You Break It, You Buy It”

The Pottery Barn (wholly owned subsidiary of Williams-Sonoma, Inc.) Rule

As we approach Wednesday’s (scarcely lamented) 35th anniversary of the (quaint by current standards of market trauma) 1987 Crash, three questions come to mind: a) is the market broken? b) did we break it? and c) if the answer to a) and b) is yes, are we compelled to buy it?

Our titular colloquialism has been around for ages – perhaps because it seems like an entirely rational protocol. In recent times, Bob Woodward, quoting Colin Powell, described it as a warning to Bush II about his then-contemplated (but not yet executed) Iraqi invasion (turns out, after a fashion, he was right). That was ’03; a few years later, in a nod to the Company’s newly installed policy to this effect, it became known as the Pottery Barn Rule.

Which is fine. Except for this: Pottery Barn (now a wholly owned subsidiary of Williams-Sonoma, Inc.) does not, and never has had, such a policy. Instead, it writes off broken merch.

Kinda like the Fed. But I get ahead of myself.

As alert readers recall, I personally lived up to this standard, having purchased my first home after crashing my foot through its ceiling during an Open House. All good; we wanted the place anyway.

However, for our present purposes, in order to measure the applicability of our axiom we must determine whether (or not) the market is broken. So, is it, or isn’t it?

Well, yes.

Indications that it is are everywhere one chooses to look, with perhaps the most visible of these perhaps emanating from the U.K., where shards of market glass hurtle across grey skies, where economic engines groan, flutter, and sputter, where financial springs and wires pop out of their casings.

The sequence over there has been so rapid and multi-faceted that I suspect it’s beyond the reach of human description. But let’s try. Liz II died – immediately after putting her namesake (Liz III) in charge of the operation. The latter wasted no time in implementing a stone-cold Thatcher-style Supply Side Economics program. Brit markets went into free-fall, the most pressing consequence of which was outright panic in its once vaunted/now deeply impaired Pension System.

Whereupon Liz III and the Bank of England immediately turned tail, reversing course on both tax cuts and monetary policy. Whether or not this “fixes” the U.K. Pension System remains to be seen. Like their counterparts across the globe, the custodians of British retirement funds have been chasing yield in all the wrong places for eons. But this much is indisputable: their constituents now have a free hand to impose the Pottery Barn Rule on their own government.

Contemporaneously, Former Fed Chair Ben Bern copped 1/3rd of an Economics Nobel, prompting partially justifiable outrage from those who blame our current mess on his overly enthusiastic QE extravaganza. No matter, say the folks in Scandinavia; we gave him the award for an obscure paper he wrote in the 1980s.

In a touch of irony, his Nobel coronation came immediately in advance of last week’s Inflation reports, which was neither of them none too good. They didn’t rocket up, but neither, it is to be feared, did they come down — >2x increase in interest rates across the curve notwithstanding.

The initial reaction to these reports was anything but enthusiastic; particularly problematic was the rise in the oxymoronic “core” rate, which excludes the Food and Energy that would seem to be at the essential (core?) epicenter of the human pricing matrix.

The early returns suggest that the Fed’s aggressive Inflation busting moves have been effective, but only partially so. They seem to have cooled the economy (e.g. Retail Sales flat for September) without much denting Inflation itself. All of which raises the following question: are Central Banks in general broken? Well, I think we can draw appropriate conclusions about the Bank of England. Meanwhile, the Bank of Japan’s stubborn adherence to sub-basement rates has not only collapsed the JPY but has so paralyzed their country’s bond market that for the second straight week, days have passed with no trades in this once most liquid of financial instruments.

But the question remains: is the Fed broken? I won’t pass judgment just yet. However, for the record, given their $9T Balance Sheet and the carnage in the markets in which they invest, their mark-tomarket losses since the July highs most certainly approach $1T or more. This is against an historical annualized P/L of ~$25B, — implying a 4000% earnings reversal in one rolling quarter. And it could get worse. Were the Fed not a public utility, heads at the top of the structure would no doubt roll, and former chairperson(s), instead of preparing speeches for the top honor of its kind in the world, would be consulting attorneys and girding themselves for a mountain of lawsuits.

Equity indices fell nominally after Wednesday’s PPI drop, and positively collapsed in the wake of Thursday’s Consumer Price Report. But then, late morning, they aggressively reversed themselves. By close, the Gallant 500 surged nearly 6% above its bottom feeder lows; Captain Naz nearly 7%.

This fleeting V-bottom had all the trappings of a galactic short squeeze, and one could indeed hear the voices of traders across the spectrum rising an octave or two as the proceedings unfolded.

At the depths of Thursday morning despair, NAZ was knocking, from above, at the threshold of 10,000, and, on Friday, after yielding a good portion of the short-lived rally, is within visible distance of 10K again. And I couldn’t help recalling, a few years back when it breached this milestone to the upside. Bloomberg Radio held multi-day celebrations. They passed out hats on the floor of the Exchange (not that there actually is a floor).

And I couldn’t help but wonder whether somebody – maybe a MAGA haberdasher with an enthusiastically-rendered but now depressingly excessive inventory, might not want to convert them, in retro fashion, into reclaimed NAZ 10K head toppers.

So, are equity markets broken? They certainly are not functioning like well-oiled machines, but they have arguably experienced worse intervals and survived to tell the tale. We should know a great deal more over the next month — as the earnings cycle unfolds. To be redundant, I’ll be more interested in forward guidance than the actual income figures themselves.

I reckon the likely outcomes range from outright disaster to “meh”.

Moving along, we arrive, inevitably, at the Energy Complex. Is it broken? Well, oil trading whale Pierre Andurand not only thinks so, but has said so. And he may be right. WTI Crude has experienced an approximate 100% range over the last nine months. Our own government has kneecapped the domestic industry.

Long-standing Middle Eastern import outlets are pulling back. Russia is in an arguably existential military battle, its feelings are hurt by its main export clients, and, as such, it not likely to pitch in helpfully. We have depleted our strategic reserves and have, with mixed success, come hat in hand to Banana Republics for assistance.

For of the above, Crude is trading >30% below its early summer highs.

The price of American and European Natural Gas has plunged in recent weeks – all in advance of the inexorable, seasonal mercury drop, and I can observe no trade with better risk reward than getting long the Nat Gas market at current prices.

More generally, energy markets do indeed appear to have decoupled from physical fundamentals and seem to be trading on little else but a wicked recession hypothesis.

Well, maybe so, but it sure seems to me like gas may be in high demand this winter – both here and abroad, that supply is constrained, and that given this combination, the pricing dynamics are, to some extent, broken.

Finally, there are the credit markets. At the end of the week, and with little fanfare, the benchmark basket of Investment Grade Corporate Debt broke through even pandemic pricing levels:

Investment Grade Debt: Not Lately a Great Investment:

Meantime, and more prominently featured, mortgage rates have careened to thresholds last seen a couple of years after G.W.B.’s ill-advised “Mission Accomplished” photo op:

It all makes me nostalgic for 2006. When liar loans ruled, and banks were happily issuing no-moneydown mortgages, approaching and topping seven figures, to blind grandmothers, living on Social Security. When financial engineers packaged these debts, rating agencies sprinkled them with Aaa ratings, and investment banks sold them to (U.K.?) pension funds that still carry the burdens of there losses to this day.

Yes, I pine for ’06 and wish we could turn back time, because, after all, what was better than ’06? Everybody got rich; everybody got laid (er, paid).

Though there were some clairvoyant warnings about what would follow, markets seemed anything but broken in ’06.

Now, it’s all a bit different.

But far be it from me to engage in gratuitous hyperbole.

Let’s thus conclude that markets are kinda broken, but not completely so.

Who broke them? Well, that’s hard to say. But somewhere in there, we bear some responsibility, because there is no one else to do so.

And, in result, while we kinda gotta buy ‘em, we also kinda don’t.

And, in fact, right here (except for perhaps Nat Gas), I kinda wouldn’t.

Buy ‘em, that is.

After all, the capital markets, while difficult to define, aren’t the Pottery Barn, are not, for instance, a wholly owned subsidiary of Williams-Sonoma, Inc.

But whatever they are, let’s hope their made of sterner stuff than porcelain, clay and other materials that can be shattered by an inadvertent flick of the wrist or elbow, and no one under heaven to write them off or take them back.

TIMSHEL

I am indeed a little ashamed of this week’s mash up theme. Truth is, well into the weekend, I was drawing a blank as to what (borderline unhinged) spin I would put on this note, particularly against the current/pending mad rush of data flows and attendant (potential) market impacts. Some weeks the thematic riff jumps out at me, and my madness leaps, of its own accord, off the keyboard. Others it’s a desperate struggle against the glib, the trite, and the flat out boring.

I am typically easy on myself when the latter construct is ascendant. I’ve been pumping out this tripe – week in and week out – for more than 16 years. Some notes were always destined to be better than others.

And so it goes this week. I’ll cut myself some slack and proceed accordingly. So here goes.

I am a child of FM Radio: a forum consigned during my early youth to the audio backwaters but which emerged as a commercial and cultural force some time in the early/mid 1970s. My own associated experiences emanate from the sonic streams over Chicago, which I like to believe was a pioneering jurisdiction. First, there was Triad Radio – almost too weird for even those of us determined to seek out the strange. Then came WXRT – a magnificent outlet which at the outset only broadcast for six hours a night, whose disc jockeys would often fill the dead air with internal silences, but which could be counted on to unearth untrammeled, unexpected delights – from Ornette Coleman to out-takes from the Abbey Road sessions. Such fare is now widely available, but – trust me here kids – back in the deuce, it was rare and magnificent. It made us feel like radio listening gods.

Inevitably, though, FM Radio expanded and commercialized. Cars (most of which, I kid you not, were typically limited to AM mono functionality) began to blare out deafening stereophonic acid rock. Advertisers soon caught on and the whole venue turned to algorithmic, commercialized garbage.

The shark-jumping moments were manifold, but my mind fixes on the programming gimmicks that emerged. Pretty soon, every station was featuring such programs as a Sunday Morning “Breakfast with the Beatles”. One October day, I knew it was over. It was a Tuesday, and I was driving my kids to school. The local FM station was in the midst of its “Rocktober” schtick, and it was a Two-Fer Tuesday (back-to-back songs by a single artist) to boot. Topping it all off was the scheduled, contemporaneous, smarmy, obligatory, Zep-inspired “Get the Led Out”. So, of course, we were treated to a sequence of “Whole Lotta Love” followed by “The Immigrant Song”.

Rocktober/Two-fer Tuesday/Get the Led Out – a triple whammy of the blindingly unsubtle. I pondered whether the moment to shoot myself hadn’t truly come

As should be apparent, I resisted the temptation, found Napster, then Sirius, then Spotify. I rocked steady with each; meanwhile, Standard FM Radio continued its downward spiral.

But it is now October, and, for investors, the month promises to be rocky. So, while the pokey Rocktober Radio orgy continues unimpeded,10/22 indeed looks to me, from a market perspective, like (R)Oc(ky)tober. The sequence began with the biggest rally/subsequent selloff since the onset of the lockdowns – much of it centered around anticipation and reaction to Friday’s Job’s Report.

The consensus in its aftermath was that it was good – perhaps too good – at least for those hoping to see a cooling of the Fed’s rate-raising jets, and everyone bailed. Except the Fed, which, its if published statements can be believed, has no intention of changing, slowing or reversing course.

But I personally didn’t see too much here to cause a pre-Halloween yield-boosting fright. The base rate dropped a titch, mostly owing to a reduction in Labor Force Participation. A few tens of thousands of folks voluntarily bounced from the workforce, and this, combined with a somewhat surprising > 1 Million reduction in Job Openings revealed on Tuesday, suggests to me some economic deceleration. But what do I know?

And this coming week, as almost pre-ordained by the Gods, we have an approximate Two-fer Tuesday, with a critical PPI release coming on the appropriate day, followed by CPI on Wednesday. Projections are sort of flattish, and, simply from a blood pressure management perspective, let’s hope that they come true. A surprise in either direction, but of course, particularly to the upside, is likely to cause a serious case of volatility overload.

We also must anticipate the formal commencement of the Q3 earnings season, the previews of which have been less than encouraging. Gallant 500 profit growth currently projects out to a meager 2.4%, lowest since the ’20 lockdowns. But there’s probably not much to fret about on that score. These numbers tend to drift up across the reporting sequence and will almost surely do so in this instance. I am more concerned about forward guidance, as there is always a seasonal Q3 incentive for Management to dump all bad news and dampen expectations in “3”, so as to engineer a “beat” in “4”, and, in the process, dazzle and delight their Compensation Committees.

More narrowly, it probably pays to be mindful of recent dreadful announcements issuing from key chip manufacturers Advanced Micro and Samsung. These entities are experiencing menacing decreases in orders for their silicon output, portending of weak demand for PCs, smart phones, cars, refrigerators and nearly every other product we actually use out here “in the field”.

It ought, one way or another, to be a high-drama, volatility inducing cycle, which won’t end until R)Oc(ky)tober winds down, and the fat part of the earnings season fades to blue.

As all the above unfolds, we also face a renewed, overwrought focus on Energy Prices, and rightfully so. As is widely known, OPEC delivered a major one finger salute – to the West in general and, maybe, to Biden in particular, by cutting production by 2 million bbl/day. The timing, from a political perspective, is unfortunate, but the Saudis probably understand this. In fact, they may still remember being called criminals by the occupant of the White House in the 2020 election, and, beyond this, may take a dim view of its “Green Energy” policy that features the crippling of domestic production, while cajoling, exhorting and begging foreign producers to pump away with abandon. They may wonder, as I do, how the planet is benefitted by simply shifting production to different portions of the globe.

My own view is that for political reasons, the Administration is desperate to keep a lid on energy prices – particularly during (R)Oc(ky)tober, as it justifiably perceives that it may impact their fortunes in the coming election. So, we toy with other imponderables: the full depletion of our Strategic Petroleum Reserve, cutting deals with bad actors in jurisdictions such as Iran and Venezuela, imposing export bans, raising taxes on energy companies, exhorting gas stations to patriotically cut prices. And so on and so on and scoobie doobie do.

I am especially concerned about “Hail Marys” here, and, while laying aside my frustration at the stupidity of it all, am fairly convinced that any aggressive move to create better energy optics in (R)Oc(ky)tober will only lead to Newtonian reactions of opposite impact once the month is behind us.

And this is to say nothing of what awaits us should the dreadful situation in Eastern Europe take a turn for the worse.

Thus, with huge interest rate agita, currency markets in disarray, never-ending Fed hand wringing, electoral outcome concerns reaching crescendo, menacing increases in Energy prices, and myriad geopolitical problems we have not even covered, it’s no wonder that cross-asset correlation financial market stress indicators (which I don’t even begin to understand) have surged to multi-year highs:

Not Sure What This Means But Most Likely It Ain’t Good News:

Whether or not all of this ends in a market tragedy of Hamlet-like proportions is in the hands of fate. But it certainly reinforces my assertion that this particular October stands to be one mother of a (R)Oc(ky)tober. And I suggest you gird yourselves for a continued wild ride. The current paradigm (hardly encouraging) could turn on a dime – for better or for worse. Portfolio flexibility, liquidity and fluidity, eternal heavenly virtues, will be of heightened importance.

It will, like all intervals, pass quickly, and we’ll be on to the next. Meanwhile, we’ll have to endure another 3+ weeks of Rocktober/Twofer Tuesday/Get the Led Out. All across the country.

I am happy to report, though, that ‘XRT – Chicago’s Fine Rock Station – still abides at 93.1 on your FM dial. It now features a 24-hour broadcasting cycle, and, while some of the original DJs remain on the air, the silent intervals are now gone, replaced by annoying, chirping, excess energy. They don’t (at least I don’t think) do Two Fer Tuesday. Or Get the Led Out. But they do have a nicely understated Breakfast with the Beatles. They retain a quirky playlist, which, if it’s not my particular jam, it will occasionally surprise. And delight.

It’s worth a listen. And if it helps you survive the recently commenced (R)Oc(ky)tober, well, all I can say is so much the better.

TIMSHEL

Probably, you’ve never heard of it, but we’re locked in on one of two films released in 1967 about idealistic teachers breaking barriers with difficult, disenfranchised high school students in lower class urban environments. UTDSC is set in New York, with Sandy Dennis as the pedagogic protagonist. The titular theme refers to the incorrect traversing of the unidirectional venue for vertical egress established by the school, as necessitated by overcrowding.

It’s thematic doppelganger: “To Sir, With Love”, features Sidney Portier and is set in London.

And that is all I have to say about that.

But it does strike me that in a broader sense, society, and more narrowly, the markets, have been travelling up a down staircase for several years now.

While not wishing to put too much grey matter into the topic, the wider the sequence may have begun on June 16, 2015, when carnival barking real estate man Donald J. Trump announced his improbable, and improbably successful, run for the presidency. In a moment now consigned to history, he did so with great optical flourish, descending the gilded escalator in his signature eponymous tower, lusciously accessorized by his arm candy wife, Melania.

We’ve been trying to climb those descending electronic stairs ever since, but, on the other hand, the markets lurched from one new high to the next in the ensuing quarters and years.

Until they didn’t.

One is thus tempted to turn to the lockdowns as an inflection point, and, for a short time, they were. Crude Oil flashed to negative prices in April of 2020, everything was going down, and nobody, including me, could visualize a bottom.

But then a gale force wind of Fed monetary stimulus blew in, and everything, and everyone, was blown upward. ‘Twas a strange interval indeed. For a while, we couldn’t go anywhere, and when we finally could, it was with tiny holes in our arms and flimsy, cotton germ blockers of dubious effectiveness affixed to our visages.

But by the time 2020 ended, everyone was rich. The Gallant 500 had more than doubled its hosts from the covid bugger lows. Captain Naz nearly tripled. More folks told me more times than I can count that they had cracked the stock market and had no more vexing problems than determining how to spend their fabulous retirements.

The upward momentum continued throughout ’21, but, clearly, market participants were getting winded by the climb. Our indices peaked out just after our most recently celebrated(?) New Year. It was like, well, school is out, and this here market staircase is now exclusively leading towards terra firma. The gravitationally aided stampede towards the exits was further catalyzed by Putin rolling his tanks where they didn’t belong (and facing a sustained rude welcome), and the attendant Inflation obsession which this evoked. Since that point, the Gall 5 is down >25%; the Nazzy Captain >30%.

I’m too lazy to research this, but suspect that any year, including the one we are currently in the midst, where market highs are registered on the first trading day, is bound to be one of significant frustration for investors.

Oh yeah, lest I forget, 10-year yields are nearly triple their late ’21 lows, as are mortgage rates, causing home buyers touring lovely colonials to abruptly reverse course and head downstairs.

(I can’t resist a personal anecdote here. When visiting what turned out to be the first home I ever purchased — in Oak Park, IL, a troublesome friend accompanying me insisted that I take a look at the attic. As she was pointing out something important feature, I stepped between the beams, onto the pink, flimsy Owens Corning insulation, and through the second-floor ceiling. My little daughter cried. A couple heading up the stairs and encountering my crashing sneaker – it was an open house – abruptly reversed course, descended the stairway and departed the premises. I broke the house, so I bought it and have no regrets. True story).

But let’s revert to our 1967 high school stories of deliverance. In 55-year role reversal, it looks like Ms. Dennis and Mr. Portier have switched roles, and that the upward traversing of down staircases is now mostly taking place in London. No sooner had Prime Minister Truss occupied her office at 10 Downing than she issued the blasphemous order to slash U.K taxes, thereby breaking the hearts of government revenue agents across the globe (none, presumably, more so than her sister in levies, our own Janet Yellen) — who are all conspiring to set a floor on what each nation gobbles up from the toils of our labor. Following upon the heels of the Bank of England’s dovish 50 bp hike and resuming of the purchases of their own paper, this sent the (once) mighty Sterling into a full-on swoon, and caused yields on the gilded (10-year) Gilt to more than double over just a couple of weeks:

The Guilty Gilt (BOE buys but everyone else sells):

More than one savvy macro fund with which I deal anticipated this, and – not gonna lie – it was the first time in more than a generation that I had even seen the once active but long-dormant Gilt futures contract on my risk sheets.

Those positioned in this market made a killing, which certainly lightened my step.

But I weep for Madame Truss, for whom, Tory that I am, I had such high hopes. Moreover, I think she’s on to something. Whatever ails the U.K., a tax cut is not likely to do much harm. But there is already talk that her coalition is fracturing, and that she may be bizounced in Usain Bolt record time. Let’s hope not; I’m (still rooting for her).

Across the pond, we enter Q4 with virtually every risk asset in the fundamental and technical subbasement – below, even, the room where that weird old guy who teaches shop sleeps. Nearly every investment instrument I can survey (even Crude Oil, FFS!) is trading below its 50, 100, 200 and 1,000,000-day Moving Averages. Growth is slowing. Inflation – including the just-released, Fed favorite PCE, is showing stubborn (if unsurprising) persistence. Credit markets, the biggest bugbear of ‘em all in my judgment, are beginning to crack.

However, since we appear to be fated, evermore, to traverse upward on the down staircase, our friends at the Atlanta Fed (who I tire to the extreme to reference) ginned up some surprising love for us last week:

Not often in my experience have Fed GDP estimates ever quintupled so quickly – much less in the final week of the quarter upon which they are reporting.

But these here folks is all trained economists, and therefore to be trusted unilaterally. Worst case, if they turn out to have misled us, perhaps we can send them back to school – to be trained by either Ms. Dennis or Mr. Portier.

And now, like it or not, the 4th Quarter commences, and, in result, our own, er, education continues. In trademark perversity unique to our species, our first sessions will be driven by attempting to understand the recent past. Monthly and quarterly economic data begin to roll off, and Q3 earnings are just around the corner. I’m not thinking either set of data flows will feel much like recess.

We’re also, dare I mention it, entering the final month of a gruesome election cycle, which will be beyond tedious to monitor but the results of which may be critical to the immediate subsequent fortunes of the capital economy. I have my hoped-for outcomes here, but so as not to offend anyone’s sensibilities, will keep my own counsel as to their precise nature.

September (always marking the sad end of summer break), as has so often been the case, was an unmixed market disaster, and October, given the forgoing, promises to be a wild ride.

The markets are migrating downward, and each of you must decide whether you wish to attempt to climb the steps that it is descending. My sense is that anyone attempting to do so might just get paid for their troubles somewhere down the road. But as for me, I’d wait a spell before heaving my ass upwards. Those hormonal high schoolers are still trampling down the stairs, and it might be best to wait them out. It also bears mention that we must take this journey without the divine guidance of the lovely Ms. Dennis or the perfectly formed Mr. Portier (both are now dead). Yup, we’re on our own.

But isn’t self-reliance the lesson they tried to impart to their students anyway? I think it’s enshrined somewhere — perhaps on a ‘67 blackboard, and, if we can either avoid or evade those trampling adolescent feet eager to embrace the freedoms of the urban underworld, perhaps we can still learn it.

It’ll do us no harm trying, at any rate, so grab them rails and head where you will.

TIMSHEL

“The pen is in our hands. A happy ending is ours to write.”

Hilary Mantel

This one goes out to Hilary, Not Hillary but Hilary, who left us unexpectedly this past week. Not many of you know her, but she was the perhaps greatest writer of historical fiction of our time. She wrote of vast conspiracies that were real, not artifacts of political device. Rest well, Hilary. And thank you.

Meantime, something’s been bugging me: the obsessive market focus on short-term interest rates. We were treated to an example of this on Wednesday, when, Chair Pow, as expected, jacked up the overnight Federal Reserve borrowing rate by 75 bp, and (as less anticipated) indicated that he weren’t nowhere near done yet. Got another >1% of hikes in store for us, and that only takes us until year end.

But (laying aside that only a few hundred privileged financial institutions are even eligible to borrow from the Fed), the following question emerges:

Who borrows overnight? Goldman Sachs, yes. Citigroup, yes. Occidental Petroleum, maybe.

But not you. Or me. Our mortgages, if we’re smart, extend out more than a decade. Personal loans gotta run for at least a year. My best research suggests that corporations typically borrow for minimum periods of at least 5 years.

So, why all this bruhaha about the overnight rate?

To me, it’s not an idle question, preferring as I do to fixate on longer term borrowing costs. This may make me a bad person, but I firmly believe that the real action in the debt markets has less to do with overnight rates, repos, reverse repos and such, and is much more impacted by the vig imposed over much larger numbers of clock ticks.

All this is arguably timely, because a review of rates across maturities is not especially\ recommended for the faint of heart:

In the pointy-headed parlance of the markets, this configuration is called inversion. It is not the preferred construct; normally one expects that the farther out on the maturity curve one traverses, the higher the rate should be. There are several reasons for this – some even risk-related.

But I won’t get into them right now.

Suffice to say that the government is currently paying a higher rate to borrow for two years than it is for thirty. And something about that seems, at minimum, rather unholy to me.

But there are identifiable root causes. The Fed wants high rates — to cool the fires of demand, and, by doing so, taming the inflation beast. It explicitly sets its short-term levels, but much like us regular schmucks, must yield to the caprices of the market at the longer end of the curve.

The Fed has indeed begun the long trek towards reducing its subsidizing ownership of Treasury and Agency paper. But even this is oriented towards the short end. No, they’re not selling into the market; rather they are simply allowing securities they hold to mature without replacing them. And the shortest end of the short part of the curve is a maturing debt security.

The current pace is $100B/month of passive unwind, a rate which would place their holdings at previrus levels by early 2026. Reverting to longstanding, pre-financial crash thresholds (~$ 1 Trillion) will take a good bit longer, but, with diligence, they could reach this reverse milestone by the end of the decade (by whence all California engines will be forced to run on sun, wind and daisy droppings):

The Fed may indeed wish to see higher rates out beyond two years (again, where nearly All God’s Children borrow), but does not appear to have the stones to engage in some bona fide selling at the long end of the curve.

It can perhaps take some perverse comfort in the reality that others are doing the selling for them. This past (withering) week featured not only an equity market rout, but a fire sale of Govies by entities other than our own Central Bank. This placed Madame X’s (Ten Year Rates) yield skirts at levels last witnessed in 2010. One can have nothing but sympathy for this sexy but aging siren, who, with 3/4ths of Terrible ’22 in the books, is having the worst year of her long, stormy existence:

Similar sorrow has worked its way across the globe last week, as, in the immediate aftermath of the laying to rest of Liz II, not only did her own, stolid, Bank of England jack up terms, the Central Banks of colonial Canada, New Zealand, Australia, as well as Sweden, Norway and even Switzerland (Switzerland?) followed suit.

The lone global exception is Japan, which is stubbornly clinging to its subsidized interest rate policy. In response, and you can’t make this up, the JGB recorded zero trading volumes on multiple days this week.

Probably the other matter to which we must attend is the continued quagmire in Eastern Europe. As you are no doubt aware, having suffered some reversals in the field (Ras)Putin is making menacing threats about cranking up the nukes. Which is not a particularly promising prospect for global commerce. But, beyond this, we can perhaps take comfort that his contemplated plans only involve the use of shorties – missiles that have ranges of a mere few hundred kilometers.

If, by contrast, he was contemplating use of the long boys – Inter-Continental-Ballistic Missiles – we might really have something to worry about.

If all the above gives you a long face and renders you short-tempered, please know that you come by these conditions honestly. But it begs the following question:

Long or short?

Wish I had a better answer, but I find both market orientations depressing. There may be some bargains here and I’d venture so far to state that there probably are, but and one must seek them out carefully and at one’s own risk. Could be, the time has come to load in on the short side and gloriously capture an all-out market crash.

Which I don’t think will happen. And if you play for this, be prepared for the possibility of being squeezed into oblivion.

So, the answer to the long/short question is both. And neither. There’s nothing really for us to do but pick ‘em as we see ‘em. I think this will be an exercise of significant frustration, and I don’t anticipate that it will bear much fruit – at least in the short term.

Longer term, well, there is hope. Which springs eternal.

Over time, the pen may indeed be in our hands. However, with due respect to the brilliant Ms. Mantel, I’m not sure if this renders us fully empowered to compose a happy ending. All the protagonists in her magnificent Cromwell trilogy, as well as in her masterwork on the French Revolution, end with heads severed from necks, by rope or blade.

I fear we also need some help – from Above, from Providence, or maybe just a simple fortunate turn of the random die. But we can, in fact, we must, manage our risks along the way, lest we deny ourselves even the possibility of benefitting from positive happenstance.

And that, my friends, is the long and short of it.

TIMSHEL

“Which is it to-day,” I asked, “morphine or cocaine?”
He raised his eyes languidly from the old black-letter volume which he had opened.
“It is cocaine,” he said, “a seven-per-cent solution. Would you care to try it?”

The Sign of Four, Sir Arthur Conan Doyle, (1890)

No thanks, Mr. Holmes. Been there; done that.

Sir Conan Doyle’s Sherlock Holmes is perhaps literature’s most famous cocaine addict, showing, as indicated above, a decided preference for a 7% solution. Seeing as how the former was a physician himself, I’m assuming that this is an effective mixture. 5% would probably not do the job. 15% might kill a horse.

Key risk management lesson: gotta get the percentages right.

Percentages are always important but at this pass, they are particularly ascendant. They’ve been coming at us fast and furious, and the stream has not yet run its course. But it behooves (behoves?) us, nonetheless, to review a few of the figures.

We begin with the >8% ranges, which is where this past week’s Inflation statistics dropped. CPI 8.1%; PPI 8.7%.

Or do I have this backwards? I’m not convinced it matters much.

Because either way, these numbers were significantly higher than what everyone (myself included) expected. They catalyzed a wicked equity selloff, with much of the carnage transpiring on Tuesday, in the wake of the CPI surprise. This caused Gallant 500 to retreat 4.307% and Captain Naz to turn tail to the tune of 5.542%.

This was the worst daily showing in, well, in quite a spell.

And these markets, after meekly gathering themselves on Wednesday, continued their downward slide across the rest of the week.

Moving on, however, the next percentage figure we must consider is 6%, the level through which the average thirty-year fixed mortgage rate breached this past week. Last time mortgages were in these vicinities was late ‘08/early ’09.

As I recall, this wasn’t particularly accretive to the housing market, but hey, new day/new way, right?

All of which points toward the Percentage Grandaddy of ‘em All – the Fed’s decision on interest rates, scheduled to be revealed to a breathless financial world on Wednesday.

After the Inflation numbers, the prognostication graph has shifted ominously to the right, with the projected range now toggling not between 0.5% and 0.75%, but rather between 0.75% and 1.00%:

Trust me here and take the under. No way the Fed goes 1.00% — in an economy that is showing unmistakable signs of slowing and ~6 weeks before an election in which their political paymasters own any and all associated negative impacts:

Further signs of deterioration derive from the Private Sector, particularly the widely socialized, buzzkill comments of the new top dog at FedEx, in the midst of a rather dire negative pre-announcement.

To offer a blindingly obvious observation, when the guy that controls those Memphis-originating trucks and planes tells us he’s anticipating a significant worldwide recession, we should pay attention.

Because he oughta know.

Thus, as an investor, one is faced with the formidable challenge of allocating capital into a slowing economy, featuring stubbornly persistent inflation and skyrocketing (e.g. mortgages) interest rates.

It’s enough to cause a body to turn to drugs. Or return to them. Or if already a user, to amp up dosages – maybe well beyond the 7% threshold that Holmes worked to such advantage.

But as your risk manager, I can hardly countenance this.

Nope, we’re gonna have to find other means to navigate our myriad difficulties.

All of which brings us to our last percentage analysis, which is one that cannot be calculated, but only estimated. I checked my trusty Zippia.com dashboard and learned that the average age of a professionally employed portfolio manager in the United States is 45. This implies that at the time of the ’08 crash, our Mr. or Ms. Average was a tender 31. If they were, at the time, managing money (probably a minority of them) they caught the last third of a 40-year rally in Treasuries. Methuselah types like myself have navigated with the benefit of declining yields, and their attendant positive impact on equity valuations, for our entire careers:

Bond Yields and Equity Valuations: A Long Tale of a Long Tape

This implies that virtually all risk takers – call it, conservatively, >80%, have operated with a secular tailwind at their backs. But now, the winds may not have just died, but reversed themselves.

How prepared, therefore, are any of us for a market environment where the null hypothesis is not rising, but either flat, or perhaps declining, prices?

Not very, I suspect.

Perhaps these longer-term trends will reassert themselves, but – not gonna lie – I don’t see any support for this hypothesis, and we thus may very well be forced to accelerate our climb on the learning curve, however we choose to do so.

But it may be an expensive education, as, in the meanwhile, those inserting risk into the markets are almost unilaterally operating without an historical roadmap. Accidents may happen; we may get lost. It’s happened many times before when surveyors have travelled into uncharted territory.

Sometimes it works out. Chris Columbus wanted to travel East and instead headed West. Lots of good stuff happened in result over the subsequent > 5.25 Centuries (disgraceful attempts to refute this notwithstanding). In Doyle’s “The Sign of the Four” (Spoiler Alert), Holmes solves the case, and Watson gains a wife.

Other lessons from history, however, are not as uplifting.

Unpacking it all may be the case of our lifetimes, but, unlike Holmes, a 7% mixture of cocaine is unlikely to assist us in cracking it.

Meantime, it’s best, I believe, to play the percentages, which don’t for the moment, augur in our favor. Let’s remain alert, stay nimble and see what unfolds from here. Lacking a magic % solution to enhance our clarity of thought (yours and mine), it’s about the best risk management advice I can offer – for now.

TIMSHEL

I reviewed with interest the recently released CollegePulse rankings of free speech at ~200 American Institutions of Higher Learning. My undergraduate Alma Mater – the University of Wisconsin – clocked in at a pedestrian 98th. By contrast, the school that (somewhat dubiously) awarded my MBA – the University of Chicago – topped the list, while the one that (entirely irrationally) issued my master’s degree in Economics – Columbia University – came in rock bottom.

I can offer anecdotal support for the last of these, at any rate, having served as an instructor at Columbia for several semesters, and as recently as early in this young decade. Trust me – you gotta watch your back in Morningside Heights, and even then, you’re not safe. Them b!tches will cut you for just about anything.

I am, by contrast, proud of the U. of C. for copping high honors, and, as for Wiscy? Well, it cudda been worse, right? I do take some comfort, though, in the normality of my educational speech matrix, which not only features the top of the bell curve, but also each of its extreme points.

In case you care, here’s a link to the entire list:

https://rankings.thefire.org/rank

This here column, however, is shaded in the Maroon hues of unfettered communication (as opposed to the oppressive Columbia Blue or the non-committal Cardinal Red), and, since I can put pretty much anything I want into this file, I suppose I should offer up something about Liz. For whom, as documented in these very pages, I have always carried a torch.

I won’t overload your senses here; you have and will receive an assault on this topic in the coming days. Overall, though, you gotta give her some mad props. She strengthened her monarchy even as she presided over the (inevitable) demise of its associated empire. On balance, she did few favors for her former subjects in Northern Ireland, on the Subcontinent, and other colonies in the dying empire, but please. I mean, why go to the trouble of even having an empire (which she did not, after all, create) if you cannot engage in some parameterized economic exploitation?

No, you couldn’t get within 50 fathoms of her, and if you did, there was no guarantee she’d be nice to you. If she wanted you gone, you were vaporized in microseconds. But she seemed kinda approachable, nonetheless. All at once quintessentially regal and entirely common. I know of no public figure that took her status more seriously and herself less seriously – at the same time.

I will only add one thing. I will cop to being glad for Charles that he finally gets some swats with the Royal Polo Mallet. In some ways, he’s the opposite of his moms: not very regal but supremely unapproachable. But he’s waited a long time. And, really, how much harm can he do?

Strike that. Barely 72 hours into his reign and he’s already starting to annoy me. Threw an olive branch to that insufferable couple on the West Coast. Said he’s gonna hang around till they carry him out horizontally. Oh well, the Brits survived the Luftwaffe, so they can probably endure 2 decades – tops – of Chuckie Triple Sticks.

The markets failed to declare a holiday in the wake of Lucious Liz’s demise. Yup, not only are they trading ‘em but they’re buying ‘em. All week. Careful readers (and selected clients) are impelled to acknowledge that I anticipated this. My main reasoning, as previously articulated, is that an upside reversal was the pain trade. But there are others. A galaxy of cash remains unmoored in the capital markets universe and was always likely to find at least fleeting sanctuary in risk assets.

And the economy, which faces threats on every side of the global hexagon, is not in terrible shape. The jobs market is strong. Commodity prices have, at worst, normalized. Rumors abound that there was some renewed nut squeezing, some upside gamma hedging, that sort of thing.

All eyes this coming week (while not otherwise diverted by the Queen’s memorial ceremonies) will naturally be trained on the Inflation releases, and, if the surveys are to be believed, there is further moderation in these realms. August PPI, scheduled to be announced on Wednesday morning (CPI drops Tuesday), is projected to have actually declined last month, taking the year-over-year rate down a full percentage point (from 9.8% to 8.8%). That, my friends, would be a precipitous (and welcome) reversal. The USD has stopped its by-now-counterproductive upward climb – in part owing to the ECB’s Madame LaGarde – perhaps channeling her inner Catherine the Great — having hiked Euro rates by 75 basis points.

After which, with Elizabeth II planted in eternal repose at Windsor Castle, the focus will turn to the Fed. The Street is now expecting them to go the full smash 75 at their meeting on 9/21:

With apologies to the 10 percenters, I gotta believe that 75 is a lock. This past Thursday in remarks at the Cato Institute, and two short weeks after his J-hole excoriation, he reiterated his further diabolical plans for us.

Can he back off now? I hardly think so. Even if the Inflation statistics float down like goose feathers, they’re still: a) historically and uncomfortably high: and b) stratospheric compared to his recently reiterated target of 2%.

Plus, he’s on the hook to stop shopping for securities issued by the Treasury Department, which I don’t think will toe tag govies (too much cash in need of a home), but certainly won’t help them.

Unambiguously, Treasury yields reside on the other side of the volleyball net from risk assets – particularly, high-flying Tech. Which, in time-honored tradition, is likely to continue to influence, if not lead, the equity complex as a whole.

And yes, domestic energy rates have stabilized below their highs. But in Europe – where Central Bank rates were negative from 2014 until this past week – there is no solution in sight for an energy crisis the likes of which has not been experienced in our lifetimes. Prices have backed down dramatically since rising above €340 per Megawatt Hour last month. The Germans are telling the world that their energy cupboards are full. But winter is coming, and Putin, their monopolistic supplier (and who just suffered some military reversals), is one angry bear…

Thus, and for all these reasons, I wouldn’t get too emotionally attached to last week’s rally. It may continue ere it tests recent lows but test them it will.

It all likely turns on the Inflation statistics and subsequent Fed action. The largest probability outcome is no surprises and muted market reaction. But investors are in no mood for any nasty data accidents, so it’s best to remain on high alert.

I otherwise lack much visibility into what happens next.

Were I you (and let’s face it, I am) I’d prepare myself for some continued aggravation. Among other matters, it’s U.N. week in New York, where statesmen from rogue nations that don’t pay what they owe for the privilege, will lecture us on our moral failings and then head to the local watering holes and (unfortunately, it must be said) strip clubs for some self-congratulatory recreation.

It’s a fair bet that before the month ends, 45 will either announce his run for re-election, get slapped with an indictment, or both. And won’t that be fun?

On a related note, we’re also moving in execrably into a cycle where election politics will dominate the equation. As indicated last week, the market-impacting outcomes shade from neutral (Republicans pick up seats) to dire (Progressives run the table).

When the best you can do is lose or draw, the wise move is to fold. But we’re made of sterner (more fool hardy?) stuff. We’ll keep trading. And investing. And hoping for the best.

I am highly optimistic that we will endure and ultimately thrive. After all, our friends across the pond fought the Battle of Britain. They won but it cost them an empire. Elizabeth II assumed the throne seven years later and held that spot for fully seven decades. Within a generation, her country was bestowing upon the world the perpetual gifts of the Beatles, the Stones, Zep, Floyd and Bennie Hill.

Yup, they’s a lot of ways to get by – with a little help from your friends or by other means. At least that’s my opinion, and as a proud alumnus of the University of Chicago, I feel a unique agency to share it.

I’m also proud of the schools that round out the Top 5, which include, in ranked order, Kansas State University, Purdue University, Mississippi State University and Oklahoma State University. These are authentic institutions of learning and training, with which I’ll roll every time.

However, to keep matters in perspective, even Top Dog Chi-U clocks in at tepid 77.9 (presumably on a scale of 100), and only rates as “Good”. Presumably, there is a higher rating, but not one college in America has the juice to reach it. The schools at the bottom of the list, which include the University of Pennsylvania, Yale and Northwestern, all are characterized as “Poor” or “Very Poor”.

Columbia, in a class by itself (and featuring the only single digit score) ranks as “Abysmal”.

We can infer from all the above that American free speech is a relative concept, and that, despite having won that ’76 Revolution, the best of us don’t rate very highly on the spectrum.

If I said that this didn’t depress me, I’d be speaking with forked tongue. But when it comes to analyzing the topic of what passes for free speech in these realms, perhaps this is about the best that I can do.

TIMSHEL

So be careful when they’re kind to you
Don’t you end up in the dirt
Just remember what I’m saying to you
And you like-el-ly won’t get hurt

And when it rains the rain falls down, wash away the cattle town,
And she’s far away somewhere, in her eider down,
And she dreams of crystal streams, of days gone by when we would be,
Laughing, fit to burst, on each other

Bernie Taupin

I’m always kinda blue this time of year. And not in the Miles Davis sense. Labor Day is here (and gone). And, for several reasons, I hate Labor Day. Labor Day sucks. First, it marks the end of summer, meaning now we all must knuckle down and try to get some things done. The Little Fellers are back in school, and that makes me sad as well.

Also, however else one cares to describe me, I am not Labor but rather Management. I wouldn’t go so far as to state that these two economic classes are natural enemies, but they do differ in terms of style, objectives and modes of operation. This here holiday, for instance, is cast as a celebration of the former (there is, to the best of my knowledge, no Management Day) and here’s hoping all those strivers and toilers enjoy their government-sanctioned day off. But for Wicked Management, there is no rest, as evidenced in part by my slaving away at the keyboard while the rest of y’all are busting out the ‘Cue Sauce and Kingsford.

In my idyllic former haunt of the Hamptons – a Management Mecca that I now seldom visit, they call the day after Labor Day Tumbleweed Tuesday. All the renters have packed their bags, returned their keys, and bounced back to Manhattan (or Brooklyn). Business for the local shop keepers dwindles down to imperceptible levels. I don’t think there are actual tumbleweeds on the streets, but one can forgive the retailers on the streets for swearing they’re seeing them.

And I’m all about Tumbleweeds, particularly Elton John’s magnificent Tumbleweed Connection. My having placed it on my audio Mount Rushmore (along with, in no particular order, L.A. Woman, Blonde on Blonde and London Calling) has singled me out for criticism in certain quarters. To which I always reply that these things, to the best of my understanding, are matters of taste. I suggest, as such, that you give it a listen and decide for yourself.

Meantime, we celebrate Labor at an interesting pass. In a quirk of the calendar, the August Jobs Report dropped on the Friday before the three-day weekend. It came largely in line with expectations: ~300K new non-farm gigs, a modest uptick in the base rate. Not much else.

It’s a good labor market, save for the vexing and stubborn amount of unfilled Job Openings. But I will stop short of flat out scolding those who sit on their thumbs when > 11M legit gigs go begging:

And whether you are Labor, Management, or ignominiously out of the matrix, the next several weeks offer in interesting sequence. It’s one for which I strive – unsuccessfully – to equate to any previous paradigm through which I have traversed.

On the 83rd Anniversary of the onset of WWII, the Poles demanded 6.3 Trillion Zlotys (~ $1.3T but falling, as is virtually every other currency against the newly-almighty USD) in reparations from the Germans. Germany is Poland’s largest trading partner, and that by a wide margin. Both countries border/are threatened by Russia, from which they each import >50% of their Natural Gas. As such, both are subject to the POSSIBILITY of a devastating economic collapse this winter. Both are on the brink of (or perhaps in) Recession.

Let’s in any event wish the Poles God Speed in collecting their invoice. Maybe the Germans will fork over the 6 large Zlotys without complaint, and lord knows that the bill of attainder is probably legit. But I certainly would not be holding my breath.

On a related note, G7 ministers are pushing through a price cap on Russian Oil, to which the Russians responded by shutting down – full smash – the Nord Stream pipeline. Someone’s gotta help me with the math here. Russia is in a nasty war. The G7 has lined up against it. Yet the allied powers seem to somehow imagine that Putin will go along with this. Which brings to mind (albeit in extreme form) the following question: did Hitler import/impose an oil price cap on Stalin in 1944?

Didn’t think so.

And here on these shores, we enter the final third of the year with the markets way down, but no clear signal as to what happens next. I don’t see many upside catalysts, but, on the other hand, I doubt we’re looking at a full stop crash. The Gallant 500 closed Friday below its 50,100 and 200-day Moving Averages, as did Captain Naz. And all this in the first two trading days of September – historically and by a wide margin, the worst month for risk asset performance on the Julian Calendar.

Normally, this would be a dire configuration.

But Ima gonna hold onto my call that there’s a bid out there in these ranges. Not much of one, but a bid, nonetheless.

Why? Because it’s the pain trade. We’d all probably be better off with a market clearing crash. Which is why it almost certainly won’t happen.

The post-Labor Day sequence should unfold in slow, deliberate fashion. There’s almost no data this coming week. But after that, we’ll be confronted with yet another round of Inflation statistics, with the next FOMC meeting following quickly on the heels of this.

Though it wearies me to reiterate, much of what happens next depends upon Fed action and the market’s reaction to same. It’s currently a dice flip between 50 and 75 bp hike at the September meeting, and as for me I’ll take the over. After Powell’s J-Hole’s words of anger and admonition, I think he’s gotta back the rhetoric up with some fire and brimstone on the Fed Funds rate.

However, this is not the whole of the story. Accelerated Fed Balance Sheet reduction is also on the docket, and not, per se, arriving at an ideal time.

All of which should put upward pressure on rates of all types, which, irrespective of its impact on the actual economy, is not exactly constructive for the markets.

Overall, the Macro meter points to the negative, but not dramatically so. If one envisions it as the upper half of a clock, with the extremes being at 9 and 3, respectively, I’d place it at about 10:30.

Yes, the technicals and fundamentals are both flashing warnings, but in this muddle, I would caution against getting to jiggy on the short side. Stocks were squeezed hard earlier this summer, and, while that ran its course and ushered in double digit selloff in our favorite indices, these things, too, can reverse course. The tumbleweeds could roll up the street and it might be nut squeezing time again.

Mostly, I think we stay in ranges with the top marked by those giddy days after we absorbed the Ukie, and the bottom represented by the puke that ensued immediately thereafter. This is a pretty wide range of > 20% (+/-), so not much of a call there.

But I’d ease into the “business end” of September, allowing your portfolio risks to evolve with market conditions. If we make it through that month of aspirational memory (which, to the obtuse, I’m trying to remember), it’s on to October, which will usher in a new set of earnings and quarterly macro data – much of which will be overwrought and, yes, overthought.

Then there’s them midterms. Whatever your political persuasion, I can assure you that if the Progressives manage to run the table, it won’t be pleasant for investors. By contrast, if as expected, their ruling coalition weakens and they lose at least one chamber of Congress, it would preclude a lot of bad sh!t for the markets, but won’t, in and of itself, catalyze more accretive governmental policies. Because they will only have the juice to block stupid government initiatives, not to pass smarter ones/ Their success thus takes more the form of a risk mitigation dynamic than an investment opportunity.

I am anticipating some wicked bumps (and a few tumbles) ere we put a capper on ’22, and the action starts right now. Again, I feel the best approach will be reactive rather than proactive.

Meantime, Tumbleweed Tuesday is hard upon us, whether we like it or not. But, as for me, I’ll hold on tight to my dreams of the crystal streams, of days gone by, of private, fit-to-burst laughter.

However, these things, as indicated above, are matters of taste. Do what you will. But be careful when they’re kind to you; don’t you end up in the dirt.

Just remember what I’m saying to you, and you like-e-ly won’t get hurt.

TIMSHEL

“It is perfectly true, as philosophers say, that life must be understood backwards. But they forget the other proposition, that it must be lived forwards.”

— Soren Kierkegaard

Hard as I’ve tried to banish Kierkegaard from these pages, he keeps popping up.

He died in 1855, and the proper thing to do is to allow him to rest in peace. But, in addition to this widely read publication, his presence remains ubiquitous – on platforms such as tiktok, Insty, Etsy, Hulu and wherever else the hipsters roll and keep secret from us old fokes. His visage graces coffee mugs, bumper stickers every other form of merch. Like the Kardashians and the re-nuptialized Bennifer, the more we try to ignore him, the more he forces us to contend with him.

When he last haunted these pages, it was owing to his observation that in this world, it’s best to either do something or not do it, because you will regret either choice. True enough, but this time, another dichotomy in his catalogue emerges – the oxymoronic notion that while time only marches forward, the choices we make are, substantially and necessarily, based upon information gathered from instances, eras and epochs that have passed us by.

Welcome, my friends to the show that never ends: the world of Risk Management, where those who presume to ply their craft are expected to anticipate future ranges of outcomes, with only what has already occurred to use as effective guidepost.

What would you have us do? Predict the future and then share the results with the rest of y’all? I ain’t gonna say whether we have achieved the former (or not), but obviously, if we have, we’re keeping it to ourselves. I will let you in on this much: though it has never occurred to a single one of you, us risk managers wouldn’t mind banking some coin for ourselves once in a while.

At any rate, the need to live forward while looking backward strikes me as being a particular plague for our Central Bank. Perhaps this is fitting and proper, because: a) the Fed typically brands itself as gestore del rischio di tutti gestori del rischio (risk manager of all risk managers); and b) relative to the power it wields, its senior staff appears to me to be similarly underpaid.

This past Friday, perched at a podium high up in the Teton mountains, its chief, er, philosopher, one Jerome Powell, delivered an eight-minute wallop to the markets that I believe was as impactful as any such set of remarks delivered in that setting in a decade – dating back to J-hole ’12, where Powell’s predecessor’s predecessor – Ben Bernanke, announced QE3. At the time I redesignated QE-Infinity — insomuch as it was a QE that was unparameterized in terms of magnitude and duration. In eerie foreshadow, it transpired ~10 weeks before an extremely important election, and I have always believed that it went a long way towards insuring a second term for Barack Obama.

This time, though the venue was identical, the players have changed, and the polarity has, by all appearance, reversed itself. In 2012, Big Ben giftwrapped a big ole love bucket for Barack. In 2022, subsequent developments may unfold such that Joltin’ Jay has landed a body blow to his presumed pals down The District: Joe and Janet.

While neither Jay nor any of his professional forebears (this side of Volcker) have been particularly known for their clarity of message, this time there was little room for ambiguity of interpretation. He reinstated his organization’s longstanding (but tragically relaxed) inflation target of 2% — in an environment where, depending upon the measurement one prefers, the current rate is somewhere between 7% and 11%. He emphasized this point by acknowledging the sacrifice and economic hardship needed to achieve this objective. Said he didn’t care. Told us we’d have to do it anyway.

Channeling his inner Kierkegaard, he made reference to the monetary policy mistakes of the 1970s, during which time (he believes) we failed to fully exorcize the pricing demons because we ended tightening cycles pre-maturely. Not gonna happen this time, he tells us.

So, Powell is moving forward in hawkish assault, swooping down on soon-to-be-hatched Inflation eggs and other avian fondlings before they fill the skies. To the extent he was looking at what has recently transpired, he’d see economic data that included a reconfirmation of negative Q2 GDP, a housing market that is showing alarming cracks, a collapse in global service PMIs, Brent Crude climbing back over $100/bbl, Nat Gas at all-time highs, EURUSD at below parity, and any number of other issues sufficient to tax the fortitude of even the heartiest of monetary bureaucrats.

Deciding how to move forward based upon all this backward stuff strikes me as being a formidable challenge. But the good news is that it’s his problem; not ours. Until, that is, it isn’t.

If Powell appeared dour and humorless up there in J-hole, perhaps he should seek to cheer himself with a visit to the White House and Capitol Hill, where they’ve had quite a month and are justifiably giddy about it all. Over the course of August, the ruling party has gathered itself to transfer yet another > $1.5 Trillion of our money into their control. They have sourced ~$300B to give to highly profitable chip makers to spend in their districts. They ginned up >$600B for the Sacred Cow of Green Energy development. I really don’t want to tread too heavily on the tiresome topic of the latter but I do think that the commentary, published in the attached WSJ column and authored by Mark Mills of the Manhattan Institute is worthy of consideration:

https://www.wsj.com/articles/why-the-energy-transition-will-fail-11661547051

They saved the best for last (that is, under the dubious premise that they are done), by cancelling >$500B of student loan debt. Now don’t get me wrong – I am not some Dickens character disapprovingly wagging my finger at those who presumed to borrow for the purposes of selfimprovement. But there is so much wrong here that I would not even begin to capture it in this family publication. But perhaps the following visual will offer some insight at to who stands to benefit:

The threshold for qualifying for this relief is nearly double the annual salary of the average American; nearly 4x for those who are married/have a family. Presumably, they will finance at least a portion of this largesse through stepped up tax collection, as enforced by nearly 90,000 new IRS agents tasked with ensuring that not a penny of what we owe our public servants slips through the cracks.

Maybe free handouts for Silicon Valley Billionaires, Fossil Fuel Antagonist/Vigilante Capitalists, and former college attendees earning up to 10x the Poverty Line will indeed purchase enough votes this November to keep the progressive boat afloat. We can be pretty certain that this is what it’s all about. On the other hand, it could all backfire. Spectacularly.

We can only hope.

I could take it all in stride if so much of the money weren’t being allocated to scolding me and my antecedents for our unpardonable sins, to limiting my future economic prerogatives, and, of course, to auditing my ass (probably more than once).

But it sets up for a continued tough slog in the markets. Inflation may come down, but there’s NO WAY we get to 2% without a deep recession. Interest rates are going substantially higher, and I think the housing market – already injured, will be the first of the fallen. The ex-Goldman centimillionaires who run the SEC are cooking up so much impairment for traders and investors that it takes over a thousand pages to describe them all.

But if I have learned anything in my > 6 decades on this planet it’s not to draw definitive conclusions about anything in late August. So, I’ll reserve judgment as to what unfolds after Labor Day until, well, after Labor Day. Not much is likely to transpire in advance of this, though I do hasten to remind readers that due to the quirks of the calendar, the important August Jobs Report comes out this Friday, right before the three-day holiday weekend.

After that, we will continue move forward while looking backward. School will be back in session at all levels, offering me renewed cause to regret having paid back my student loans.

But I think I can still draw insights into the future from what transpired before.

It was in college, after all that I first encountered Kierkegaard. Who earned a Masters of Arts in Philosophy from the University of Copenhagen. In 1841.

It is not known, at the point of this writing, whether he borrowed money to finance his degree, or having done so, what assistance he received from the King of Denmark in discharge of same.

It was in college that I also read a play about another member of Danish royalty. It was a tale told by an idiot, full of sound and fury…

Signifying nothing? True, that story didn’t end well. As for the rest of us, it could go either way. Or both ways. Which I guess is my point. Unless it isn’t.

Because I don’t remember the past and can’t predict the future. Or maybe I have it backwards – I can’t predict the past and don’t remember the future.

And if that doesn’t kill Kierkegaard once and for all, I suspect that nothing will.

TIMSHEL

“If you should rear a duck in the heart of the Sahara, no doubt it would swim if you brought it to the Nile”.

Mark Twain and Charles Dudley Warner

“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand”.

Milton Friedman

“I was born in the desert, raised in a lion’s den”

Noah Lewis

“I have nothing to do on this hot afternoon but to settle down and write you a line”

Rod Stewart and Martin Quittenton

Let’s start at the end. It is indeed a hot afternoon. And no, I’ve nothing to do but drop y’all a line. I should mention (if for no other reason than to improve your musical erudition) that I lifted this quote from what is perhaps my all-time favorite song – “You Wear it Well” by Rod Stewart.

And you do. Wear it well, that is. Madame Onassis got nothing on you.

And that, perhaps (but perhaps not), is all I have to say about that.

Next, as the fates would have it, I was indeed born in the desert, the one that is nestled about 100 km east of Los Angeles. I can’t say I was raised in a lion’s den, but, then again, I can’t say that I wasn’t. Truth is, I don’t much remember.

And that, perhaps (but perhaps not), is all I have to say about that.

Except this: the desert that forms in the basin of the Big Bear Mountain range, due east of not only L.A. but also of Pasadena, is a quaint little affair. It fails to rise to the dignity of, say, the nearby Mojave Desert, which contains the legendary Death Valley.

And it comes up particularly short when compared to the Sahara, which stretches across a full one third of Africa – from Algeria to Egypt. It ranges 9.2 million kilometers and is surpassed in size (by those who presume to determine what a desert and what ain’t) only by two slightly larger expanses proximate to the North and South Poles.

But please. Those deserts are some of the coldest spots in the world, and I suspect those, er, hearty enough to brave those realms wouldn’t call them deserts at all. If you did so to their faces, they might be offended enough to club you with an ancient but still functional thigh bone of a Wooly Mammoth, drag you by the hair to their caves, and cook you for supper.

During their alternating winters, night-time in these regions last > 22 hours. By contrast, some parts of the Sahara register 98% sunshine in daylight hours and average daily temperatures of 47 degrees centigrade (117 degrees Fahrenheit).

Given its nearly infinite reach, I reckon it would be difficult, but not impossible, to transport a duck born there to the Nile (where it would no doubt swim), but I think that rearing one in its most arid districts might be even more problematic.

Still and all, Twain/Warner have a point; God’s creatures gonna do what they gonna do.

And this is certainly true for those magnificent mallards who noisily debate and ultimately set financial policy. This week, in time-honored tradition, the quackery migrates from Washington and New York to a pleasant setting in Wyoming; specifically, Jackson Hole, for its ritualized Economic Symposium. It’s host is the Federal Reserve Bank of Kansas City (bestowing on FRBKC some reason to exist) and it is one of the two mountain migrations for these birds every year, the other one of course being that swarming orgy of self-congratulation in Davos, Switzerland each winter. I can’t say as I blame them for doing so. It is easy to wing ones-selves to these high altitudes– using either one’s own extremities, or lacking the appropriate bio-functionality, simply gassing up private jets, nestling in, and refining one’s notes admonishing the rest of us for excessive fuel use.

Wiki states that there are over 20 types of ducks in Wyoming, but all ears this week will be trained upon one particular orinth – Jerome (Big Quack) Powell.

He will be laying his latest Daffy wisdom on us at an interesting pass. In a rapidly changing, exceedingly opaque financial landscape, his objective is to effect a precarious balance between his battles against Inflation and his desire to avoid doing gratuitous violence to what appears to be a very fragile set of economic conditions.

I don’t envy him his task. Whispers abound that he will recommit to the mission of taming the pricing beast, and investors have backed this up sentiment by driving Madame X (U.S. 10-year) yields by 50 basis points in August alone. Other markets have reflected similar mindset. The (Almighty) USD is again knocking on the door of two-decade highs.

And there are unmistakable signs that Inflation, channeling it inner Elmer Fudd, is back on the hunt. On this hot afternoon, Natural Gas in both Europe and the United States is surging to all-time highs:

Nat Gas: Flying and Squawking on Both Sides of the Atlantic:

Meantime (and inadequately reported), German PPIs were reported last week at an astonishing >37% annualized. The July figure of +5.3% is an all-time record.

And, of course, the cold weather is still a couple of months off (except in the world’s coldest deserts), and when it arrives, biological ducks and wealthy human waterfowls will simply fly south, while the rest of us suffer through a crippling increase in the price of heating our homes.

Cotton is yet again surging, but we won’t be wearing much of that this winter. Copper is gathering force. I could go on, but you get the idea.

So, Inflation may indeed be ascendant, and Daffy Powell may be forced to measures beyond uttering the favorite phrase of his namesake’s pal — Sylvester the Cat (Suffering Succotash!). Because though it is a culinary mashup for which no financial market exists and thus no pricing information is available, the cost of succotash has almost certainly increased considerably, as well.

I’m not sure what Powell’s gonna say or do, but I reckon we find out this coming week. Lord knows he’ll get no help from his brother and sister public servants across town, who are on something of a roll. Not only have they gathered themselves to spend $1T on microchip and green energy, but they have also allocated sufficient IRS resources to hire enough IRS agents to populate a town nearly ten times the size of Jackson Hole and Davos (villages whose populations are nearly identical).

I have my doubts about the wisdom of this. It seems kinda Inflationary/recessionary to me, and perhaps more importantly, ‘tis a mere drop in the bucket relative to what they wanted to spend.

Which brings us to the last of our four quotes. Friedman was right about sand shortages in the Sahara materializing in a mere half-decade, but I believe, in the present day, the grains would disappear at a more rapid rate. All 9.2 million square km of them.

And that’s where we stand on this hot August afternoon

I recently stated my view that risks tilt to the upside, and, considering recent market action, I did myself no favors by doing so. Stocks and bonds have sold off by noticeable amounts. As has crypto. Most of what’s up is stuff we’d rather see go down.

But the market is the market, investors are investors. If you reared the latter on the remote precincts of Pluto and then transported them to Wall Street, they would no doubt invest.

And I think, as such, there’s still a bid out there.

But now my coffee’s cold and I’m getting told that I gotta get back to work. So, when the sun goes low and you’re home all alone, think of me and try not to laugh.

No, I don’t wear it particularly well. But you do. Unlike the ducks, lions, bulls and bears to which I make reference in this note. Who wear nothing at all.

I wish I could offer a vision of Duck Soup on the horizon. But right now, it looks more like a game of ducks and drakes – skipping stones on a watery surface and hoping for a few perky bounces before gravity drags them down beneath the surface.

All of which makes me want to take a swim. Which is what I think I’ll do. And so, till next time…

TIMSHEL

Thus, in whimpering fashion, have the July Inflation numbers dropped. Both CPI and PPI, much to the delight of investors, came in below-expectations. Those not rushing to take credit are racing to buy every financial instrument under the sun.

Let us therefore collectively rejoice that “Peak Inflation” has come and gone. Never to be observed again – on these shores, or, indeed, in this galaxy.

We won’t miss it. Peak Inflation, that is. However, and while I don’t want to ruin the waning days of summer for any of y’all, I believe we should keep a watchful lookout for its possible re-emergence. Like MacArthur in the Philippines. Like Napoleon from Elba. I don’t know that this will transpire, but, on the other hand, I don’t know that it won’t.

But as always, I digress, as time-honored protocols impel me to first pay obeisance to my theme, which, as is often the case, wants both explanation and justification.

Humble Pie is both a colloquialism and the name of a classic rock band. As to the latter, it’s a group in which I take very scant interest and about which I have very little to say. With respect to the former, by truncating it to Pi, I make reference to the Greek Letter that immediately follows my beloved Omicron. It is most commonly linked to the divine constant that resolves the linear with the circular. Measure the length of any straight line, multiply it by Pi, and damned if you haven’t hit upon its precise circumference. Pi is an irrational number, meaning that it has an infinite string of digits to the right of the decimal place. A year ago, this coming Wednesday, some characteristically fastidious Swiss scientist carried the calculation out to 62.8 Trillion digits, and my guess is that they ain’t done yet. In fact, I wonder if they stopped at this figure because it is precisely 20 trillion times the value of Pi itself. It would be pretty cool of them Swiss if this were the case.

The calculation required 108 days and 9 hours of processing time, executed on what we can assume was a very powerful box. But they have barely scratched Pi’s circuitous surface, as its full, precise value cannot, by definition, be known by anyone other than the Good Lord himself.

The first recorded use of Pi is by the Babylonians, roughly around 2,000 B.C. Since that time, though, the pilfering field of economics has purloined the term and applied it to the rate at which the value of a fixed amount of currency fluctuates against a basket of goods and services; in other words: Inflation. The meanderings of which are the current obsession of those with vested interests in the fortunes of the Capital Economy.

One might be tempted to deem the Economic Pi an irrational number as well. It’s calculated in dozens of ways, each one hated more than the next by those that that monitor its whimsical path. Best case, it is a patchy indication of the cost of goods and services within the economy, but – particularly in these troubled times, it’ll have to do.

We all knew that the shocking numbers generated in Q2 were not likely to extend themselves. I myself was convinced of this and opined accordingly. Mostly, this was due to my focus on commodities markets, and my observance that critical sectors such as Energy and Grains were backing off like little bitches. And I continue to believe that the twists and turns within these markets will be the key determinant of Inflation on a going forward basis.

But I also think this: once Inflation has reached a critical mass, it takes on a life of its own. I won’t plague you with the indignities through which I was forced to slog during my econ grad school days, but I will state, briefly, that the triumphs and tragedies in these realms are driven not by Inflation itself, but rather by an even more obtuse concept called Inflationary Expectations – the expected level of future price changes — embedded in the actions and decisions of economic agents.

Such things are, of course, unobservable, unknowable. But for our purposes, it is important to bear in mind that the inflation rate anticipated by commercial and consumer interests informs the critical decisions they make. If Expectations are high, these entities are deeply incentivized to spend and borrow, as they assume the value of both their purchases and borrowings will diminish over time. Conversely, if Expectations are low (or worse yet, negative), agents hold off on economic activity and are more comfortable deferring transactions in hopes of better pricing down the road.

Rendering an accurate monitoring of Inflationary Expectations is more difficult in the modern environment, for about 62.8 trillion reasons. But let’s focus on a couple. First, the Developed World’s Central Banks have tinkered (read: goosed) the money supply (against which prices are measured) as aggressively as any point since at least those blissful days between the two world wars. And no one, no one, knows what the long-term impacts of this will be (lotta spit ballers guessing, though). Beyond this, with persistence of real-world problems such as the not-yet conquered global health crisis, an observable and arguably crippling deterioration of international trade flows, all as overseen by what seems to be the least capable set of policy makers in my lifetime, who’s to know how goods and services will be priced in the coming months and years?

Finally, economic history is rife with examples of surging Inflation that subsequently abetted, only to re-emerge in stronger force just as everyone began to believe we had licked the thing:

Pi Over the Last 50 Years:

The most vexing action transpired back in the ‘70s. We was going along OK until, sometime after the ’73 Yom Kippur War, our Middle Eastern relations began to deteriorate. But we got over that. Until, that is, all that OPEC embargo nonsense and the Iranian hostage crisis took hold. At which point Inflation surged to unthinkable levels, and it took crippling, recession-inducing interest rate hikes to, so to speak, right the pricing ship.

The technicians among you may recognize a double top/head and shoulders formation during this period. If we were to extrapolate to our current circumstance, it seems likely that even with a serious dip in the pricing surveys, we may require another double top to achieve normalization.

And just as was the case in the ‘70s, I believe it all centers around the Energy Complex. It’s been heartening indeed to bear witness to a ~25% drop in Crude Oil prices (during the peak driving season, no less) and a Nat Gas decline of approximately 1/3rd. But both commodities are back on the rise, with Nat Gas knocking on the threshold of all-time highs (before Winter, no less). Meanwhile, the price in Europe is more than 5x that of the U.S.

All of which has caused a shift in Continental heating protocols – away from Nat Gas and towards other Crude Oil byproducts. And if you don’t believe me, just check with the (impressively named) International Energy Association.

Meanwhile, the mighty vessel of domestic energy production remains moored in drydock. We continue to press on our good buddies in Iran and Venezuela to open their spigots, but neither they, nor the Saudis, are likely to do our bidding. Russia (from whence the Continent derives nearly half of its energy supplies) may very well up the ante by shutting down Euro business altogether.

All of which could send Energy prices to heretofore un-breached highs. On the other hand, maybe not. Maybe we’ve seen “Peak Oil”, which would do a great deal to cure a multitude of our (P)ills.

On the other hand; maybe not. At which point Pi may resume its baking ways, it will be, optically at any rate, up to the Fed to cool its ovens. There are worse places to afix this solemn responsibility, but other than with their colleagues across The District, none come immediately to mind.

But now, we enter something of a data/liquidity vacuum. Not much of import is set to be released between now and a (late-arriving) Labor Day, and, as August melts away, so too, I suspect, will the liquidity.

So, I reckon we’re gonna have to wait a spell to obtain any clarity – on Inflation, Interest Rates and the general health of risk assets. And then, in all probability, wait some more.

While I continue to urge caution in terms of portfolio construction, I don’t mind if you do a bit of celebrating on the Humble Pi numbers released last week. After all, we survived pretty well through the August data onslaught. In addition to tamer-than-expected Inflation, we have boffo employment stats. Earnings, while mixed, were hardly the disaster some prophesied. True, GDP was negative, but investors can be forgiven for believing the main impact of this will be to dampen the hawkish hisses currently emanating from the Fed.

So, if investors, in their extensive-but-finite wisdom, want to keep up the “game-on” vibe, I am no position to quarrel. I don’t think it will last forever. The Capital Economy strikes me as being drained, strained, disrupted and latently despondent. It is ill-prepared to absorb much in the way of distemper or disappointment. But I see nothing of this sort on the visible horizon. And if investors wish to use the remaining days of sunshine and warm breezes to play around a bit more, they have my blessing to do so.

Of course, I could be mistaken, and if so, I am fully prepared to swallow as much Humble Pie as will legitimately help the cause, with the only hope I can hold out that it doesn’t rise anything close to the 62.8 trillion units of Pi served up by the Swiss last year.

And bringing these linear musings into their full, circular symmetry, I’d also like to avoid spending Thirty Days in the Hole.

Maybe some small set of my readership will understand.

TIMSHEL