Circle Back

 

"I gotta circle back Touch something near Find out which way to go To get on out of here I lost my thread And i've lost some time But it takes a lot of ground For me to change my mind"

John Hiatt - Circle Back

As Summer winds down and people rediscover the notion of "Back to School," we are re-evaluating our fundamental view of the markets. We learned our lessons long ago and Hooper will continue to drive the boat (while we chum off the back like Chief Brody) but we find "un-knowing" what we know harder than it sounds.

The new high in the SP future today (over the May 1 high) was the culmination of a mid-year pull back in economic activity that morphed into an End of the World fantasy as Memorial Day approached. Hairy at times, we relied on our financial conditions metrics and belief that monetary tools can buy debt problems a fair amount of time. Bears were hoping for Lehman Moments that just weren't there.

We underestimated the veracity with which "others" would scramble for US Treasury obligations and bond gurus continued to be anointed for lucking into Beta performance (i.e. yields fell). Spreads continued to improve and that only bolstered our equity long bias. Outside of crisis, stocks and bonds continue to be positively correlated. The lags are what confuse the Tourist Macro practitioner (h/t Mark Dow). And this is where we circle back.

The market structure and incredible bear market in hold time has exacerbated the capital market as casino culture. Over a short enough time horizon, everyone is right.  Casinos tend to limit their kickback to big players to rooms and tickets to Wayne Newton. The exchanges are "comp-ing" much more than this, however. A robust economy demands robust and vibrant capital markets and financial institutions. Disintermediation and regulatory encroachment sold as reform are blocking the utility function of markets. Fading the EOTW is different than being "borne back ceaselessly into the past."  Lets see what the Fall brings.

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