Direct And Clear

There Is No Subtlety To This Market

Old dinosaurs like me have seen a lot of stuff in the markets. Sometimes it is good to listen to them and sometimes you push their advice to the side because something really different is happening.

Trump said Joe Biden would crush your savings and stock portfolio, and he was right. It wasn’t a hard call to be fair given what Biden said he wanted to do. I lost friendships over politics in the past years since Obama was elected. It’s not enough to say, “at least there are no mean tweets”. The people in charge right now are deliberately destroying the country.

Permabear Tim Knight of Slope of Hope fame posted a video. Listen to it from 3:00 to 3:50 for the salient point. Essentially, nothing has changed in the world. Wake me when it does.

No one is going to rush in to buy this market. It is not 1987. It’s not 1929. It’s not 2008. There is no savior that will pledge their fortune so the market turns. This is death by a thousand cuts. The market is bleeding to death and sometimes it bleeds a little more than other days. If you like catching really sharp knives when you throw them in the air with your bare hands, buy ‘em. If you look at this chart, you can see why I have been saying that 3200 might be a point to take a sniff and buy. That is 16x earnings for stocks in the S+P, which is a good rule-of-thumb metric for valuation.

But, in recessionary bear markets, sometimes things get out of hand.

My friend Jack Bouroudjian made a great point on Twitter that I hadn’t seen anyone make before. Jack was on the board at CME and ran operations at several banks. He’s a dinosaur too.

Jack Bouroudjian @JackBouroudjian

Dear Fed: What if it all doesn't work? What if stocks go down with bonds? What if unemployment goes up? What if credit spreads widen out? What if real estate goes down? What if commodities start a deflationary spiral? What happens when the banks get in trouble? It's 1990's Japan!

Raising rates is not going to work in a vacuum. Without corresponding cuts in government spending and decreases in taxes on investments, we certainly could become Japan.

The part about government spending and tax on investment is what people are missing.

I noticed that the liberal Financial Times criticized the recent budget that the new government in the UK has put forward. Parts of that budget are excellent because it frees up the private sector to invest. The problem with it is they are trying to ease the pain of high energy prices in the short run with government spending. Unless the UK figures out how to generate a lot of electricity at low prices, that will not work in the long term and the debt will be crushing.

Socialist Representative Rashida Tlaib shows you exactly where the Democrats’ head is at on fossil fuels and using safe technology like nuclear power to build a larger electricity grid in general in her diatribe last week. It’s not just what she says, it’s her delivery and tone. This isn’t new. Obama led the world on the ignorant march to energy ineptitude. These people just aren’t serious people that spend time in reality solving real problems. The Martha’s Vineyard escapade along with the JB Pritzker response to The Scream ought to prove that fact to you. They don’t want to legislate they want to dictate.

Tom Elliott @tomselliott

Rep. @RashidaTlaib challenges bank CEOs to agree to stop funding fossil fuels, is rejected by every single one Jamie Dimon: "That would be the road to Hell for America"

I am glad Dimon answered the way he did. It is time to be direct and clear.

In recent years, we have found gigantic copper deposits in Minnesota and a large lithium deposit in Nevada. Both are needed for an on-demand energy information economy. Will environmental wackos let them be mined? No.

California really needs a lot of fresh water. If you think that global warming is happening, they really need a lot of fresh water. Will they build desalination plants along the coast to pump water to farmers in the Central Valley that need it? No. The environmental wackos are against it and people that live on the coast think they will be eyesores.

Instead, no one does anything. Politicians score political points. The problems remain and the citizens get screwed. How do you like paying your taxes now?

In another little covered statement at the same hearing he chastised Tlaib, Jamie Dimon addressed the level of regulation on banks to lend money. From the Financial Times,
He warned US lawmakers that capital requirements for large banks pose “a significant economic risk” that is curtailing their capacity to lend to homebuyers and other customers. Dimon said “the continued upward trajectory” of capital requirements is making it harder for banks to meet customer needs just as “storm clouds” are gathering on the horizon for the US economy. “This is bad for America, as it handicaps regulated banks at precisely the wrong time, causing them to be capital constrained and reduce growth in areas like lending, as the country enters difficult economic conditions,” Dimon said in written remarks to the House committee on financial services.

In order to fight inflation and get out of the recession, there has to be an incentive for investment. Big Regulation is gumming up the works. Now financial regulators are using the “global warming” excuse to regulate finance. It is nonsensical and dumb. You can only think it’s a good idea if you are at an Ivy League cocktail party or sipping espresso at a professor’s house in Berkeley

They also are mandating “central clearing” for many Treasury transactions in the name of safety when it will make the entire market more unstable. My friend Professor Craig Pirrong, an expert on clearing writes,

This week the SEC released a proposed rule to mandate clearing of many cash Treasury trades.

Clearing of course has always been a mania of Gary’s. His deep affection for me no doubt dates from my extensive writing on his Ahab-like pursuit of clearing mandates in derivatives more than a decade ago. Clearing is Gensler’s hammer, and he sees in every financial problem a nail to be driven.

The problem at issue here is the periodic episodes of large price moves and illiquidity in the Treasury market in recent years, most notably in March 2020 (the subject of a JACF article by me).

Clearing is a mechanism to mitigate counterparty credit risk. There is no evidence, nor reasonable basis to believe, that counterparty credit risk precipitated these episodes, or that these episodes (whatever their cause) raised the risk of a chain reaction via a counterparty credit risk channel in cash Treasuries.

Moreover, as I have said ad nauseum, clearing and the associated margining mechanism is a major potential source of financial instability.

Indeed, as I point out in the JACF article, clearing and margin in Treasury futures and other fixed income securities markets is what threatened to turn the price (and basis) movement sparked by Covid (and policy responses to Covid) into a systemic event that required Fed intervention to prevent.

I note that as I discussed at the time, margining also contributed greatly to the instability surrounding the GameStop fiasco.

Meaning that in the name of promoting financial market stability Gensler and the SEC (the vote on the proposal was unanimous) are in fact expanding the use of the very mechanism that exacerbated the problem they are allegedly addressing.

More gum in the gears of the free market. Of course, when all the stuff this administration is enacting blows up, they will want to apply more gum to the gears and will blame the free market system for the problems they themselves have caused.

It is not as if a lot of us didn’t see all of this coming. We did and we tried to warn people but they didn’t believe us. In this case, you should have listened to the dinosaurs.