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 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:

Enter Voldemort

In the early days of the Bill Clinton administration, James Carville had a melt down about the new POTUS' quick abandonment of his campaign agenda. As outlined in Bob Woodward's outstanding The Agenda, the "Ragin' Cagun" was pointing to a napkin with 4 top issues, all tossed aside because Treasury Secretary Bob Rubin had convinced the new President that "the bond market would not permit it." To which Carville famously replied, "I used to think if there was reincarnation,  I wanted to come back as the president, or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Now is the time to start imagining what a Clinton 2.0 agenda might look like. Central bank bond purchases were considered desperation 3rd world Hail Mary's as recently as POTUS 42. The deficit was public enemy No. 1, as it was with Obama and the "sequester." The destructive force of inflation remains a feared ghost, the Valdemort of economic old timers. I do not get the sense that Hillary will be so quick, or politically able, to throw her agenda aside for the now 1.75% 10 year. Compare to the ankle shackling 6.50% that so constrained Bill and Bob. (interesting sidebar- the 2/10 curve is about 40bp steeper today than 1997 !)

I think a change is coming. I don't think the bond market, having been tamed for so long, scares Mrs. Clinton. I don't think, even with her many Wall St. lectures, she seeks the council of FI grey- hairs who recall the power of falling bond prices. I think the re-incarnation is beginning.

We’re All Rooting For You

My dog opined about the TLT back on Sept 15. after 10 points of downside in the Ultra Bond contract. As markets tend to do, the bond then rallied into the end of the quarter aided by some D-Bank FTQ. But, low and behold, despite moderate data and continued international issues...The UB is back to making new lows and hasn't had an up day in Oct.

We are just glad no one is getting hurt, as always.

The Dog Weighs In

Issue #1: D-Bank

And so it goes, as Kilgore Trout may have summed it up. A story, a punishment, a trial balloon is "leaked" to the WSJ about a $14 B fine for Deutsche's now nearly decade old mortgage backed shenanigans and a "panic" quakes up in the bank's credit default swaps. Despite negative interest rates and heavy ECB bond buying the ancient institution continues to hemorrhage billions in losses annually. As said trial balloon melted more  capital away from the bank - already nearly halved for the year  - a more "palatable" $4 or 5 B number circulated through the water carrying press.

This game of governmental support and flogging has allowed for outrage on both the left and the right. A week ago we were enthralled with the public dressing down of John Stumpf for Wells Fargo's low brow fleecing of its customers. Others will argue that it is government oversight and regulations that are pushing banks into these unsavory activities. The truth is banking is and always has been a boring little business. National support for the industry was followed by massive fines for illegal and unethical behavior of systemic scale, paid for with electronically generated balances. (This international reach out, some believe, is tit-for-tat slapping after Apple. )  It's a self-perpetuating "There ALL Twix" ,circle jerk ,incestuous waste of time. Which leads us to

Issue #2

The Shallows. If you haven't read the WSJ Weekend page A11 opinion by Peggy Noonan, take 5 and do so. You don't have to subscribe to Noonan's world view to appreciate the truth behind "life in the shallows." The term comes from Nicholas Carr's book of same name. The notion comes close to one I've promulgated here, long ago, the internet makes us all dumber. Noonan and Carr see a direct link between the internet and media news cycle reporting. It's not just the election that has us wading in the shallows. The ability to deal with complex structural issues like the one described above is impaired by the thin emotional responses that are passed off as intelligent discourse. Which leads us to

Issue #3

Who is this Paul Volcker Senior Fellow for International Economics at the Council on Foreign Relations Sabastian Mallaby ? Mr. Mallaby has penned a new bird cage liner on Alan Greenspan called, are you sitting down?, The Man Who Knew.! Trotting out the usual genuflections to Ayn Rand and mysterious missing doctoral thesis, Mallaby constructs a revisionist history glowing portrait of the "Maestro." Reading this amazingly distorted view of recent history caused my soul to throw up in its mouth a little more than a few times. The sub-title is the "Life and Times of Alan Greenspan" but could easily be " Because He Made It Happen." From quid pro quo rate cuts for deficit reduction, GSE balance sheet pump ups to supply "AAA" debt , to self regulating financial innovations, Greenspan oversaw the mudslide. An ex-Randian leaving a decades long trail of activist tinkering that germinated the 3T monetary pornography we now call modern central banking. Long live Lincoln Savings #GIK.

And so it goes, indeed.

Rosie O’Donnell Stock Market Bubble

Last night the would-be Republican nominee for President referred to the economy with the same adjectives he used to describe entertainment footnote Rosie O'Donnell. "Big, fat, ugly bubble, " was how Mr. Trump analyzed the state of the US economy, throwing in a few innuendo laden half sentences about Fed Chair Janet Yellen. Nothing unifies the populist movement like Fed bashing.

Always short on details, Mr. Trump then let the armchair conspiracy theorists (having already outed the obese, bedridden, hacker crowd) fill in the gaps by chastising both low interest rates and the consequences of raising them. Surprisingly, neither candidate laid out even a HS sophomore's argument on the optically creepy and monetarily sketchy practices of IOER and QE bond buying regimes.

I think campaigns are good times to press candidates about both Federal Reserve mandates and monetary policy execution. Pat answers protecting Fed independence were all the rage not long ago when Alan Greenspan graced the cover of Time as "World Savior." Today, the long successful career of Dr. (multiple ) Yellen is called into question by the possibility of something yet to occur. Truth be told, we do not know Mrs. Clinton's philosophy of central banking, but her husband took a fortuitous pragmatic approach (cut the deficit and Greenspan cuts rates quid pro quo). The financial tinder of a balanced budget and good intentions on housing would play out terribly later. Trump, however, shows the dangerous populist bluster of CB neanderthals.

The Fed has a long history of pumping up and wrecking economic expansions. The "soft landing" is as rare and mysterious as a Loch Ness sighting. Someday, I'd like to be able to vote for a candidate that actually understands the way the financial system works.

Post Script: Who would be Treasury Secretary in either administration. Considering Jack Lew's ticket was punched for being COO at Citi from 2006-2008 overseeing an historic mudslide into insolvency for an institution founded in 1812 !