upon which LIBOR is based. Not by much, only teeny, tiny amounts, fractions of percents.

But that sh!t added up. Because LIBOR was the biggest market in the world. Like, to the tune of $300 Trillion. Thrice Global GDP. And, while nobody except wonky interest rate traders pays much attention to LIBOR, it impacts just about everything with an interest rate attached to it. So, we all got ripped off. Bigly.

I’ll spare you a review of the dirty details (it’s Christmas Week, FFS!), but around 2013, the scheme unraveled, got blown wide open. A couple of cats went to jail; some banks paid fines.

And then the whole thing blew over.

Except for this. The British Bankers Association, stuffy, stolid but routinely shady sponsors of LIBOR, decided that the juice was not worth the squeeze. Started backing away from the project, albeit in a protracted fashion.

Enter SOFR – calculated by the impeccable, unassailable (at least by comparison) NY Federal Reserve. And now, after many years of doing direct battle, SOFR rules pre-eminent.

Again, SOFR, so good. Especially if you were long these puppies, which have trounced their opposite numbers in the Eurodollar pit in unceremonious fashion:

SOFR vs. ED: The Market Has Pronounced its Verdict:

OK; so this is little more than an obtuse joke. SOFR is quoted in yield, which has gone up dramatically, while ED is price based, and thus migrates in opposite direction. As such, these graphs describe an identical trend.

Which is that interest rates are rising. We kind of knew that already, and, in case we were in any\ confusion, Chair Pow reminded us, during last week’s FOMC Presser, that not only is this so, but that he ain’t done yet. Across our little global financial village, the same message was conveyed by the likes of the ECB’s Madame LaGarde and the fine folks on His Majesty’s Monetary Policy Committee.

The risk markets didn’t like what they heard. Not. One. Bit. And perhaps it’s no wonder. Our miracle of a capital economy has weathered much higher interest rate regimes than the one that currently prevails, but this does look like a major buzzkill hiking cycle. Coming, as it does, not to cool a whitehot economic surge, but against the backdrop of an unambiguously slowing one, with Inflation still hovering at > 3x the Fed’s stated target. With all kinds of pressures on margins and earnings, and various other dainties not overly pleasant to contemplate, much less ingest.

Thus, not only is the market selling off, but its longstanding leadership is being annihilated.

Goldman is sh!tcanning a few thousand bankers. SBF lingers in a rudely appointed Caribbean prison, awaiting a likely to be unpleasant extradition to the States. Frenemy Binance’s auditors suspended their review. The world’s largest cylindrical fish tank exploded in Berlin.

In all, I think it is well that we’re finally putting 2022 to bed. Not many in my professional acquaintance will much miss it. And as for ’23, well I don’t have a great deal of visibility as yet.

About all I can state with any confidence is that the first market move of ’23 is probably a big head fake fade. I’m not suggesting that the right trade is to get short an early January rally or to buy into an associated selloff, but there are worse trades I can contemplate.

I do suspect, however, that the rising tide of rate increases will ebb and ultimately reverse itself ere long. The delightfully diluted CPI print is one sign, and last week’s additional data releases corroborate the trend. Retail Sales, Industrial Production, PMIs of every stripe, confirm an unmistakable slowdown in economic activity. Which, presumably, is what the Fed intends.

The contorted yield curve remains in a gruesome state of inversion, and, just because I can, I’ll include an illustration of investors views on breakeven Inflation, as measured in 10-year equivalents:

This suggests that investors are putting their capital behind the concept that Inflation will come careening down, placing the Fed in a position to shift from “taketh away” to “giveth” mode.

To which I offer a few caveats. Yes, I expect Inflation to cool considerably next year. However, I can’t get there without factoring a Recession into the calculus. I am also, as I’ve repeatedly stated, concerned that renewed upward pricing pressure in the Energy Complex, while doing nothing to stave off the latter (Recession, that is) could upset this trajectory. Finally, to borrow a thought from a credentialed former Fed guy I just met, I believe that while the Inflation ride down to, say, 5% might easily be accomplished — still > 2x the Fed’s target– any move below this – particularly in this gnat’s ass tight Labor market — will be difficult to manifest and painful in its unfolding.

But hey, why even think about that no? There’s still two weeks that remain to our current solar circumnavigation, during which time our attentions will be diluted so as to pay proper homage to Hannukah, Christmas and New Year’s.

I wish I had something smart to offer about this final chapter. But in abstaining, please bear in mind that recently I suggested that risks tilted to the upside and gave my blessing to would be buyers.

I might recommend a combination of short SOFR/long Eurodollar, but that, my friends, is a trade, which back in the glory days of Open Outcry, known as a Texas spread.

The pits are shuttered now. SOFR has supplanted Eurodollars. It’s the holiday season, and All God’s Children are on the move. Perhaps it is well that it should be so. That no one stays in one place anymore.

And yes, it would be sooo fine to see your face at my door.

Trouble is, I won’t be home.

TIMSHEL

“The growing good of the world is partly dependent on unhistoric acts; and that things are not so ill with you and me as they might have been, is half owing to the number who lived faithfully a hidden life, and rest in unvisited tombs.”

George Eliot

Allow me, while the world still reels from the aftershocks of C. McVie’s death (and my stirring tribute to same), with time-honored self-indulgence, to take this moment to celebrate the 100th anniversary of the birth of my stepfather: Stanley Maurice Warsaw.

He shed his mortal coil late in 2006, and little has been heard of him since. Still and all, I think of him often, and always with fond remembrance.

Whatever else may be said of him (and of this there is a great deal), perhaps on this we can all agree:

He takes a nice snapshot.

But I can hardly rest my keyboard there. This cat was born in ’22, right in the heart of the Greatest Generation. Played Centerfield for the Chi-U Maroons, a project rudely interrupted by Pearl Harbor. He enlisted that day, and spent the next 4+ years fighting, as a Non-Commissioned Officer, through North Africa and Italy – under the generalship of Mark Clark.

To be sure, there were worse WWII theaters of engagement to be dispatched (Stalingrad comes to mind), but Stan came back to the States covered in shrapnel, and with a deep aversion to speaking of his war experience. Nay, he’d rather discuss his exploits on the Hyde Park diamonds, and who could blame him for this preference?

He went on to live the prototype existence of a successful urban Jewish man of his time. Had a great run as a stockbroker. Married and divorced two wives, giving off progeny in each. His third spouse – my mother, however, got her hooks into him pretty good, and they remained together for the last 30+ years of his life.

He had a big, bellowing voice, sang in the shower, drank, smoked, played tennis, attended ballet recitals and sporting events. Laughed a good deal, cried only in private, dutifully called his mother (who lived to be 100 but shaved 5 years off her age to the very end) every day. And came home every night. Which my bio dad never did.

He had his faults, but gosh oh mighty, he was good to me. Took a great interest in me – at a time when I had almost none in myself.

When he bounced and the battles for his assets commenced, I only asked for one thing – his first print copy of Winston Churchill’s WWII Memoirs and two-volume treatise “The History of the English- Speaking Peoples”.

I carried those off these books and still have them. They give the room an unmistakable Stan-vibe.

But I digress. Going back to our titular theme, the following image struck me:

Someone help me out here. I mean, why cage a tree? I don’t think it was transported illegally across the southern border by mules.

And, come what may, it’s not likely to be going – very far, or anywhere, anytime, soon.

Mostly, of course, I wonder what Stanley would’ve thought of it all.

I have indicated above that Stanley was a broker, and it is easy to slip into the temptation of marveling at how quaint the markets were during his innings at the bourse. 50s/60s – buy IBM; 70s/80s – buy Cisco and Microsoft. But he did endure a couple of nasty recessions, and through 20% interest rates in the early ‘80s.

In fact, across my undergrad years (an enterprise he, at minimum, subsidized) Inflation rose to beyond 13%, and, during my Freshman, Sophomore and Senior years, the U.S. economy was actually in Recession.

The specter of our ignominious defeat in Vietnam and of the Watergate debacle were omnipresent. Geopolitical tensions wreaked havoc on the Energy Complex, and, for the first time in anyone’s existence, Americans became vulnerable to Fundamentalist terrorism.

Just as we were emerging from all these niceties, a heretofore non-existent virus began killing off people by the thousands.

My memories of Stan’s professional experience through these times, for a variety of reasons, are both incomplete and clouded. But it couldn’t have been terribly easy to provide financial advice to his well-heeled tennis buddies, nor to articulate bad tidings to them as they unfolded. Mostly what I remember is that Sgt. Warsaw soldiered on.

Perhaps more pertinently, it strikes me that many of the challenges he faced stand in eerie verisimilitude to our current situation. There was no internet, no FTX, no Bitcoin. Derivatives were but a blot on the financial horizon.

Other than that, though, the financial challenges we confronted were about the same 40 years ago as they are today. Most prominently in my mind, there is a diminished faith in the future that is reminiscent of that time, long past.

It feels, walking around some of these days, like we’re all a caged tree.

But like Stanley, we will soldier on as best we can, and perhaps it’s a perverse pity that we do so without the benefit of the training and intestinal fortitude that developed during the Greatest Generation, and was essential to the survival of a society that was forced to endure the hardships of two world wars, with the Great Depression daintily sandwiched in between.

But that all began more than a century ago. As of now, there’s three weeks remaining to Terrible (on a relative basis) ’22, with the one immediately upon us being perhaps the most interesting. After last week’s equity drubbing, capped off so appropriately by a disappointing PPI print, we’re staring down the face of CPI on Tuesday and the FOMC on Wednesday.

I’d suggest close adherence to both. A bad CPI result will certainly inform the Fed’s behavior, and – not gonna lie – the upside PPI surprise was particularly noteworthy to me, considering that Crude Oil hit its lowest level all year on Friday.

One can certainly take this as good news, but if last week be any indication, investors did not – perhaps in particular because they didn’t appear to kill the PPI pop. My concern is that if Oil Vs (as it very well could), Inflation could, er, re-energize, in a land of higher interest rates, slower growth (pointing towards Recession).

In an environment of geopolitical discord, menacing viruses, and, perhaps most importantly, one where confidence, determination, vigor, and clear-sightedness seem to be in short supply.

Returns, as such, may be hard to come by, and explanations to becalm investors perhaps even more so.

We could certainly use a Man like Stan again. But Stan’s gone. And mostly forgotten. Certainly, though, things are not so ill with me as they might have been without his faithfully lived, partially hidden life.

Maybe it’s time for me to visit his unvisited tomb. If only, that is, I can liberate myself from this godforsaken caged tree.

TIMSHEL

“I was alone in the cold of a winter’s day, you were alone so snug in your bed”

Yeah, I know my obligations, so let me begin by joining in the chorus of lamentation over the final flight of “Songbird” C. McVie, for whom I have long carried a respectful torch. Much credit is due to her — for her pioneering work both behind the Fleetwood Mac microphone and on the FM keyboard bench. While Rock and Roll features many great ladies, she was certainly the first, arguably the best (and maybe the only) female band member to drive an entire ensemble. Much more than psychedelic eye/ear candy (though this, undoubtedly, she was), she also served as both a principal instrumentalist and songwriter.

Of what other sixties sirens can this be said?

But with this out of the way, I must now strongly state what is obvious – at least to all of us aging, crusty, curmudgeonly rockers: Fleetwood Mac was a much better band before the arrival of those impossibly fetching California kids – Lindsay Buckingham and Stevie Nicks, than it has been across their five decades of smarmy pop sensuality.

Of course, I’m supposed to think this, but nonetheless I do.

FM was conceived out of that prolific womb of Brit Blues Rock: John Mayall & the Bluesbreakers. They went through many lineup changes but hit on their peak combination with the insertion of Christine on the piano. The albums this quintet released – “Mystery to Me”, “Heroes are Hard to Find” and their masterwork: “Bare Trees”, stand up to the best works of that sublime era. After which, by all appearance, the band appeared to be headed into oblivion.

Then, almost if by chance, the crew met Lindsay Buckingham – in L.A. – natch. Asked him to join, but he insisted on bringing the delicious Stevie along with him. They assented, and it was the ruination of two bands. Because Buckingham/Nicks was a fine duo. As fates would have it, they kludged it all together, and released two of the most over-rated records in modern music history. The songs demanded nothing of the listener, and the salacious, incestuous bed hopping between band mates became the stuff of trite, weary legend. The songs themselves refuse to die.

One could argue (as I myself might) that the monster success of “Fleetwood Mac” and “Rumors” brought about the end of the golden age of Rock and Roll. Everybody copied their vibe. Exit the unkempt one-finger salute to the man; enter an over-produced idiom where optics and branding became, at minimum, co-equal to the Almighty Riff. Even the Grateful Dead (FFS) hired their producer, who engaged a stylist to coif up Jerry’s hair. They did about as well (badly) as one would expect with this, and we had to console ourselves with the marvelous tresses of our two golden haired Mac ladies, as well as that of Peter Frampton.

But the music devolved, and, except in rare snippets, has never re-ascended.

All of which bring us to the markets. Which hardly peaked in the mid-70’s but, like our fave bands from the Golden era, have seen better days.

However, like the ears of my peers two generations ago, we hoover up what we can get. Thus far in Q4, risk assets of every stripe are up considerably, some, improbably like the Gallant 500 and Investment Grade Corporate Credit, double digits.

And why not? Economic activity appears to be robust, as witnessed most recently by the boffo November Jobs Report, released this past Friday morning. Wages are up; gasoline prices are down.

And Madame X has dropped her yield skirts an astonishing >20% over this same interval:

As December unfolds, bells are ringing, pipers are piping, shoppers are shopping. There’s still a war in Eastern Europe, but we seem to have lost interest in it. We enter ’23 in blissful anticipation of a neutered 118th Congress. There are some vague issues in jurisdictions such as China, Iran and North Korea, but what of that?

Thus far, and with due respect to the victims, the FTX saga unfolds more like a perfect Netflix docudrama than an earth-shattering bloodbath. There are those that believe the episode marks a death knell for crypto in general. But the numbers give the lie to said assertion. The key liquid coins are down a bit since the story broke but are flat to up over the ensuing three weeks.

Thus, crypto abides. At least for now.

So, too, and this eternally, does risk. Yes, there are some worrying signs on the horizon. Lots of\ spit-balling about troubles in the land markets, and massive, elegantly named Real-Estate Investment Trust run by Blackstone (ticker symbol: BREIT) announced that it is restricting withdrawals.

This, my friends, is indeed unsettling, and, combined with the FTX drama, foretells of a rash of markdowns-to-reality of a wide variety of illiquid assets.

This, indeed, will be an unpleasant, if cosmically welcoming, development.

But I reckon for now we can live, nay, even benefit, from a downward adjustment to housing/real estate prices, which were too danged expensive, and this by a significant amount, for anyone’s liking anyway.

We’ve now only the 12/14 FOMC meeting to endure, and it’s bound to be a dreary affair. But the outcome is perhaps already foretold. They’ll go 50, and push Fed-Effective above 4%.

On the whole, though, I don’t see much downside risk for the remainder of Terrible ’22. I’m not sure I’d be doing any frenzied shopping up here, and I wouldn’t be inclined for much rejoicing over what you own.

But given where we are now, you’re probably OK buying what you will.

I myself would recommend “Bare Trees”. By Fleetwood Mac. The old (though not original) Fleetwood Mac.

They don’t make records like that anymore; maybe they never did. For decades, sometimes generations, we buy and listen to what our fashionable betters instruct us we ought. I reckon this is true in both the markets and the music.

Likely, some of these days, the skies will brighten, and the trees will shed their bareness. Even now, it’s not so dark as we rightly perceive it to be.

But let’s not, for all that, mistake ourselves by embracing the misapprehension that the inauthentic is anything but that. We can consume what is in front of us, gratefully, but with remembrance of the good things now gone that passed our way.

And yes, I am alone in the cold of a winter’s day. Not sure about you, but it would please me to think that you are snug in your bed – preferably (it must be allowed) alone.

And with that, I bit Christine a gentle good night, with thanks for sparing us a little of her love.

TIMSHEL

I don’t want to write an encyclopedia here, though Lord knows I could. But we’ve just completed a long holiday weekend, during which the news cycle has, inevitably, slowed to a crawl. We’ve still 5.5 trading weeks yet to go in this godforsaken year, and not much visibility as to what may transpire.

If my nerves are shot, I feel I have come by this condition honestly. And it may just well be that a little bit of enthusiastic shade throwing could restore my flagging energy.

At any rate, it’s worth a try.

So, what am I sick of? I’m glad you asked.

Let’s begin with the Titanic – which to this day retains the status as the world’s most deadly passenger ship disaster, claiming more lives than the Lusitania and Empress of Ireland (the next two on the list) wrecks combined.

But it hit that iceberg more than 110 years ago FFS, and I think it’s high time we just shut up about it.

I’m also already sick of the 2022 World Cup, which is only now in the midst of its qualifying rounds. It’s scheduled to go on for another month or so, and all I can say is God help us. The tourney is in Qatar, which nobody even knows how to properly pronounce. There’s a great deal of whining about the tragic lack of provisioning for malted hops.

Next.

Next? How about China? Lots of yackety yack about China. What with that big army of theirs. And the reality that their efforts to douse the population with poison gas notwithstanding, they’re back contending with a record number of them covid buggers.

This is buzz kill from too many perspectives to enumerate.

But China was around long before we arrived on the scene and it’s a fair bet that they will be so — well after we’ve peaced. So, let’s get over it, shall we?

Kinda sick of SBF/FTX as well. No doubt it’s good copy, and I’ll probably be among the first to purchase the definitive written account, which, presumably, any number of aspiring authors are already outflanking one another in hysteria to produce.

The most interesting thing about FTX is the warp speed at which it collapsed. The Theranos, Enron, Lehman and other similar sagas unfolded over months, and, in some cases years. In almost every case, some dogged reporter called BS while everyone else was singing praises. But ultimately, the story broke wide open and the reporter was vindicated. Not so with FTX. It didn’t want the vigilance of investigative journalism to bring it down, but rather collapsed of its own ossified greed and incompetence. And this in a matter of hours.

Also not surprisingly on the list is pickleball. Which I’ve never played and don’t intend to. But lots of folks is all wound up about it, and I am rapidly wearying of the topic.

Then there’s Twitter. Ah, Twitter. I don’t tweet; never have. I don’t care who owns it, who is trending or who is banned. Twitter – stop squawking!

I’m sick of all public servants. Elected and appointed. But that’s nothing new. And though I’m not proud of this, I’m already sick of Christmas songs, and November ain’t even over yet.

Finally, at least with respect to this note, I’m sick of this market. And all its drivers. Some of which I intend to use this opportunity to call out.

At the top of the list is the Fed. All of it. I’m sick of their Forward Guidance. Of their Dot Plots. Of FOMC Pressers and the parsing of every associated spoken and written word. I reckon we’re stuck with it, though, and, in this demented, unhinged market environment, what’s worse is that what it says is all we’re supposed to care about. Case and point: the Gall 5 and Cap’n Naz have both risen to the tune of 10% in a little over a month – with the main catalyst being a potential pause in the aggressive Fed’s rate raising ways.

Their main task is to manage interest rates at various maturities – in other words the Yield Curve. Here’s what the textbooks tell us it’s supposed to look like:

When we is goin’ great guns, the green line prevails. When we’re stymied and frustrated, Big Red takes over.

But look what they’ve ginned up now…

I don’t even know what to call this. It’s all twisty and turny, and mostly inverted, This indicates recession. But if that’s what they think, somebody forgot to send the memo to the Atlanta Branch, which is predicting blowout growth in Q4:

But I’m sick of all the Fed Banks (not just Atlanta). And of the ECB, and the BOJ, and the PBOC. And so on and so on and scoobie doobie do.

And I’m sick of Risk Factors, Quantitative Algorithms, Actively Managed ETFs, Passively Managed ETFs. Of Drawdowns, Correlations, the Volatility Skew, the Bid/Offer Spread. Fundamental Investors, Quantamental Investors, Short Squeezes, Triple Witches, Quadruple Witches, Yields to Maturity, Fair Value, Intrinsic Value, Extrinsic Value, Value Investors, Value Gaps, Surplus Value…

OK; strike the last one, which is a Marxist construct and therefore clearly outside the market matrix.

But I’m not sick of you. Far from it. I can use all of you I can get.

And you’ll have to carry me through this malaise. Until I gather myself.

Because right now, all I can think of is tweeting about pickleball tournaments held on the Titanic as it makes its way towards China, with winners paid out in FTX stable coins.

I’m sure I will get over this, but in the meantime, it’s all on you.

TIMSHEL

“Well, it’s sugar for sugar and it’s salt for salt, If you go down in the flood, it’s gonna be your fault,
But, Oh, Mama, ain’t you gonna miss your best friend now?
You’re gonna have to find yourself another best friend somehow”

Bob

I ain’t sayin’ you ARE going down in the flood, or that if you do, it will necessarily be your fault.

But oh, mama, ain’t you gonna miss your best friend now?

It’s a valid question, but I nonetheless adopted a more hopeful title. There has been a flood, a flood of data, and now, at least temporarily, it has subsided. We’re still here, so “After” seemed like a more appropriate modifier of the recent deluge than “Down in”.

There are a couple of songs that share this week’s header – one of them by a once-promising but now largely forgotten outfit called Lone Justice, who I had the pleasure of seeing at Farm Aid 1.

All of which is, of course, beside the point. More pertinently, we entered October with a gully-wash of pending information, and in this pre-holiday interval, I thought it might be worth reviewing: a) what tidings the tide delivered, and b) where it leaves us as we dry off the drench.

Let’s start with the macro data, shall we?

The first half of Q4 featured two strong jobs reports, a recovering GDP, and, more recently, a dip in Inflation and a surge in Retail Sales.

On virtually every level, it coulda been waaay worse.

The Fed, nonetheless, increased rates to the upper end of the consensus, which now, after resting for most of Q1 at 0.0%, be knocking on the door of 4%. The curmudgeonly President of the St. Louis Branch, James Bullard, is calling for a continuation of this rising rate tide – all the way up to, or above, 5% (the crusty old dog even threatened an eventual 7 handle, FFS!).

Moving along, Q3 earnings appear to net out at < 2%, which ain’t good. And most of my krew believes that the true profits plunge will transpire in the first half of ’23.

We also endured a soggy election cycle, the outcome of which, while surprising some and disappointing others, probably reflected the will of the electorate. We now have a divided government and can rejoice in this optically minor but (I believe) substantively significant blessing.

Then, seeming outta nowhere, came the sinking of that Titanic Crypto Ship – FTX. To suggest, metaphorically, that it hit an iceberg would be to understate the case. By all appearance, the vessel was built of duct tape and balsa wood, cannot be salvaged, and lacks sufficient lifeboats to rescue the millions of its passengers stranded on its deck.

All of which brings us to our present state — wondering what on earth to make of it all. With five trading weeks remaining to this frustrating year, the Gallant 500 has retreated by magnitudes in the high teens. Captain Naz – stalwart that he is, is going down with his ship at a nearly 30% loss. Madame X (U.S. 10-Year) has dropped an un-demure 10%, which doesn’t sound like much but is an historic retreat for this dainty, delicate debt doyenne.

On a more positive note, alternative dating site Grindr (ticker symbol: GRND) launched an IPO on Friday – inevitably, as a SPAC — and shot out a 4 bagger on its first day of trading.

But perhaps, my friends, my best friends, the less said about this the better.

Whither does all this lead? Not gonna lie; for me it’s a head scratcher. It does indeed appear to me that for now at any rate, we’ve managed to dunk the Inflation Monster under the drink, and here, I look no further than the Energy Complex, which features a Crude Oil and Nat Gas market trading below all important Moving Averages:

But prognosticating whether it pops back up in the next few months is above my paygrade.

There’s a good deal riding on whether the P wave waxes or crests, because, among other matters, it will inform the future trajectory of the public vig. The Fed is on record as reiterating its 2% target, and it’s hard to imagine success without even higher rates an accompanying recession.

Lower energy prices for longer would cure a multitude of ills, so let’s keep our eyes peeled there.

There’s probably some yet-to-be revealed, incremental fallout from the capsizing of FTX, but that debacle will most probably run its course rather benignly. Unless, of course, if you’re one of the > 1 million poor schlubs trying to recover a portion of your capital from the shipwreck. I wish you the best of fortune in these efforts. Meantime, we know two things: 1) the lawyers are poised for a massive payday; and 2) as mentioned in this space last week, Wall Street carnivores are already bidding between 5 and 8 cents on the dollar for your claims. If the script holds, significant amounts of heretofore untraceable collateral will materialize immediately after you take your nickels and dimes.

Meantime, I’m also a bit worried about what the lame duck 117th Congress will do in the six weeks that remain to their term. And this on both sides of the aisle. Expect some brinksmanship on debt ceilings and some weird legislation to be ascendant — none of which will be uplifting, or, for that matter, accretive to investment returns.

’23 is, improbably, just around the corner, and it does not from this vista appear to portend much positivity. But hey, you never know, and, as attributed to legendary but controversial Kentucky basketball coach Adolph Rupp: “that’s why they play the game”.

I hope you do indeed suit up in ’23, but that’s still a few weeks away.

Meantime, whatcha gonna do?

Well, unfortunately, you cannot train on down, to Williams Point, because the only such-named location of which I am aware is on the northern tip of Livingston Island, just northwest of fabulous (frozen) Antarctica.

And there ain’t no train from here to there.

Apparently, though, you can drive there. Or at least drive once you have disembarked. More than this, personalized license plates are seemingly available:

And, once there, you certainly can bust your feet/rock this joint, and if you do, you will not be alone.

Because your best friend will be there with you, all bundled up and sporting a life vest — in anticipation of the floods that, our best precautions notwithstanding, are sure to come our way.

TIMSHEL

“Evening, time to get away”

The Moody Blues: Days of Future Passed

File this week’s theme under the burgeoning, nigh-overflowing, low hanging fruit section. It is, of course, a titular inversion of the iconic 1985 film “Back to the Future”. The accompanying quote comes from a forgettable Moody Blues album (which nonetheless features the band’s two greatest hits) of a similar motif.

But there’s lots going on which I believe tethers what has already transpired to what has yet to come — a notion which occurred to me as I became aware of a couple of bittersweet but otherwise irrelevant developments that revealed themselves last week.

First, filmmakers from the History Channel apparently discovered a large portion of the fuselage of the ill-fated Space Shuttle Challenger – off the coast of Florida – where it blew to pieces minutes after liftoff, as well as approximately 6.5 months after the release of “Back to the Future”. Moreover, the ever-irrepressible Boulder, CO Police are re-opening the JonBenet case — the poor little seraphine, who, much to everyone’s horror, was found murdered in her basement on Boxing Day, 1996.

And I thought everyone had concluded that it was the brother that did her.

Meantime, the markets themselves served up some futuristic nostalgia for us this past week, with the lightening quick demise of crypto giant FTX, recalling such epic collapses as those of Enron, Lehman Brothers, Bear Stearns and MF Global.

The death throes of each of the above-mentioned financial ghosts could be heard for months, whereas FTX went from crypto colossus to computerized coinage corpse in just over ’72 short hours.

Isn’t technology development a wonder to contemplate?

Well, yes and no. Modern transaction processing and telecommunications protocols undoubtedly hastened the euthanizing of FTX, but the underlying story is as old as civilization itself. It is an Old School tale of excess leverage, hubris, mismanagement, and misappropriation of funds.

Specifically, FTX used the coins it sold to customers, which were believed by the latter to be held in sacred custody, to fund its own speculations. What could possibly go wrong there? Well, when the levered portfolios went sideways, the coins themselves became worthless, and with them, the value of the issuing enterprise.

Kinda like Enron, with the creepy, additional similarity that, shortly before they collapsed, each company bought the naming rights to high profile sport stadiums.

Enron imploded fifteen years ago – arguably a simpler time. But to me, the tightest parallel is to MF Global, the misanthropic derivatives trading firm that foundered in rapid fashion when levered speculations moved dramatically against its interests.

Like MF Global, FTX committed the additional unpardonable transgression of using client funds to collateralize its own risk-taking activities. In case you were unclear on the concept – this is a deadly sin. The derivatives markets rest on the principal of segregation of client funds – explicitly precluding their use for any commercial operation which would put them at speculative, proprietary risk.

But there is this difference. The fatal MF trades were generationally attractive investments. At the direction of their chieftain: former Goldman Sachs Chair/New Jersey Senator/New Jersey Governor Jon Corzine, the firm bet the ranch on the likelihood that sovereign debt rates in Southern Europe – which, at the time, approached and sometimes exceeded double digits, would come careening down.

Well, they did. All the way to near, or, in some cases, below zero. But not before Corzine’s former buddies at Goldman and elsewhere had squeezed the firm into oblivion. There were many object lessons in this, but the following is also clear. Had ‘Zine been able to hold onto them trades, he would’ve broke the bank. But what edge did FTX (or, more specifically, its sister company Alameda Research) have with respect to its levered crypto speculations? Beats the hell out of me.

The FTX death rattle and immediate aftermath also bring us forward to the past. Desperate, ultimately unsuccessful attempts to fall into the saving embrace of heretofore hated competitors. Postmortem fallout – yet to be fully revealed — featuring the crippling, if not all out demolition of proximate enterprises that had transacted with the recently departed organization. A legion of disenfranchised individual investors who can now only hope (and wait) for a return of a small portion of their capital. And, certainly on the horizon, some smart Wall Street guys who will swoop in, grab these claims at pennies on the dollar, and stand a fair chance of cashing in for years to come.

Certain markets wobbled on the demise of FTX, but others were untroubled. The Equity Complex experienced its best day in a couple of years on Thursday – ostensibly on a docile CPI report that told of a drop in the year-over-year rate to 7.7%. So, we’re ahead to the past Inflation-wise as well. Back to levels last seen this past January.

The late week, uber-aggressive rally has the look and feel of an old-school short squeeze.

But we must also remember this, my McFlys: short squeezes, like so many other elements of our existence, are only identifiable in the rear-view-mirror; we won’t know if this here rally is legit or fugazi unless (until?) the market sells off yet again.

Reticent though I am to bring up the subject, the recently (nearly) completed election cycle also brings us forward to days gone by. Whatever the final result, we’re looking at a government with elected officials and associated constituencies deeply at odds with one another. But here’s the good news: this configuration virtually ensures they won’t be able to do much incremental damage. And for this we can truly rejoice because Lord knows they’ve certainly done enough to vex us already.

I also must wearily join the chorus of complaint as to the inability of the system to deliver a vote count in a timely, accurate fashion. Which is particularly mortifying considering that backwater jurisdictions such as Brazil and Florida are able to complete the process in a matter of hours.

To my everlasting shame, I also find myself unable to resist the temptation to deliver my political synopsis of the (still-undetermined) outcome. First, I’m praying that the Republicans are able to recapture the House. Laying aside any party preferences, my hopes in this regard derive from my strong belief that the last thing we need during these troubled times is one party – either party – wielding explicit control over the action in Washington.

I also (here from a more partisan perspective) am pleased with the prospects for the next political cycle. It is now clear that Trump Derangement Syndrome has hit the Big Guy himself. He positioned himself to take credit for a GOP rout that he was sure would come to pass. But failed to fully consider the contingency that the rout would not be forthcoming. He’s absolving himself of all blame now, but not with any particular effectiveness. And his post-election rants against those who are supposed to be his political allies should have the whole country calling for the butterfly nets to be placed above his enormous neck.

With a little luck, we may be able to deem him gonzo. Meanwhile, on the other side of the ledger, the guy with the ‘70s style aviator glasses and leather jacket is strutting about like he owns the place. His bluish fellows clearly wish to banish him, but now will face some incremental difficulty in doing so.

None of them are particularly well-positioned. In the lead-up to the voting, they artificially suppressed energy prices and ginned up ~trillion-dollar giveaways to favored constituencies such as relatively affluent student loan obligors, microchip manufacturers, and Green Energy vendors. A judge just put the kibosh on the first of these. And if the GOP does indeed cop the ‘ouse, neither of the last two stand a snowball’s chance in Florida (or Rio) of obtaining funding.

And, as investors, we should be doing a rain dance for a GOP Congress. We need to control Ways and Means/Appropriations, or, I fear, all hell will break loose for risk assets. As I type this out, the Repubs need to win only 6 or 7 of the remaining 29 uncalled races to secure a majority. Should be doable, but with the Dems continuing to draw last minute inside straights, one has cause to wonder.

In any event, it looks like a hard slog for the capital markets. Inflation is still nearly 4x the Fed’s stated target. Our Central Bank remains on a warpath and seems intent upon ginning up a recession. They’re likely to succeed. Corporate earnings are on the down. The country and the world are awash in debt. War still rages in Eastern Europe. Our enemies in the Middle and Far East continue to menace.

But when was it ever easy? Never, is the answer. Except in the rear-view mirror. What lies ahead, from many perspectives, looks indeed like episodes from the recent and distant past.

But as I type this, it’s evening, and time to get away. I’m locked out of my FTX account, where I keep my vast fortune. I’ve got the Moody Blues on my re-modeled turntable, but “Days of Future Passed” is full of scratches (how did that happen?) – particularly on the smarmy “Knights in White Satin” track.

I think I’ll switch to a better Moody Blues record: “In Search of the Lost Chord”. And my fave Moody’s song: “Ride My See Saw”. Seems appropriate for these nostalgic, futuristic times.

Also got my VHS all teed up, and if you don’t know what I’m watching, you ain’t paying attention.

TIMSHEL

“Mr. Praline: Now that’s what I call a dead parrot.

Owner: No, no…..No, ‘e’s stunned!

Mr. Praline: STUNNED?!?

Owner: Yeah! You stunned him, just as he was wakin’ up! Norwegian Blues stun easily, major.

Mr. Praline: Um…now look…now look, mate, I’ve definitely ‘ad enough of this. That parrot is definitely
deceased, and when I purchased it not ‘alf an hour ago, you assured me that its total lack of
movement was due to it bein’ tired and shagged out following a prolonged squawk.

Owner: Well, he’s…he’s, ah…probably pining for the fjords.

Mr. Praline: PININ’ for the FJORDS?!?!?!? What kind of talk is that?, look, why did he fall flat on his
back the moment I got ‘im home?

Owner: The Norwegian Blue prefers keepin’ on it’s back! Remarkable bird, id’nit, squire? Lovely
plumage!

Mr. Praline: Look, I took the liberty of examining that parrot when I got it home, and I discovered the
only reason that it had been sitting on its perch in the first place was that it had been NAILED there.

(pause)

Owner: Well, o’course it was nailed there! If I hadn’t nailed that bird down, it would have nuzzled up
to those bars, bent ’em apart with its beak, and VOOM! Feeweeweewee!

Mr. Praline: “VOOM”?!? Mate, this bird wouldn’t “voom” if you put four million volts through it! ‘E’s
bleedin’ demised!

Owner: No no! ‘E’s pining!

Mr. Praline: ‘E’s not pinin’! ‘E’s passed on! This parrot is no more! He has ceased to be! ‘E’s expired
and gone to meet ‘is maker! ‘E’s a stiff! Bereft of life, ‘e rests in peace! If you hadn’t nailed ‘im to the
perch ‘e’d be pushing up the daisies! ‘Is metabolic processes are now ‘istory! ‘E’s off the twig! ‘E’s
kicked the bucket, ‘e’s shuffled off ‘is mortal coil, run down the curtain and joined the bleedin’ choir
invisible!! THIS IS AN EX-PARROT!”

Monty Python

I couldn’t resist the long opening quote here, and that’s not the totality of my transgressions. Because I lifted the reference to the iconic, Pythonic “Dead Parrot” sketch, I think, from a recent editorial in the WSJ.

It can be hoped, at any rate, that y’all get the gist of the interplay between the justifiably vexed Mr. Praline and the dissembling (unnamed) pet shop owner. The latter sells the former a dead parrot, and then, upon the former’s complaint, he heroically sticks to his story.

I admire him for this.

Among the alternative realities he lays before the misanthropic Mr. P is that the bird, exhausted after a prolonged squawk, is “pinin’ for the fjords”. But I think, with his rant at the end, Mr. P resolves the argument in his own favor.

The bird is dead. But it causes me to wonder whether, this reality firmly established, he could not also be both exhausted after a prolong squawk, and, in fact, engaged in some authentic fjord-pining.

Moreover, it seems to me to be a rather timely matter to consider, particularly as it pertains to this past week’s most salient event – the FOMC meeting/rate announcement, and Fed Chair Jay(bird) Powell’s comments during the presser that immediately ensued.

Our chief monetary policy orinth first disappointed his constituents by going the full smash 75, but then, in his written remarks, managed to bouy buoyancy-bereft spirits with the following statement: “As we come closer to that level and move further into restrictive territory, the question of speed becomes less important. … And that’s why I’ve said at the last two press conferences that at some point it will be important to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made.”

This was the “tell” that investors were seeking. Equities and Treasuries rallied in Pavlovian fashion.

Then came the presser, a decidedly avian affair, during which, however, there were neither doves nor parrots to be found. Only hawks. And my extensive research corroborates that this lastmentioned predatory bird will indeed feast on the two more docile species mentioned just before. So it went with the presser, during which Jay-Hawk Powell somehow managed to be loud and clear – lovely plumage extending from his beak notwithstanding.

Investors, reacting to his prolonged, beak-stuffed squawking and knowing they’re next, responded in pain and fright. He made it clear that: a) what he fears most is pausing too early; b) his objective is the time-honored (but perhaps highly aspirational) 2% Inflation target; and c) that the rest of us better buckle in for some unpleasantness, because we are galaxies away from achieving b).

In short, he took the opposite tack of that scamp pet shop owner. Channeling instead Mr. P, he informed us that the pausing parrot has, for now, joined the bleedin’ choir invisible.

This certainly clipped the wings of the buying crowd, which was flat on its back for the remainder of Wednesday and all Thursday, before being hoisted up and nailed to its perch during Friday’s session.

I was surprised as anyone at Parrot Powell’s Presser 180, feeling certain that he directly intended, in his formal statement, to calm the mournful warblings of beleaguered investors, and, by so calming, bestow some illusory life upon comatose capital markets. I was wrong.

I wonder what his game is and can only conjecture that politics is deeply in play with respect to his pet shop owner policy plays.

Specifically, he has now raised rates from zero to ~4% in eight short months and has made clear he ain’t done yet. From a political perspective (his presumed political perspective; he is, after all a Yellen acolyte) the timing is passing unfortunate. He has swooped in to ground the economy right up to the point of an important election, with (if the perfidious polls can be believed) his side feeling wicked gravitational pull. His friend and mentors must be quite angry with him.

But what’s done is done and cannot be undone. The elevated rates are upon us, and the economy will feel their presence. Here’s hoping these moves will help tame Inflation, and for all I know they probably will (or should).

But history instructs us that these levels of Inflation almost never dissipate without an accompanying Recession, which I believe is part of the Fed’s calculus. Better, or so I assume they think, to bring it about, in, say, the early innings of ’23 than a year later, when it might cause even greater partisan damage.

That’s my hypothesis, at any rate. And if it so plays out, we’d best strap ourselves in for (oxymoron warning) an immediate accelerated economic slowdown.

All of which offers a bleak prognosis for risk assets. As perhaps the most overworn of market platitudes admonishes us: “don’t fight the Fed”. I made the mistake of operating against this wisdom in the wake of the lockdowns. Even at the Q2/20 lows, I figure we had much further to drop. But then the Fed came in with its $4.5 Tril, and y’all know what happened next.

Well, if you don’t want to fight the Fed as it giveth, it certainly does not pay to do so as it taketh away.

It presents quite a quandary, no? Because there’s other menacing stuff out there that has nothing to do with Fed policy. We can feel the rumblings of economic deceleration from several sources, and I’ll offer a few visuals in support of these fears.

Q4 projected Earnings Growth is not only careening to terra firma, but has actually crashed through the zero boundary:

As we wearily turn towards Q4 economic estimates, Wall Street economists (who are paid to shade to the chipper in their chirping) are prognosticating an approximate goose egg:

Inflation figures drop over the next several days, and, rather than approaching 2 handles, they’re looking more like 7s and 8s. And, ever so quietly, this is reflected in commodity prices. Brent Crude is creeping back near 100, and the broader basket of Oils, Grains, Metals, and the like, is flapping its wings towards liftoff velocity:

If it all makes you pine for the fjords, know that you’re in good company (myself included).

Yes, our parrot is dead, off its twig. And our pet shop owner is only too prone to sell us another of similar status.

But we ourselves remain among the quick, and, as I conclude this prolonged squawk, I can only advise you to keep your feet firmly nailed to whatever perch you presently occupy. If you cannot do this for yourself, perhaps there’s a perfidious pet shop owner available to assist you.

If we can keep ourselves upright, perhaps, defying laws of logic, biology, physics, and economics, we will emerge to a day when we can rise again.

TIMSHEL

“Bis dat qui cito dat”

Miguel de Cervantes

“He gives twice that gives soon, i.e., he will soon be called to give again.”

Benjamin Franklin

Let’s work our brains a bit, shall we? Our title phrase offers significant food for thought but must be analyzed carefully, as it can be interpreted in multiple ways.

Understanding the first of these – indisputably the more hopeful of the two — compels us to brush off our Latin, which, I fear, for most of us, is probably a bit rusty. It comes from Cervantes’ magnificent “Don Quixote” and suggests that rapid largesse dispenses a double gift – precluding the need for multiple solicitations and placing the associated fruits immediately in the hands of the recipient.

In a more perfect world, I’d be able to resist the temptation to refer that most ubiquitous of DQ images: that of the title character tilting his lance at windmills. Moreover, as I am unable to ignore this glib parallel, I reserve the right to bring it forward again a bit further down the road.

“Don Quixote” was published in two volumes in the first part of the 17th Century. Over a hundred years later, that singular American statesmen, philosopher, inventor, and wit – Ben Franklin – put his own spin on the notion, pointing out that a too rapid giving leads to a near-certainty that the giver will be compelled to give again.

Both interpretations, so it occurs to me, appear to be valid.

Applying this to our long-time and current obsessions, investors have acclimated themselves to favors, given rapidly and repeatedly, for at least the last 15 years; arguably longer. It may have started about two decades ago, when politicians and bureaucrats in Washington decided to subsidize the mortgage markets – in a misguided quest (Impossible Dream?) to confer the blessings of home ownership on broader swaths of the electorate than had heretofore enjoyed the privilege. Lots of folks got their piece of the rock – albeit temporarily and, for many, at prohibitive cost. Wall Street turned these mortgages (and other forms of loans) into sparkly, fee-rich financial instruments, and everyone made a bundle.

Until they didn’t.

The packaged loans ultimately proved themselves to be about as flimsy as Don Quixote’s homespun armor – unable to withstand anything but the feeblest of assaults. When they shattered, the whole financial earth shook, placing at risk much of the core of the capital economy.

Cue the Fed and its magic money-printing machines. Hark the tinkling of the fiscal sleighbells.

Within months, we were the recipients of glittery, gravity-defying, green gravy, bestowed upon us, each month, for > 5 years. Moreover, these care packages grew as the decade of the 10s unfolded.

By the end of ‘13, the Gallant 500 and Captain Naz had tripled. All was good and quiet in the land.

Lots of stuff happened in the intervening years, including a global pandemic that crippled the world’s economy for quite a spell (and is still – truth be told – somewhat of a pain in the ass). Here’s where the Ben Frank side of the equation kicks in. The Government was compelled to give again. And boy oh boy did it come through. The Fed shelled out ~$4.5 Trillion of manufactured money, and used it to buy its own publicly traded securities. Its elected counterparts, determined to surpass the bureaubankers, managed to indeed excel them, but only by a measly $100 Billion ($4.6T). Of course, it would’ve been more had not meanies McConnell, Manchin and others not veered from script.

Be that as it may, the covid Christmas spirit extended for more than 18 months in Equity-land and more than two years in the realms of Fixed Income. The former more than doubled from its viral lows; and the latter saw benchmark yields plunge to deeply negative at the short end of the Treasury Curve, and < 1% at the longer end.

And then the giving, which had certainly been historic in its scope and proportions, stopped. The Fed switched off the Money Machine, began allowing the assets on its Balance Sheet to mature without replacement, and, in cruel coup de grace, started to jack up its own terms for lending.

The White House and Congress have tried to fill the breach, allocating another couple tril – earmarked to favored constituencies – Green Energy Purveyors, Scholar Borrowers, and Microchip Manufactures (FFS!). But these offerings are currently subject to the caprices of Congressional appropriation and the Courts, and their ultimately delivery is thus very much in doubt.

Investors, feelings and sensibilities injured, have shown their wroth. Been, until lately, putting stocks, bonds, crypto, crude oil, nat gas (?) on fire sale.

My own notion is that they were channeling their inner Ben Franklin, and figuring that if they moped around enough, they could force the re-ignition of the giving engines anew.

Who knows? It may even work, and we’ll find out more this week when the FOMC lays down its latest round of righteous wisdom on us. Official Fed Watch metrics indicate an 80% likelihood of another full-smash 75 bp hike – which would place Fed Funds on the threshold of 4%. Hard as it is to believe, as recently as this past February, the Fed Effective Rate was Zero:

All this Fed Giveth/Fed Taketh Away folderal has the yield curve tied up in knots. Never (I believe in anyone’s living experience) has the government been forced to pay a higher rate to issue 6-month bills than it does for thirty-year bonds:

And thus investors, as depicted in the following graph, can be forgiven if they are confused as to how best to position themselves in the Treasury markets:

What any of this means is anyone’s guess; yours is certainly as good as mine.

I do like the color scheme, though. So, there’s that.

But I hate to see our investment warriors so at odds with one another as to whether they wish to be long or short, and where, upon the Treasury Curve, they wish to be so.

I reckon it all boils down to whether the Fed, who certainly gave early anytime it was remotely compelled to do so, will find itself obligated to give again. The consensus is that it will; the main question is when.

Maybe, someday, we can address the larger, philosophical issue as to whether dual or multiple largesse cycles is a blessing or a curse, — to the giver or the recipient.

Cervantes and Franklin disagreed on this score, but both are dead, and the debate has thus never been resolved. Don Quixote and Poor Richard live on, though, and it may be well to conclude that an overabundance of the windmill tilting proclivities of the former, places us at risk of devolving into a condition of poverty, as indicated in the modifier of the latter.

Don’t do it is my advice, given quickly and with the hope that I am not obliged to give it twice.

TIMSHEL

“If I am occasionally a little over-dressed, I make up for it by being always immensely over-educated.”

Oscar Wilde, “The Importance of Being Ernest”

In a flush of admitted (if partial) desperation, we turn to Oscar Wilde. But we will not dwell on his works and will entirely bypass any reference to his private life. Further, while I am unable to comment on his sartorial standing, in terms of his claims of overeducation, either its true or, having attended both Trinity College (Dublin) and Magdalen College (Oxford), it wasn’t for lack of trying.

“The Importance of Being Ernest” is a fun little romp, but Wilde is perhaps better known for his dark, disturbing novel “The Picture of Dorian Grey”, which tells of a handsome young man who makes a Faustian bargain to transfer the aging of his person to his exquisitely rendered portrait, while he himself remains unblemished by the marks of time, debauchery, and hard experience.

One wonders if many investors wouldn’t accept this trade with respect to their portfolio summaries.

Meantime, the eternal debate – whether it is better to be overdressed or underdressed – has never been firmly settled. Across my monitoring of the subject, the consensus has generally tilted towards the former: one might be embarrassed about wearing a tux or formal gown to an event where everyone else was rocking biz cas but would be less so than by showing up in flip flops to a cotilion.

However, that was then. Before lockdowns. Before the Jeffery Toobin episode. And, in the interim, I’m not entirely convinced that the tide hasn’t turned in favor of insufficiently formal attire as being the preferable transgression.

Naturally, one can apply the question to the state of the markets. Are they overdressed or underdressed, and, either way, which is the favored configuration? I’ve reflected on this and believe that the answer varies by market and jurisdiction. An inventory of the breakdown follows.

We begin, in time-honored fashion (dating back to last week), in the U.K. I’m not enough of a clothes horse to judge whether Madame Truss was over or underdressed, but I suspect the former. Because she was on the receiving end of a nasty dressing down, having been summarily defrocked, so to speak, of her Prime Ministership — her double fortnight reign standing as the shortest of any in the more than a ten-century history of British Parliamentary Government. What comes next no one knows. But her program has been certainly withdrawn in boddice ripping fashion. In result, English cross asset class finances have improved a titch. Whether they can sustain their recaptured vigor remains to be seen.

Our query also applies to the first world’s other most prominent island nation – Japan — and particularly to its benchmark currency pair: USDJPY, which breached the astonishing threshold of 150 earlier this past week – highest level since 1990.

In response, the normally ceremonial Bank of Japan decided to let its hair down a bit – intervening in such a way as to cause a neckline plunge to 146.

What is perhaps noteworthy about this is that it comes against backdrop of significant financial duress, which, time immemorial, tends redound to the benefit of the JPY. During the Big Crash, USDJPY fell to barely half of the elevated levels experienced last week. But this time ‘round, with global indebtedness more than double its pre-crash levels, with Inflation, rising interest rates, with economic pressure points too numerous to enumerate, nobody loves, nobody wants, the JPY.

Except for the BOJ, which was forced to throw a coverlet over its exposed loins at the end of last week.

Not to be forgotten in our tour of the fashion globe is China. Where, in an election the results of which nobody bothered to contest, Xi was anointed for another term. We’ll hope for the best here, but I will take some comfort in the stylish, western suit he rocked at his People’s Congress acceptance speech. Say what you will about Xi, but his accoutrements are most certainly an improvement over that drab, grey tunic that Mao used to wear.

Stateside, we revert to our own Fed. Is it over or under dressed? Well, across the summer and into the autumn, its appointments suggested that it was girding itself for a Napoleonic, winter battle for Moscow. It donned its heavy armor and its thermal underthings and advised its investing minions to do the same. All of which put a serious drag on risk assets.

Rumblings at the end of the week suggested that the Fed might be rethinking its wardrobe selections, that it might want to shed its heavy boots – rammed so recently, so repeatedly, so rudely, on the accelerator of monetary hawkishness. Our next glimpse at its prevailing fashion choices will arrive with November, when the suits at the FOMC stride down the Washingtonian runway. Meantime, investors, breathing heavy under the weight of its Fed-mandated vestements, reacted with delight at the mere rumor of such relief, ginning up the first weekly rally in, well, in quite a while.

But we anticipate ourselves.

Because, oxymoronically, Energy markets have taken the opposite tack, attiring themselves for an Endless Summer. Nat Gas in particular – both stateside and in Europe — continues to plunge:

Domestic and European Natural Gas: Perhaps Excessively Au Naturale?

I reckon somebody knows something here that I don’t. Because I believe these markets to be scandalously over-exposed. So much so, in fact, that I feel I must turn my virgin eyes away from these here charts.

Winter’s a-coming, and I fear without a few more layers of protection, this showing may transcend pure embarrassment and devolve to physical discomfort.

Maybe the folks in Wisconsin and Bavaria simply plan to turn down their thermostats and throw on extra sets of woolies this winter. But I suspect that if they don’t, buyers of these commodities will be the ones that end up dressed to the nines over the coming months.

Meanwhile, in the realms of Crude Oil, we’re emptying our strategic closets of late – in advance of an election where everyone wishes to look their best (what could go wrong there?). They are now at their lowest levels since the 1970s. Here’s hoping that we don’t soon find ourselves in a perverse construct where we’re all dressed up, with important destinations on our itinerary, but with no affordable means to transport ourselves from here to there.

All of which brings us to Equities. We are now entering the period where those most Imperial Emperors of our global corporations sashay forward to proclaim recent results and future tidings. We will thusly learn whether they channel the Hans Christian Anderson Fairy Tale – wallowing in their spiffed-up splendor until some poor innocent points out what no one else will say. Namely, that they are standing there naked.

In which case, upon this we will all agree – they will have been disastrously underdressed.

And investors, if early earnings returns can be fairly extrapolated, are not likely to be in a forgiving mood no matter what they say (or wear):

It all makes for a tricky wardrobe selection conundrum, but I recommend that, let others think what they might, you dress for comfort as events unfold. It would be foolish at this juncture to over accessorize your portfolios. Simplicity equates to elegance during these times, as it does – so the fashionistas inform me – across most of the interludes of our existence.

I have every hope and expectation that you’ll look fabulous in basic black (or blue).

But whether you can generate satisfactory returns is another matter, and one entirely above my pay grade.

TIMSHEL