Tag Archives: Little Feat

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

Fat Man in the Bathtub

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“Spotcheck Billy got down on his hands and knees

He said “Hey mama, hey let me check your oil all right?”

She said “No, no honey, not tonight.

Come back Monday, come back Tuesday, and then I might”

— Lowell George

Any of y’all remember a few weeks back when I invited my readers to be a good rascal and join the band? Course you do. But not many of you followed through. I guess being a good rascal, never an easily attainable objective, is now barely worth aspiring to. No musical knowledge was even required; only that you follow me on Twitter @KenGrantGRA, where my numbers are indeed up, mostly as populated by Bots. They have handles like @JonitaDouwood (Daffy Duck Avatar) and @YaniessyCruff (Homer Simpson/Tighty-Whitey Avatar) and their accounts were created in May of 2018.

Anybody know these cats? Didn’t think so. On the other hand, though I looked carefully, I did NOT see @InsertYourName/TwitterHandle on my roster. But it’s OK; I forgive you. Again. And now all I can do is carry on like the band that I am. That’s right. I. Am. A. Band. Just like the Black Eyed Peas, or, more pertinently for our purposes, just like Little Feat.

So, if it’s all the same to you, I think I’ll just go ahead and join myself.

But before I do, I must encourage you to give LF’s seminal live album “Waiting for Columbus” a listen, because: a) it pretty much captures to perfection the Feat sound; and b) it came out early in 1978 — just 6 short months before the release of the film adaptation of “Sgt. Pepper’s Lonely Hearts Club Band” starring Peter Frampton and the Bee Gees.

Historians, wherever else they may differ, are generally in agreement that the film version of “Pepper” marks the low point in the ~3,500 years of organized human civilization. And, to add insult to injury, it was produced by the magnificent George Martin, and featured performances from such legit rockers as Jeff Beck, Alice Cooper, Billy Preston and Earth Wind and Fire.

It came out that July, and is now mostly known for setting the Siskel/Ebert Thumbs Down Speed Record. But back in February, when “Columbus” dropped, we were blissfully ignorant of what fate had in store for us. So we popped on Side One, which opens with the “Join the Band” chant and then folds into an energetic “Fat Man in the Bathtub”.

And I have decided to follow the same sequence.

I’ll begin like Spotcheck Billy, getting down on my hands and knees and asking: hey mama hey let me check your oil, alright?

Because there is indeed a fat man in the bathtub, with the blues. If you listen carefully, you can hear him moan.

What ails thee, fat man? As one like you, I’d say that things are perking up for us adult males of formidable gravitational force. The large contingent of us who are investors can rejoice in the reality that our already-corpulent holdings are expanding further. The equity securities we own – and I mean anywhere in the world – experienced a noticeable valuation swelling about the belt this past week, and what’s bluesy about that?

Some of us pudgy types might even go so far as to take a victory lap, in celebration of the heroic recovery of some of our favorite names — each of which, including Facebook (attacked for cynically selling our data), Amazon (Trump Tweet victim) and Apple (myriad naysayers taking shots) suffered under recent threat by a series of diverse and nefarious forces.

How do you like ‘em now?

Fat Cat FB                                                                 Ample-Bellied AMZN 

Anti-Newtonian AAPL

Heck, even Tesla, the most hated enterprise this side of Enron, has recovered a good measure of its valuation equanimity:

Notably, this is a company that burned through a cool $1 Billion that it didn’t have in the first quarter, whose CEO refused to answer questions about incremental funding sources on the earnings call – because he found them boring, and who, on the same call, practically begged investors NOT to buy his stock.

But who could resist such a pitch? Not us fat men for sure. So, while my In-Box is assaulted on a daily basis by articles suggesting the that the Company will not, CANNOT survive, the stock that simply HAS to go to zero (and soon) has risen a cool 20% in Q2 alone. And we’re only half way through the quarter.

All of this action contributed to an increasingly rotund Mr. Spoo’s breakout — to ranges above it’s 50, 100 and 200 Day Moving Averages. He’s been fatter before (say, in January), and it’s now anybody’s guess whether he continues to gorge himself or backs away from the table and/or mixes in a salad now and then.

There’s a similar story to be told about zaftig bond holders, who, after suffering the early week indignities of a selloff into 3% yield territory, could not but be pleased about the subsequent rebound. Notably, these markets were able to incorporate the issuance of $75B of new paper and live to tell the tale.

3% on the 10-year still looks like an unbreachable wall, but Fixed Income bears could at least take some comfort in the continued selling activity on shorter-duration instruments, perhaps in part catalyzed by some truly tepid inflation statistics issuing from the Commerce Department this past week. These and other factors wedged the yield curve into increasingly narrow, and likely unsustainable “skinny jean” territories:

2s/10s – Looking Increasingly Scrawny:

Of course, even us obese gentlemen occasionally look beyond the financial pages as we digest our Grand Slam Breakfasts, and were not slow to notice that the U.S. is now out of the dubious Iran Nuclear Deal and gearing up for a potentially dubious summit with one of our own: Little Fat Man Kim Jung Un. These things mean something, but I’ll be switched if I can put my finger on what that might be.

One might hazard a guess that the risk premium has dropped in recent sessions, but I wouldn’t necessarily bank on its continued suppression. Trust me on this: just like everyone else, Mr. Risk likes to eat, and if we don’t feed him appropriately, he’s perfectly capable of gorging himself – at our expense.

But the plain truth is that across the back half of Q2, there’s just not that much to write, much less write home about, in risk-land. I’ve predicted quiet, and I reckon I’ll stick with that prediction.

And to my fellow fatties out there I say this: if the action bores you, go take a bath. And, for what it’s worth, I don’t see much reason for you to cry the blues. Spotcheck Billy is going to take another crack at that whole oil-checking thing — as soon as Monday, and, if you clean yourselves up and stop your moaning, perhaps you can do the same.

Alternatively, you can still join the band @KenGrantGRA. And be forewarned: if you don’t, then within a short period of time, I’ll be forced to continue down the “Columbus” track sequence and lay a little “All That You Dream” on everyone.

The opening line of that song says it all: “I’ve been down, but not like this before”.

Let’s not go there, OK?

TIMSHEL

Joining the Band

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Join The Band

Hey Lordy… (join the band, be good rascal…)

Hey join the band, be good rascal and join the band

Hey Lordy…

Join the band, be a good rascal and join the band

Oh huh oh ho ho ho

— Little Feat

Don’t you think the moment has come? To join the band, I mean? There are worse ways to spend your time, you know, and when Little Feat’s late and lightly lamented Lowell George asks, I believe we owe it to him to respond favorably – even four decades after the initial request.

So, even at this late date, I am inclined to take up Lowell’s invitation. However, one problem remains: which band should I join? It’s not as though I am flooded with offers; the plain truth is that I have had none. And believe me, this hurts, because these days I can really shred. In fact, I’d go so far as to say that I’d be a major asset to any ensemble fixated on the rolling decade between 1965 and 1974, and, in the right group (i.e. one that: a) narrowed its focus to 1968 through 1972; and b) let me do exactly what I wanted), I could be great.

But at my advanced age, I have learned that delusion is risky and even sometimes fatal, and this forces me to face the possibility that no rock and roll outfit will have me. However, there’s more than one kind of band to join, so I’ve chosen to take a different course, affiliating more assertively with that band of brothers and sisters that form the global financial blogosphere. It’s not as though I haven’t contributed to their catalogue; the consistent production of these weeklies, and subsequent posting to the web is, in itself a testament to my longstanding affiliation with the blog bros. But, my friends, like so many other matters, it comes down to a matter of degree. I’m going to be doing more with them, and whether I become a full-fledged member of the group, or, like Darryl Jones, who has ably managed the base lines for the Rolling Stones for a period longer than founder Bill Wyman but has never achieved full membership, linger as a side man, remains out of my hands.

Please know that I don’t take this step without due consideration. I am solemnly aware that, over the baker’s dozen years that I’ve been pumping out these weeklies, missing nary a one, through sickness and health, triumph and tragedy, that you (the reader) and me (the scribe) have developed a sacred, unshakeable bond. It would nauseate me beyond measure to think that any step I could possibly take would weaken, let alone sever, these ties. Please know that you will continue to receive these missives, under the same timelines, and based upon the identical format – one that as you know, features my often futile efforts to gather what remains of my wandering wits.

That being stated, the chattering voices inside my head have convinced me that a wider audience beckons, and that I must answer the call. So if you observe me blogging, tweeting (under the rather generic handle of @KenGrantGRA) you will have two choices. You can consider this an unacceptable betrayal on my part (I will love you no less if you do), or you can give me a pass.

Oh yeah, there is one other alternative available to you: you can join the band, the @KenGrantGRA Band, accompanying me on my virtual journey through soaring arena anthems, destroyed hotel rooms, mud sharks and other such delights.

There’s room for you (and any friends you might wish to invite) on the @KenGrantGRA Tour Bus, and Cowboy Neil (at the wheel) will pull over and let you off at any point of your own choosing. Do me a favor and think about it, OK?

*******************

Whether you believe me or not, the plain truth is that I hate to write about politics. I find it an unproductive, loser’s game. I tell myself that I have held more or less to the discipline of only doing so through the filter of political impacts on risk conditions. But you’ll have to make your own judgments as to how well I’ve actually adhered to this protocol, and how rigidly I’ll stick to the discipline going forward.

One way or another, I believe that politics hover over current market conditions in a highly menacing fashion, so this week, and perhaps for a spell going forward, I must at least move towards the borderlands of my pledge. By my judgement, Trump had by far his worst political week since he put his hand on that bible, amid so much protest, almost exactly five quarters ago. Let’s dispatch with the easily analyzed events first. Paul Ryan announced he’s stepping down at the end of his term, and, any way you look at it, this is not a positive development for the Administration. I’ve always liked my Janesville boy, and think he was one of the very few competent members of Congress. He did his homework, did his work, and, through a number of hits and misses, actually got things done. And I ask this to anyone in favor of any part of Trump’s legislative agenda: where we’d be now without his steady hand? But he’s riding off, taking the certified Republican House Majority down to a slim 22. Also, and, ominously (at least in a symbolic fashion), his departure means that nearly half (10 out of 21) Congressional Committee Chairs have now stepped down, and, given that it’s only April, that number could rise.

More chilling was the raid on Trump lawyer Michael Cohen’s office and home by those fluffy fellows from the Office of the United States Attorney Southern District of New York. Acting on a referral from Special Counsel Robert Mueller, they forced their way into Attorney Cohen’s private professional and personal lairs, and seized pretty much anything that wasn’t nailed down. Subsequent reports indicate that he’d been under investigation by the Southern District for criminal activity for several months, but the timing and the methods turn my blood to ice. Federal prosecutors have many methods to procure information from investigation targets, most notably their subpoena powers, and raids are the most aggressive of these tools. Typically, this type of thing is only justified when the target is either a flight risk (which Cohen clearly was not), or information suggests he was committing serious crimes on an on-going basis. So I hope for all our sakes, that whatever impelled the G-Men to give Cohen the Manafort Treatment be disclosed in short order. And it better be good.

Because, and I state this more in sorrow than in anger, attorney client privilege is so embedded in basic human rights as to not even require inclusion in the Constitution. It dates back to the Elizabethan Era, and is a core part of British Common law upon which our Constitution is based. We are now headed down a very slippery slope on the treacherous terrain of civil liberties, and however much you may be enraged by Trump, I urge you to bear in mind that someday, you yourself might need a good lawyer, who, if we’re not careful, may have his professional materials seized. At which point they won’t be of any use to you. If this ever happens (and I pray that it doesn’t), it’ll probably be lights out for your case. Of course, this won’t apply to everyone. If you happen to be very rich, powerful and aligned with the appropriate forces, not only will your private realms not be raided, but you will have the prerogative to respond to subpoenas by simply decided what, of the information demanded, you choose to share.

The deal struck between the Southern District and the Special Counsel is such that anything the former uncovers that might be useful to the latter will be referred back to them. And here’s where I can at least plausibly make my case of tying the political to the financial. Anyone who had a shadow of a doubt that Mueller is going for the jugular should disabuse themselves of this fantasy at the earliest convenient opportunity. There’s an end game afoot here, set to play out over the immediate months ahead, and I believe it behooves the risk sensitive to bear this in mind as they seek to navigate through these choppy market waters. Because I don’t think the markets will much like the action, however it turns out.

But equities, notwithstanding these and other worrisome events, gathered themselves in gratifying fashion this past week, with the SPX bouncing jauntily off of its 200-Day Moving Average yet again, and now resting in the friendlier confines of its 50 and 100 day equivalents. One might be tempted to ascribe the bounce to giddiness about earnings, and I’ve seen estimates of growth rise to the dignity of ~20%. But I’d be careful here. A large contingent of big banks reported on Friday (JPM, Citi, Wells, PNC) and despite ALL of them beating both profit and revenue estimates by a comfortable margin, EACH sold off in the wake of their announcements by >2%. This suggests that the bar is very high for a paradigm involving strong earnings being followed by shares being bid up.

Volatility has indeed risen in the equity markets, but perhaps a little perspective here is in order. The combination of renewed price action after the vol paralysis of last year, and a rally that has increased the denominators associated with percentage moves, may be creating the illusion that the Equity Complex is in hyper-volatility mode. However, statistics offer a different story. While February and April brought some truly noteworthy action, across the course of 2018, we’re still only looking at a standard deviation of SPX returns in the mid to high teens, which is about the norm in the modern market era. So the equity market has become more volatile, but not alarmingly so, and while it is likely to continue to rise, in percentage terms, it’s important to remember that we’re pretty much at historical norms. And in terms of options volatility, last week’s selloff in the VIX took this benchmark to under 17.5 – right about its median for the lifetime of this eccentric index.

However, in a continuation of a highly vexing pattern, non-equity asset classes remain stuck in the volatility mud. The following chart, coming to you through the courtesy of those dedicated public servants at Goldman Sachs, Inc., illustrates what it looks like when one asset class awakes from a winters-long hibernation, while others remain in blissful slumber:

I’m not entirely sure what this correlation drop implies, but it doesn’t strike me as the kind of breakdown that the ghost of Tom Petty could reasonably describe as being “alright”.

Meanwhile, as cross-asset class correlations have migrated to decade plus lows, the story is quite different within the equity complex. Here, correlations, have spiked dramatically, again as illustrated by those talented graphic artists in residence at Goldman:

Among other things, one might wish to review other periods when stock correlations took an abrupt leap forward, and the intrepid among you might choose to superimpose equity index graphs on the image. I myself am either to frightened or have too much sensitivity for my readers to connect the dots here.

It may be the case that the jump in stock correlations is more easily explained than the drop in the cross-asset class correlation metric.

To wit: there’s a great deal to worry us in current affairs that has little to do with the relative fortunes of individual companies. For one thing, us Yanks got together with the French and Brits to lob some bombs into Syria this weekend. I don’t know what impact this will have on the markets, and won’t know till at least Sunday night, so I won’t opine upon this development.

More visible is the trade war of words currently under way. No one knows how this will resolve itself, but let’s just agree that it’s a risky proposition. Certainly, the Energy Markets have taken notice, bidding up Brent Crude to a 3-year high, and even the long-suffering, ag-heavy Continuous Commodity index has shown indications of higher pricing:

Strong Trade Winds: Crude And Commodities

Thus, as anticipated, we are in what I believe to be the early innings of a high impact information cycle. My best advice is to temper your investment enthusiasm and add a healthy measure of reactivity. There are opportunities developing, but they will require all of your talents and energies to capture them. You may also wish to place an extra focus on risk management.

So maybe it’s as good a time as any for me to step up my whole blogging game. Lowell George asked for our participation, but he’s been dead for nearly 40 years, and we need to make use of the tools that are at our current disposal. Please, in any event, don’t judge me too harshly for my expanded electronic footprint. And, if the spirit moves you, be a good rascal and join my band.

TIMSHEL