KEN GRANT: Here’s the Story (July 23)

Ken reminisces the Brady Bunch, and discusses President Trump, Q2 earnings, VIX and SKEW, and upcoming GDP.

Here’s the Story

July 22, 2018

I read, with mixed regret and a great deal of interest, that a certain residence: 11222 Dilling Street in Studio City, CA, is up for sale. More pertinently, this 2,500 square foot, 2 bedroom/3 bath dwelling, has been since time immemorial, the home of the Bradys.

My first reaction (a logical one I feel) was to scream “Fake News!” After all, everyone knows that whatever else its appeal (sliding doors, eat in kitchen, etc.), 11222 Dill contains NO bathrooms. I think there was a closet with a mirror and a sink, where those whacky kids used to fight from time to time for sufficient space to brush their unilaterally, impossibly white teeth. But a bathroom? No.

However, I’ve checked and it’s true, Casa Brady is indeed on the market, and for the bargain price of $1.85 mil. And part of me feels that we’re all worse off for the prospective transaction. I developed an early fascination with the Bradys, perhaps in part because the Bunch are my chronological peers. I’m a little younger than Jan; a little older than and Bobby.

So when the series was in Prime Time, I never missed an episode, realizing even at a young age, that it offered a perfect caricature of life in 1970s America at its campiest and blandest. That it did so in contemporaneous time, and without any intended irony, is a marvel for the ages. It ran for about 6 seasons, but was eventually cancelled because the kids got too old. And neither Mike and Bobby’s dubious perms, nor the arrival of the ill-matched, misanthropic Cousin Oliver, could salvage it. But as the saying goes, Old Bradys die hard. A couple of years later, the cast convened through a variety series, which, somehow, and against all odds, managed to outdo even the Brady Bunch in Brady-ness. The same could be said of a spinoff called The Brady Brides, in which newly betrothed Marcia and Jan seek to economize by moving in together with husbands that hated each other. Trust me on this one: hilarity did indeed ensue.

Lingering, still, is the Marcia/Jan debate, and, to me, despite having a soft spot for Jan (easily the most unhinged of the Brady scions), in terms of romantic appeal, it’s no contest. It’s Marcia, Marcia, Marcia. Even with her banged up nose. But I do have one further matter to get off my chest: once, in a fit of sheer boredom, I took a BuzzFeed quiz to determine whether I was more Marcia or Jan, and I came up unambiguously as Jan. I posted the results Facebook.

But as Mick once sang (on a record that was released, as it happens, about the time that the Bradys kids hit their aggregate hormonal peak) “Time waits for no one”. Not even a Brady. Mike and Carol are both dead. Alice is dead, as is Sam the Butcher. Mangy mutt Tiger disappeared with no explanation after Season 1, and, nearly 5 decades later, we can perhaps safely conclude that he too has gathered to the dust of his forebears. Greg rocks a weave/dye job, and croons the borscht belt circuit. Marcia is born again, and no longer speaks to Jan. Peter turns up on the telly here and there. Cindy, I believe, is a radio DJ with pretty solid rock sensibilities. Bobby, improbably, sells decorative concrete on his home turf near Salt Lake City.

So maybe it was indeed time to sacrifice 11222 Dill, but I felt it my responsibility to not allow this milestone to pass unremarked.

So that’s the story. At least that story. But meanwhile, what’s ours?

Well, I’ve nothing to relate that rises to the dignity of the Johnny Bravo episode (or the one where Marcia resorts to cross-dressing, in her hot pursuit of the adorable Davy Jones), but it’s not like we don’t have some ground to cover, so let’s get to it, shall we?

In simpler times (say, suburban L.A. – circa 1972), market participants might’ve casted their collective focus on the many salient data points coming our way,: the acceleration of the earnings calendar, Fed Chair Powell’s testimony on Capitol Hill, and other information flows directly tied to the fortunes of the global capital economy. However, these are anything but simple times, because among other things, our fearless leader accomplished the nigh-impossible, drawing incremental attention to himself - at a point when his face had already become more ubiquitous than that of Orwell’s Big Brother.

More specifically, he’s fighting with everyone, and in doing so, is channeling his inner Jan: always at risk of descending into phantasmagoric delusion (the wig episode, the made up boyfriend, etc.) One time, she even decided, and was accommodated in this wish, to disown the entire Brady crew. And Trump is acting out in similar fashion. He’s brawling, of course, with China, with Europe, and even with Canada for God’s Sake. In his own way (though the superficial narrative runs in the other direction), he’s circling in menacing fashion around Russia. Moreover, in addition to his longstanding beefs with the FBI, CIA and Justice Department, he’s now picking bones with the supposed-to-be-independent Federal Reserve Bank of the United States.

These are serious matters, but the markets, like the Bradys did to Jan in the aforementioned episode, have chosen to to pretend he’s not there. Thus, just as Jan’s brothers and sisters simply hopped around her when she tried to disrupt a backyard sack race, investors ignored such matters as threats to up the Chinese tariff ante to a cool $500B, and shade throwing at our Central Bank, and went about their business.

They didn’t have much to show for their efforts, but they did manage to gather themselves sufficiently to push the Gallant 500 up about 9 handles for the week (0.27%), and a similar tale can be told about our other favorite indices. Treasuries sold off a bit, pushing yields from ~2.82 to ~2.89, but continue to trade in the narrowest ranges witnessed for more than a decade. The Bloomberg Commodity Index was able to register a pulse, with my victimized grains catching a small bid, but other components – particularly the whole metals complex – continuing their descent into the netherworld. Thus, if nowhere else, we see the trade war risk premium rising in the mundane world of commodities.

Earnings, thus far, have been a mixed bag, with winners such as Bank of America, Morgan Stanley and Microsoft being offset by disappointers including eBay, NetFlix (improbably) and (of course) General Electric. However, with 17% of the SPX clocking in, the market is still on pace to reach its socialized target of >20% earnings growth, and if the trend continues, no one should complain.

Casting our eyes towards the VIX, we note benign volatility conditions, but again, that’s not the whole story on vol. As we’ve discussed, the VIX is a rolling measure of at-the-money SPX implied volatility, and it is indeed low by any relative/historical standard. But if one looks out at the tails of the volatility plain – i.e. the realms where investors actually purchase portfolio protection, we see that they are evidencing a willingness to pay up – substantially:

Now, just like the rest of you, having always been a bit leery of the VIX, my inclination is to evaluate an index of skew thereto with a particularly jaundiced eye. But the way this thing is calculated, a value of 100 implies that investors expect a normal distribution of SPX returns, and now we’re at 160 (record levels by a wide margin), which suggests an increase in the options-projected probability of a multi standard deviation crash to statistically meaningful levels.

On the other hand, I mentioned this to a couple of clients and they usefully pointed out to me that all of the implied overpayment for portfolio protection is as strong an indicator that this here bull market has yet to run its course as any we’re likely to find in these troubled times.

I reckon we’ll see. Next week, after all, brings another big series of earnings, including the Googlers and Facebook. Beyond this, on Friday morning, we’ll get our first glimpse at Q2 GDP, and, for what it’s worth, those crazy cats at the Atlanta Fed are up to their old tricks again, turbo-charging their projections back up to a big, fat 4.5%.

Part of me wishes that they’d just make up their minds, but then again, this would be a futile gesture. The Commerce Department will make minds up for them on Friday, and that is the number that will go into the history books.

Until, of course, it is revised. And then revised again. But pretty much everyone who’s cared to look into these matters expects an exceedingly rich quarter, and here it bears remembering, because > 4% prints on GDP don’t last forever.

On the other hand, nothing does. Last forever that is. And if you doubt this, just ask the Bradys. Given that for many of us (myself included of course) they will forever remain the perpetually perky, well-scrubbed teens and pre-teens that they always have been, it must be very upsetting for them to have their childhood home sold right out from underneath their feet. Here’s hoping that the buyer(s) whoever they may be, understand that they are not purchasing a house, but rather, a shrine.

And yes, I’ve considered bidding myself. But it’s a stretch. I can probably scrape together the 1.85 large asking price, but with little margin for error. More importantly, this would leave me with almost no financial resources to undertake certain structural adjustments that I feel are just nigh essential.

I probably don’t need to elaborate here other than to state that, at my advanced age, an upgrade in the plumbing arrangements at 11222 Dilling Street, Studio City, CA is among the most effective risk management actions of which I possibly can conceive.

If I were to take this step, it would be important for me to remind myself that my life in Studio City would not fit into tidy 22 minute segments, resolving themselves in crescendos of happy endings and lessons learnt. This is particularly true 45 years after the demise of the Brady Bunch, and even more so in today’s markets. It’s tricky out there; not much edge to be found anywhere. Be forewarned.

TIMSHEL

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