Google: “First Drawbridge”
If Google is AI 1.0, it’s thankfully – by design or folly – not yet caught up to the technology’s capabilities, which better scare the tar out of us. Try as I did to research “Quban,” the search’s response to my two-word query, the engine insisted on illuminating me about a different bridge off Cuba. Infuriated, I dug deeper to learn why ‘Quban’ was so elusive. It seems that 4,000 years ago, the world’s first drawbridge on the Nile’s east shore, across from the better-known Dakka, was a victim of antiquated archeology. As Lake Nasser rose, the mudbrick structures were simply reabsorbed. Until swallowed whole, Quban was a commercial hub, controlling the Wadi ‘Allaqi gold mines. Some 6,699 miles due west is Cuba, which Google instructed me by force via pages of search results, thought to have been home to pyramids and gold of its own, connected as it was 6,000 years ago by a 100-mile land bridge to the home of the ancient Mayans.
Continuing a two-decade quest, offshore engineer Paulina Zelitsky and her husband, Paul Weinzweig breathlessly await future explorations off the Guanahacabibes Peninsula on Cuba’s western tip to better investigate the “distinct shapes and symmetrical designs of a non-natural kind.”
A non-natural gap that’s opened between initial and continuing claims, cleverly captured by today’s guest Feather cartographer, Tier1 Alpha, was what originally set my mind’s eye on drawbridges. The idea of great big manmade chasms, that open before an inevitable close, captures one of the many anomalies that typified 2023, the antithesis to the theme I foresee of returning to the “basics” in the coming 12 months.
As we’ve explained of the prior 12 months, two related change agents made all the difference in official reporting. The first was the white-collar nature of the initial wave of layoffs. The nucleus was Silicon Valley, home of the prima donna worker who would never have deigned to do anything as distasteful as file for unemployment insurance. Their cash cushions were deep enough to sustain the lifestyles to which they’d become accustomed, overcompensated as they were. Plus, they were on the receiving end of even cushier severance packages.
And then there was the subtle shift in filing requirements for cost-cutting companies. Protocol once dictated that firms pressing through with headcount reductions in excess of 100 had to file notice with the state and provide the severance automatically triggered. If under that threshold, the practice was rare. Contrast a pre-pandemic zip file with one for 2023 and you’ll see the ‘miracle’ of sub-100 filings. As Tier1 notes, “Despite a historical high in the number of people working both a primary and secondary job, initial claims remain low, not yet breaching the 300,000-mark, considered significant enough to impact the unemployment rate meaningfully.” As for those who’ve lost work, good luck finding a new gig – the drawbridge remains wide open (upper left chart).
A separate 2023 feature has been ‘0DTE’ options, which expire at the end of the trading day and help ‘explain’ stocks’ monster rally for 2023 as the attractiveness of selling these options has pulled equity volatility back into single digits. Short vol equal long equity with a twist – the options sold must be purchased by option market makers and the rapid time decay of these options facilitates a nearly constant drumbeat of motivated index buying. Per Tier1, the sole remaining concern for 2023 calendric pull-forward: “We can almost taste the Target Date Fund rebalancing ahead of end-of-year illiquidity. With the strong rally in equities in November and December, these strategies are going into the end of the year with equities significantly overweight. The ‘active’ rebalancing process may have begun, at odds with the prevailing narrative blaming 0DTE options (upper right chart).” For good measure, roughly 90% of the stocks in the S&P 500 are trading north of their respective 50-day moving averages, in the 99%-ile over the past decade, “which is even more unusual as the market is sitting near an all-time high.” The flipside of this argument is equally compelling – “Just Don’t Sell Us!” was CNBC’s Jim Cramer’s mnemonic for JDS Uniphase; perhaps for 2023 we can repurpose it for all assets. Even small caps and bonds are now sitting on 2023 gains and the temptation to hold on to sell until 2024 is palpable.
Consider today’s last two charts to be mirror images of one another, albeit a bit in the abstract. For starters, with a hat tip to Charlie Biello, “The University of Michigan Consumer Sentiment Index has now been below 75 for 29 consecutive months, surpassing February 2008 – May 2010 as the longest period of extreme negative sentiment on record.” How, I wondered, would that chart look against the S&P 500? As you see, this open drawbridge speaks to QI’s theory that the expansion that began in June 2009 was merely interrupted by the biggest monetarily monetized fiscal stimulus in U.S. history, one that helps explain why many drawbridges have yet to close (lower left chart).
Finally, we get to the final of the four, hand-crafted by Tier1 Senior Executive Advisor, Michael Green, at my request. Look first to the inset, to the beta (volatility relative to its benchmark) of Dr. Lacy Hunt’s pure prism into money in the system – Other Deposits within U.S. Commercial Bank Liabilities, or ‘ODL’ – vis-à-vis the size of the Federal Reserve’s balance sheet. While there’s no ‘general visible rule,’ per se, you can see that the first iteration of Quantitative Tightening (QT) had a consistently negative beta to ODL. That negativity abruptly ended at 2019’s outset, after Jerome Powell pivoted hard, apologizing for his rookie days of castigating Quantitative Easing in 2012.
As for what the New Year holds, what can be said is it begins nearly $2 trillion skinnier than yearend 2022 when the Reverse Repo Facility (RRP) peaked at $2.5 trillion. Ozempic’s got nothing on the money-market funds. Cliffhanger-style, all we can deduce is that the downward slope of the trajectory off of which beta was thrown in December 2022, will be recaptured once the RRP nears depletion in coming months…