Tag Archives: US 10 YR

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

Through the Looking GLASS

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Ladies and gentlemen, you have my apology, because somehow I missed it. Maybe it was the Cosby Trial, the NFL Draft, or the weather.

On further reflection, I’d have to say yes, it was the weather.

Given my borderline obsession with celebrating milestones, I am deeply ashamed of myself that I missed a big one: the 20-year anniversary of the functional end of the four segments of the Banking Act of 1933 – sections that are widely referred to as the Glass-Steagall Act. As most are aware, the key provisions of Glass-Steagall forced the legal separation of financial enterprises that accept deposits and issue loans (i.e. Commercial Banks) from those that engage in trickier activities such as stock/bond issuance, proprietary trading and the like (i.e. Investment Banks). The idea was to put a wall of sobriety around those institutions charged with the responsibility of holding customer cash balances and writing mortgages, while allowing the more energetic and creative among the Wall Street crowd to do pretty much anything else that they wished. At the time, it could be argued that this was a wise move – particularly given the widespread failure of nearly every bank this side of the Bailey Building and Loan in the wake of the ’29 Crash and subsequent Great Depression, and the valid concerns that their failures could be traced to their excessive enthusiasm for more speculative activities.

And for 65 years, it was the law of the land. But it was a pain in the caboose for those forced to comply. Investment Banks such as Goldman Sachs and Morgan Stanley suffered the indignities of needing separate subsidiaries just to compete in the frigging swaps markets, and banks had to jump through hoops if they wished to even approach sacred realms where stocks and bonds were issued and traded.

The legislative repeal of Glass-Steagall didn’t transpire until mid-1999 (giving me another year to pay obeisance to the 20th), but Sandy couldn’t wait that long. To wit: Sanford I. Weil, then in the midst of converting the prole-like American Can Corporation into the World’s Biggest Financial Colossus – one that just a decade later required taxpayer support to the tune of nearly $0.5 Trillion – was in a great hurry to add an Investment Bank to his portfolio, and wasn’t inclined to wait for the Wheels of Legislation to turn in his favor. So, in April of 1998, he went ahead and purchased venerable I-Bank Salomon Brothers, and that was it. GSS was dead and everyone went about his or her business. The regulatory wall between Commercial and Investment Banking had been shattered by Sandy’s Golden Hammer, and it was game on – even if it took another year to codify the removal of the restriction into the national legal register.

Of course, Sandy had some help. He was a Friend of Bill (Clinton), and, presumably, as homage to this alliance, he likely gave the guy tasked with executing the nation’s laws an amiable heads-up about his intentions (which I’m sure the latter appreciated). In addition, there was Treasury Secretary Robert Rubin, who, shortly after he greenlighted Sandy’s power move, landed at Citi’s Co-Chairman seat.

But everything ended up for the best, right? At least for most of the subsequent decade, after which, if memory serves, there were a few problems.

And this type of game of “Inside Baseball” is exactly the type of thing that I believe ails us most: a world where different rules apply to entities with different positioning on the Financial Food Chain.

It was ever thus, and perhaps ever it will be. At present, taxpayers support the whims and predispositions of corporate faves such wonder-boy owned electric car manufacturer, a Farming Industry in which the overalls crowd have long ceded ownership to the folks in Brooks Brothers suits, our gargantuan Energy Companies, and yes, our brilliantly run and ethically unimpeachable Banking Sector.

It seems that our system is generous to everyone but consumer/taxpayers, and recent data suggests that, while they shoulder on, they are arguably losing energy. This week brought a first look at Q1 GDP, which brought tidings of marginal weakness, as did the more obtuse Chicago Fed Index of National Activity:

Perhaps owing to these and other little glitches, the U.S 10 Year Note Yield, after having placed a trepid toe into 3% territory the prior week, has backed off to just under 2.96%. Ags were en fuego, and the USD lifted itself off the carpet a titch.

Most of the investor focus, however was on earnings, and here, somehow, my nearly impeccable prognostications failed me. Far from tanking the quarter, The Big Tech Dogs – particularly the two with the biggest targets on their backs (Facebook and Amazon) absolutely blew the roof off the joint. They also declined to heed my suggestion about the possible benefits of issuing muted guidance. Across the Kingdom of the Gallant 500, with more than half of loyal subjects now having dutifully reported, the blended earnings growth is beating even the rosiest of estimates at a somewhat astonishing >23%.

However, for all of that, it was a flat week for the indices, as investors neglected by and large to embrace the enthusiasm issuing forth from Silicon Valley and elsewhere. Maybe they should teleport themselves to the Continent, where (for reasons unknown to this reporter) a post-Lent rally continues unabated:

European Equities: The Destination of Choice This Spring:

But within these here borders, we’ll be through earnings for all intents and purposes, within two weeks. And all we’ve seen for the last month is a narrowing of the SPX channel to a skinny 100 Index Points:

So let’s for the moment dispatch with the notion that the barking volatility dogs have taken over the junkyard, shall we? Once the Retailers report, we’ll have nothing left to anticipate but some always dodgy macro numbers.

We get a taste of this next Friday, when the April Jobs report drops. It might be well to recall that March was something of a dud – so much so that many economists were forced to resort to the shameful ploy of suggesting we focus on the three-month moving average. As of now, this will require adding the fly 313K Feb number to March’s dismal 103K and whatever comes out Friday, and dividing the whole thing by 3 (glad I could help).

By that time, the Fed will have mailed in its latest Policy Statement (i.e. no Presser), and is not expected to have moved. But at the long end of the curve, hope for a price selloff/yield rise springs eternal, with the volume of speculative shorts in U.S. 10-Year Futures currently resting at record levels.

Maybe they’re right this time, but as I’ve written before, the mighty 10-Year Note has been a tough nut to crack. I reckon that some of these days, we will see higher borrowing costs at the long end of the duration spectrum. After all, I’ve lived through cycles when rates were off the charts and there seemed to be nothing under the sun that could move them in a downward direction. I do suspect, however, that for now,influential politicians who must go back to their districts to beg for money this summer would prefer to not have to explain away a sharp rise in interest rates, and you can place me squarely in the camp of those that believe said politicians have an important say in these matters.

But one way or another, what goes ‘round, come ‘round, and to paraphrase Jerry Garcia/Robert Hunter: “If your Glass was full, may it be again”.

Who knows? Someday they may even re-instate Glass Steagall, and if they do, they can perhaps count on the support of Sandy, who in 2012 said this: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Sounds like he’s now in favor of a reinstated GS, but, having made his money and gotten out of town before the bad hombres arrived, one can hardly blame him. Surely, he maintains substantial holdings in accounts at large financial institutions, and would be justified in wanting to ensure that they are not engaging in monkey business. As for the rest of us, I reckon we’ll have to take pot luck.

TIMSHEL