At the risk of stoking the fires of what is already a pre-holiday frenzy, I wish all my havirim a Happy Yom Ha’atzmaut (Tuesday), which this year celebrates the 75th Anniversary of the Founding of the State of Israel. It falls, as always on the 5th day of Iyar, and, if you’re like me, you’re wondering, in this rapidly evaporating year of 5782, how on earth we are already into the month of Iyar.

Since time immemorial, Israel, Palestine, Canaan, whatever you wanna call it, has been a geographic exemplar of all the contradictions of mankind. Birthplace and spiritual home to the Western World’s three leading religions, it has been ravaged, plundered, fought over, wept over, since it first emerged – some 60 Centuries ago. Jerusalem (its capitol no matter what anyone says) has been attacked 52 times, captured/recaptured on 44 occasions, besieged 23 times, and destroyed twice.

At least in part owing to the pounding they took earlier that decade, the post-WWII Allied Forces officially recognized it as an independent, Jewish State in 1948. Whereupon its four most immediately neighboring countries declared war on it. They asked Albert Einstein to serve as the first Prime Minister. Wisely, I think, he declined the honor.

Yet it has survived nearly perpetual war, considerable doses of bad press, and the unending enmity of its neighbors – for three generations. It presses on. Ironically, it is accused of perpetual warmongering – often by the same sources who have wondered aloud why, say, the Jews allowed ~1.1 millions of their numbers to be executed at Auschwitz by a few thousand Nazis. If every condemned prisoner took out one guard, so they say, the massacre never would have taken hold.

75 years later, they assail Israel for daring to protect itself, for responding to ceaseless attempts to bomb it into oblivion.

Israel abides, arguably thrives, as the premier democracy in the Middle East, with justice and civil rights systems that compare favorably to that of any other jurisdiction in the world. It is in every sense a democracy, but herein lies a divine paradox. In a world of wandering demography, it must daily resolve its commitment to Judaism with its democratic principles. One day, there might not be sufficient voting-eligible Jews to sustain its religious orientation.

Other countries in the region avoid this dilemma, but then again, they are not authentic democracies (or democracies at all). In Iran, the Ayatollahs run the show. The House of Saud stands, creaking as it does, at least for now. I suppose they have some form of elections in Egypt and Syria, but please. From a distance, they appear to be as legit as the recent Chicago Mayoral runoff.

If you’re like me, you take, at minimum, great comfort in the presence of Israel – warts and all. They’re not above a bit of chicanery now and then. There is a widely known story about incessant American fundraising for the development and support of the country’s citrus crop. When I was a kid, every year, they’d come to school and cajole us to buy a tree that would supposedly bear our name. As James Michener records in “The Source” – immediately upon landing on an El Al jet at Ben Gurion Airport (equidistant from Jerusalem, and Tel Aviv and named after the guy that took the job Einstein turned down) every single American would demand to see their tree. Whereupon each would be driven to a single, forlorn citrus grove in Jafa and shown the same depleted orchard.

It was a well-rendered scam (kind of like those folks who, for a price, will name a star after you), but it has not impeded the alarming rise in the price of Orange Juice over the last several months.

Somebody help me here. What gives?

I was under the impression that nobody drinks Orange Juice anymore, finding that it has all the nutritional qualities (but none of the taste) of A&W Root Beer.

Yet the price of the stuff they used to sell from vending carts on every street corner in New York has doubled in little more than a year. Probably, you didn’t notice, because, like me, you may not have choked down a glass of the pulpy potable in at least ten years.

Israel is also infamous as being the one jurisdiction in the Middle East that does not produce fossil fuels. Because there are none of the associated raw materials under its sacred soil. Meantime, those countries around the world rich in this vital natural resource are, for different reasons, weaponizing its production (including, unfortunately, the USA).

As this evolves, the smart hedge fund crew is loading up on the long side of the bubbling crude:

But we’ve other (gefilte) fish to fry this coming week. We’ll get our first look at Q1 GDP on Thursday, and most estimates call for 2% or greater, which ain’t too bad in my book for an economy said to be careening into nasty recession.

Beyond this, and mostly because it cannot be deferred any longer, most of the High Priests of Tech report this week. I wish I could gin up more interest/enthusiasm for the attendant, pending drama, but, right now, it’s not in me. There are certain signs that tech is overvalued and others that the associated earnings picture is bleak. But I’m not sure it matters, as, to borrow further from the Old Testament, Cathie Wood’s ARK may be there to save the day.

Our public servants in Washington will also make their collective presence known. We’re still a fortnight away from the next Fed release, but, in the interim, we can busy ourselves outflanking one another in hysteria over the debt ceiling drama, and the possibility of a default of our paper. It’s not clear when we hit said ceiling; estimates range from Memorial Day to Labor Day. Meantime, opportunities for bi-partisan political brinksmanship abound.

Do what you like, here. I elect to ignore most of this.

I don’t, in the meanwhile, see much likely to move the markets. Not stocks. Not bonds. Not FX. Not commodities. Not crypto.

Perhaps it’s a good time for me to visit Israel. To which I’ve never been. To see my trees, as by my estimate, I bought at least a dozen of them.

I reckon I’ll wait, though, until the Yom Ha’atzmaut celebrations die down. I note the milestone as a significant one but do my rejoicing over here.

Because 75 years is a pretty good run. One that coincides with the period of American Exceptionalism, where this country has been pre-eminent in political, economic, cultural, and social affairs. We have, of course, benefitted greatly as a result, but to the best of my judgment, the rest of the world hasn’t fared that badly either.

Among our most prominent prerogatives has been support of the State of Israel and my own belief is that the latter would never have survived in its present condition without this bounty.

Our position as the world’s global superpower has perhaps never been more threatened than it is today, and, of course, nothing lasts forever. If we are superseded by, say, China, or India (the latter, as widely reported, just passed the former in total population), it’s not clear to me that they will continue to sponsor that fluky little Jewish state. More probably, there will be no f@cks give about, and perhaps outright hostility towards, the Land of Milk and Honey, home of Abraham, Isaac and Jacob. Birthplace and sight of Execution/Resurrection of one Jesus of Nazareth.

So, here’s to you, Israel. I look forward to visiting your shores and (fair warning) inspecting my trees.

But, come what may, I think I’ll take a pass on any orange juice that is offered up to me.

Particularly at these prices, I reckon I can put that ritual off for another decade.

Or at least until Tisha B’av – now just three short months away.

TIMSHEL

Men ought either to be well treated or crushed, because they will readily avenge themselves of slight grievances, but not more serious ones.

Niccolò Machiavelli

Been thinking a great deal about my old crime partner Nicky Mac lately. While I won’t get into specifics here (what happens, after all, in the Florentine Renaissance, stays in the Florentine Renaissance), suffice to say that he, I, Leo DV, Mickey the Angel and Larry the Great Medici (the last of these plausibly the founder of the misanthropic 27 Club) kicked up quite a bit of dust in the late 15th and early 16th Centuries — engaging in unmentionable Hijinx and dodging that buzz-killing Dominican Friar Girolamo Savonarola (original architect of the Bonfire of the Vanities) throughout. And, while a few of them cats had personal tastes, which, shall we say, I did not share, we had one whale of a time.

It was, though, ages ago, and the old crew ain’t what it once was. Luckily, though, they left stuff to remember them by – the Sistine Chapel Ceiling and the Mona Lisa, for example.

And in the case of Nicky Mac – that posthumously published, world-changing Political Treatise “The Prince”. Containing such eternal and universal truisms as “if you strike at a prince, you must kill him”.

As well as our thematic quote, which seems to me to be highly a’ propos to modern times. Because we live in an era where grievance is currency – perhaps the most valuable unit of account under heaven. And, as Nick instructs us, small grievances often carry more weight than large ones. Look at a colleague funny and they’ll drag your ass in front of H.R. Disagree with the settled academic consensus – particularly as to the high crimes of our forebears and, wham, you lose tenure and find yourself banished from the physical plant of the campus itself. Offer compensation for silence to a former side piece? Well, I reckon it depends on who you are.

As I recall, it wasn’t always that way. Saturday marked the 40th Anniversary of the iconic but arguably tacky New York Post headline “Headless Body in Topless Bar”, for which that world-class publication has been lampooned for a full four decades. Further, the cops did bust the perpetrator – one Charles Dingle, who was found guilty of the dual serious grievances of murder and decapitation. He was last denied parole over ten years ago, and I cannot find any more recent information on him. Presumably he’s still in jail.

But in today’s markets, it is certainly the case that if one transgresses in small ways, one can expect to pay dearly for such sins. Larger crimes, though, will indeed tend to go unpunished. Nobody, for instance, went to jail for nearly tanking the entire global capital economy a decade and a half ago. Ditto for the contemporaneous LIBOR scandal – arguably the largest scam in financial history. And, in terms of the latter, the only vengeance extracted only came to fruition on Friday, when the once dominant CME Eurodollar futures contract (settled to LIBOR) gathered to the dust of its forebears.

Jho Low – absconder of ~$5B from the complicit Malaysian Sovereign Wealth Fund 1MDB — remains at large. Bernie lived out his final days playing cards and doling out financial advice to other cons at a North Carolina Club Fed.

And so it has always been. I reckon that what Nicky was really trying to tell us though, is that if you’re gonna f@ck with someone, you probably ought to go big. This was plainly true six centuries ago, and remains so, I think, till this day.

I myself have some grievances against the market, which, unfortunately, are of a finite nature, and thus subject to the maximum penalty under our titular maxim. Risk assets, building on a surprisingly robust Q1 performance, remain on a tear. Newly promoted (yes, it was approved by Congress) Coronel Naz is up > 15% for the year. Bonds of every configuration are enjoying a strong rally. Live Cattle – perhaps unfortunate beneficiaries of that Texas dairy farm explosion which claimed 18,000 head (and appears to be a crime that remains unsolved) is up double digits.

Crypto is through the roof – nearly a double in 3.5 months of ‘23 action. And this despite myriad frauds, bankruptcies, and concerted, coordinated attempts to destroy every exchange and trading platform where it is transacted.

The White Sox are off to a dismal start, but then again, I take comfort that some things, at any rate, are eternal.

Attempting to trade or invest through this madness has routinely evoked the full wrath of the Gods, who seem determined, at least at present, to express their full outrage at such audacity. Unless, of course, you’re a bulge bracket bank. In which case your hubris is richly rewarded.

Meantime, the extended damage wrought on the developed world’s capital economy ensues unavenged. I remarked to one of my clients, in the wake of encouraging Employment, Inflation, Industrial Production, Consumer Confidence and (through inverted logic) Retail Sales figures, that risk assets are configured more comfortably than they ought to be – considering my overall view of the current economic problems that plague us.

And what are these, you may (but probably won’t) ask? Well, allow me to inventory them.

Economic agents of every stripe – Consumer, Government, Corporate and Institutional, are overextended, awash in debt. Policy makers are universally hostile to value creation. Corporations and even small businesses – those vital engines of output, are focused with laser attention on image and branding rather than innovation and efficiency, and if you doubt this, consider the recent Bud Light fiasco, about which I cannot bring myself to offer more than passing reference.

Recent surveys suggest that 70% of American households feel financial stress, nearly 60% are subsisting from paycheck-to-paycheck. Yet consumers continue to binge. Our workforce is listless and unmotivated, a vast majority of them adopting a rent-seeking approach under which they strive to extract more value than they generate.

Politicians and political leaders wallow in small ball – seeking, first and foremost, tactical advantage over their rivals – rather than earnestly attempting to confront, much less solve, the myriad problems that plague us. This theme is recurrent through history – Europe of the 1930s comes to mind. And how well did that turn out?

And, in result, a serious grievance emerges. As I am convinced that the lion’s share of investible assets is priced irrationally, decoupled from underlying realities. To the extent that I am correct, here, it is unavenged. For now, at any rate.

But we will continue to trade. And invest. As we must. To do so, however, we must embrace our myopia. We’re into the heavy part of the information flow season, with the short-term focus fixed on the Q1 earnings cycle. The big banks kicked us off and delighted us with vanities for which no bonfire is poised to combust. Q1 was a laugh riot for them, despite (or perhaps because of) the mortal threats and carnage imposed upon a few (Credit Suisse, SVB, etc.) of their number.

A month ago, it appeared that the banking system was under enormous threat. Now, it’s the place to be. But these wheels keep spinning so it pays to stay alert. This might require an extra dose of caffeine, but it may bear mention that Coffee has had an even better run in ’23 than has our population-depleted Cattle Complex, and that for those who like a bit of authentic sweetener, Sugar tops them all:

No Sugar (Right Graph) Tonight in My Coffee (Left Graph):

God oh mighty, I sound like an old man. But give me a break – it’s 600 years since me and my krew were pounding the streets of Florence, looking for action.

As time goes by, I believe I understand those days better than the present era – rife as it is with risk of undefined nature and magnitude. But like my boy NM pointed out:

“And what physicians say about consumptive illnesses is applicable here: that at the beginning, such an illness is easy to cure but difficult to diagnose; but as time passes, not having been recognized or treated at the outset, it becomes easy to diagnose but difficult to cure.”

I’m not a physician, so I have no idea where we are in this cycle. I only can thus admonish that we heed the symptoms and react in a timely fashion to whatever comes our way.

TIMSHEL

Though my interest in baseball has now dwindled to imperceptibility, I have suffered the multigenerational affliction of being a Chicago White Sox fan. I come by this honestly, as my maternal antecedents passed it on to me at a very young age. Took me to the charmingly decrepit Comiskey Park (now replaced by the banally but aptly named Guarantee Rate Field) – ensconced at the corner of 35th Street and the elegant Dan Ryan Expressway, where I spent many weekend afternoons watching the zaftig but effective knuckler Wilbur Wood pitch both ends of a double header:

Other than the appeal that derives from gang bangers dating back to Eazy-E embracing their merch (and that whole episode when Arnold Rothstein paid them to throw the 1919 World Series), it’s hard to imagine a team in any sport with a less geographically dispersed identity than the Sox. They have one but a single title in more than a century. They clearly play second fiddle to the cuddly, misanthropic cross-town Cubs.

The South Siders in Bridgeport and beyond love them, but for the rest of the world, any mention of them draws little but a blank stare. They are the second team, in (what used to be) the Second City, in a barely watchable sport. Yet they have been and remain my team.

They are, however, the original source of one trend that has taken hold– as the organization whose fans first took to singing the hook line from our title song, when they were on the verge of certain victory. Since the late ‘70s “Na na na na, Na na na na …” would echo across the mostly empty grandstands upon rare occasions when a positive outcome for the contest was assured.

Now, everyone does this. In every sport. Across the land.

But more to our purposes, the theme has traversed Chicago, and can be sung to the city itself.

All of which is a glib means of articulating my displeasure at the outcome of Tuesday’s Mayoral Runoff, which produced a winner directly from the ranks of those most likely to euthanize what already was (arguably) a dying metropolis. Ironically, the fellow is an African American named Johnson, which also the moniker of Chicago’s and arguably the nation’s two pioneering, African American-led enterprises – Johnson Publishing (issuers of Ebony and Jet Magazine) and Johnson Products (manufacturers of Afro Sheen, etc.). These corporations, along with HARPO Productions (created by Oprah, who also made her bones in Chicago), set the pace for minority-owned entrepreneurship around the world.

The companies blazed trails, created great products and opportunities for three generations of economically disadvantaged urban minorities.

Mayor-elect Johnson, however, has other ambitions. He is a product of Public Sector Unions – you know, those righteous organizations who have done so much for the communities they serve, and who, according to public records, financed over 90% of his campaign. Chicago is deep in hock, is losing population and businesses at an alarming clip. Crime, as everyone knows, is rampant and on the rise. The schools are collapsing.

The weather, for several months a year at any rate, still sucks.

His answer? Tag large corporations – many of which have little incentive to operate there in the first instance and are now afforded every inducement to leave. Attack school choice. Divert resources from Law Enforcement.

The outcomes are, and will be, inevitable. Corporations will continue to bounce. Cops will depart in droves. The rich and empowered will, other than what they read about in the newspapers, scarcely notice. The teachers will present aggressive bills of fare for campaign services rendered and will be rewarded handsomely for their support.

The suffering classes will bear the brunt for all of this. And this once-great global city will continue to fade into irrelevance.

Oh well, it had a great run. Became, for no reason other than the applied resources of its leaders and population at large, a vital, global socioeconomic force. It was a place to establish oneself – and thrive. Folks went out of their way to visit the city, and, as evidence of this, to this day, it has hosted nearly twice as many Presidential nominating conventions as any city in America – including those that ultimately elected Lincoln, Grant, Garfield, Benjamin Harrison, Cleveland, Taft, both Roosevelts, and Dwight D. Eisenhower.

Superior transportation and lodging facilities were counted among the major alures. But that has recently been on the wane. Nonetheless, Mayor-elect Johnson proposes a substantial incremental room tax on the city’s put-upon hotels. Large corporations found a highly trained, motivated, and able workforce, but now, under the proposed plan, will face a new tax on their headcount. It has already lost Boeing, Tyson Foods, Caterpillar, and Citadel. Local Big Boy Mickey Ds. is downsizing. Expect this trend to accelerate.

But what really frosts me is the proposed tax on financial transactions.

Because Chicago is the birthplace of Exchange-traded derivatives, an industry that provided the city enormous global visibility, and launched many, many thousands of careers (including my own). Automation and Consolidation have reduced the number of boss dog exchanges from three to two, and massacred the headcount needed to support these franchises.

Still and all, and to this day, if one wants to trade Equity Index, Foreign Exchange, Interest Rate or Commodity futures, the Chicago Mercantile Exchange (CME) is the place to do it. Single stock options? The Chicago Board Options Exchange (CBOE).

And now (or as soon as next month when Mayor Johnson takes office), there is a strong possibility of Chicago imposing a toll for such transactions. For a couple of reasons, it’s a fair question as to whether they will be required to.

Because first, there’s absolutely no reason why the CME or CBOE need to stay in Chicago. They’re businesses long ago went all-electronic. All, in fact, that remains in the city is some senior staff, who will be given the alternative to either relocate to Austin (or wherever) or find other employment. Heck, the exchanges won’t even need to change their names if they move. And no one can make them.

The other potential impediment is the State of Illinois’ rotund trustafarian governor J.B. Pritzker, who will need to ink any city-based levies. He’s reported to be on the fence about this (no doubt a severe trial for the fence itself). But if he’s against it, it won’t be due to his desire to protect valuable civic franchises. Instead, he’ll be following a picked over script that routinely plays out in many jurisdictions, including New York. There and elsewhere, avaricious governors often fight with money grubbing mayors in their states to grab the lion’s share of what, after all, is a finite amount of money that can be extracted from the economically productive numbers among their constituency.

My guess is that this here Johnson is gonna have a tough time raising taxes of any kind. I reckon we’ll see, but what I am certain about is that the Windy City financial sector will NOT abide this assault and instead will blow like the February wind off Lake Michigan.

And the political news doesn’t end there. The newswires reported last week that Bobby Kennedy, Jr. has thrown his hat into the presidential ring. Here’s hoping he meets a better fate that his daddy, who was a stone-cold animal – egging Brother John into the Bay of Pigs Invasion and attacking the mob so viciously that he airlifted New Orleans Crime Boss Carlos Marcello into the Guatemalan jungle. That was the ‘60s – a decade that Marcello survived, and the Kennedys did not.

But this is not a political journal. Rather, it is a probing analysis into market economics. A fascinating week awaits us. The banks report, and that should at minimum be amusing. In addition, we have CPI/PPI. Both of which are slated to fall dramatically. Which would be nice.

After that, there’s the fat part of earnings, more macro statistics, etc. The Fed don’t meet again until the calendar turns to May, and who knows where we will be by then? The consensus of the prognostication class is that we’re headed straight into the teeth of a recession. Perhaps. But I don’t think that it will be particularly noticeable – at least at the outset.

I suspect that bi-directional price movement across all important asset classes will continue, without bringing much clarity to the proceedings. It’ll be a tough trade, but the nimble may have a chance to coin a few shekels.

More likely, it will be reminiscent of the trials and tribulations of the Chicago White Sox – early ‘70s vintage. With Wood on the Mound, Walter (No Neck) Williams leading off, and the nine-fingered left fielder Carlos May supplying the juice.

The score will be low, the stands empty. The winds will blow off the Lake, on to a diminishing city of bureaucrats, run by bureaucrats, for the benefit of bureaucrats.

It all makes me sad. But I haven’t even visited the city limits of Chicago in more than four years. I have fewer reasons than ever to amend this oversight. I’ll follow the fortunes of the Sox in the box scores, though, and hope for the best.

And with that, all I can do is bid everyone a (na na na na, na na na na, hey, hey) goodbye.

TIMSHEL

In the second of a series of themes deriving from Presidential Experience, I draw your attention to an anecdote attributed to the singular Abraham Lincoln, telling of a man attempting to mount a horse so rambunctious that it threw its back hoof into the stirrup. Whereupon the man exclaims “well, if you’re gonna get on, I’m getting off”.

The context of the yarn was Lincoln’s inability to compel George B. McClellan — Commanding General of the Army of the Potomac — to adhere to the military chain of command. There are other examples of this in U.S. History – Patton in Sicily, MacArthur in Korea, come to mind.

As do some episodes in the experience of the newly indicted 45. There was, of course, the unfortunate, post-election saga of the Chairman of the Joint Chiefs of Staff establishing direct communication Chinese Leadership, to assure them that he’d give them a heads up if the Big Guy took a notion to lob a massive orange ICBM their way.

More recently, it seems that DJT cannot rally his MAGA army to generate even the semblance of a respectable protest – much less take to the streets with pitchforks and torches – as he compelled them to do in the lead up and immediate aftermath of a New York DA slapping 34 counts on his sorry ass. He has, to me, never looked like more of a Tin Foil Hat Commander, leading an army of wooden soldiers. And that, given his history, is saying a great deal indeed.

However, in each of the above-mentioned cases, the lesson is plainly this – in military and other affairs, if a horse is trying to ride itself, other riders must dismount and beg off.

All of this comes to mind as Q1 ’23 comes (from some perspectives mercifully) to a close. If you hung around the circles that I haunt you wouldn’t suspect this, but our equity indices (to which I have, for many years, assigned military handles) are all in significant rally configuration. General Dow crossed again into positive territory on Friday; the Gallant 500 gained a respectable if unspectacular 7%. All of which was upstaged by Captain Naz — up nearly 17% and annualizing at a spiffy 86%.

If this continues, I may just kick The Captain upstairs – to Major or even Colonel. Or at least send him a medal like the Distinguished Service Cross.

And all this in a three-month period that featured a banking crisis, a crypto crisis, nigh-massive layoffs in the tech sector, an unrelentingly severe and continuing set of rate hikes, and other assorted dainties. Throughout, the market has somehow surged forward, but it not been an easy steed to ride, and (again in my world) upside capture has been elusive.

As we enter Q2, the several questions confront us. Are equestrian investors riding these ponies? Are they, alternatively, riding themselves? And either way, is now a good time to climb on board and commence galloping?

I am reticent to sanction this action. And I encourage all those out there that monitor my opinion to take care.

We can take some perverse comfort the reality that the dreary, late-quarter information vacuum has come to an end, and that we will soon be on the receiving end of an onslaught of important data. For the most part, though, that’s a few days off, and in the interim, of course, we must divide our attentions to adhere to the solemn rituals of Passover and Easter. Each teaches lessons of Salvation and Resurrection, from which we can certainly benefit in these trying times.

The release of the latest Macro Statistics, Earnings Outlooks and other key information points won’t, indeed, commence for several days. In the meanwhile, we can perhaps be glad that the overwrought, over-analyzed “banking crisis” has, if not subsided, at least take a pause.

But it could certainly re-emerge – particularly with renewed Fixed Income volatility. Bank portfolios, mapped to a “Held to Maturity” designation, have grown at an alarming rate, and we have no visibility into the authentic value of these holdings:

Somebody please help me here. Can I possibly be reading this graph correctly?

Because what I see is a quintupling of the amount of assets on bank balance sheets which: a) they are not permitted to sell; and b) are therefore not obligated to mark to their true market value – all in three short years.

No doubt a good deal of this is driven by all that fabulous QE the Federales laid on us since the lockdowns (now, unthinkably, three years behind us). But – not gonna lie – this makes me somewhat apprehensive.

Bloomberg estimates the associated losses on these asserts at ~$620B – somehow down from even greater, more gruesome heights – with the recovery of Fixed Income assets caused by declining interest rates. Notably, this amount is > 25% of the industry’s entire capitalization, which, as is the case with so many other sectors, is dominated by a handful of institutions (JPM, BofA, Citi, Wells and the recently worrying Schwab). However, the infallible Nouriel Roubini estimates these losses at > 2.5x this figure. If he’s right, and the losses do indeed approach $2T, it implies that, for the most part, these HtM portfolios are worthless.

I doubt this is the case. But nobody knows.

It is perhaps fortunate that according to longstanding protocol, the banking sector is first in the reporting queue for Earnings and Forward Guidance. In the wake of SVB, Signature, Credit Suisse, etc., it should be a fascinating sequence.

But it is more than a week away.

A renewed rise in interest rates and/or a widening of credit spreads (perhaps catalyzed by a resumption of CS-like raids on troubled financial institutions) would certainly cause these depository institution losses to swell again.

In terms of the former, ubiquitous inflation trends remain at the center of the saga. Official government statistics releases are a couple of weeks off, but I wouldn’t expect any miracles here. Particularly, as was reported Sunday, OPEC has just announced a ~1.5M bbl cut in daily production. Even before this surprise move, I sensed that the Crude Oil was oversold, and this action certainly won’t detract from that viewpoint. Further, if the Energy Commodity Complex regains upward pricing momentum, it’s almost certain to goose Inflation trends, in which case Interest Rates could indeed rise anew.

This, in turn, would be dilutive to the assets swelling up inside depository institution balance sheets. But what you can take to the bank is that they will say nothing about losses in their Held-to-Maturity portfolios. Because they don’t have to. And among the certainties in this world is that banks don’t do anything they don’t have to. If you doubt this, just walk into a local branch try applying for a mortgage. Or a loan of any kind.

Still and all, it’s heartening to observe a rally in risk assets – if for no other reason than the opposite condition is so wearying and depressing.

And it may indeed continue. But if it does, I will attribute it to a decline in the risk premium – a realization, among other things, that the Developed World Banking Complex is not on the verge of collapse. This, of course, is a welcome development, but should not be mistaken for the kind of rally that is the stuff of our dreams. One that is driven by economic vigor, possibility, and opportunity.

Because that’s not where we’re at. I cannot think of a single sector where Senior Managements are making bold, assertive plans for future growth. Not Technology. Media. Telecommunications. Not Industrials. Not Financials. Not Health Sciences. Not Consumer (Staple or Discretionary). All, from my vantage point, are playing defense. Waiting until the massive, if undefinable mess that we’ve made for ourselves resolves itself, or, at minimum, dissipates.

Alas, my friends, we seemed to have stepped in it. And I’m not talking about a stirrup. It devolves to us to clean it up, and then to determine whether we choose to ride this mount or walk.

But wherever we’re going, we’ve got to get there somehow. And about the best advice I can offer is to take care that we are sure that we are in control of our conveyances – that we are riding them and not the other way around.

Trust me here my brothers and sisters — as an introductory risk management framework, one could do a lot worse than beginning from there.

TIMSHEL

“An economist is a man who wears a watch chain with a Phi Beta Kappa key at one end and no watch at the other”

Harry S. Truman

And this isn’t even Truman’s most famous economics joke. He is known more prominently for his forlorn search for a non-equivocating (i.e. “one-handed”) practitioner of the dismal science — one that would not dilute his core prognostications by subsequently describing why the exact opposite conditions may prevail.

I have some sympathy with these self-styled two-handed economists, because, as I tell my droogies, the essence of economics is the socialization of tradeoffs. Take Path A, and one may obtain a specified benefit at a defined cost; adopt Path B and the payoff matrices change, or, perhaps, reverse themselves entirely.

Or anything else might happen. Which is what makes it all the great game that it is.

However, our purloined quotation is, plainly, a nastier jab at the econ crew. Here, Truman, never one to mince words, asserts unambiguously that the entire field of economics is worthless. He may have a point, and, as a trained economist (I do have an advanced degree in the discipline – for which I paid good money), I will strive not to take this too personally.

And besides, the modern-day world appears indeed to be over-loaded with double-pawed/timepiecebereft analyzers of the exchange of the world’s goods and services. Many, indeed, support fancy degrees and high honors, but do any of them have the first clue as to where the economy is headed?

Didn’t think so.

We must begin our inventory of those who know not in Washington – at the Treasury and the Fed, who have spent the better part of the last two decades printing, spending, and taxing – to the tune of trillions – and expecting no consequences for this madness.

All of which was justified by the work of watch-less, key-carrying, two-fisted economists.

But the Fed, at least, has gotten some religion of late, and intrepidly continues its rate raising journey, having taken its key overnight rates from 0.0% to nearly 5% in warp speed. The consensus of, er, economists is that they’ll now rest. At least for now.

I will cop to being a bit surprised at this last hike. It was, indeed, the likeliest outcome, but I had a hunch that the just might pause – ostensibly to insure against further losses by banks and insurance companies holding pant-loads of unhedged, Fixed Rate paper (ala SVB).

However, as it happened of course, the FOMC session – long billed to be the headliner of the month, turned out to be mere sideshow – upstaged by the Big Banking psychodrama.

Events here were something of a whirl, but I’m pretty certain that it began on Sunday night, when the Swiss National Bank pushed Credit Suisse into the superficially reluctant arms of rival UBS. There was more here than met the introductory eye, as the state-mandated transaction featured two elements that violated market protocols of at least 50 centuries standing: 1) it rammed through the transaction without bothering to hold a shareholder vote; and 2) in doing so, it unilaterally zeroed out $17B of bond obligations – owed by Credit Suisse to its creditors.

These two bedrock concepts of Private Enterprise – that the owners of a company for sale are afforded a vote on the terms, and that debt holders get paid before the equity guys — date back to before King David and maybe even King Saul. I shudder to contemplate the longer-term implications of these rudely rendered improvisations. All I know for sure is that lawsuits will abound, smart, patient entities will bank profits for years on these now-worthless obligations, and the ADD public will soon forget the whole affair.

Presumably, the Swiss Government will justify its action by reverting to the old bromide about doing all in its power to protect the interests of their lederhosen-wearing constituent/depositors. But nay, my friends, methinks something else is at play here.

It is, instead, and as Harry S. Truman might have said, a case of more fat to a fat pig’s arse.

Let’s begin with who I believe to be the biggest winner in this here game: The Union Bank of Switzerland. Though it kicked and screamed in Brer Rabbit “oh please Brer Fox, don’t chase me into the briar patch” fashion, it comes away from this here trade having vanquished its biggest domestic rival, and copping a half tril in wealth management balances and an equal amount in liquid demand deposits. It now lords over the Swiss financial realms, and, perhaps, over those of the entire Continent (more about this below). And it barely had to spend a penny or lift a finger to do so.

I strongly suspect that other financial behemoths, say, U.S. bulge bracket firms and hedge fund whales, made tidy sums of varying sizes in their successful efforts to euthanize CS.

It was ever thus (see Lehman, Bear, Baring, MF Global, Continental Illinois, etc.). And now they’re out in search of their next victims. On these here shores, First Republic is at the top of the hit list and appears to be wavering.

But the bigger game – for now — is in Europe, with, of course, Deutsche Bank as the primary target.

Now, to fully articulate my viewpoints here, I must state my belief that DB has been economically insolvent for eons. Like the fancy, fabled SVB, it holds most of its assets in a Held to Maturity portfolio which has not been marked to market since Bush II and the Great Financial Crisis. Were these wonky securities ever priced at their prevailing economically accurate valuations, it would likely wipe out the bank’s equity by a factor of five or more.

But this has been the case for more than 15 years, over which time both DB and the world have endured (if not prevailed).

And here’s a one-handed economic projection:

DB ain’t going nowhere. It carries the full weight of the German political economy behind it, which, if its vigor has deteriorated nominally from the reign of Frederick the Great (1740 – 1786), should be sufficient to sustain the viability, if not the vitality, of its largest and most important financial institution.

But DB is, by no stretch of the imagination, a well-run bank and is now under indecorous attack by its industry peers.

If only Frederick the Great were still around:

Let us acknowledge upfront that Fred was not the manliest of men. More of a Freddie Mercury/Fred Rodgers than a Fred the Hammer Williamson. And whatever other accomplishments might be to his credit (including, it must be allowed, a remarkably long string of military successes), he never had to deal with a Prussian Banking Crisis. Moreover, if he was around to discharge the current mess, he wouldn’t have the luxury, afforded to the Swiss, of simply shoving DB into the lap of a competing bank. Because, in Germany, there are no competing banks.

He might also be ill-equipped to tackle the Rothschilds or whoever was around to abet the destruction of said, non-existent competitor(s).

But (he might have asked) why would the competitors do this? Answer: Because they can.

So, they’ll continue to short the stock, bonds, and OTC positions of the institution, until a Teutonic bailout is required, or they tire of the game. I suspect they will then move on to other impaired financial institutions. The French banks look like a big fat target, so stay tuned.

Meantime, the watch-less Phi-Betas (with an emphasis on the Beta) at the Fed assure us that the domestic banking sector is adaptable and sound. And, down the road at Treasury, an institution presided over by a PhD economist whose husband sports an Econ Nobel, we are assured that all American demand deposits either are – or are not – backed by the full faith and credit of the Greatest Nation on Earth.

As indicated above, all this renders the productive part of the economy something of a sideshow. The wheels appear to remain in motion, but at what force and for how long is anybody’s guess.

I won’t hazard one at the moment. Because I feel unqualified to do so. I am an economist. With 2 hands, but without a Phi Beta Kappa key, a watch chain, or, for that matter, a watch.

Thus, according to the Truman standard, I’m half an economist. Or maybe less. I am, however, at peace with this, and will leave it to the readers to form their own, associated judgments.

TIMSHEL

A few years back, in what seems like several lifetimes ago, I came up with a spiffy title for my weekly musings.

The Blognormal Distribution.

Thinking it a clever play on words, I ran it by my company’s Chief Arbiter of Taste (CAoT) – one Charles P. (Chip) Hutton, III.

I had elevated him to that cushy C-Suite post for having called me out on my preceding, somewhat unhinged and published moonings after then-Secretary of State Condoleezza Rice, and more specifically for phrasings such as “that sister really puts led into this boy’s pencil”.

And he was right. I shouldn’t have committed that sentiment to writing, much less in a highly public forum. And I most certainly should not be busting it out again in this, most touchy and sensitive of eras.

But like I said above, that was all was several lifetimes ago. So (I figure) why not let ‘er fly and see what happens?

Meantime, about the title and all, it’s a riffing off of the wonky mathematical concept of lognormal distributions, to which securities prices are said to adhere.

Rather than assuming the boring, symmetrical form of a normal bell curve, a lognormal distribution looks something like this:

No wonder trading is such a hard job. I mean, what in God’s name is going on with this here graph, of which there are, by my count, 4 different renderings?

And, apparently, this s factor is pretty important, because if you set it to 2, it looks like the Black Diamond runs at Jackson Hole. Fix it at 0.5, by contrast, and it morphs into a mathematical depiction of the Bunny Slopes at Alpine Valley.

Either way, I am far from sure that stock returns adhere to this logic.

Consider, if you will, the recent performance of the benchmark Banking ETF – The KBW Index, which has (rather indecorously in my opinion) plunged more than 25% over a handful of trading sessions.

Which is a lot for a Banking Index to drop:

The results are not overly surprising, however, as dumping shares of banks and bank holding companies has become something of a Cottage Industry these days.

I do hate to pile on to what is among the most over-analyzed of dynamics in at least a month, but duty calls. So, about SVB – I have a few beefs with what’s been written. First and perhaps most annoying are these breathless revelations about “gap” and/or duration risk. Seems like everyone just figured out that, like any bank, SVB sourced its funds through deposits that feature instantaneous liquidity and invested the proceeds in securities with maturities of approximately ten years.

C’mon people! Smarten up! The whole Treasury Market runs this way. Nobody buys 10-year Notes with money that is locked up for equivalent time periods. If investors didn’t pay cash for this paper, then there wouldn’t be a market for it at all – causing, among other tragedies, the Green New Deal to go tits up. More to the point, the market liquidity of such a portfolio is equally instantaneous – the whole book can be sold in micro (if not nano) seconds. Thus, with the ability to move in and out of these securities at will, it wasn’t some unaccounted-for risk that caused the losses; it was a failure to trade out of bad positions in a timely fashion.

Much has been written about the vacant SVB CRO position, but to me, it looks like they didn’t even have a Treasury function.

Which is pretty bad for a bank – the financial equivalent of a marching band without a sousaphone.

But SVB’s problems were on the liability/deposit side, with their funding liquidity mostly deriving from animalistic, VC-backed enterprises with happy feet. A 1% loss on a poorly constructed securities portfolio impelled the lead underwriters of these vessels to call for everyone to abandon ship. Abandon they did, and down the Good Ship SVB went.

A review of SVB’s 2022 Balance Sheet reveals > 60% in cash and liquid, tradeable assets and\ standard debt amounting to < 10% of total assets. Trust me, folks, this is an exceedingly conservative banking profile. Longstanding regulatory protocols require depository institutions to maintain no more than 10% of cash and liquid securities to meet the potential demands of withdrawing depositors (fractional reserves in industry parlance), so SVB was off-the-spectrum above these requirements. The idea is that account holders are exceedingly unlikely to transfer or remove more than 10% of their funds at any given moment, and, thus, 10% reserves is deemed practically adequate. This is a system which (other than during annoying intervals like the Great Depression) has functioned efficiently for many centuries.

But apparently no more. And thus, a new kind of bank risk emerges in this amped up age of instantaneous telecommunications. Call it Thiel Risk – the losses that can accrue when a big VC whale orders his minions to move their funds out – en masse – of a financial institution — and to do so pronto. So formidable and fearful is this newfangled Thiel Risk monster that even a $30B cash injection by its (no doubt spooked) Wall Street buddies has failed to prevent First Republic Bank from losing 80% of its Enterprise Value and witnessing the degrading of its debt to junk – all in a matter of days. Other, financial institutions of similar profiles are no doubt quaking in their boots.

But out of all menaces – latent or manifest – some good does issue forth. Covid, after all, brought about a surge in new telecom and biotech innovation. And in this instance, a number of (perhaps mixed) blessings emerge.

The first of these, which I cannot unfortunately endorse, is that for now, the government, playing the role of a latter-day George Bailey, has issued a blank guarantee on ALL bank deposits. So, don’t worry, you pool-playing Building and Loan depositors, your funds are safe!

I’d like to designate this a righteous act but can’t. In fact, I struggle to contemplate anything worse, any step, which, if rendered permanent, would do more damage to our multi-century, on-going experiment in capital-based economics.

Financial risk is embedded in all our economic doings, and if individual economic agents are shielded from this reality, they will, literally, wreck the joint. This includes our banking relationships. If we, as its depositors, fail to regulate our financial institutions by selecting them, at least in part, based upon their soundness and good judgment, they will run rampant with risk. Why not let ‘er rip by issuing the riskiest of loans? Owning the most dubiously speculative of securities portfolios? Our friends in the Brooks Brothers suits will no doubt cut us in by paying economically stupid interest rates for our balances — but not to worry – it’s all backed by Uncle Sam.

Until, that is, something goes wrong – a series of defaults on those funky loans or the like, and the banks blows their wad. We’re then in comprehensive bailout territory (cira ’08) and/or full, inflationary economic collapse (ala the Weimar Republic).

As it is (and again, here, I am compelled to bust out some over-used, over-analyzed metrics), the steps taken in the wake of the SVB debacle – including new funding facilities provided by the Fed, have reversed several months of its long deferred and much needed efforts to reduce the size of its own Balance Sheet:

The other manifest blessing of the “crisis” is a righteous profit opportunity for large, solvent financial institutions choosing to use their resources to put impaired and potentially vulnerable competitors out of their misery. Sometimes it works; sometimes it don’t. But when it does, God Oh Mighty, what fun we have.

The biggest prevailing target, of course, is Credit Suisse, which has seemed, for years, to have bungled its way to the center of every financial scandal and supreme misstep that has transpired over the better part of the last decade. If one took a poll: a) most informed folks probably endorse its gathering to the dust of its yodeling forebears; and b) I might vote with the majority myself.

At the point of this writing, the master puppeteers – including the Swiss National Bank – are in a frenzy to consummate a takeover of CS by local frenemy UBS. The latter has offered 2 bits on the Swiss Franc (~$1B) for the whole show. However, to put this in perspective, as recently as 18 months ago, CS sported a market cap > $50B, so UBS is able to maybe scoop up its biggest rivel for about 2% of its recent peak valuation.

Oh, how the mighty have fallen.

Still and all, it brings a joyful tear to my eye to witness the frenzy of the stronger financial behemoths striving to cash in by shorting their stock, bidding down their bonds, and moving their OTC positions against them. Call me sentimental, but it all reminds me of those giddy days in advance of the collapse of Bear Stearns and Lehman Brothers.

Meantime, the regular mechanisms of the capital economy continue to operate, and, somehow, the numbers don’t look too bad. PPI – lost amid the SVB agita – came in gratifyingly weak. Atlanta GDP Q1 estimates recently surged past 3%.

The Fed, in whatever time it can spare from, yet again, rescuing (?) the banking system, will issue its rate proclamation on Wednesday. Lots of pressure on them to pause their rate-raising ways, and no chance that they go beyond 25.

So, our troubles notwithstanding, I think there’s a bid out there somewhere. Unless, of course, the banking system collapses – in which case there won’t be a bid it sight.

I would advise, however, against modelling for a lognormal return on any investments one makes; it’s just not on the cards. Too much Thiel Risk out there to hope for such an outcome.

CAoT Hutton, III has long ago moved to greener pastures. I haven’t, in fact, heard from him for years. Thus, I am left to arbitrate taste on my own.

So, The Blognormal Distribution is back.

And I still care a torch for Condi.

Because, Thiel Risk or no Thiel Risk, some things, after all, are transcendent.

TIMSHEL

Having dispensed with any effort to play this thing straight, I feel I must plunge into deeper sonic depths here. So, this one goes out to long-deceased drummer Cozy Powell, who played with everyone – Beck, Sabbath, Blackmore, Whitesnake (FFS!). Heck, he even, for a time, replaced Carl Palmer in ELP (it probably didn’t hurt his cause that his Sir Name Initial is P, but still..), and, for those in the know, that is saying quite a bit.

Cozy bought it in ’98 – in a car crash on the M4, and, while, by all accounts a sick drummer, he is largely a footnote in the rock cannon. I myself have no strong opinion about him.

But now, fully a generation after his demise, our backbeat has devolved to the control of Jerome (Not So Cozy) Powell – Chairman of the Federal Reserve Board. Who is having a busy month. This past week, he trotted up to Capitol Hill, to deliver, in time-honored fashion, his semi-annual address(es) to each Chamber of Congress. There, while equipped with neither traps nor snares nor high hat, he nonetheless pounded out a tough, rate-raising percussive on the attending masses. So much so that the markets briefly projected, week-after-next, a full 50-point mallet blast on the Fed Funds Rate (more about this below).

To my recollection, as recently as two weeks ago, 25 was in the bag and 50 was unthinkable.

Powell’s two-day, multi-venue engagement offered up little in the way of new material, and investors came away neither entertained nor amused. There was a bit of a selloff, but an unremarkable one. And, overall, I applaud the markets for accepting Powell’s remarks with equanimity and intestinal fortitude.

All the above would make for a respectable week’s worth of activity and no one could complain about a lack of action, but, as fates would have it, we weren’t anywhere near done. While Powell was spitting out his mad, wicked game, and in the immediate aftermath of same, a couple of banks went tits up. One of them was a crypto bank, so who really cares?

The other, of course, was a Silicon Valley concern – so embedded in that lovely region that it called itself – in elegant simplicity – just that – Silicon Valley Bank. Moreover, with a touch of the area’s trademark hubris, it selected for a logo the universal mathematical symbol for “greater than”: > 

I cannot resist the temptation to point out that this symbology is now perfectly a propos – insofar as SVB’s liability are now greater than (>) its assets. Bank Regulators, perhaps justifiably, take a dim view of this condition, and have swooped in, creating, somehow, the second largest breakdown in American Banking history.

As the tale unfolds in rapid fashion, several frightening concerns emerge. As mentioned above, it’s the second largest bank failure in history. Number 1 was Washington Mutual (WAMU) in 2008. But while the collapse of WAMU unfolded in slow motion train wreck fashion over many months, SVB was toe tagged within a couple of days. Early last week, it was a fancy, little-known highflier; by Friday, there were chains on its front door and the FDIC had taken over.

Further, and on a related note, while WAMU’s demise was rooted in levered over-investment in the dubious mortgages that were, at the time, all the rage, SVB’s vaporization was catalyzed by losses in the world’s most liquid financial instruments – U.S. Treasury and Agency securities. Notably, this caused an old school bank run, as recommended by their big shot, thought-to-be-intrepid VC chums down the road in the Greater San Jose Metropolitan Area.

What we have here is a through the looking glace financial insolvency. Normally, a bank fails due to problems on the asset side of its Balance Sheet – investment in risky loans and such, rising to the point where its typically diversified lender/depositors achieve a sufficient level of concern to withdraw – en masse – its balances. With SVB, the assets were sound, liquid, virtually default-proof, and have rallied sufficiently in the wake of its collapse to have significantly offset the losses that triggered the event in the first instance. It was their liabilities – their deposits (mostly uninsured due to their size) that lacked diversity and liquidity.

I never knew till now that accepting large cash infusions and investing them in Government Securities was a high-risk enterprise.

It is all, finally, reminiscent of the barely remembered collapse of those two Bear Stearns credit funds back in 2007. We were all at the time was alarmed by and annoyed at these tidings, but hardly anybody expected the torrent that followed. In retrospect, the failure of these two funds arguably started the cascade which, less than a year later, nearly took down the entire financial system.

I don’t know and rather doubt that this here situation mirrors that one in magnitude. My strong sense is that SVB will be quickly snapped up by a larger financial institution, their depositors made speedily whole.

And this ain’t ’07. Banks are much better capitalized. Underwriting standards have tightened to rival that of Cozy Powell’s Standard Tom (if you doubt this, just try to get a loan of any kind).

And my relative serenity appears to be matched by our betters in Washington. Prez Bi released his budget plans a few days ago, which feature a quaint $6.9T in incremental spending and $5.5T in new taxes. We are told that these are remedial measures that will help restore the health of the capital economy and improve the balance sheets of programs such as Social Security Medicaid and Medicare.

It is, at any rate, a lofty sentiment. Because the best estimates I have uncovered as to our unfunded liabilities to these programs rises to at least $200T and perhaps a great deal more – rendering our “on the books” Federal Deficit of just over $30T dainty by comparison.

So, maybe, in some perverse parallel universe, raising taxes is a good idea. But here inside the honest-to-God Milky Way, I’d point out a couple of realities. First, the proposed budged overspends the tax levies by ~$1.5 Trillion. More generally, never in my lifetime have I observed a tax increase that was not accompanied by spending proliferations significantly greater than the additional levies imposed. Moreover, in the prevailing environment, there is no possibility that a dollar of tax increase would not be accompanied by, at minimum, $1.50 in new spending.

And all this is to say nothing of the dampening effect that new taxes would impose upon an already impaired economy.

What passes for good news here is that the proposal is Dead On Arrival. The current administration could not manage to raise taxes (or all that much in the way of spending) when it controlled both houses of Congress and the White House to boot. With meanie Republicans having taken charge of the House of Representatives, the probabilities for passage of such absurdities converge to zero.

Still and all, we must attend to these proposals, as they are, by and large, matters of political positioning. Under certain ’24-based electoral outcomes, these wholesale transfers of economic control from the Private Sector to the Government represent our fate. It will be on us to decide whether or no this is what we want.

And, if that weren’t enough, the February Jobs Report dropped on Friday, with more vigor than that embedded in the consensus estimates. Investors, as could have been prophesied, took a dim view of these tidings, causing our equity indices – under pressure all week – to close near their lows.

But somehow, Treasuries rallied dramatically, reducing Madam X yields an astonishing >30 bp in the week’s last three sessions and rendering even more gruesome our already gruesome yield curve inversion:

In addition, the Fed Watchers released the doves, and the 25/50 bp prospect is now a rough flip of the coin. I can only surmise that these more favorable signals from the Fixed Income market are most catalyzed by the above-mentioned bank failures, as the prospects of raising rates into a banking insolvency environment are in no ways ones for the faint of heart.

And, somehow, the credit markets rallied on all of this. Not much, but with banks failing and whatnot, it is surprising, nonetheless.

My friends, these things are unsustainable. I don’t know where we’re headed, but it ain’t where we at.

For now, the plot is clear. We will watch for newly harvested bank failures and wait with breathless anticipation the contents of the Inflation Reports and the issuances of Not So Cozy Powell and the rest of the FOMC Ensemble.

I don’t reckon that any of it will amount to much. Lots of volatility, little in the way of directionality. Unless, that is, the SVB collapse spreads to other financial institutions. The latter wouldn’t be pleasant, but I foresee no chance of a widespread banking collapse. Further, I’d remind everyone that even in the Great Financial Crisis, not a penny of demand deposits was lost to the unwashed masses.

Come what may, the beat will go on. It always does. From the second of our conception, or, at any rate, when our own arterial functions begin to function.

And until we take our last breaths.

Thump, thump, thump, thump. But through our own resources, we sometimes improve upon this.

Sometimes, for instance, the beat is enhanced by the stylings of John Bonham. Or Keith Moon.

Or Cozy Powell. Now largely forgotten.

Someone or something always comes along. Unfortunately, for now, that someone is Not So Cozy Powell, who no one would choose to man the skins for any band anywhere on the planet. This condition won’t last forever, and, meantime, the best we can do is just adhere to the abovementioned beat – in the markets and in life.

By doing so, we may not achieve >, but, as last week’s events demonstrated, > might not be all it’s cracked up to be.

TIMSHEL

I write today in immediate advance of a personal, crushing yartzeit – the details upon which I will not elaborate. Those who know of this, know. As to the others, well, I’ll spare you.

Meantime, Sunday marked 70 years since the passing of that always grouchy, often petulant but somehow lovable old bear — Josef Stalin. He founded the Pravda newspaper (sort of a USSR version of The Onion) took over Supreme Leadership of the Soviet Union in the immediate aftermath of the demise of his jocular predecessor – V.I. Lenin — and held the post until his death in March 1953.

In his three decades of dictatorship, he occupied himself with countless purges, the military modernization of Mother Russia and the winning of World War II. If you doubt the last of these, read up on the topic. The best estimates suggest that >80% of all WWII casualties on all fronts occurred in the battle between the Nazis and the Bolsheviks. He named a town after himself, the scene of the most important of that global conflict’s battles – the War’s military equivalent of the Battle of Gettysburg. Like Lee following Pickett’s Charge, after losing the Battle of Stalingrad, Hitler never again seized the effective military initiative, and before you knew it, Stalin’s troops were linking up with Eisenhower’s Americans on the banks of the Elbe River, and daintily waltzing into Berlin.

Having thus vanquished the Germans, he set about establishing the Cold War (with a little help from the West), building the Iron Curtain and compiling what for decades was the biggest nuclear arsenal in the world.

As I was culling the herd of my scrap books, I came upon this old photo of my pal Jo – one I don’t even remember taking. I think the glassy eyes derive from a few shots of vodka we had just downed in a cozy little tavern near Minsk.

Joe didn’t like random pictures taken of him, and his responses could be, let’s just say, rather disproportionate. I’m surprised I got this one off, to say nothing of smuggling it past the Secret Police of the Union of Soviet Socialist Republics.

Others can feel free to assume a different view, but I think he takes a nice snapshot.

And it must be admitted that for an assistant cobbler’s son, he amassed quite a resume. But after the collapse of the Soviet Union – some half dozen or so Supreme Leaders later, there was a movement to erase Ol’ Jo from the history books. His legacy met with even a worse fate than that of Teddy Roosevelt, who only suffered the indignity of having his statue carted off from in front of the New York Museum of Natural History to some spot in North Dakota. Stalin lost a whole city. What was once Stalingrad is now Volgograd. Many dozens of streets named in his honor have been retitled; mustachioed statues melted. He was, in short, roundly banished by his former subjects.

However, now, as was perhaps inevitable, his rep is experiencing a renaissance. He polls favorably at nearly 50% in Russia, and, if that nation actually held legitimate elections, could arguably give Vlad the Invader a run for his money.

While JS could hardly be described as being Woke, there are certain elements of the modern vibe which he probably would have carried out to new extremes. Invade the Ukraine? Please. He’d have bombed the place into oblivion by now, perhaps have taken Poland and the Balkans, and set his sights on poor old Finland. He would not be over-prone to coddling filthy capitalists and their despicable lust for profits. He would’ve lined them up and shot them. He would not have cast aspersions on religious faith and its protocols, he would have eliminated religion altogether.

All of which, inevitably, impels me to ask – where have you gone Jo Stalin? A nation turns its lonely eyes to you.

But the best we can do, apparently, is to roll with our own Joe – Joe (Bag of Doughnuts) Biden. Not many similarities except that of nomenclature are present here. One was stumpy and dark; the other tall and fair. One imposed scorched earth on any territory he occupied militarily. The other loads up aircraft for retreat, leaving billions of dollars of cash and equipment behind, and somehow, declares victory. One ruthlessly eliminated anyone he felt impeded his absolute rule. The other kowtows to the enablers that launched him to his present lofty position.

But times is indeed different, and perhaps it is heaven above that ordains each generation the Jo(e) that it deserves. Stalin was a ruthless autocrat who destroyed whole generations of humanity. But Americans owe him a debt of gratitude. Magnificent as we were in WWII, I’m not sure even our best units were in a position to lock horns with the Nazis on the Eastern Front. There are, of course, mixed views on Biden. My own is that he is a something of a hypocrite, with little to recommend him but an outsize allotment of glib affability, and never could have gotten elected save his paymasters’ hatred of Trump and fear of Bernie.

I don’t think he’s calling the shots in Washington, and that’s probably a good thing. I’m not sure who is, but there doesn’t seem to be much of a plan beyond simply strategizing for optimal outcomes in the next election cycle. So, they send our Joe to Kyiv, where Stalin once ruled, for photo ops — and completely ignore (the presumed to be politically dispensable) East Palatine.

But I don’t want to get off on a tangent here.

They’s not much good news in the markets to report. Mortgage rates climbed yet again above 7%. The Sagacious Nouriel Roubini is predicting a wicked bout of stagflation. The construction of Amazon’s much battled-over second Corporate HQ – associated tax breaks having already presumably been harvested — has been put on hiatus.

On a happier note, Lori Lightfoot did go down in Chicago, so there’s that.

But God Oh Mighty, it’s a tough tape to trade.

All market and idiosyncratic factors appear to be moving in lock step with spitball conjecture on Inflation, Interest Rates and Recession. The next FOMC meeting is still > 2 weeks away; Inflation data streams in over the next fortnight.

As for Recession, we’ll have to wait awhile on that one, as even if it forms, it cannot be deemed as such for at least a couple of quarters.

By Friday, at any rate, we will obtain a glimpse of the prevailing economic picture, with the release of the February Jobs Report. And then, next week, CPI/PPI; FOMC brings interest rate tidings a week hence.

I doubt if any of this will offer much clarity, though.

With asset classes, sectors and individual financial instruments annoyingly correlated, each in anticipation of greater clarity about the state of the macro environment, and with such clarity, deferred, elusive and difficult to interpret, I foresee a cycle of diminished but dangerous volatility. Not much is likely to move in dramatic fashion, but what does move is more likely to bite than feed portfolio returns.

As in all matters, we must wait. Lenin gave way to Stalin, who passed the torch to Khrushchev. Then came Brezhnev, Andropov, Chernenko, and, ultimately, Gorbachev. Who shut the whole show down.

And then, at last, Putin, seeking to re-Stalinize the whole joint.

On our side of the ledger, it’s Wilson, Harding, Coolidge, Hoover, Roosevelt, Truman, Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush, Obama, and, finally, Biden. Who may not be Stalinizing the States, but perhaps not failing for not trying.

We can take comfort in this at least – our guys’ names are easier to spell.

Not much to do in the markets but to be extremely careful while so not doing.

And now, if you’ll excuse me, I think I’ll have myself a good cry.

TIMSHEL

I was glad to come, I’ll be sad to go,
But while I’m here, I’ll have me a real good time

Ronnie Lane, Rod Steward, Ron Wood

Well, that went over like a Led Zeppelin. Yes, I promised to devote less of this real estate to my musical meanderings and to focus more keenly on The Markets. Many will recall that I offered this in response to what I believed – gut feeling – to be the catalyst for a previously unthinkable, unceremonious, and unilateral unsubscribe request from a weekly recipient.

So, I pledge to Cut the Crap and what happens? A wholesale bail out by my distributional troops. Actually, no one, to the best of my knowledge, quit on me this past week, but that strikes me as being entirely beside the point.

Logic, in any event, impels me to restore the crap, and to do so immediately. Because — are we going to allow ourselves to observe unremarked the surviving members of the Beatles and the Stones cutting tracks together? Hardly. The concept of Mick, Keith, Paul, Ringo and the (perhaps dispensable) Woody coming together is simply too scintillating to exclude from this most public of historical records.

All that’s been confirmed thus far is that Paul has laid down bass lines for a couple of new Stones numbers and that Ringo will soon contribute some percussion. This alone is cause for great elation, but there are tantalizing rumors of more, much more, to come. The Rolling Steatles may cut and album of new, collaborative material, and then go out on tour.

There’s some talk about Ringo bagging off here, but I pay it no mind.

Ringo, I’m certain, will do as he is told.

Come what may of this, it behooves us to celebrate the moment, and to rejoice in the reality that whatever other forms our bitches may take, we lived in a time where these living, breathing deities historically transformed life as we know it. They are, none of them, getting any younger. Paul is 80. Mick and Keith will each reach that milestone this year. Ringo? A spry 82. True enough – Woody is mere fondling of 75, but I figure he’s mostly just along for the ride. The 80th anniversary of George’s birth transpired on Saturday, but sources have all but confirmed that he will be unable to make the scene.

I hope the lads give it a full go, and I don’t even care how good or bad the music they create is. This is an opportunity for them, and, indeed, all humanity, to proudly state: “This happened. This was”. It would be divine. The closest analogue I can devise is the release of the 2019 film “The Irishman”, which was entertaining, but more significant in its bringing together of De Niro, Pacino and Pesci – under the directorship of Marty. Somewhere down the road, folks are gonna look at this thing and say “Wow. How cool was it that these guys were able to get the band together — one last time.

The same can be said for the Bea-stone Boys. Only more so. Because they were bigger, so much more important, than even those great Italian American tough guy players on the 20th/21st Century Silver Screen.

And that, my friends, I all I have to say about that (for now).

It is also important to point out, crap restoration-wise, that the action in the markets is just that – crap.

Allow me to elaborate. As widely lamented, last week was the worst one going for the Equity Complex this year. So be it. It had feasted for > 1.5 months and a subsequent bio/econ voiding cycle was entirely inevitable. The evacuation, while not particularly pleasant, was finite and orderly.

Almost undoubtedly, the big catalyst was continued Inflation pressures and their attendant impact on interest rates. Yields at the long end of The Curve are up an astonishing 60 basis points this fastexpiring February. One would have expected that this might, at, minimum, have served to flatten it a But one would be wrong on that score. Short-term rates – particularly around the 6-month expiry, have sky-rocketed to ~5.2%, and the curve now looks this-wise:

After Monday’s Patriotic Presidential Pause, while we wasn’t exactly going great guns, we were hanging in there – until, that is, Wednesday afternoon. The Fed released its hawkish minutes — and it was all downhill from there – as capped off by Friday’s rout, initiated as it was by the release of an unexpectedly elevated Inflation level embedded in the Fed’s favorite such statistic – the dreaded and ominously nomenclatured PCE Deflator.

To me, the main takeaway from what we’ve learned thus far this year is as follows. Americans continue to binge, often on inadvisably assumed debt. The Labor Market is tilting red, including (unthinkably as of a couple of years ago) surging wages. All the above is Inflationary, and – here’s the thing – it’s almost all on the Demand side. Feel free to flush the entire argument about “supply chains” and their “transitory” nature. The only way this round of P disappears is for the almighty consumer to push away from the buffet table.

If our misanthropic, inept but intrepid policy makers truly wish to tame the pricing beast, they must cool the demand fires, and this won’t be a pleasant operation. It may not require a full, undignified financial bowel evacuation, but it will, at minimum, impel the removal of the blockage that seems to be plaguing our economic innards.

Investors aren’t digging any of this over-much, but are, under the circumstances, holding themselves manfully in the face of the associated abdominal pain. My guess is that they will continue to do so. I seriously doubt that they will repeat last week’s less-than-stellar performance. There’s a bid somewhere down here, but not one that is likely to demonstrate much in the way of sustained vigor.

And now, we enter the dregs of Q1. Nearly all Earnings precincts have reported, and the returns are dismal as expected. They haven’t mattered much, though. Equities are moving in lock step with one another, and paying little heed to anything but Fed Policy and Inflation:

Next week features some PMIs and little else, but even the February Jobs report is postponed until 3/11. The FOMC doesn’t meet until after St. Pat’s Day – on the cusp of the Vernal Equinox.

Not much meat to chew on in the meanwhile. If we want our proteins, we may be forced to eat our beans. And we know what happens after that.

So, again, I have few qualms about restoring the crap. Which, after all, makes the grass grow.

The Rolling Steatles are shading coy about their collaboration, and one can hardly fault them for this. Don’t commit to anything they can’t deliver. Let the rest of us build up the speculative anticipation. I reckon we’ll wait it out as best we can.

And in this spirit, I’m going to call – yet again – for Woody to focus instead on reuniting with the surviving members of the Faces – Rod the Mod/Kenney Jones. I don’t think he added much to the Stones, and his accepting the role of being Keith’s wingman broke up the Faces. Thus, this one move marked the ruination of two great bands.

But now, as we are in restoration (not ruination) mode, is time to amend all this. John and George are, well, you know, gone. As are Charlie, Brian Jones, Ronnie Lane and Ian McLagan (Bill Wyman is still around but retired > thirty years ago – not just from the Stones, but also, hopefully, from tapping 14-year-olds).

So, let’s roll with Paul/Ringo/Mick/Keith and Woody/Rod/Jones.

And that, my friends, is what I’d call having a real good time.

TIMSHEL

I am going to try to wean myself off an obsessive focus music – particularly the toppling of the sonic monuments I have worshipped all these years. It won’t be easy; particularly given that my heroes are yielding to the inexorable cruelties of the calendar and gravity at an alarmingly accelerating rate.

But I’m sick of writing about this sh!t, and, no doubt, you’re sick of reading it. In fact, my thematic shift is catalyzed, at least in part, by a request I received from a (presumed) longtime reader, that his name be removed from the exalted roster of those who receive these notes in advance of my posting them on ZeroHedge and LinkedIn.

This has not happened in more than five years, and, to add to my humiliation, the individual in question is not even on my direct distribution list. Rather, he receives these notes as a subscriber to an internal, er, research listserv sponsored by my client of longest standing. I therefore (as others on this portion of the distribution have NOT made this request) am unable to even accommodate him.

I don’t know his reasoning but suspect that he is overwhelmed by the digressions that often comprise the lion’s share of this column. And if so, he is right to be so overwhelmed.

I’d like, without sacrificing my trademark pithiness, to focus more directly on the doings in the markets. But, in my defense, this is a hard slog. Has been for quite some time. Markets, at least for now, fail to respond rationally to what I believe to be the most salient of available stimuli. Oh sure, they obsess about Fed Policy and the like (and appropriately so), but tend to ignore such matters as Earnings trends, Commodity Prices, critical economic releases, and other such stuff which historically form the building blocks of my withering economic analysis.

Still and all, I must try. But not, so to speak, in Cold Turkey fashion. This week’s title comes from the last, most widely panned albums of one of the greatest bands ever to grace studio or stage, self-described (again, appropriately so) as “the only band that matters: The Clash.

They cut this crap record having fired the irreplaceable Mick Jones, the less-irreplaceable drummer Topper Headon, and, ultimately, even bassist Paul Simonon (forever immortalized on the cover of the group’s magnum opus: London Calling). This left only the singularly great Joe Strummer from their original lineup. The results were as expected. It’s not as if CtC is a terrible album; it is simply not worthy of the impossibly high standard the band had set for itself.

After disappointing critical and commercial results, Strummer himself called it quits. And maybe I should follow his singular example. But quite yet. Because, as a follow-on to my above-stated complaints about market response to stimulus, successful investment in the prevailing environment, is, I believe, less an exercise in determining fair market value and more one of figuring out what the other trading jabronis will do. They will not cut the crap, so neither, entirely, can we.

It was something of a humdrum week for the markets, which continue to react in counterintuitive ways to prevailing information flows. It took disappointing Inflation statistics entirely in stride. It absorbed an upside Retail Sales blowout (modelled out to be bearish due to its potential impact on Interest Rates) within a couple of hours – perhaps because Industrial Production, expected to surge 0.5%, clocked in as a Goose Egg (purportedly good news in an environment of obsessive rate fears).

In result, investors limped along limply all week. Our equity indices failed to sell off – much – but neither did they rally.

There are a couple of factors at play here which have caught my eye. First, 6-month Treasury Bills have rendered themselves so unlovable that they are now, and for the first time in nearly two decades, priced to yield > 5%:

Meantime, a bid persists at the long end of the Treasury Curve, leading to a condition of inversion so gruesome that it cannot be displayed in this family publication.

First principals, this suggests that: a) investors take the Fed at their word that they ain’t done raising rates; but b) their hawkish ways are much more likely than not to push us into Recession.

Well, maybe, but my own take is that while I buy into a), I believe the bid at the longer end of the curve is more indicative of excess investment liquidity, which must, after all, find a home somewhere, than a harbinger of multiple consecutive quarters of negative GDP.

Another indication of said liquidity overabundance is the remarkable bid manifested in BTC. Crypto is going through its worst news cycle since the Moses-like proclamations of Satoshi, and, only this week, was forced to absorb a string of blows – in particular, tighter custody regulation and a wholesale bail on the part of the handful of banks still willing to traffic in the stuff.

Why the bid on Crypto? Well, as stated above, all that fiat cash must go somewhere. Thus far this year, it has modestly embraced stocks, long-term Treasuries, Corporates. And Crypto. It loves Crypto, which is up nearly 50% in the six short weeks that have passed us by in ’23.

Commodities? Not so much. Crude Oil is down ~5%; Nat Gas nearly 50%. So, the market vastly prefers wonky, digitally engineered “stores of value” to useful energy products. It’s no wonder that I give up on fundamental analysis.

Meantime, the other item of personal interest is the gaggle of legit economists who are advising the Fed to lift its 2% Inflation target. To something more civilized. Say, 3%.

I think they’re on to something. I am quite willing to accede to the notion that all that Fed rate raising jazz has taken the bleeding edge off Inflation. But moving from > 9% to a 6 handle is one thing, migrating from a 6 to a 2 quite another. This will require the climbing of the rate tree to dangerously uncomfortable levels, almost guarantee a Recession, and, end of day, I don’t think the Federales have the will to do this.

Contemporaneously, the Earnings Season is whimpering to a close, with aggregate negative results to the tune of ~5%, a deep skew towards negative forward guidance, and upside surprises nowhere to be found. All this has the feel of listless gravity to it, perhaps akin to Joe Strummer’s Clash touring with what amounted to a backup band.

What lifts us out of these doldrums? Beats the hell out of me.

Still and all, just as the intrepid consumer continues to, well, consume, so do investors appear to be willing to buy stocks, bonds, and crypto, tepid conditions for doing so notwithstanding.

Cutting the crap, I see it this way. Investors are pre-disposed to bid up securities and will continue do so unless or until a compelling (though not necessarily rational) case is made for them to suspend this operation. The near certainty of a string of rate increases will probably not change their tune. They’ve got the cash, are (perhaps justifiably for now but not forever) willing to set aside such tail risks as geopolitical turmoil, unanticipated solvency issues, and others. They appear hell-bent on at least partially eradicating the nightmare otherwise known as 2022.

If, however, as prophesied, we do devolve into a nasty Recession, all such bets are off.

It will at any rate, be interesting to bear witness to these manifestations in their unfolding.

I’m not terribly concerned about downside here. I rather believe that barring any nasty surprises, one can at least consider buying the dips. And why not? Everyone else will be.

In closing, I hope I have accomplished something in taking steps to cut the crap – an album of the same name which killed The Clash. Jones and Strummer went on to put out respectable music – that is, at least until the latter’s untimely death in 2002.

Topper’s still bouncing around but plagued by health problems caused by his excesses during his glory days. Simonon has been similarly quiet, apparently devoting what remaining juice he has to supporting Greenpeace.

Oh well, there I go again. Boring y’all with musician anecdotes. I cannot promise this won’t continue; only that I will try to stop it.

But if any of the remaining icons of my existence, turn tits up, I reserve the right to pay whatever I feel is fitting tribute.

After all, much as we’d all like to cut the crap, crap abides, and is likely to outlast us all.

There’s a risk management lesson in there somewhere, but perhaps it will keep for another day.

TIMSHEL