Is the Juice Worth the Squeeze?

June 23, 2019

 

A whole lot of squeezing going on. That’s for sure. But we’ll get to that in a minute.

 

First, a word about Juice. As anyone not living under a rock is aware, The Juice is back. On Twitter, which, for celebrities is the functional equivalent of the mirror under the nose test.

 

In his maiden tweet, and with trademark class, he suggested he’s got some getting even to do. The mind races.

 

Now, at this point, I doubt there’s anyone on the planet who doesn’t know with certainty that he did Brown. And Goldman. And got away with it. Sort of.

 

But a few years later, he himself got squeezed, and squeezed good. He did 10 years for armed robbery in what, by all appearances, was an epic set up. If you’ll recall, some inside guys moved a bunch of his memorabilia from one Vegas hotel room to another, got him drunk, told him his sh!t had been stolen, stuck a gun in his hand and virtually pushed him into the offender’s chamber. Conveniently, the cops were right there, and busted him on the spot.

 

Not that he didn’t deserve it. Everyone was happy to see him do his stretch. But a review of the timeline confirms, with scant room for doubt, that he was squeezed, squozen, squozed.

 

And lately, there’s been a plethora of squeeze activity transpiring, well, everywhere one cares to look.

 

But let’s focus on the markets, shall we? The Gallant 500 squeezed its way to a new all-time high close on Thursday, before yielding a modest amount of ground to close out the week to close below this milestone. It has now fully recovered the 200 handles it had relinquished in the wake of the May 3 Trump tweet (foretelling of a big ol’ hairy squeeze that 45 was ready to lay on the Chinese). Many in my acquaintance figured that the selloff had legs, that the ten-plus-year rally had finally run its course.

 

It is my sad duty to report that anyone who acted on this instinct, and adhered to the hypothesis, got their nuts squeezed, and squeezed off.

 

A similar pattern emerges from other asset classes, and here we begin with bonds. A number of my clients have been short the long end of the Treasury curve (in the United States and elsewhere) for a seemingly endless amount of time, under the conviction that rates would not, could not remain at prevailing depressed levels for much longer. Well, what happened? They got squeezed, of course. Our 10 Year Notes actually pierced the Shylockian level of 2.00% on Thursday, before retreating to an even- more usurious 2.06% by week’s end.

 

Much of the squeezing may be the result of the continued love hugs of Central Bankers, as led most prominently by Chair Pow, most recently at his Wednesday FOMC presser. No, he didn’t cut rates this time round, but from a Fed-speak perspective, he all but guaranteed that he was fixing to do so, most likely at next month’s policy meeting. Market chatter was rife with speculation that this strategy was at least in part catalyzed by some rather unproductive prodding by the President, who, just the preceding day, had been making unfavorable comparison between our own Fed Chieftain and his more accommodating ECB opposite number, one Mario Draghi.

So the question emerges: did Trump squeeze Powell? I’d like to think not, but based upon how juiced up the markets were in the wake of this sequence, one cannot rule out the possibility.

 

And the Fixed Income juice was flowing – in abundance – across the globe. France’s 10-Year yields went negative (France? Who in their right minds would lend those lazy, petulant shifters money at negative rates?) Germany, Japan and Switzerland rates hit new, sub-zero lows. I pity anyone who was short these instruments, because the squeezing was a sorrowful sight to behold.

 

Part of the above-described narrative features an accusation by Mr. T that the Europeans were squeezing down their currency, in an effort to provide incremental advantage vs. the US in our always-entertaining global trade wars. Now, I don’t know if this episode of monetary j’accuse was warranted, but it did yield the desired nectar of a pretty steep drop in the USD over the last couple of sessions:

 

On balance, I’m not sure how effective these currency wars are in terms of solving whatever economic woes that are keeping investors and policy-makers awake at night.

 

But I do know this: currency deflation, with respect to any given currency pair, is a game that both sides can play.

And, if this goes on much longer, both sides will; in fact, all sides will: us, the Europeans, the Chinese, the Japanese; heck, even the Australians, Canadians and Mexicans may wish to get in on the action. And all I can say is that I hope everyone enjoys the sugar rush while it lasts. Because it will end. And then what?

But in this desperate race to queer up the world’s major units of account, there are some winners, of course. Mostly, these fall within the realms of the long abused Commodity Complex. Oh what a week it was in that forlorn corner of the capital markets! Gold rocketed to a seven-year high. The Grain markets are surging in a manner that brings a joyful tear this old farmer’s rapidly aging eyes. Crude Oil, just when it’s rally had also been left for dead, surged 10% over the back half of the week just concluded.

 

Anyone entering the week short these quaint but necessary items got the full Juice-Vegas treatment.

 

But here we must pause awhile and focus more intently on Energy. The smartest energy guys I know are very bearish the bubbling crude, and these guys track inventories like my dear old grandmother would’ve monitored her preserve jars. That is, if she ever contemplated putting up preserves of her own. But she wasn’t that type of grandmother. She liked jams and jellies, and used to make my brother and me choke down more of these pasty foodstuffs than I care to remember. But trust me on this one: all of her preserves were store-bought. Anyway, if my energy guys say that there’s excess supply of Black

Gold/Texas Tea, then I’m going to assume that such excess is indeed a reality.

 

More to the point, I am on repeated record as stating my belief that the catalyst for all of this ’19 Fed love is a fear of a corporate credit bubble, and that if I’m correct on that score, the massive short-term debt outstanding in the Energy Sector is most certainly at the core of the concern. If these borrowers can’t refinance, many will go tits up, and the consequences (as described further below) may be fairly gruesome.

 

But if you check around, you find that banks are pretty much squeezing the energy boys and girls out of the credit markets:

 

This graph comes from CNN’s website, and they helpfully provided a numerical legend above the right- most, newest (Q1/19) data point. For purposes of clarity, that number is $0.00. And it bears noting that all of this non-lending was (not) taking place during a very vigorous rally for the underlying commodity:

 

One can only imagine the passel of non-lending that didn’t transpire as the May trade wars squeezed >10% off of peak, year-to-date valuations. Here, though, we will be compelled to rely exclusively on our imaginations, because, unlike global Treasury debt, energy sector lending volumes cannot reach a lower threshold than zero. Which is where they are.

 

And if the number fails to rise above this goose egg threshold, then how are energy concerns to refinance their massive short-term debt? And if they fail to refinance, then what might this do in terms of piercing the credit bubble? I don’t want to think about it.

 

But duty calls. If energy loans don’t roll, the default implications are dire for the entire lending market. Underwriting departments of banks, prompted, presumably, by regulators, will bust out their big red “Rejected” stamps in drumbeat crescendo. It won’t be particularly uplifting to watch.

 

But as is unfortunately too often the case, and as everyone is aware, the faint drums of war bailed us out in the short term. The Ayatollahs took out one of our drones over international waters in the Strait of Hormuz. Our boys were geared up on the Launchpad to retaliate. At the 11th hour, Trump scrapped the mission. For sure, there was some squeezing going on, but who squeezed whom is anyone’s guess.

 

But for our purposes, the important point is that a) Crude Oil reversed is slide and rallied; and b) anyone short going into this episode got squeezed. Yet again. What juices will flow from all of this remains to be seen. Probably, we’re going to learn something on this score based upon the outcomes of the Trump/Xi G20 summit this week. That both sides will be in full squeeze mode is a matter of certainty.

 

Here as elsewhere, though, we must bear in mind our titular theme, and ask ourselves, yet again (though certainly not for the last time) whether the juice is worth the squeeze. I reckon we’ll find out.

 

TIMSHEL

 

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