Tag Archives: China

Here’s the Story

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I read, with mixed regret and a great deal of interest, that a certain residence: 11222 Dilling Street in Studio City, CA, is up for sale. More pertinently, this 2,500 square foot, 2 bedroom/3 bath dwelling, has been since time immemorial, the home of the Bradys.

My first reaction (a logical one I feel) was to scream “Fake News!” After all, everyone knows that whatever else its appeal (sliding doors, eat in kitchen, etc.), 11222 Dill contains NO bathrooms. I think there was a closet with a mirror and a sink, where those whacky kids used to fight from time to time for sufficient space to brush their unilaterally, impossibly white teeth. But a bathroom? No.

However, I’ve checked and it’s true, Casa Brady is indeed on the market, and for the bargain price of $1.85 mil. And part of me feels that we’re all worse off for the prospective transaction. I developed an early fascination with the Bradys, perhaps in part because the Bunch are my chronological peers. I’m a little younger than Jan; a little older than and Bobby.

So when the series was in Prime Time, I never missed an episode, realizing even at a young age, that it offered a perfect caricature of life in 1970s America at its campiest and blandest. That it did so in contemporaneous time, and without any intended irony, is a marvel for the ages. It ran for about 6 seasons, but was eventually cancelled because the kids got too old. And neither Mike and Bobby’s dubious perms, nor the arrival of the ill-matched, misanthropic Cousin Oliver, could salvage it. But as the saying goes, Old Bradys die hard. A couple of years later, the cast convened through a variety series, which, somehow, and against all odds, managed to outdo even the Brady Bunch in Brady-ness. The same could be said of a spinoff called The Brady Brides, in which newly betrothed Marcia and Jan seek to economize by moving in together with husbands that hated each other. Trust me on this one: hilarity did indeed ensue.

Lingering, still, is the Marcia/Jan debate, and, to me, despite having a soft spot for Jan (easily the most unhinged of the Brady scions), in terms of romantic appeal, it’s no contest. It’s Marcia, Marcia, Marcia. Even with her banged up nose. But I do have one further matter to get off my chest: once, in a fit of sheer boredom, I took a BuzzFeed quiz to determine whether I was more Marcia or Jan, and I came up unambiguously as Jan. I posted the results Facebook.

But as Mick once sang (on a record that was released, as it happens, about the time that the Bradys kids hit their aggregate hormonal peak) “Time waits for no one”. Not even a Brady. Mike and Carol are both dead. Alice is dead, as is Sam the Butcher. Mangy mutt Tiger disappeared with no explanation after Season 1, and, nearly 5 decades later, we can perhaps safely conclude that he too has gathered to the dust of his forebears. Greg rocks a weave/dye job, and croons the borscht belt circuit. Marcia is born again, and no longer speaks to Jan. Peter turns up on the telly here and there. Cindy, I believe, is a radio DJ with pretty solid rock sensibilities. Bobby, improbably, sells decorative concrete on his home turf near Salt Lake City.

So maybe it was indeed time to sacrifice 11222 Dill, but I felt it my responsibility to not allow this milestone to pass unremarked.

So that’s the story. At least that story. But meanwhile, what’s ours?

Well, I’ve nothing to relate that rises to the dignity of the Johnny Bravo episode (or the one where Marcia resorts to cross-dressing, in her hot pursuit of the adorable Davy Jones), but it’s not like we don’t have some ground to cover, so let’s get to it, shall we?

In simpler times (say, suburban L.A. – circa 1972), market participants might’ve casted their collective focus on the many salient data points coming our way,: the acceleration of the earnings calendar, Fed Chair Powell’s testimony on Capitol Hill, and other information flows directly tied to the fortunes of the global capital economy. However, these are anything but simple times, because among other things, our fearless leader accomplished the nigh-impossible, drawing incremental attention to himself – at a point when his face had already become more ubiquitous than that of Orwell’s Big Brother.

More specifically, he’s fighting with everyone, and in doing so, is channeling his inner Jan: always at risk of descending into phantasmagoric delusion (the wig episode, the made up boyfriend, etc.) One time, she even decided, and was accommodated in this wish, to disown the entire Brady crew. And Trump is acting out in similar fashion. He’s brawling, of course, with China, with Europe, and even with Canada for God’s Sake. In his own way (though the superficial narrative runs in the other direction), he’s circling in menacing fashion around Russia. Moreover,, in addition to his longstanding beefs with the FBI, CIA and Justice Department, he’s now picking bones with the supposed-to-be-independent Federal Reserve Bank of the United States.

These are serious matters, but the markets, like the Bradys did to Jan in the aforementioned episode, have chosen to to pretend he’s not there. Thus, just as Jan’s brothers and sisters simply hopped around her when she tried to disrupt a backyard sack race, investors ignored such matters as threats to up the Chinese tariff ante to a cool $500B, and shade throwing at our Central Bank, and went about their business.

They didn’t have much to show for their efforts, but they did manage to gather themselves sufficiently to push the Gallant 500 up about 9 handles for the week (0.27%), and a similar tale can be told about our other favorite indices. Treasuries sold off a bit, pushing yields from ~2.82 to ~2.89, but continue to trade in the narrowest ranges witnessed for more than a decade. The Bloomberg Commodity Index was able to register a pulse, with my victimized grains catching a small bid, but other components – particularly the whole metals complex – continuing their descent into the netherworld. Thus, if nowhere else, we see the trade war risk premium rising in the mundane world of commodities.

Earnings, thus far, have been a mixed bag, with winners such as Bank of America, Morgan Stanley and Microsoft being offset by disappointers including eBay, NetFlix (improbably) and (of course) General Electric. Howver, with 17% of the SPX clocking in, the market is still on pace to reach its socialized target of >20% earnings growth, and if the trend continues, no one should complain.

Casting our eyes towards the VIX, we note benign volatility conditions, but again, that’s not the whole story on vol. As we’ve discussed, the VIX is a rolling measure of at-the-money SPX implied volatility, and it is indeed low by any relative/historical standard. But if one looks out at the tails of the volatility plain – i.e. the realms where investors actually purchase portfolio protection, we see that they are evidencing a willingness to pay up – substantially:

Now, just like the rest of you, having always been a bit leery of the VIX, my inclination is to evaluate an index of skew thereto with a particularly jaundiced eye. But the way this thing is calculated, a value of 100 implies that investors expect a normal distribution of SPX returns, and now we’re at 160 (record levels by a wide margin), which suggests an increase in the options-projected probability of a multi standard deviation crash to statistically meaningful levels.

On the other hand, I mentioned this to a couple of clients and they usefully pointed out to me that all of the implied overpayment for portfolio protection is as strong an indicator that this here bull market has yet to run its course as any we’re likely to find in these troubled times.

I reckon we’ll see. Next week, after all, brings another big series of earnings, including the Googlers and Facebook. Beyond this, on Friday morning, we’ll get our first glimpse at Q2 GDP, and, for what it’s worth, those crazy cats at the Atlanta Fed are up to their old tricks again, turbo-charging their projections back up to a big, fat 4.5%.

Part of me wishes that they’d just make up their minds, but then again, this would be a futile gesture. The Commerce Department will make minds up for them on Friday, and that is the number that will go into the history books.

Until, of course, it is revised. And then revised again. But pretty much everyone who’s cared to look into these matters expects an exceedingly rich quarter, and here it bears remembering, because > 4% prints on GDP don’t last forever.

On the other hand, nothing does. Last forever that is. And if you doubt this, just ask the Bradys. Given that for many of us (myself included of course) they will forever remain the perpetually perky, wellscrubbed teens and pre-teens that they always have been, it must be very upsetting for them to have their childhood home sold right out from underneath their feet. Here’s hoping that the buyer(s) whoever they may be, understand that they are not purchasing a house, but rather, a shrine.

And yes, I’ve considered bidding myself. But it’s a stretch. I can probably scrape together the 1.85 large asking price, but with little margin for error. More importantly, this would leave me with almost no financial resources to undertake certain structural adjustments that I feel are just nigh essential.

I probably don’t need to elaborate here other than to state that, at my advanced age, an upgrade in the plumbing arrangements at 11222 Dilling Street, Studio City, CA is among the most effective risk management actions of which I possibly can conceive.

If I were to take this step, it would be important for me to remind myself that my life in Studio City would not fit into tidy 22 minute segments, resolving themselves in crescendos of happy endings and lessons learnt. This is particularly true 45 years after the demise of the Brady Bunch, and even moreso in today’s markets. It’s tricky out there; not much edge to be found anywhere. Be forewarned.

TIMSHEL

All That You Dream

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“I’ve been down, but not like this before”

— Lowell George

As matters have evolved, I’m forced to make good on my threat to continue down the track list from Little Feat’s “Waiting for Columbus”. But not for reasons indicated in last week’s installment. There, I’d warned of such an outcome if I didn’t see a bunch of you birds hitting my twitter account. And it’s true that the response to this plea continues to be less than overwhelming.

But that’s not why I’m moving on to “All That You Dream.” The plain truth is that on Wednesday night, I actually had a dream – and I’m not kidding here – about Value at Risk (VaR).

I’ll spare you some of the more gruesome details of the fantastic journey upon which I entered while slumbering on 17 May, 2018. But a brief summary is perhaps in order. It involved an accusation of an incorrect calibration of the stepdown factor in the exponential decay function, causing an over-estimation of the 99th Confidence Interval estimate, and (as would be the inevitable outcome of such a misadventure) the loss of untold sums of wealth.

In the dream, I served as a bystander to these proceedings, which is only rational. I mean, after all, the mere prospect of someone such as myself committing such an amateurish blunder is beyond even the scope of slumbering fantasy. Rest assured, though, that I was in close enough proximity to understand that feelings ran high on both sides, and that matters were rapidly trending towards violence.

Then I woke up.

Perhaps I can ascribe some blame for the above-described fit of madness on the fact that it was Blockchain Week in New York (also known, alliteratively, as the CoinDesk Consensus Conference). Here, 8,000 delegates, along with their crews and side-pieces, descended upon the New York Hilton to pay obeisance to this newfangled techno-theology. Lamborghinis buzzed 6th Avenue on a ‘round the clock basis. Tchotchke bags of bling state not witnessed since the dot.com bubble littered the landscape. Parties, to which I was not invited. raged until dawn, and while I can’t say for sure, my guess is that many participants managed to make good on any short-term romantic escapades they were seeking.

The nerd revolution, like Douglas MacArthur to the Philippines in WWII, has returned.

Does it all mean anything, I mean, besides being: a) one swell party and b) an opportunity for some slick operators to stuff their pockets full of money and then exit stage left while the rest of us hang around to clean up the mess? Well, I reckon it does. Beyond all the blather, what we’re talking about is using newly available technologies to upgrade the manner in which commerce is conducted, and I believe that such concepts inevitably succeed. There’ll be some pushback, yes – particularly in the United States where economic rent-seeking agents living off the status quo will do all in their power to postpone their day of reckoning. But come it will. Perhaps more rapidly in regions such as Asia-Pacific, where, in the regions less developed nations, fewer than a quarter of the populous have bank accounts but All God’s Children have a smart phone, and will use it to conduct crypto finance.

Recent published reports suggest, for instance, that commercial agents in the People’s Republic of China are even at this moment developing a blockchain framework for the purchase and sale of tea. If they’re successful, it might create one of the most scalable business opportunities of all time, because, you know (and forgive me here) there’s a lot of tea in China.

But for the present, the masses are forced to contend with longstanding traditional markets, such as those for stocks, bonds, commodities and Foreign Exchange instruments. And it was indeed an interesting week in these old-school realms. To my considerable surprise, the US 10-Year Note not only traded above 3%, but retained that lofty threshold throughout. Its big sister, the 30 Year Bond, breached the unthinkably usurious level of 3.25% on Thursday, a 4-year high. Presumably in delighted solidarity, USD continued on the upward slope of a recently formed V-bottom and that rally looks like it has legs. Brent Crude hit $80/bbl – also a multi-year high — before backing off some on Friday.

It appear, in summary, that these most critical non-equity market factors have breached technical thresholds, and if the chartists have their day, will continue to run in similar directions for some time before they pause for a well-earned rest. But one never knows.

Fundamentals are also lending a hand. This past week, Industrial Production, the Empire State Manufacturing Survey, the Philadelphia Fed’s Business Outlook Survey and the National Association of Home Builders Housing Index all clocked in above expectations. The Atlanta Fed’s GDPNow tracker surged past 4% for Q2. New Jobless Claims – particularly population-adjusted — are tracking at an all-time low, and Continuing Clams are disappearing at an astonishing rate:

I’ll throw one more in for you – the above-mentioned Chinese are in a frenzied quest for the ownership of apples – apparently at the expense of their equity holdings:

If I didn’t know better, I’d say that the upward movements in the USD and domestic yields are rationally attributable to an exceptionally rosy economic outlook, which portends higher rates and a more attractive case for the conversion of other forms of fiat currency into Dead Prez. But one lurking question continues to vex me:

Why now?

The stone cold ballers with whom I roll have been anticipating just such a paradigm for many months, and, until just this week, have been more or less disappointed. And I’m just not yet convinced that we’ve suddenly entered a sweet spot, where the trends they teach in economic text books, ignored for so long, are suddenly to be followed.

Then there’s the equity market. I’m sentimental enough to believe that the narrative set forth above would carry forward to the stock-trading universe, but if so, I’d have been disappointed. Equities remain stuck in the narrow channel first formed after the recovery from the February debacle.

There are any number of reasons why the guys and gals on the stock desks are refusing to follow the script. They include justifiable worries that we’ve hit peak earnings, that the energy rally creates considerable negative offsets to Tax Reform, that Emerging Markets – particularly in the Americas, are showing signs of economic collapse, and that all of this trade brinksmanship is an ill wind that blows no good to any investors.

My personal favorite argument is the one that suggests the U.S. economy will quiver and perhaps crumble under the weight of > 3.5% yields on the 10-year note. The disappearance of “easy money” will cripple innumerable debt-sensitive enterprises, and the irresistible allure of higher returns on U.S. Treasuries will crowd out flows to the stock market. OK; I get it, but I’m a little leery of this hypothesis as well. We’re all in pretty bad shape if the economy can’t support nominally higher borrowing costs, but suppose we can’t? Well, then, stocks are likely to tumble, and, if the plot holds, investors will rush into the warm embrace of Good Old American Debt. If so, then yields will come back to earth, taking borrowing costs down with them, and giving a boost to equities. Then it will be lather, rinse repeat.

I suspect what ails the equity markets falls more under the heading of political risk – both here and abroad – and that there simply is very little justification for an upward surge (or, for that matter, a nasty reversal) at this moment. But I’ve been warned off getting too political here, so I won’t (get too political, that is). Suffice to say that equity investors are in “show me” mode, and the next opportunity to respond to the Missouri crowd won’t come until after the quarter is over, so I reckon we’ll just have to wait, and I’ll retain my call that the indices will hold to their narrow ranges for now.

Who knows? The wait might actually pay off. If so “all that you dream will come through shining/silver lining…”

But as for me, all that I dream about these days is VaR. And I’m doing something about it. In honor of my somnolent hallucinations, and given the fact that they transpired during Blockchain Week, I’ve asked my guys to develop a Value at Risk Module for Blockchain and crypto, and they haven’t disappointed.

We’d be delighted to show it to you if you’re so inclined.

It might come in handy – sooner than you think.

TIMSHEL