Unenjoyment Day

4.7% and 235,000 never looked so average. I got up early to watch the talking heads spin their political views all over the number. To think hiring managers have ramped up their actions in a policy environment that has been thrown into flux is new wave economic thinking devoid of foundation.

The focus should have moved away from the Employment data several years ago. Retail Sales should be the market blistering data drop of the month. And yet. Our warning over the last month has been the abrupt drop in retail activity. The sector posted a glaring negative in the otherwise standard advance. The "late tax return" meme holds a tad of water but should be gone by the March print and then, well some peeps may actually owe.

The cognoscenti wasted no time in tossing off rate levels 100s of bips higher than the prevailing. FI practitioners were once again portrayed as hapless rubes mesmerized by the Fed's sleight of hand. Equity boys, on the other hand, are brilz. The incredible heavy force of Europe that has been weighing on the term structure, and is now shifting, was never mentioned. The Fed, of course, was "behind" the "curve."

We still contend it is the SHAPE of that curve that needs adjusting more than the LEVEL of rates. The ghost of the 70s/80s  rates anomaly still haunts people's views 2 generations later. Low does not mean "easy" and Higher does not automatically equate to tighter.

I Bid 43 No Trump

The stock market continued to post new highs last week and the chattering classes battled over politically biased ownership claims. I enjoyed the silliness sipping a Crozes-Hermitage GSM, as my dog had predicted the increase months ago without political affiliation.

First, a few data points: Jan 2015 12 M LIBOR = .63 and EFF = .12

Jan 2016 the sets were 1.169 and .38. and Jan 2017 was 1.689 and .66 and March/April should be interesting.

As we suggested a year ago, the calibration of monetary policy, provided an exogenous mishap could be avoided, would become more powerful over the ensuing months. The beneficiaries of said calibration would be "anything but Treasuries and the economy" in decreasing connection. With the Taylor Rule finally being disparaged publicly by more respected talking heads than mine (@TheStalwart had me on WDYM twice over the past 2 years discussing its flaws), we will continue to monitor policy through our historically more accurate and market profitable metric.

Looking at the simple Jan samples above, we can see that Zirp 2015 was an "equilibrium calibration at best. (FF "should" have been slightly negative) in Jan of last year the metric moved to +.16 and in Jan 2017, +.43. (The higher the number the higher the loose policy efficacy. There is a whip crack effect and a lag, obviously) In  Q3 2015 we suggested that the effects should manifest themselves 6 to 9 months hence.

The SP has roughly crawled from 2000 to 2360 over that long dirge span. About 200 of those points were scored since Nov, more an indication of election resolution than dog whistled victor administration policy possibilities. More importantly, the real economy metrics behind the stock market scoreboard are spotting up after nearly 18 months of positive cluster.

March looks to come in like a Lamb around 1.75 but could go out like a Lion if European pressures that have aided the positive calibration impact here were to abate abate. A steadying, or decline, from the prevailing .43 spread would be a tell. However, spreads of 100 + or - are not uncommon in cycles hitting on more cylinders. Then, historically, the Fed screws it up.

(See Countdown to Liftoff March 2015 in the archive.)

In Other News

--The massive Pilot Whale grounding bolstered the correlation to earthquakes.

-- The 220% increase in Northern Ca. rainfall has caused an emergency spillway breach and evacuation below the nation's tallest dam. Prices for wine have been pushed "sticky" in a post-harvest attempt to curb widespread discounting. The problem is another massive harvest and large increases from non-Napa/Sonoma regions. The dam is not in danger of structural failure, but more rain is on the way. The "heads -up" is for Central Valley growing regions (Spring should be under way) where most bulk grape and large volume fruits and vegetables are produced. (The other place being Mexico, the place on the other side of the wall)

--The shift in winter weather from the plains to the coasts connects to the potential Omega block this Summer in grain growing regions. We will be keeping an eye out for rain at Riviera CC as the PGA rolls in. Also, Titans of Maverick's was canned when Red Bull pulled out but record-breaking waves have been reported.

-- You can see where we are going with this: We outlined earlier our belief that the new administration was policy tilted toward price increases. A supply oriented policy mistake(s) is fundamental to gaining price traction in a world awash in everything. A weather market would ignite the process. Corn for Dec is up 25 cents this year and 20 cents over the front month.

We are not crazy about heavy things that hurt when Garts drops them on his foot. We do think financial assets have been force-fed and stuffed like a Hudson Valley duck during the monetary experiment euphemistically called QE. Any incremental shift into the tiny commodity markets for food would bring limit moves. Craft beer chasing millennial traders would experience their first grain Summer.

We're your Pilot Whale.

Sorry Kids

I was listening to some extremely low brow unfunny "progressive talk" radio while the tag line "Because facts matter" was being smashed into my brain. In our last Dog Barks post, we pointed to financial TV and the connection to "fake news." Today, a debate team bench warmer and Mensa failure pile offered up the mental ort that bank stocks were performing well because the yield curve had steepened over the preceding reporting period - or some such. (If you want word for word contact Monica Crowley)

Sorry kids, but facts don't matter. What matters is filling up hours of live feed and bandwidth so you remain connected to your screens. Clearly this individual's understanding of NIM is limited to The Great Owl Book #GIK. Also, the quiet pressure on the curve since Op Twist and Re-Investment has been a topic for serious practitioners for years now.

Here's a thought, vet the guest. Have an anchor ready to challenge "sell side derpitage" (Check my Twitter tag) at ;east on some base level of civility. And finally, think about the offset of a sharper curve - should it ever happen - now that banks are loaded with FI assets of longer duration than past generations.

Dog Paws

The Kibble:

The rotation of the last digit in the Gregorian year count causes an eruption in momentary score keeping that we are not immune to. Our mantra of the past several years has been "Anything but Treasuries." Last year, despite the recurring hype of bullish TLT mouth breathers, the chasm between T's and everything else gapped wider. Although avoiding owning government fixed income for capital gains is easy, shorting said obligations is a tricky professional exercise. Our early thoughts for next year are other countries, especially those still stuck in "The Upside-down" are going to have rough times. The JGB meltdown story was noticeably missing in primary financial news wrap ups. Tops are long drawn out affairs and the 35 year Bond Bull is dying a Francisco Franco length death (GIK).

The Bone:

The Cinco closed at 1.93 and one of our favorite cheat sheet indicators held up again. On Dec 22, the BEA said Q3 GDP advanced 3.5%. Long time readers know we advance a parlor trick that GDP should track the nominal 5 year plus inflation. (1.93 + 1.7 = 3.63 for smart phone addicted Millenials no longer able to perform simple human functions without hand-held assistance.) [Other goofy compasses we watch, like our equilibrium FF rate also held up well last year] Eight years of incredible global monetary lifting has left a significant legacy of advancement despite the pedestrian outrage of the opposition. The trouble with the prosperity is the foundation it rests on now that the flow is being dialed back. The paucity of IPO's is less a warning sign on markets than a trend we highlighted toward keeping money making enterprises private in a world awash in capital.

The Meat:

The market is going to take a shot in the first quarter. There will be a laundry list of pseudo-reasons to apply to the action in a post-truth, post-fact world. Anyone who has watched financial television knows "post-truth" didn't come along in 2016, it just reached drinking age. Global monetary pornography as policy stretched the relationship between "the market" and "the economy." We think an evaluation of the link in a pull back is about to unfold. For context, the best performing thing (I can really called it an asset class) in 2016 was - and I quote - "an electronic currency not backed by a government or central bank but by a code launched in 2009 by an anonymous cryptographer. It works through a network of servers (hopefully not DNC servers) that produce coins by solving complex equations and then sharing information about transactions and ownership." WSJ B10 Dec 31 2016. ( Dog takes deep breath, quaffs clear distilled spirit w olive) Almost all of Bitcoin shenanigans takes place in gambling obsessed  China. The WSJ continues: "When people started complaining on Twitter that Airbnb didn't accept bitcoins as payment CEO Brian Chesky responded; 'Wow, didn't realize this!' This stuff, my friends, doesn't happen at bottoms.

The Trump-flation

date money rate FF Equil Var
Jan-15 0.63 0.12 0.03 0.09
Jan-16 1.169 0.34 0.57 -0.17
16-Feb 1.14 0.38 0.54 -0.16
16-Mar 1.179 0.36 0.58 -0.22
16-Apr 1.213 0.36 0.58 -0.22
16-May 1.232 0.37 0.63 -0.26
16-Jun 1.328 0.38 0.72 -0.245
16-Jul 1.225 0.39 0.625 -0.235
16-Aug 1.433 0.4 0.833 -0.433
16-Sep 1.565 0.4 0.96 -0.56
16-Oct 1.559 0.4 0.96 -0.56
16-Nov 1.575 0.41 0.975 -0.565
16-Dec 1.643 0.41 1.043 -0.633

Most of the policies that the new administration is advancing are also inflationary pressures. The Fed's policy calibration has moved to its most accommodative stance as you look back 9 months. The data above show the estimated equilibrium FF rate (the rate at which Mon. Policy is neither tight or loose) and the actual calibration. The more negative the last number, the more policy ease impact (positive numbers would mean Fed is too tight)

The media is up in arms about the PEOTUS having conflicts of interest as to his holdings. The easiest and most effective way to increase his wealth while in office would be to advance the inflation rate. We believe it will happen. The release of Rogue One right after the Fed meeting is perfectly timed. We can all sit back and see if either Death Star works.

Instead- Some Wine

I was going to get all Hunter S on the present sitch in my usual half sotted way then decided to pass. As long time readers know I'm a big Thanksgiving fan and have promulgated the reading of the pre-Holiday OP-Eds in the WSJ. My children have had to listen to them for decades. And so I defer my thoughts to the incredibly awesome notes of the folks from Delfshaven and the Wed WSJ tradition - and instead suggest some wines for the feast.

I never understood 100 malo Chardonnay with a well crafted Thanksgiving but if that's your thing I suggest a Rombauer or Best Value - Novellum from France. (about 30.00 and about 9.00)

In Pinot Noir, I've been swilling Jim Clendenen's ABC Knox Alexander. let it open hours in advance. Calera is very well made in the 25.00 range.

Since Cab is still King - ya, you can drink cab with game meats, sage, pork dressings and fried sprouts - go Ghost Pines 2012 magnums. The wine I'm most excited about is Dave Phinney's Mercury Head - forget the Prisoner, its been over long before Hill. If you want a Meritage (like heritage so lose the phony frog accent) go The Pairing by Jonata at around 25.00, insanely good.

For the adventurous, go 2014 La Pierre Morgon - an incredible Gamay and forget the nouveau juice to be released on Thursday.

Finally, since you all did so well long the TLT, Paul Hobbs To Kalon is life altering at a mere 425.00 a bottle.

Blot out the news, boycott Black Friday, enjoy the real Holiday and please  - read the WSj op/ed on the Wed before.

 

The End of Reason

The most important event of the week involved neither the FBI or Billy Bush. The Bundy case was ended with a stunning unanimous "Not Guilty" verdict. It is important to remember that verdicts are rendered as to the charges and not necessarily the realities. The results can be summed up like this:

A militant, armed militia group took over a Federal Game Land, occupied it for an extended period of time, made it dangerous for the workers to go to their jobs and recruited hundreds of armed civilians from across the country to come help them - but committed no crime and were merely exercising their Constitutional rights..

Americans, on both sides of the aisle have deeply twisted the concepts of "rights" and "privileges." Rights cannot be revoked but still carry consequences when acted out. Privileges are granted and revoked in regular process. Essentially, a militant group could now over take a Federal building and have precedent as to its legality. Understandably, the charge of "Conspiracy" played directly into the verdict and the conspiratorial Pynchon mindset of the public. The defendants were known to be followers of fringe fanatic groups such as The Oath Keepers, The Tenther Movement and The Praetorian Guards.

Trump's rhetoric and Clinton's resume play into the militant response "rights" narrative. These groups and their views will be emboldened not just by the jury verdict but by both/either a Trump victory or defeat. Emotion precedes the end of reason.

As the great Sen. Warren Rudman said of Ollie North's Iran/Contra scheming, "The Constitution gives the American people the right to be wrong about things." And that right has consequences.

The Slow Growth Meme

The pre-determination of slow growth for the US and other developed nations took another step forward with a WSJ cover story on "Learning to Live with Slow Growth." The finger-pointing centered on productivity, or it lack there of. Even the chart posted shows a sideways path from the 80s to the crash, damaging the base premise.

In reality, the productivity miracle, heralded by the Greenspan Fed, never really took place. Innovation (computerization) in a service economy was exciting but hardly the Holy Grail. Consider Lawyer X, cheap computing power and innovative software boosted his and the firm's efficiency. Labor intensive work became easier and more streamlined. The quicker he embraced and implemented the tools, the potential profit margin of his work increased. But what about his work relative to other lawyers? Weren't they rolling into these new technologies also? Once all firms had updated their systems, was Lawyer X, or the entire Law community any more productive from an economic standpoint?

The financial system is a perfect example of the productivity meme myth. Everyone chased technological innovations right down to suing each other over lines of code. It is too easy to call this chase productivity increases. If one used to take 10 seconds to buy 10000 shares and now it takes 400 milliseconds..is the trader more productive? Once everyone has the same platforms, is the system? Essentially, 17% of the economy became quicker, not "better" and certainly not more productive. (Who had time to read Twitter?)

The production, availability and use of credit has a much more accurate effect on growth than the always cited productivity. Since the Industrial Revolution, and even centuries earlier in the Mediterranean, individuals, groups and societies that rejected the Puritanical notions equating austerity with morality, grew faster and out prospered their neighbors. Big government, small government, balanced budgets, raising taxes, lowering taxes, privatization, regulation, reform or deregulation all failed to deliver the productivity nirvana. Credit, however, made the multitude of Crusades for the cause possible.

But don't take my word for it, take James Burke's: