June 9, 2019
Can we give it up, one last time, for Malcolm John Rebennack, aka Dr. John the Night Tripper, who took his show to the sky on Thursday?
He’s gone, but nobody can say he didn’t leave his mark. Particularly in his home city of New Orleans. He’s best known for a couple of FM Radio hits in the ‘70s -- most notably the edgy but arguably overplayed “Right Place, Wrong Time”, but there was more to him that that. Alone perhaps apart from the long-since-departed Professor Longhair, Dr. John’s was the musical voice of the Crescent City. And we owe him, at minimum, for that.
But I’m going to focus this week’s tribute upon one of his (Oxymoron Alert): lesser-known hits: “Such a Night”. It’s a rolling, rambling honkey tonk/boogie woogie kind of thing, that tells the story of his leaving a joint with his “best friend Jim’s” date. I think this was kind of a questionable move on his part, as he admits himself in the verse. But in the memorable chorus, he offers the following justification:
“If I don’t do it, somebody else will, if I don’t do it, somebody else will”
And so on.
And now, with the good doctor closing up shop for keeps, somebody else indeed will have to. “Do it” that is. And almost assuredly, somebody else will.
Because it’s that kind of world we live in. Particularly these days. You may hear different from other quarters, but as your risk manager, I caution you not to believe that tripe. Instead, my advice is to take what’s out there for the grabbing, because (everybody say it with me) if you don’t do it, somebody else will.
And last week, in the markets, somebody indeed was doing it, or, to be more specific, buying it, at levels sufficient to beat the band. Across a wide range of instruments and asset classes. All over the world. U.S. equities, as has been widely reported, enjoyed their best Monday through Friday session of this remarkable year. In result, the Gallant 500, which little more than a week ago resided 200 index points below its pre-Cinco-de-Mayo-Trump-China-Tweet highs, has now recovered well more than half of its lost ground.
And that was before Friday night’s “forget the whole thing” announcement on Mexican tariffs. Now, I’m not in a position to quantify just how damaging those south of the border levies, had they been enacted, might have been, but I can confidently state that the threatened action did indeed contribute to some of the hardships that many of you experienced in May.
But now the plan has been scrapped, and in all likelihood, the markets will continue to register their satisfaction with this act of discretion – by extending the rally into at least early next week.
However, threatening to overwhelm the focus on all of this is the continued, astonishing bid for global treasury debt. I will spare you an inventory of the current, microscopic yield conditions, but if you care to look for yourself, I won’t stop you. Presumably, you’ll see for yourself what I’m writing about.
Even my home dog Grains are continuing to show some mojo, but that’s probably as much due to growth condition deterioration as anything else. Further, I’d caution you against piling in, as it were, whole hog, into these realms. As a near-five-decade observer of Corn, Wheat and Soy Beans, I’ve too often witnessed the construct of weather-related summer rallies that fatten the wallets of the insiders, only to subsequently observe, come harvest time, another set of record yields and collapsing prices.
Likely the main catalyst for all of the stolen love inventoried thus far into our essay is the compound impacts of central bank wooing and an unambiguously tepid Jobs picture. We woke up Wednesday morning to the news that according to the near-infallible Advanced Data Processing folks, this here giant economy managed to gin up only a pathetic 25K of new gigs in May. We’d barely digested this intelligence when Chair Pow took to a Chicago podium, to offer, yet again, his formidable, protective arm to the domestic capital economy. On Thursday, his opposite number in Europe, the outgoing ECB Chair (Super) Mario Draghi, riffed off in the same key and core theme. Then came Friday’s official BLS Jobs Report, which while not as dire, told of only 75K new employment positions emerging last month.
I’d like to combine the BLS and ADP numbers and call it an even hundred thou, but the math just doesn’t seem to work in that manner.
In any event, the markets, as described above, swooned with delight. And one can certainly extrapolate that investors considered bad news to be good news, at least in this instance (they do this sometimes, you know). So smitten were investment analysts that short-term interest rate futures have now priced in as many as four fed cuts in the remaining six plus months of 2019.
I’m a little skeptical here I must say. First, I don’t think a rate cut, to say nothing of four such reductions, is particularly warranted. My biggest fear (which also happens to be my second point of incredulity) is that I don’t think that reducining short-term rates (which is what we’re talking about here), will generate the desired outcome. Presumably, everyone, including the Fed, would like to lance the boil of a pretty severely inverted yield curve. But, gun to my head, I believe that it won’t work. I think that if the Fed cuts on the point where it can, it will drag longer-term rates right down for the ride. The curve, under my scenario, would remain inverted, just at lower magnitudes at every point of maturity.
Haven’t we had enough of this medicine already? Are we not sufficiently anesthetized to all of this? It’s certainly a fair question to ask.
But if they don’t do it, maybe somebody else will. However, not everyone is buying into the buying frenzy. In a widely publicized interview, money management titan Stan Druckenmiller, citing a litany of issues (tariffs, the possibility of a progressive taking the White House in 2020, valuations), proclaimed that he had taken his equity portfolio to neutral. Now I don’t know Druck personally (have said hello once or twice), but as a money manager (with due respect to my former bosses and current clients), he’s my absolute idol. He’s everything that I would wish to be if: a) I was foolish enough to enter that arena; and b) if some group of investors was imprudent enough to back me in such a venture. To begin with, he has not had a down year in nearly four decades of investing. Think about that. But more importantly, in addition to being transcendently brilliant, he shows enormous self-awareness, and an equal measure of humility. He does not seek the spotlight, and doesn’t offer his opinions until they are fully vetted through his fabulous brain.
In contrast this to many of his higher profile peers, he does not offer opinions in advance of taking actions. He doesn’t “talk his book”: making his statements and diving in afterword – in the hopes of moving markets his way. He sold out and then spoke.
And when Druck speaks, we should all listen. Again, he pretty much keeps to himself unless he’s got something important to convey. So he must be pretty nervous about the markets, and if he is, so, too, should be the rest of us.
Not being Druck, my sense is that he’s right about the troubles that plague us. It’s just a matter of when they manifest. For him, as he articulately pointed out, it’s about what he thinks is best for his private wealth. He’s no longer managing other peoples’ money (in itself a red flag), and thus feels no acute performance pressure. As such, he can afford to be early.
Most of the rest of us lack this luxury. And for those who must eat (or buy a summer home) from what they kill, I think that the short-term risks tilt to the upside. Valuations, yes, are stretched, and we’re looking at a slowdown in everything from global growth to earnings outlooks.
But the Central Banks seem hell-bent on keeping the band playing. And I think I see they’re point. At the risk of being a repetitive bore, I think that they are absolutely terrified of a credit collapse, and feel that they must do all in their considerable powers to insure against this sort of calamity. And that means: a) keeping financing conditions at ridiculously unsustainable accommodation levels; and b) priming the pump even further if what they’re already doing proves to be insufficient.
What may be even more pertinent in my judgment is that the monetary chieftains are acting in what must be pretty full-knowledge that investors have them backed into a corner. A selloff of any kind ensures more monetary stimulus, and, beyond this, their fat finger on the valuation scale (most specifically its attendant suppression of yields) virtually guarantees that if there is indeed a credit bubble out there (and indeed there is), their actions will only serve to expand it, through the catalyzing of even more borrowing. The CBers are not stupid; they know all of this. And yet they persist and double down. They must be really scared, and probably we should be too.
As I’ve mentioned before, I believe a lot of the short-term risk centers in the Energy complex, which is over-levered by any standards. Lots of energy paper needs to roll over the next few quarters for the drillers, refiners and explorers, and at levels much below current prints on the underlying commodity they utilize, the odds on likelihood is that it won’t roll. This means defaults. Which might very well cascade. Well beyond the Energy Sector. And then we’re in real trouble.
So I advise everyone, to keep their eyes fixed upon energy prices. Crude has experienced a recent ~20% correction. And as for Nat Gas, well, it’s best not to ask.
So I get it. I mean, I get it all. Why the CBs are bending over, why Druck doesn’t want to be long here. But if you want to make some money here for your investors, my strong recommendation is that you not pile in on the short side. I will not quarrel with you if you wish to ride light, but anyone playing for a short-term collapse is, in my judgment, playing with fire. The Fed won’t help you, and neither will I. Instead, you will be on your own.
What, of course, you want to avoid is being in the right place at the wrong time. Dr. John rode this mismatch to several decades of fame, and, on Friday, the City of New Orleans were filled with music for his Second Line Funeral Parade. They don’t do this for just anyone, you know.
As for Druck, well, come what may, time is on his side. On the whole it’s tricky out there, and I’m here to tell you to that I’d proceed with caution were I in your shoes. After all, if I don’t do it, NOBODY else will.