KEN GRANT - Supreme Court Justices Should Be Seen and Not Heard (and Not Seen)

Ken discusses the Kavanaugh spectacle, a history of Supremes, last weeks vol and Central Bank action, and maturing paper

Supreme Court Justices Should Be Seen and Not Heard (and Not Seen)

October 7, 2018

I truly hope that everyone survived the Kavanaugh confirmation madness. Yes, this is my hope, but not my sense, of our current collective mindset. Because whatever side of the fence one occupies, perhaps we can all agree that the spectacle was not the finest visual that this great nation has ever offered. More has been written about this than the rational brain to absorb, so I promise to go easy here. As I mentioned last week, the uber-political timing of the Ford bombshell was in its own way, sublime. But in the end, it probably sunk the opposition. Bringing charges from >35 years ago, that can neither be proved nor (importantly) disproved, was arguably a bridge too far for the hard pressed populous.

More to the point (or my point, at any rate), the sequence generated an inarguably excessive amount of screen time for BK. Here, I will cop to being pretty skeeved out by his multi-hour star turn, which – let’s face it – generated too much information. I did NOT wish to know that he maintained his virginal status well beyond his reaching the age of majority (whether it’s true or not), nor do I believe I benefitted from his forced, tortured definitions of terms like “Boff” and “Devil’s Triangle”. He had many strong moments, but some of his whimpering and self-pitying attacks will be difficult for any of us to un-see.

And all of this got me to thinking that there’s a reason why Supreme Court Justices generally remain out of the public eye. Admit it: other than perhaps Clarence Thomas (who had his own Star Chamber Inquisition over a generation ago), and the inimitable Ruth Bader Ginsberg, would any of you recognize any current members if you bumped into them on the street? Stephen Breyer? Elena Kagan? Samuel Alito? C’mon!! They keep quiet and stay out of the public eye for the holiest of reasons, so we really don’t know them as human beings.

In addition, though it pains me to state it, very few of them are, or ever have been, particularly easy on the eyes. Consider if you will, William (Cue Ball Comb-over) Rehnquist – a fine jurist but hardly a movie matinee idol. The same can be said of Thurgood Marshall, Warren Berger, Melville Fuller, etc.

I’ve done my due diligence here, and have learned that these protocols of demurral began with one Roger Brooke Taney, who held the “first-among-equals” post from 1836 to 1864. History has not been kind to Jolly Roger, and perhaps rightly so, due to his unfortunate role in the Dred-Scott decision which as much as anything placed us firmly on the path to Civil War. But we do owe a debt of gratitude for him for being so homely that nobody ever wanted to look at a Supreme Court Justice for the last 15 decades:

Just pipe those jowls – why they are gruesome enough to make Richard Nixon (not exactly a jowl lightweight) green in his grave with envy.

So whatever else happens now that the Supremes are able to take the field with a full line-up, let’s agree that while we can expect them to do important work and write soaring opinions/dissents, they should, by all that we consider sacred, avoid the cameras at all costs – including or maybe even especially BK.

But now this is over, and we can turn our attention to the vast and vexing problems of how to trade these maddening markets. And make no mistake – this is a BIG issue, as, from my perspective, this rapidly elapsing year has been the most difficult performance interlude in this rapidly elapsing decade.

As predicted in this space for several weeks, the volatility bands across almost all tradeable instruments have widened considerably, and I’ll remain perched on the limb I have placed myself by stating my belief that this will continue. It was, of course, a very difficult week for global equity indices, which, after something of a rousing start, came plunging towards terra firma in rather rude fashion over the last couple of sessions.

Maybe some of this is despair over the undignified doings in Washington, but the handiest catalyst was the alarming selloff in global bonds. The puke in our govies actually continued across the entire sequence, and I will cop to some surprise at the vigor and sustainability of the selloff. While everyone was obsessively focused on the 10-year note and 30-year bond, my own attention was also fixed on the 5-year, which not only breached the unthinkable barrier of 3%, but, at 3.06%, resides at levels last seen 10 years ago -- almost to the day when the investment world was just waking up to the horrific short-term problems ensued from the Lehman bankruptcy.

Of course, it’s been quite a while since the Big 3 Central Banks all came out as aggressively hawkish as they have been over the last few weeks, but in the U.S., this is nothing particularly new. The FOMC has already raised overnight rates more than a half-dozen times, and everyone knows they’re not done. Yes, the Fed is rolling down its Balance Sheet, but at a very moderate and civilized rate. Over the course of the somewhat unexpected upward shift in the yield curve over the last rolling month, I count a reduction of holdings on the order of less than 1%. And, for what it’s worth, we’re still above the austerity threshold of $4T. Similar moves in Brussels and Tokyo are, at present mostly rhetoric.

So with respect to the big bond selloff, I’ve been asking myself the following question: why now? And I can’t come up with an answer that satisfies me. And as such, I wonder if it is sustainable. Of course, I can point to any number of glib, rate-rise supporting catalysts, including a strong Jobs Report (particularly Hurricane Charlotte-adjusted), an impossible-to-ignore rise in Crude Oil prices, Amazon’s cheesy, politically motivated minimum wage move, and, of course, the encouraging and somewhat surprising surge in Q3 GDP estimates:

If the Bulldog government economist forecasts from the Atlanta Fed are correct, and Q3 clocks in above 4%, it would be quite a coup. And there are some corroborating data points, perhaps most notably those tied to Jobless Claims, Non-Manufacturing ISM and Factory Orders.

We’ll have more information by next week’s installment, particularly after the BLSt releases September inflation numbers. I don’t think they’ll move the needle much, nor do I believe that a p-less 4% is much of a justification for a bond fire sale .

So I’m not entirely convinced that the bond selloff is sustainable, and on a personal level, I’m sorry to offer this prognostication. As my 59th birthday approaches, I find myself with no debt (not even a mortgage), but with enough money in the bank to wish for yields above the 0.00001% that I am currently amassing in my savings accounts.

But I’m just not sure that rates can hold at this levels, much less climb to thresholds that would represent material comfort to me during my rapidly approaching dotage.

Because while I haven’t written about this in many weeks, I continue to believe that there is a shortage of supply of investible securities on a worldwide basis, and this includes both equity and fixed income instruments. Too much QE cash is still sloshing around, and a lot of it needs to find a home. At current levels, to say nothing of yields much higher, government bonds look like cozy landing spot to me.

The same can be said of equities, perhaps even more so. The world has fewer stocks to own than ever before, and while the available inventory is expensive, it’s likely to remain so, because there’s just not enough supply to feed ravenous investment portfolios. I therefore counsel that at levels much below Friday’s close, or, heck, even at current valuations, favorable and elusive entry points are now available.

Yes, it’s going to remain volatile. Among other matters, for the first time this year, the growing chorus of concern about excessive debt levels are starting to reflect themselves in the credit markets, and this across the lending quality curve:

A passel of this paper is coming due over the next couple of years, and refinancing it is likely to be a sloppy exercise. But hey, why worry about what might happen in a couple of years? What I foresee that is within my field of vision is an extension of the mean reversion cycle that we’ve been enduring over the last rolling quarter and beyond. If I’m right, somewhere in here, there’s a bid for both stocks and bonds.

But that’s my secondary call; mostly I think we’re in for a sustained set of sessions characterized by high vol. There is a truly formidable amount of information on the horizon to assault us, and it is likely to bring a mix of delight and despair. Earnings look remarkably strong, and the macro data appears to be, at minimum, solid. But we do have a critical election on the horizon, and I think that qualitative information may be politically and financially impactful. I won’t inventory all of this, but it’s obvious we need to keep an eye on China and even Iran; pretty much anywhere that political rhetoric might move the polls.

I’m going to close with one last shock-worthy prediction: I have a vague hunch that Mueller (remember him?) might drop some type of interim report over the next few days. In general, I applaud him for his reticence, but if he’s the political animal that I suspect he is, such timing would fit the script perfectly. He wouldn’t need to go beyond innuendo to do a great deal of damage.

So it’s tricky out there and I must urge caution. Of course, I’m here to help, but you won’t find much of me on any media forum. After all, who’s to say that someday they won’t call my name to serve on the big bench? If so, I don’t want to blow my chances through over-exposure. I’m not a virgin, am mostly a teetotaler, and don’t think I resemble either Kavanaugh or Taney. But if I am to urge caution upon my readers, I must lead by example. BK: if you’re out there, I suggest you do the same.

TIMSHEL

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