“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

Boy, this social media thing is really taking off, eh? I’m not much of a user myself. I’m mostly a lurker, but an enthusiastic one. I am not proud of this, but I find myself checking various outlets, several times a day, in the hopes of obtaining visuals as to what everyone I’ve ever known has consumed for lunch.

Most visible among the platforms, of course, is the one operated by Meta Platforms, Inc. In days of yore, it was called Facebook, and, near as I can tell, that’s what it still is. Facebook. And this is where I turn to greedily review cat pictures and inspirational quotes, issuing, routinely, from individuals I once knew, but in many cases haven’t seen or spoken to in several decades.

For a variety of reasons, though, this company has not only launched itself into the dubious, parallel metaverse, but has taken the additional step of modifying its branding accordingly. In the markets, this means those wishing to monitor the current fortunes of its stock must double their effort to do so – typing the four-digit code META as opposed to FB, the two typographical characters of which are conveniently proximate to one another on a standard keyboard.

Perhaps this is also part of Zucky’s corporate strategy, because, given that its market capitalization now stands at half of where it entered Tricky ’22, he may figure the fewer clicks on his ticker the better for all concerned:

Far be it for me, a grubby risk manager, to offer strategic advice to those fabulous, flashy folks in Cupertino. However, were I to do so, I might suggest that they expand their offering to include a separate Social Media silo – The Fess Up Book. They wouldn’t need to go so far as to engage in yet another rebranding (but if they chose to do so, the elegant, truncated equity ticker FU remains available). But I betcha they’d draw a lot of clicks on this portion of their platform, and that their advertisers (almost all of whom have some considerable fessing up of their own to do), would fall all over themselves to purchase prime real estate on the banner/front page.

The premise here should be obvious – content would be limited exclusively to that involving the repudiation of longstanding, inauthentic statements/actions, on any subject of any kind.

I came up with this idea a couple of weeks ago (and would’ve written about it last week had not Jerry’s 80th intervened), as partly inspired by, of all places, the New York Times, which, a couple of weeks ago, instructed all eight of its active columnists to write editorials about what they’d gotten wrong. Michelle Goldberg issued a “my bad” for sanctioning the kneecapping of Comedian-turned- Senator Al Franken. University of Chicago graduate David Brooks apologized for being a proponent of Capitalism (!). Gail Collins sent forth a mia culpa to a toothy, always-coifed Mitt Romney. And a writer I’d not heard of – one Farhad Manjoo, informed the world he was wrong for encouraging everyone to join – you guessed it – Facebook.

A pox on you, Manjoo! May no more wedding pictures or diatribes about local sports teams ever enter your stream again!

The uber-pompous and eternally annoying Paul Krugman, to whom, and to their everlasting shame, the Skandis awarded the Nobel Prize in Economics a few years back, took an editorial page walk of shame regarding his repeated downplaying of the Inflation conundrum. That’s a lot to chew on – particularly given that the next cycle of critical data awaits us mid-week. But, for the moment, I digress.

Even as an identified Conservative, if I could engineer the first posting on The Fess Up Book, it would come from Donald Trump – not for his existence, not for significant portions of his presidency, but for his highly destructive behavior after the 2020 election, which cost untold damage on the country and his party.

Two problems exist in this regard, the first of which is that DJT has been banned from FB until next year, whereupon, at expiration, they will presumably ban him for all time. The second, of course, is that there is a lower probability of him fessing up, to anything, on any platform, than I have of joining an NBA roster or winning the Miss Universe pageant.

From there, I’d move to the Fed, which, through multiple cycles, has missed the opportunity to normalize rates at an appropriate point (say, about five quarters ago). Instead, it presides over normalization in an economy, which, as evidenced on Friday, features a white-hot job market with a lot of patchy holes, the near-certain persistence of Inflation (we’ll know more this coming week), visible activity declines in critical sectors, and a market that has no way of determining what to make of it all.

Of course, a lion’s share of fess up content would justifiably emanate down the street from the Fed, in the hallowed halls of Capitol Hill and the White House. But when was this not the case? The newest postings should certainly come from Congress, for stuffing $1T of new spending – half of which involves handouts to the semiconductor industry and sacred, politically favored Green Energy projects down our throats. They’re also gonna put a cap on drug prices. I’m not sure what David Brooks learned at the U. of C., but I came away from there convinced that such measures only restrict output, stifle innovation, lead to the misallocation of resources, and in the end, in fact, place upward pressure on associated costs.

It’s all billed – presumably in some metaverse – as the Inflation Reduction Act of 2022. Well, we’ll see, but as for me, I’ll take the Inflation Over. Congressional Leadership managed to beg, threaten, and cajole the two outliers in the ruling coalition, each of whom managed to wrangle desired concessions, to climb on board.

Machin and Sinema – your Fess Up Book table is ready.

Particularly given that recent events have ginned up an approximate 20% snap back in the realms of the Gallant 500 and Captain Naz.

It hasn’t been costless, and some of the expense has been born by our fickle siren — Madame X (U.S. 10 Year Note), who has been impelled to lift her yield skirts noticeably in recent sessions. If, as planned, our fess up Fed continues to reduce its Balance Sheet, she may find herself exposed to an even more undignified yield configuration.

But maybe it’s all just talk. The fess up Fed has been threatening Balance Sheet reduction for more than a year, but at present, it looks like this:

With Inflation at current levels, real interest rates remain in deeply negative territory, and this, as a matter of human nature, has extended the never-ending orgy of debt creation. Back to the Fed, which, on Friday release the latest Consumer Credit figures, telling of a borrowing binge last month, the second highest on record:

My read of this chart is that, considering business, state and municipal credit, the numbers reach about 1.5 years of GDP.

And this is to say nothing of Treasury borrowings, which themselves are the equivalent of another 1.5 GDP years.

And this is to say nothing of “off Balance Sheet” obligations, most notably Social Security and Medicare, which add several years to the amount of aggregate toil involved in settling our balances with The Man.

All of which begs the big question: when, as a society, do we fess up to our fundamental, unequivocal insolvency?

But as no one seems to be attending to this, I will defer the topic to another day. All of which leaves only one item of unfinished business for this note: my own obligatory contributions to The Fess Up Book.

I’ll keep my never-ending inventory of personal transgressions to myself. On the professional side, I will cop to the transgression that the vigor of the current snapback has taken me by surprise. I remain skeptical, but the earnings cycle has, on balance, been better than I expected it to be. I also find myself to have been on the wrong side of the big slide in most commodities.

I am particularly embarrassed to observe, as I type out this note, WTI Crude residing at below $90. If it stays there or retreats further, perhaps this rally has some life left in it. I have my doubts, especially with power costs in Germany and the rest of the Continent hitting yet another all-time high at week’s end – before the weather turns, in advance of any nasty tricks that punishing Putin has up his sleeve.

But I remain confused, and I’ll fess up to wondering whether (or not) I still got it. Maybe not, and if so, perhaps it’s time for me to seek out another profession.

The problem is that I don’t know where to look. So, I have one step to take in preparation.

Keep this to yourselves, but also keep an eye out for an announcement in this space of a joint venture with you know who — a professionally oriented social media platform for the professionally disenfranchised.

I’m thinking, for obvious reasons, of branding it as Linkedout. My sense and expectation are that none of my readers are called to post on it, and I hope they never do.

But as to The Fess Up Book, I can say this much. Any of y’all who have nothing to contribute simply aren’t looking hard enough.

TIMSHEL

Crazy Cat peakin’ through a lace bandana like a one-eyed Cheshire like a diamond-eyed Jack,
A leaf of all colors plays a golden string fiddle, through a Double-E waterfall over my back

Garcia and Hunter

I had other ideas, after a breathtaking weak of data releases, about this week’s theme, but then I was reminded that today marks the 80th anniversary of the birth of Jerome John Garcia – a milestone which I feel duty-bound to honor.

I was a bit reluctant on this score, because I’ve written about Garcia before, and could probably continue to do so into eternity, while contributing a but a drop into the ocean of what has been written, said and thought about him. In truth, the subject can be a tiresome one; I am genuinely creeped out by the obsession he commands, and was thusly tempted to allow the date to go unmarked. Yes, I’m a Deadhead, own all their records, have seen the band about 25 times (all but once with Jerry manning his trusty post, stage right).

But one can carry these things to excess. After all, Jerry, great as he was, was neither Lennon nor McCartney. Nor Dylan. And I am often tempted to tell those whose admiration of him rises to worship to let the poor fellow rest in peace.

Conflicted as I was, asked Joe (who loyal readers will recall, is the only person in my acquaintance to offer even nominal respect to my cycling exploits) what he thought, throwing out a couple of alternative riffs for his consideration. Joe, though too young to have tasted the fruits of the original, Garcia-led lineup, is a stone-cold Deadhead himself, and he didn’t hesitate.

“You gotta give this one to Jerry” he said, and that’s what I have done.

So, this goes out to you, Jerry. The world has taken 80 trips around the sun since you arrived, son of an amateur jazz man with enough sensibility to name you after Jerome (“Old Man River”) Kern. You only accompanied us on 53 of them, but you showed us the way.

I have every expectation that you will continue to do so.

Lyrical themes from his catalogue abound, but only indirectly so. Because from the outset, he subcontracted the wordsmithing to Robert Hunter. If I could ask him one question it would be this: why? Hunter was a competent lyricist, whose contributions we sporadically sublime. But Jerry himself was both lyrical and articulate, and I’ve often pondered the reason he never penned a few lines of his own. Because, you see, as something of a songwriter myself, I can authentically state that it is the elusive hook, riff, or chord sequence that makes the song. It’s well-nigh impossible to come up with something original that sounds good along these lines (there are, after all, only 13 available notes to work with) and it’s all been done before.

But if you stumble onto that riff, you can say whatever you want. The lyrics, are, to me, the payoff. So, I wonder why Jerry never took the opportunity to tell us what moved him, what was really on his mind.

Whatever the reason, though, it occurs to me that even today, Jerry’s influence is felt in surprising ways. Consider, for instance if you will, the outsourcing of descriptions of our current economic situation. The key players in Washington have now gifted us two consecutive negative quarters of GDP; it is, at least for the moment, their riff, their hook. And, according to longstanding protocols, it is precisely that – two consecutive quarters of negative GDP — that signifies a recession.

Done and done, no? Apparently not. At least, not so fast. While reluctantly acknowledging that we might be in a recession (though taking pains not actually use the word itself), the Powers that Be have outsourced the final designation to an obscure outfit called the National Bureau of Economic Research (NBER), while helpfully adding that a formal determination cannot be made for, at minimum, a year.

Team Biden may just as well have given the job to Robert Hunter, save for the inconvenient fact that he died three years ago.

But we’ll leave aside both Hunter and the NBER and ask ourselves what Jerry – the crazy cat peeking through the lace bandana, would make of the current proceedings.

He, like the rest of us, might be taking the weekend to catch his breath to review the onslaught of data that assaulted our screens last week. The information streams, of course, came in two keys, which we will designate E(arnings) Minor and E(con) Major, and combined in crescendo to produce a jam worthy of that famous 1973 Watkins Glen show.

An ensemble attempting to riff in multiple keys it’s always an iffy proposition, somehow, but as indicated above, it worked. The investment audience verily swooned at its rendering, showing its appreciation by ginning up the biggest weekly risk asset rally in several quarters. Equities, Corporate Bonds, Sovereign Debt and Commodities (more about this below) got higher. The USD came down a bit, after, (it must be said) trippin’ balls for months.

All on the back of an earnings cycle which seems to me to have been rather mixed. Investors were grooving to the stylings of Amazon and Apple (Facebook/Meta not so much), but, on the whole, it’s hardly been a sequence for widely distributed bootleg tape glory. The overall numbers have been OK, but as anticipated, guidance not so much; it’s been dropping like a stone since reporting began:

To me, the heartening vibe of investors to react favorably to tidings such as the Big Tech Dogs performing marginally better than expected – particularly as compared to glory days of your – is analogous to all the love that the current Dead and Company lineup (featuring John Mayer in Jerry’s lead guitar spot) is currently receiving. It’s a welcome treat for a quality-starved recipients, but let’s, at all costs, not confuse it with the real thing.

Of course, while all this transpired, the E-major econ stuff folded its way in, beginning with Powell, who knocked his audience off their feet by first raising the Fed Funds rate by 75 bp and then dropping juicy hints that perhaps his crew would not need to raise this rate to previously contemplated heights.

The crowd roared its delight and showed similar enthusiasm for a -0.9% GDP print on Thursday. And why not? there’s certainly nothing in my experience that says “buy” like a -0.9% GDP.

Again, it’s all about rate relief, and maybe they’re on to something. Maybe Powell purring that he’s got inflation under control and ain’t too worried about inflation is legit. But to me, it sounds more like the ’22 Dead Shows, transpiring not only without Jerry but also with a person named Oteil Burbridge manning Phil’s bass and (perhaps even worse) the posterior of some dude called Jeff Chimenti filling out a keyboard bench once occupied by Pigpen.

But I can’t help but notice that commodity prices, particularly in the Energy Sector are ominously creeping up:

Nat Gas is knocking on the door of post-invasion highs. And that’s just stateside. In Europe, locus of the historic Grateful Dead tour 50 years ago (the album release of which set me on my own GD journey), it’s three times as expensive. And this before: a) the coming winter; and b) the distinct possibility that the Russians will make good on their threat to cut the Continent off.

Meanwhile, Congress just passed a giveaway to our poor, starving, homeless chipmakers — to the tune of > $250B and is now working on a Mississippi Half Step Uptown Toodoloo spending bill that will round out the total pork tally to $1T. It will spend > 10% of this on new IRS agents, and tons more on the suppression of fossil fuel production, the disincentivization of biotechnology innovation and other, er, righteous initiatives.

It is the handicraft of Schumer and Manchin, who I can hardly deem a modern-day Hunter/Garcia. It has been designated the Inflation Reduction Act of 2022, and, as a commentary on the current practice of diverging branding from content, I deem it to be a winner.

But if you want to buy up here, you’re on your own. You’ll get no succor from me. Nor from Jerry, whose incinerated ashes are floating – half in the SF Bay, half in the Ganges River.

Meantime, our trips around the sun continue, and we’ll take from them what we can get. Forgive me, though, if, on Jerry’s 80th, I take the occasion to lament comic book colors on a violin river, crying Leonardo words from out a silk trombone. Remembering in doing so, what once was and what might have been.

TIMSHEL

So, I’ve been rocking Citi Bikes lately, and overall have no regrets. It’s a quirky experience, particularly given how little I’ve engaged, over four decades of adult living, in bike riding. Navigating the streets of Manhattan in this way — helmetless (I know) is about as close as I get to thrill seeking these days. But it is enough. Moreover, I’m happy to report that for risk management purposes, I traverse the Island, to the greatest extent possible, via Central and Riverside Parks, where cabs don’t threaten to send you careening unceremoniously to the pavement.

Significantly, over the approximate six weeks that span this experience, I have been passed by other two wheelers no fewer than a thousand times. And have passed — no one.

I have shared this anecdote with several of those close to me – informing them about the number of times I’ve been whizzed by — and asked them to guess the amount of my own offsetting whizzes. They all correctly conjectured zero. Except Joe. Who, perhaps owing to his organic diplomacy (and the fact that I’m his boss) threw out an estimate of one.

God bless Joe, who threw me an additional bone of reminding me that at least I haven’t fallen yet, much less while in a resting position. Which is more than can be said for President Biden.

But I still don’t understand. How can this be? Though unmistakably old, I’m in the best shape of my life. I work out approximately 15 hours a week, including innumerable stretches on my Peloton, upon which, in a good week, I churn through somewhere around 200 miles to nowhere.

However, as I have recently learned (and somewhat to my surprise), peddling the Pel taxes different muscles than those required for best use of a two-wheeled, non-motorized vehicle that doesn’t remain in the same precise geographic location across all eternity. I’m improving my standard cycling muscle memory, but (obviously) still have a way to go.

Meantime, even the flattest part of the Central Park biking trails have an Alpine look and feel for me. Every meter before me seems to slope uphill – even those where the opposite is true, and l am really heading in a direction where gravity works to my advantage.

And so it goes with the markets, which seem (at least to me) to be slipping and sliding even when they’re soaring.

This past week was exemplary of same. Cutting the tape at Thursday’s close (and thus conveniently ignoring Friday’s ignominious index retreat), it felt like the band was back together and rocking in a manner more reminiscent of magnificent stadium tours of yore – as opposed to those boat cruise gigs that are all our manager can secure for us lately.

But was anyone in the investment universe coasting (to say nothing of rocking)? Or, as I suspect, did market participants need to grind away for every inch of performance they were able to capture across this dubious rally?

Well, as the saying goes, your mileage may vary. But I saw what I saw, which was an uphill climb amid sweltering heat, even as the adjacent screens flashed unilaterally green.

Weather maps suggest that at least in the Northeast, we’ll get some relief from the boiling temps this coming week, and perhaps this will help me as I traverse that accursed Jaqueline (nee’ Bouvier) Kennedy Onassis Reservoir, but in the markets, the mercury should be rising throughout.

This past week was, by and large, prelude. Earnings reports accelerated and were mixed. Netflix produced what now passes for a blockbuster, losing only a million subscribers versus a projected drop of 2 million, and, in consequence, its stock rallied >25%. But then there was SNAP, slowing from a crisp click of the fingers to a droning dirge. Its price declined by nearly 50% after its earnings release and is down from ~80 to <10 in nine short months.

For what it’s worth, of the eleven companies with stones enough to issue forward guidance, ten have guided down.

The ECB weighed in with its first interest rate increase in, like, forever. I think the last time this occurred, outgoing Italian Prime Minister Mario Draghi was ECB Chair. He is now working with the local U-Haul contingent to remove his personal items from Chigi Palace to his own private dwellings.

Somehow, the European markets took it all in stride. Kuroda-san of the BOJ also spoke. But did nothing. Perhaps he’s still in mourning for his fallen friend Abe. Investors in Japanese securities, apparently quicker to regain their equanimity, ginned up a sustained rally.

But again, all this is likely prologue to what awaits us in the days to come. The real action will take two forms – earnings results from the Titans of Commerce, and pronouncements from Washington as to the cost of money and the pace of economic growth.

Of the former, I have little to say. I will be attending closely to what issues from the golden tongues of speakers ranging from Zuck to Cook. But your guess is as good as mind as to: a) the tidings they will bring; and b) how the markets will react to a).

Perhaps even more important than this will be the one-two punch of Wednesday’s FOMC announcement and Thursday’s first glimpse at Q2 GDP. Investors remain locked in on the likelihood of at least a 75 bp rate increase, and I doubt they will be disappointed in either direction.

GDP, on the other hand, is a perplexing mystery. The wizards on the payroll of the Atlanta Fed are prognosticating a decline of 1.6%. The organization’s survey of Wall Street analysts clocks in at +2%. The Bloomberg canvas splits the difference, at +0.5%.

All involved are trained and paid economists, but as I pointed out last week: God oh mighty, that’s a wide divergence of opinions, and I suspect that where the number actually lands may be the most important data point in an exceptionally data-rich week.

Thus, by Friday’s close, by when we bid farewell to a fleeting, forlorn, bittersweet July, we should have more information, but not necessarily more clarity, as to the overall state of the capital and commercial economy.

Whether we use this acquired knowledge for support or illumination remains in our own hands.

Meantime, what we can gather from current market pricing offers some hints. Witness the current trajectory of the domestic yield curve:

This dizzying path shows a deep upward slope out to six months, then inversion to ten years, a pleasant climb from ten to twenty, whereupon it re-inverts from twenty to thirty. Standard economic interpretation would suggest that the recession warning lights are flashing red. But I’m just not so sure.

I’m. Just. Not. So. Sure.

I rather believe that this tortured yield curve trajectory reflects a belief that inflation is fixin’ to come careening down over the next few months, after which the risk of recession rises, but not alarmingly so. There is support for this argument – particularly in collapsing commodity prices. But predicting the end of a cycle of rising prices is a bit like riding a Citi Bike, blindfolded and helmetless, on the BQE at Rush Hour.

As such (and considering the above-supplied narrative) I wouldn’t blame you if you thought it best to ignore this conjecture. This much is certain, though: if this was the bike path you chose, you’d be in for an interesting ride.

But for me, the road I’m on feels like the treadmill represented in the first six months of the above supplied graph.

Nonetheless, I still hold out hope that some of these days, I’ll find myself peddling along and encounter a bike in front of me looming ever larger on the horizon. Whereupon I will cheerfully and diplomatically veer left and leave it in my wake.

Meantime, though, I reckon I’ll keep grinding away, offering what greetings I am able to those who swiftly pass me by. And here, I’ll take some inspiration from Biking Biden, who continues to use his two-wheeler, his recent inglorious fall notwithstanding. Until, that is, he got covid, a happenstance which I believe has sidelined him. Given recent developments, one wonders if he was dosed, but we’ll leave that aside for the time being, wish him both a speedy recovery, and an expedited return to his righteous cycling ways.

My best advice is that you do the same. Keep peddling along, kids, bearing in mind, all the while, that it is the destination, not the pace, which should be our primary focus.

TIMSHEL

Sometimes I live in the country, sometimes I live in the town,
Sometimes I get a great notion, to jump in the river and drown.

— “Goodnight Irene” by Huddie William (Lead Belly) Ledbetter

No, I’m not gonna lay a bunch of Lead Belly righteousness on y’all. Yes, he was The Man. But the work of even the maestros he influenced (Dylan, Zep, the Stones, etc.) is lost upon most of you, so why bother?

I will mention, though, the book that inspires our theme – Ken Kesey’s “Sometimes a Great Notion”. It’s an enormous, expansive, heart rendering saga of the demise of an Oregon logging family. Kesey, at the time, was not only stimulated by LSD and the Great American Songbook, but also by domestic literary giants such as Faulkner and Steinbeck. Slogging through it, like many masterpieces, requires some patience and discipline. To paraphrase a line in the book itself, you’ can’t force Kesey; you must let him force you. But the rewards are magnificent.

Few of you will even try, but that’s OK. The one I care about already has. And that is enough.

And, as for me, tempting as it sometimes is, I’m not thinking of jumping in the river. Nope, all I can offer is small notions. So, here goes.

My sightlines to market risk flows have been deeply blurred for many months now, but I will press ahead, nonetheless.

And what I predict, over the next several weeks, is a great deal of hand-wringing data flow, which leaves us pretty much where we are right now. With thoughts about tributary suicides, upon which we have no intention of acting.

And where are we now? Well, earnings have begun as a mixed bag. The banks are mostly in, and weren’t terrible, but were tagged by increased set-asides for anticipated loan losses. Which had been artificially suppressed by all that lockdown monetary stimulus but are now back at pre-viral levels. Let’s keep an eye on this, shall we?

Delta screwed the pooch, but can the difficulties in the airline sector come as a surprise to anyone?

Inflation figures came in hot. Way hot. Everyone knew they would. But as is widely speculated, I believe they will come down. Hard. It will be temporary. But it will descend visibly. Starting with the July statistics. Commodity prices have (I believe only briefly) plummeted. Everybody over-ordered everything. Inventories of products ranging from back-to-school clothes, microchips, personal computers and even used cars, are unacceptably high. All will be on fire sale by late Summer.

Six months ago, there was a chronic shortage of perhaps the world’s least needed commodity: (everyone say it with me) Investment Bankers. Deal flow has deeply diminished, is almost nonexistent. Demand for these services has followed suit, and one hopes that those impacted have not squandered the entirety of their beyond-generous 2021 bonuses.

But it is always unwise to underestimate the capacity of bankers to pay themselves. I just read a Bloomberg article about a new wave of banker-fee-rich single stock Exchange Traded Funds (ETFs) emerging on the horizon. What, in heaven’s name, is the point of this? They are billed to offer short exposure and leverage in a manner that is unavailable to investors through standard transactions – unless, of course, they choose to use these tools themselves. Which is not costless, but which will also be charged to the ETFs, with the only advantage I can identify being that said costs won’t appear as line items on brokerage statements.

All of which reminds me of an outdoor show I attended in Madison, billed as the world’s first-ever wind-powered concert (it was in the late ‘70s). OK; fair enough. But there wasn’t enough wind that day to power the Marshall amps. So? They plugged the windmills into diesel-fueled generators.

Meanwhile, next week should be dominated by the earnings reports of lesser god companies, with a few PMI releases to add some variety. The one that follows, though, should be a barnburner. On the Macro side, we obtain the windfall blessings of the next FOMC proclamation (July 27th), which precede by one day, and in divine, plot-thickening flourish, our first glimpse at Q2 GDP estimates.

One can either fear or hope that the members of the Federal Open Market Committee obtain a sneak peek preview of the latter and use it to inform their monetary policy choices. For what it’s worth, you can put me in the “hope” camp. Not that I place much faith in their present abilities to incorporate information flows into rational decision-making. But what the heck – I’d still prefer that they know – just in case there are any unpleasant surprises which have remedies so obvious that even they cannot fail to notice and act upon them.

I don’t expect any (surprises, that is) from either the Fed’s decision or the GDP release. As a point of reference, the current handicapping of these two important revelations is presented below:

The probability of a 75 bp rate increase thus predominates, while that of a full-smash 100 looms larger on the horizon than it did even a week ago. The Atlanta Fed is at -1.5% on GDP; the hopesprings- eternal Street estimates are a full 3% higher.

I figure the Fed takes ‘er right down Broadway, and, come what may, does 75. I further suspect that the Atlanta estimates are closer to reality than those emanating from New York, but please know that the spread in these estimates is menacingly wide, adding to the prospects of vexing volatility in its wake.

Whilst all of this is transpiring, the Big Tech Earnings Wizards will make their presence known. All of them. The whole GAMMA gamut (Google, Amazon, Microsoft, Meta and Apple) reports that week.

Now more than ever, forward guidance will be more important than the numbers themselves.

On a weary, wandering tape, all the above will be a great deal to process.

I suspect it will leave us in a big muddle. The Fed will obfuscate; the GDP numbers will contain ambiguous, sound-byte-inducing bits that render us unsure as to how bad the economy really is. Some of the tech earnings will contain a ring of hopefulness, while others will toll the bell ominously.

And it will be nigh-impossible to draw any definitive conclusions from any of it.

And that’s what I predict for the month of July. After which, if I’m not mistaken, comes August, during which time we can drown ourselves in cocoanut oil, ponder what comes from the end of earnings and monthly macro statistics, and seek to figure out how to make some post-Labor Day Chicken Salad out of this chicken droppings of a year.

It won’t be an inexpensive exercise, as, like everything else, a dollar don’t go as far in the chicken game as it has in years’ past:

Broiler Chicken Prices: Hot as a Poker

However, I personally will be looking for what clues I can derive — not so much from chicken coops as from the fortunes of the energy commodities market. Crude, Gasoline and Nat Gas are all down at least 25% since those hand-wringing days of Spring, and if they remain in those realms/migrate downward, it will be a great blessing for the Capital, Commercial and Consumer Economies.

If, on the other hand, these commodities, as I suspect they will, ascend towards recent highs, we’ll all be in something of a bind. The inflation respite will be over, and the prospects of investing into a rising price/higher interest rate/slowing economy will re-emerge in crescendo.

The hard slog thus continues. But I reckon we can leave off notions of jumpin’ in the river and drownin’ – for now.

Nope. Let’s stick to smaller notions instead. Like how we’re gonna muddle through this mess. I’ve some ideas and am fixin’ to acting upon them.

But that, my friends, is a story for another day.

TIMSHEL

I beg your indulgence here, as I share the details of my long-awaited “Warhol 15”.

Specifically, this Weekend Edition of the Wall Street Journal contains my photo. To the best of my knowledge, it is the first publication of my gnarly image in a recognized daily publication of any kind.

Those that doubt me can find me in the bottom-most shot in the following article. I’m the guy immediately next to the dude standing in green:

https://www.wsj.com/articles/the-life-lessons-of-summer-camp-11657292830?mod=Searchresults_pos1&page=1

What’s that you say? Don’t have a WSJ subscription? Well, first, shame on you (particularly if you eschew it in favor of the perpetually perfidious New York Times). But no matter, here I am:

When made aware of this unsolicited P/R, my first reaction was, of course: “Holy Sh!t! My moment has come!”

It’s the Senior Cabin of 1975/Camp Menominee (CM), Eagle River, WI. Of which I was a charter member. For better or worse, the article makes no reference to me – or the crew with which I ran back then. It was simply used as a visual aide for a piece celebrating the joys of camp, written by a best-selling author who is also a CM alum. He was a bit younger than me, and I didn’t know him at the time.

He has gone on to write bestsellers about rangy topics like the Rolling Stones and the Chicago Cubs. Which I haven’t read but mean to.

Well, at any rate, if your picture is going to be in the Journal, this seems as favorable a manner as any. It certainly beats one of those stipple portraits for which they are known. You know, those avatar-like images drawn with little dots?

(As your risk manager, I can state this much with certainty: if you wake up one morning and find yourself stippled on Page 1 of the Journal, it’s over for you. You are beyond my help. I therefore advise you to comport yourselves in such a manner as to avoid this outcome at all costs).

I spent several summers at CM. And from what I can recall, mostly enjoyed the experience. But not as much as my parents did.

They were both single at the time, and it has since occurred that when they were not handing off my brother and me between their separate residences in Chicago and Southern California, an eightweek, summer hiatus from us two obnoxious little monsters must have had irresistible alure and was perhaps one of the few topics upon which they could agree.

So, off we went.

I’d like to tell you that it was a simpler time, but if it was, it wasn’t by much. It was the mid 70s, so we were dealing with Impeachment, Inflation, Energy Crises, Foreign Wars, Rampant Urban Blight and Crime, etc.

Sound familiar? Thought so.

The geopolitical stage was then dominated by a hodgepodge of shady characters. Ford had just replaced a deposed Nixon. Brezhnev ruled the Roost in Moscow. Mao was in the last year of his seemingly endless reign of China. Someone named Harold Wilson was ensconced at 10 Downing Street. The (blissfully-ignorant-as-to-what-awaited-him) Shah lorded over Iran. East and West Germany were still a thing. L’ll Kim’s grandfather called the shots in North Korea. Chirac was in the midst of the first of his two runs in Paris. Pierre Trudeau ran things up North – even as his fetching wife Margret was moaning underneath Mick in the backrooms of Studio 54.

It’s quite interesting to contrast this list with the current Heads of State in associated jurisdictions, which are, respectively, Biden, Putin, Zhe, the lame duck Bojo, Khamenei, the non-descript/I-knownothing- Scholz in a re-united Germany, L’il Kim, Macron, and Trudeau’s kid Justin in Ottawa.

It’s hard to argue the roster – weak as it was — has improved much across the intervening 47 years.

All of which becomes prominent in my mind when I think of Abe, and the Japanese Navy vet who did him this past week. He had stepped down a couple of years ago, and his replacement don’t kick up much dust. In 1975, a forgettable guy named Miki held that spot.

I’m here neither to bury nor praise Abe, but I will say that he had a righteous plan for Japan and did his damnedest to execute it.

Of whom, in these troubled times, can the same be said? Not a single Western Leader (and probably Biden least of all) seems to have a clue. Putin and Zhe apparently aspire to take over the world; Kim to make as much mischief as possible. The Ayatollah? Merely to rid the planet of us infidels.

However, and fortunately, it would perhaps be a stretch to state that our problems, relative to ’75, have risen dramatically in terms of magnitude and urgency. But you would’ve had to have reached the age of awareness back then to understand this. My generation grew up wondering when (as opposed to if) the Soviet Union and/or Russia was going to nuke us to smithereens, with the only saving grace being that they hated on each other more than on us. Inflation and interest rates were well on their way to the mid-high teens. Then, as now, we were suffering humiliating defeat in the foreign wars with which we (unwisely) chose to involve ourselves. But at least back then, instead of handing our cash and weapons directly to our erstwhile enemies, we at least had the good sense to dump our helicopters into the South China Sea.

For what it’s worth the market was better back then. It was before Captain Naz was even born, and prior to the launch of futures on the Gallant 500, an index which only priced periodically.

But the G5 managed to gin up a >30% gain in ‘75, rising from a beyond quaint 68 to a (still beyond quaint) 90 across the year.

Informing you of what you already know, thus far in ’22, the G and the N are down >18% and 25%, respectively, and have had to rally to achieve this lofty elevation.

But I reckon risk asset prices, wherever they are, will be anything but stationary over the next little while. The Big Summer Data Dump is under way, having begun with a June Jobs Report, within which, one survey (Payrolls) showed surprising vigor and the other (Household) came in implying a decrease, due in large part to mismatches between bountiful inventories of open positions, and ranks of the able-bodied — available and willing, to fill them.

From some perspectives, the markets took it all in serenely, but the optically strong jobs report goosed the CME’s Fedwatch meter to an implied >90% probability of a 75 bp rate hike at the end-ofthe- month, with the only other contingence even registering a blip is that of a 100 bp move:

Madame X 10-year note yields flirtatiously dropped below 3%, but you had to move faster to catch this than, say, I was at chasing the girls at nearby Woodland in ’75. Crude Oil dipped below $100/bbl, but again, only for the briefest of moments. Yields now stand at 3.08% and WTI Crude closed Friday at $104.79.

Nest week’s drama begins on Wednesday with the June CPI report. On Bastille Day (Thursday) comes PPI and, after the close, the commencement of bank earnings announcements. From a volatility perspective, it should be off to the races from there.

Surveys suggest that neither measure of inflation will have abated, and there is widespread handwringing as to the earnings cycle. With respect to the latter, warnings of waning microchip demand, and excessive inventories of sundry commercial and consumer products loom cloudily on the horizon. If the latter dynamics manifest, Inflation numbers should indeed come down, as there will be fire sales of everything – except, perhaps discretionary items such as food and energy — before the summer begins to wane.

But I hate like hell to think of waning summers, as they bring about wistful memories of the fabulous innings I spent at CM. These sorts of things stick with you, and I still keep in touch with some of the crew from Cabin 12. My best friend went and bought the Camp. One guy runs his dad’s home product manufacturing business. Another is a doctor in Akron. The guy in green, a truly righteous fellow, followed his dream and became one of the most successful veterinarians in Chicago.

And as for me, the winding roads brought me to Wall Street. Where I was sent to warn everybody that the hard slog we currently face has not yet run its course. Buckle in, my friends, because what awaits us is anything but a cookout under the North Woods skies. We can get through this summer, but not without bringing our full focus and attention to bear.

And, God willing, we can also avoid the worst of indignities—the dreaded front page stipple.

TIMSHEL

Oh You Pretty Things, Don’t you know you’re driving your Mamas and Papas insane?
Let me make it plain: Gotta make way for the Homo Superior

— Bowie

With the first half of Terrible ’22 in the books, I’d like nothing better than to offer some hope for a brighter conclusion to the year’s proceedings.

But – not gonna lie – I’m having a very difficult time doing so. Equity indices closed out the first six months with the worst ytd performance since 1970 – the year the Beatles broke up. The year that both Jimi and Janis died.

Further, until an improbable, quarter-capping rally, Treasuries came in with the biggest losses since 1844, a year which featured the founding of the University of Notre Dame, Smiling Sam Morse’s first telegraphed message: “what hath God wrought?” (what indeed?), and the formation of the (immortalized five generations later by the Village People) YMCA.

It also marked the election James K Polk as the 11th President of the United States, who, among other achievements, brought The Republic of Texas into the fold.

Has anything remotely so cool happened in ’22? I’m waiting…

But a couple of late breaking news items captured, for me, the truly gruesome vibe that prevails.

First, as no one paying attention could have missed, the Big 10 Conference (B1G) announced the addition of two Angelino schools – UCLA and USC – to its numbers, bringing its tally of higher learning institutions (which for nearly a century was actually 10), to a tidy 16. Its reach now extends from Rutgers on the Atlantic all the way to Westwood, on the shores of the Pacific. I personally would’ve preferred the addition of Pepperdine, if for no other reason than that it’s in Malibu, but I reckon the Conference Brain Trust — in highly unfashionable Rosemont, IL, know what they’re doing.

When the B1G first expanded, it split into two divisions — along geographic lines, but with the dubious nomenclature of Leaders and Legends. The construct remains, but now under the more intuitive and utilitarian monikers of East and West.

In these troubled times, a new set of pairings comes to my mind. Though the breakdown is less than perfect (after all, every major university currently considers itself obliged to dictate our mores and modes of living), I recommend that we separate the college by ideological branding. One, in tribute to our newest arrivals, would be named the LaLa Land Division, and would be made up of urban and urban wanna-be institutions, with pretensions to paradigm-shifting global thought leadership. Its roster would include:

• UCLA (Natch)
• USC (Natch again)
• Michigan
• Northwestern
• Wisconsin
•  Rutgers
• Maryland
• Minnesota

The other cluster, which I propose to call the Landlocked Division, is comprised of schools that more exclusively concern themselves with the task of educating and training their attendees, and sending them out into the world as competent, contributing adults:

• Michigan State
• Illinois
• Iowa
• Nebraska
• Indiana
• Purdue
• Penn State
• The Ohio State University

And, just for the record, I checked my maps, and the Landlocked Division is indeed landlocked. The most respectable body of water adjacent to any of these campuses is the Wabash River, near Purdue (Please).

By contrast, my LaLa Land Division abuts, respectively, the Pacific Ocean (UCLA and USC), Lake Michigan (Northwestern), Fabulous Lake Erie (Michigan) the Atlantic (Maryland and Rutgers) and the Mighty Missisip (Minnesota). Finally, my beloved Badgers (which I must depressingly consign to LaLaLand) are on lesser watery bodies (regional lakes). But there are five of them within city limits. So, there’s that.

However, a couple of points before I move on. Of course, the main impetus for B1G expansion is money, and there’ll be plenty of that to go around. The TV advertising implications are themselves delectable. And those legacy, zaftig Midwestern alums travel better than any such group anywhere. I suspect they will be more than happy to make their way to the coast and spend their hard-earned pay at cheesy Los Angeles tourist traps each November.

But in terms of which division is likely to contribute more to GDP growth over, say, the next generation, my money is on the Land-lockers.

The other recent development which renders me more certain than ever we are staring into the abyss is the latest Bowie version of Mattel’s iconic Barbie Doll. It’s not their first rendering of a bad idea, but the arrow is clearly pointing in the wrong direction.

Yes indeed, she’s hot. But I find her offensive to the point where words fail me. And Bowie, having died in 2016, is not here to defend himself. That his estate agreed to such corrupting of his image is beyond me.

But the rendering on the left is no more Ziggy, no more Aladdin Sane, no more “Thin White Duke” than Purdue is known for its School of Film Studies.

I’m gonna stop short of calling for an all-out boycott of Mattel. But please – in the name of all that is holy, do not enable this nonsense by allowing one these monstrosities into your homes.

And, as we enter H2/22, the big question is – can we endure these indignities, rise above them to regain the best in ourselves? I’ve gotta say, at times like these, I have my doubts.

The next few weeks should be very informative in this sense. The rollout of quarterly earnings and macro data will commence, and then crescendo.

With respect to the former, there’s a more worrying ambiance emerging with each passing moment. I’m particularly concerned about critical signals deriving from the land of micro-chips. Even on Friday, as the broader-based indices were gathering themselves for a rally, two industry leaders – Micron and Advanced Micro, pre-announced weak demand for the back half of the year, rendering the sector SOX index perhaps the biggest heap of smoldering metal in this market pileup:

Nobody should be surprised here; we literally gorged ourselves on semis — all during the lockdown and beyond. The re-emergence of computationally intensive, chip comping crypto – now in a form of free fall — only added to the bloat.

At some point, we were bound to push away from the chip table. But declining semi demand is a very bad omen of what awaits us this earnings season, and woe betide us if this is an indicator of CEO tidings when they next take their walks (of shame?) to the podium.

And this is to say nothing of the Scary Monster (and Super Freak) Macro environment. In a breath of good news, many commodities have backed off and others have, for the moment, stabilized. But the June CPI estimates (release date 7/13) still clock in at 8.8%. Crude remains well-above $100/bbl, and: a) when the President informs us of our need to hunker down to preserve a “liberal world order”, only to be: b) slapped down by none other than Bezos, well, you can draw your own conclusions.

And as for GDP, if those krazy kids at the Atlanta Fed are right about their latest Q2 estimates, following on the Q1/now -1.6% tape bomb, we’re already in recession:

Yes, you read that right – they now are prognosticating a > 2% contraction. And if that weren’t bad enough, just take a read of the accompanying note:

After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, the nowcasts of secondquarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7 percent and -13.2 percent, respectively, to 0.8 percent and -15.2 percent, respectively.

Heck, I don’t even know what the bolded phrase means. But it don’t sound good.

I reckon we’ll survive, though. Just as we did 1970. The quality of music started to deteriorate after the breakup of the Beatles, the demise of Jimi and Janis. But it did so in gradual fashion. Pretty much all of Bowie’s best stuff, for instance, came after.

The post-1844 tidings are arguably a bit more problematic. Polk died in ’49 – barely six months after leaving office. His replacement, that crazy mofo Zack Taylor, is best known for having issued a beat down of a badass bunch of Mexicans. Which catalyzed, for better or for worse, the addition of California into the Stars and Stripes (1850). He didn’t live to see it. Sixteen months into his term, he met his maker, with the official cause of death listed as an overdose of cherries (fact).

After that, Millard Filmore was foisted upon us, followed by Franklin Pierce and then the singularly misanthropic James Buchanan.

Lincoln came next, and, while he wasn’t fighting of Rebels and getting himself assassinated, he signed the Land Grants that funded the creation of most of the founding Midwestern universities that formed the B1G Conference, now a nationwide conglomerate.

All of which gives me a change of heart. Go ahead and buy that Bowie Barbie if you must.

She’s a pretty thing, after all, but homo superior she ain’t.

And I don’t think she will help much in beating back the bears in the second half of Terrible ’22.

TIMSHEL

True, as we approach the mid-point of, ’22, I am combing through my back catalogue, but I have some justification for doing so. Or at least an excuse.

So, let’s return to a theme I last employed over 15 years ago, and celebrate the 40th Anniversary of the magnificent maiden (and also final) voyage of Lawn Chair Larry.

For the uninitiated, on July 2, 1982, San Pedro, CA’s Pride and Joy: Larry Walters, strapped himself into (yes) a Lawn Chair that was affixed to 45 helium-filled weather balloons, instructed his girlfriend to cut the cord that restrained the device, and ascended more than three miles into the heavens. He took with him, on his journey, some sandwiches, a CB radio, and (natch) a few beers.

Three quarters of an hour into his mission, he passed into a corridor directly under the jurisdiction of the Long Beach Airport, whose personnel were none-too-pleased to encounter him.

Presciently, he was also packing some heat – in the form of a pellet gun, and eventually the Long Beach tower guys convinced him to use it to shoot down a few of those orbs that were keeping him afloat. At some point he dropped the gun (presumably by accident). Gravity, inexorable but gentle, soon took hold, and Larry found himself floating towards terra firma.

The entire odyssey would have been an unmixed success, had not LL got himself entangled in some power lines, causing regional outages for well-nigh half an hour. He finished the triumphant trip a little frazzled, but physically intact, and was promptly arrested. One problem persisted – they didn’t know what crime to charge him with. Ultimately, he got off with a $1,500 fine, and was left to pursue his Andy Warhol 900 seconds.

And that was it. The world moved on. As the world will tend to do.

Now, four decades have passed, and it would appear that Lawn Chair Larry rides again – at least from a market perspective. But has anything changed? Have we learned anything from his wise example?

I suspect not. We took his righteous vibe and it them for quite a spell. At the point of Larry’s liftoff, the Gallant 500 was trading at under 100, and thus, at its recently registered highs, was an approximate 50 bagger. Madam X’s 10 Year Yield skirts were hiked all the way up past 12%, only to bottom out at around 0.5% in the Summer of Lockdown.

And of what stuff was the rise in equity prices, the drop in borrowing costs, etc., made? Well, particularly over the last 15 years, one could certainly argue that it was the financial equivalent of helium weather balloons – taking the specific form of galactic huffs of newly minted fiat currency.

Yes, we had a few laughs, consumed a vast quantity of beer, along the way.

But even the modest luxury of the latter is now much dearer than it was when Larry was wetting his whistle with Pabst Blue Ribbon, high over Orange County, CA.

Whether Larry would’ve fared better if he had left the suds back at home we can only speculate; perhaps he would’ve controlled his vessel in such a way as to escape notice by Long Beach Sonar and Radar. And, as this lesson partially applies to our current market mess, it can be argued that the asset valuations themselves flew too high/copped too big a buzz — in the process impairing judgment and drawing the unwanted attention of meddlesome bureaucrats.

If so, the tidings are measured by soaring inflation and the Fed’s attempts to attack same. Chair Pow and Company have indeed shot a few pellets at the visible monetary balloons, and, in result, one notices a downward trajectory of economic vigor. Separately, and taking the analogy to its extreme, our flying machine, even as it plunges earthward, is also caught in power lines, disrupting energy supplies of every sort, and (importantly) increasing their price.

And this includes helium itself, which is, by composition and usage, a natural gas. I can’t even source a price for the lighter than air element prior to 1997 – 1.5 decades after Larry’s moment in the sun. But over the ensuing generation, its value has risen from under $50 to over $300/million cubic feet.

However, in a blinding glimpse of the obvious, the capital economy is not Larry’s Lawn Chair, and as such, its path is much more difficult to ascertain, much less predict, than that of his makeshift chairway to heaven. This much was obvious over the last several trading sessions, during which investor focus was trained primarily on Powell’s Congressional testimony. It’s unclear to me the message he was trying to deliver, but let’s afford him some sympathy, shall we? He is obliged to call out inflation as his primary dragon to slay, but was impelled to temper his rhetoric — so as not to scare the sh!t out of an already skittish universe of risk taking capital allocators.

(And one may also wish to extend condolences to JPow — for presiding over an inventory of securities that lost > $500B in the last rolling quarter. A bigger reversal, over three months, than the entire market cap of any bank in the universe).

Investors, however, were less confused as to his intent. They seem to have taken a needlethreading interpretation that the Fed is going to do some wicked tightening, but perhaps over a shorter time and with less ominous rate implications, than was previously assumed.

We witnessed, in result, something of a frenzy of buying in the Treasury Market, as evidenced across the entire yield curve. In addition, the widely watched 5-year break-evens – risk factors that predict the path of inflation over the maturities in question, came careening down in a manner that evokes images of what might’ve happened to the Lawn Chair, occupant and accessories, had Larry not dropped that pellet gun and instead worked himself into a dubious frenzy of balloon blasting:

Commodities across most sectors (Grains, Metals, non-Helium Nat Gas), in unison and in sympathy, plunged dramatically as well. Crypto came roaring back.

And equities experienced a joyful, upward reversal. I’m not entirely sure what drove this, and there are several technical factors at play: short squeezes, the always iffy Russel Rebalance, the anticipation of tens of billions of dollars of Q3 pension fund inflows. In addition, and though I hate to mention it, there just may have been a little early tape painting in play, in advance of the conclusion of what, for most, was a very painful second quarter.

I reckon we’ll take what we can get. However, by doing so, we are impelled to embrace recession as a welcome antidote to inflation and higher interest rates. But that’s the way these things go. Larry, after all, must’ve been a bit freaked out about his ascent, but not particularly so in comparison to what his downward trip must’ve felt like.

And there is some justification for this abrupt reversal of our priorities. PMIs – in the United States and across the globe, came in wretchedly below expectations. Consumer Sentiment hit a new low – but not by much. So, there’s that.

I wish that I could see more clarity in market pricing flows than Larry presumably manifested in planning and executing on his journey. But I can’t. Stocks and bonds are rising in value, presumably because the economy is now more likely to stave off inflation (and attendant higher yields) by entering into a recession. This is all a form of logic that resides above my pay grade. But I suspect that investors will find occasion to re-think and re-think again before they begin to make sense of the current confounding configuration.

So, pack your Pabst and pellet guns. It looks like we’re in for a bumpy ride.

Just like Larry, who, during his brief period of existence, was certainly able to accomplish what the Good Lord had intended for him. Not much went right for him after that, though. People tired of hearing his story (or, at minimum, paying to do so). His girlfriend dumped him. And one sad day in October of ’93, he offed himself.

But oh, what a magnificent ride he had. And in addition to saluting him on the Ruby Anniversary of his voyage, I believe we have it in us to take appropriate instruction from him.

I’ll be delighted to share it with you – just as soon as I figure out what it is.

TIMSHEL

It was, most certainly, a pearl-clutching week, in a pearl-clutching month, of a pearl-clutching quarter — in a pearl-clutching year.

We can only now hope it doesn’t morph into a bodice ripper.

A strong argument can be made that entering last week’s proceedings, all ingredients for a full-on Heathcliff/Wuthering Heights crash were in place, which only wanted a minor, bothering plot twist to tear the delicate fabric of the current market into shreds. The Gallant 500 had retreated to ~3750 – almost precisely at the levels where it ended 2020 and prior to the >30%, largely joyless runup of ’21.

Down > 10% over a span of a few short weeks, scenarios for authentic capitulation were ascendant. Several important data points loomed — none of which felt like they would serve to increase risk assumption vigor. PPI dropped Tuesday. The Fed spoke on Wednesday.

The increasingly cryptic Bank of Japan followed suit, in short duration, on Friday.

Though nobody much discusses Japan these days, its CB faces a vexing portfolio management problem:

The BOJ Asset Bulge:

The BOJ asset ledger includes $0.5T of domestic stock, including, improbably, 80% of the ETFs issued in the Land of the Rising Sun.

When these figures are added to its gargantuan holdings of its own government bonds, the tally easily exceeds the GDP of the country. We think of ourselves as being naughty here in the States, but the Fed’s Balance Sheet topped out at $9T, a (by comparison) modest, approximate half of the Gross Domestic Product of this great nation.

Plus, while we’re not selling down, stateside, this very week. we are beginning to shed assets by allowing maturing securities to roll off without replacing them.

The BOJ, meeting expectations that puzzle just about everyone, did nothing. Kuroda ain’t gonna use his powers to tame Nipo-inflation. So be it.

BOJ Chair Kuroda-san also reaffirmed the Japanese version of QE – a process known as rate targeting (currently 25 bp).

When the rate reached the usurious level of 0.265%, the BOJ, reflexively, bought paper – in the process wreaking havoc on the cash/futures spread:

Japan is widely admired for its pearl production, which is among the best in the world, so the good news is that the ladies of that country had high quality materials for their pearl clutching – as manifested in the wake of the blowout of the JGB basis trade.

But as near as I can determine, this did little to salve the wounds of those unfortunate souls who trade this spread.

Such are the fortunes of the monetary wars.

Japan and the U.S. also have the following commonality: the special Repo facilities put in place by both jurisdictions to backstop liquidity in the wake of lockdown are now at double the peak utilization manifested during the crisis. But this is where similarities end. On the policy side, the Fed came through with a whopping 75 bp blast – largest since ’94.

But even that wasn’t the biggest pearl clutching moment issuing forth from the world of Central Banking. The Swiss National Bank (SNB), in a move that surprised everyone, raised its policy rate from -0.75% to -0.25% — the first move of its kind in seven years.

And by the way, those minus signs are no typo; the 50bp jacking merely takes the Swiss rates into more benign negative territory. Not sure exactly what’s going on here; the boys and girls in Zurich are notorious for discouraging full-scale conversions into their precious unit of account, but now, with the alluring prospect of only paying a quarter of a percent per annum for the privilege of parking cash at the SNB (vs. 3/4% a few days ago), the temptation for investors may be too great for them not to succumb to it.

Nothing that the Fed was gonna do was likely to redound to the delight of capital allocators, but, for a few fleeting moments, the markets rallied on the 75 bp news. Risk takers thought better of it by Thursday, though, which featured an all-out rout.

In result, the Gallant 500 and Captain Naz reclaimed their ignominious place at the bottom of the Bloomberg Equity Index league tables:

U.S. Equity Indices – Send ‘Em to the Minors:

The ladies faced further moments of shock and awe on Friday – in the form of a gargantuan $3.4T Quadruple Witch/Quarterly Options Expiration.

Nobody’s dead husband materialized therein, bearing family secrets he had blessedly taken to the grave. But – particularly on this type of tape – accidents can happen on the Q4 Witch, which the clutching of all the pearls rendered from all the oysters in all the oceans of all the world won’t counteract.

But we managed, if somewhat worse for the wear, to survive all that. However, just when we thought we was in the clear, what few pearls there are on the Great Plains were no doubt held tight to rural breasts – when 2,000 Kansas cattle dropped dead in a heat wave.

I tried to do some research on my Commadore 64 about this, only to learn that Microsoft had decommissioned its iconic Internet Explorer program. Oh well…

I own no strings of pearls, and probably wouldn’t clutch them if I did, but I was compelled to wrack my brain looking for silver linings in the dark clouds of the investment horizon to bring a shred of hope to my forlorn clients.

I came up substantially short.

The equity complex is in the midst of wicked multiple contraction, to the tune of approximately 1/3rd, and P/Es are now nominally below their 10-year average. So long as the denominator (earnings) holds firm, we probably can take some comfort. But the vibe out there is that earnings are at risk, and the truth is that I don’t know.

I dunno; maybe Q2 earnings drop majestically, maybe guidance will be docile. If not, though, we could be subject to the double whammy of continued multiple contraction against the backdrop of a declining earnings profile.

Won’t that be fun?

But earnings don’t drop for another month or so – after the Independence Day celebration.

Meantime, everyone I encounter is clutching her pearls at the thought of the economy plunging into recession, while inflation continues to rage like the villain in a Barbara Cartland novel.

I don’t have much insight into either plague. My economics training suggests that inflation, once unleashed, is a tough cat to bag. The best hope I can see involves the widely discussed “Whipsaw Effect” which posits that due to all those maddening backlogs, retailers have ordered too much inventory for delivery for the back half of this year and will be forced to slash prices. Like some rogue destroying the upper part of the garment of a fair waif he has encountered and must now have as his own.

This may be deflationary. But even so, it’s hard for me to see the specific contours of a recession emerging in result. It may be looming, but I think those who confidently prognosticate one are mostly spit balling.

Notably, though, the good folks at the Atlanta Fed, who are paid to make these calls, just lowered their Q2 estimate — down to 0.0%:

We’ve seen them hit and we’ve seen them miss with these tallies, but they were right last quarter, which featured a drop of 1.5%. If they are overstating growth now, we will officially be in recession by the end of July.

And we cannot expect much help from our elected officials. There may be some perverse good news in VP Harris being placed in charge of the recently shelved Disinformation Governance Board, where she is likely to do little harm to the cause of free and open debate.

Other Administration initiatives offer less promise. A recent trial balloon featured a windfall profits tax on the Energy Sector, with proceeds to be allocated in the form of gas debit cards issued to the unwashed masses. What better way to deal with rampant inflation for a vital commodity than to disincentivize production while artificially boosting demand?

But they scrapped that initiative because – get this – they couldn’t source the chips to create the specialized cards themselves. Which should tell you all you need to know about the economic issues that we currently confront.

In any event, global and domestic growth are, at best, slowing – at a time when upward pricing pressure is everywhere one meets the eye, and showing no signs of fading from view.

One other thing I can state with some certainty: the market is ill-prepared for any unexpected, incremental negative news. Like a REAL resurgence of the public health crisis. Or the Chinese deciding that now is a good time to cop Taiwan — once and for all.

So, the downside risks remain acute, and everyone is impelled to play defense. Protect the core of your portfolios. De-risk everywhere else.

Presumably, you will also want to locate and secure your pearls, and, if any of you ladies can take even the smallest comfort from grabbing at them and holding them tightly to your person, you’ll get no complaint from me.

And one last bit of risk management advice: make sure that they are linked by a solid string, so that when the handsome cad comes for your bodice, they don’t spill out onto the floor.

TIMSHEL