It’s important to recognize that a Big Trade is a long campaign made up of dozens of Narrative battles and skirmishes. We won the first battle – and that’s great! – but now it’s on to preparing for the next.

Why did the Fed slap down Mr. Market’s expectations of massive rate cuts in 2024?

Because the most important thing for the Fed is not to be right, but to be believed.

In narrative-world, we have now redefined core CPI to not only exclude food and energy prices directly, but also indirectly. If airfares went up in-line with or ‘because of’ rising fuel prices, then obviously we need to ‘adjust’ those airfare readings for a ‘true’ core CPI, right?

The ghost of Arthur Burns haunts us still.

The latest narrative development I’m seeing is that the US economy has “decoupled” from the other Big Three economies: China, Germany and Japan, and that has a couple of important implications for market-world, I think.

Last week I wrote that the Big Idea (unmoored long-end of rates curve) had been discovered, which always means that the counter-narrative isn’t far behind.

That counter-narrative is Bad News Is Good News TM.

Just in the past week, a new viral thread in narrative-world to support the ‘unmoored long-dated rates’ trade.

We’re reconfiguring the entire ET Pro service to support our Big Idea for 2023: long-dated interest rates are coming unmoored, meaning that 10-year+ Treasury yields and mortgage rates are poised not only to go significantly higher, but to do so in a sharp, punctuated and painful fashion.

Well, it’s been about three weeks since my “feel it in my bones” email describing why I think the next investable (+/- 7% or so) move in equity markets is down rather than up.

I still think that’s the case.

There is a constructed ebullience in the US economy right now, by which I mean that the usual narrative wall of worry that Wall Street uses to grind higher has totally vanished.

And that ALWAYS ends in tears.

Over the past 14 years, Quality, Value and Skill have been useless in professional asset management.

They used to work. They don’t work any longer. But we all act as if they work.

What are we even doing?

I feel like Clint Eastwood has said the line “a man’s got to know his limitations” or something similar in every movie he’s ever appeared in, and we’ve got to know the limitations of our Narrative Monitors, too.

It’s an interesting period of time in the world of professional investing right now, where everyone is going through the old motions and observing the proper forms and using the words and language we’ve been using for decades, but somehow their hearts aren’t really into it.

This week we’ve got a new big note on AI, a new set of Narrative Monitors with several new signals triggered, and two new articles from the past week that bear directly on recent Pro notes. All that and I think markets are largely unchanged from their grind upwards post-banking ‘crisis’ and post-inflation/unemployment ‘events’!

Assuming that Treasury and the Fed have stopped the immediate, fast-motion bank run at First Republic and created a reasonable firewall (and I think they probably have), what’s the impact of this credit freeze on the overall economy? Is this a polar vortex credit freeze that throws us into a nasty recession, or just a mild cold snap?

Last week I wrote that my spidey-sense was not tingling when it came to systemic risk for the banking system, that I just didn’t see the pervasive rot that would create a real worry about the stability of the *system*.

Today my spidey-sense is tingling like crazy.

Over the past week we’ve had one bank fail (Silvergate) and another forced to raise new equity and start protesting-too-much about how there’s no slow-motion run on the bank (Silicon Valley Bank). The question, of course, is whether these two banks are canaries in the coal mine.

Has systemic risk returned to the banking system?

ODTE stands for zero days to expiry, and it’s the catch-all phrase for options that expire the same day they are written.

ODTEs are all the rage, prompting questions on Wall Street like “are ODTEs the tail that wags the market dog?” and “are ODTEs a ticking time bomb for markets?”.

My answer: yes, kinda, but not in the way you think.

I’m 58 years old, and this is the greatest level of direct military confrontation between the world’s superpowers in my adult lifetime.

“Narrative Stability, Hanging by a Thread” is a badly mixed metaphor, but it conveys exactly what we’re seeing in narrative-world these days.

We are in a market where we are one inflation shock or one jobs shock (like the one last Friday) from broadly reshaping the narrative landscape. But for now it’s steady as she goes.

Nothing gets my spidey-sense tingling more than a market that looks benign enough, but has enormous carnage occurring just below the surface. And that’s exactly what’s happened so far in 2023, where risk assets in general and the US stock market in particular have been strong but momentum strategies have been absolutely destroyed.

Whether or not Blackstone and Starwood are successful in maintaining the Story of Adequate Liquidity and preserving their private REIT franchises through this storm depends on one thing and one thing only – how bad is the storm going to get? If it’s a “soft landing” or a “mild recession”, then they’ll sail through this fine. But if it’s a bad recession …

Unfortunately for private REIT managers and their LPs, I think the odds of a bad recession in 2023 went up substantially this week.

I expect Wall Street and financial media to trumpet the “soft landing” thesis pretty loudly over the next few weeks. Is this correct? Personally, I don’t think so. Six months from now, will we have a soft landing or a hard landing? Personally, I think it’ll be a hard landing.

But who cares what I think!

If you are responsible for Other People’s Money, you sever ties with your undercapitalized, overlevered broker before there’s a run on the bank. You get out when you suspect, not when you know for sure. And if your friends are unhappy about that … well, tough.

This is the business we have chosen.

I believe quite strongly that Bankman-Fried should be questioned a) by professionals, b) under oath, and c) in a venue that allows for evidence to be presented, other witnesses to be called, and his testimony to be impeached.

Here’s the script for that!