During a recent trip overseas, a client asked me why I admire Edmund Burk. The question should not have caught me by surprise as we frequently discuss the impact of politics on the markets, but my immediate reflection/answer was to quote W. B. Yeats whose poem “The Seven Sages” called “Burke’s great melody” the epitome of a lifelong struggle for the rights of those who have been abused by tyrannical forces of power. Burke’s political life is marked by the five causes he championed: His advocacy for the rights of American colonists, his fights for the peoples of India against the abuses of the East India Company, his defense of the rights of Catholics in Ireland, his foresight about the terror that the French Revolution could unleash, and his defense of the British constitutional system against royal encroachment. Let’s simply call all of that foresight Perspective. Morley’s tribute to Burke presents a person who made the right calls because he had the right judgment when pivotal issues were presented before him. It is difficult to find persons like Cicero and Burke who are grounded in realism and who can advocate the right politics based on philosophical beliefs.
The great Sienese painters of the fourteenth century cannot be considered part of the Italian Renaissance period of that era because they were still notably faithful to the Byzantine style of painting. The Renaissance produced, throughout Europe, a new style in painting that emphasized realism, naturalness, and a sense of an appearance of a painting that was coming alive and becoming real in front of your own eyes. Let’s simply call this Verisimilitude.
Someone might have questioned the Perspective and Verisimilitude of a market – nudged by the piles of liquidity – that is amassing huge amounts of leverage and margin debt to the tune of close to $840 billion (more than 4% of GDP). The recent failure of the Archegos family office (whose losses – due to leverage – exceeded $10 billion) doesn’t seem to register any concerns for an over-leveraged market. Moreover, the fact that the amount of leverage has doubled in just a year and is more than double the amount of leverage just before the financial crisis of 2007, doesn’t seem to raise eyebrows among the major players either.
More than ample liquidity and extremely cheap credit are the main culprits of such leverage drive. That liquidity is also the main driver of the extraordinary, annualized growth rate that was recently recorded, and which leads to record-breaking profits. Thus, from that perspective, valuation measures look justifiable, especially if the Fed pushes back rate hikes to late 2023 or even 2024. Even the bond market may be registering new perspectives on fixed income verisimilitude. Despite the greater-than-expected rise in consumer prices, the 10-year Treasury bond remains below 1.70%, assuming that such rise is transitory.
Speaking of price pressures, we should note that it was reported yesterday that the ISM Manufacturing Index dropped from 64.7 at the end of March to 60.7 at the of April. That drop in our reading implies shortages (given that the other economic indicators are robust) which, in turn, may be translated into price pressures. The backlog of orders stands at an all-time high, and the result is that the prices paid index rose from 85.6 to 89.6. Similar performances in the past are consistent with an inflation rate of more than 4.2%.
Overall, we would say that such confidence in market efficiency is, in our opinion, a sign of complacency which is never healthy when risks are involved. Those risks could be exacerbated if, indeed, the Fed is quietly releasing funds to the banking system via the Treasury’s General Account. If such liquidity is affecting fundamental metrics, then the prices of those holdings run the risks of a pretty rough landing when such liquidity starts being withdrawn from the system and/or if the price pressures turn out to be more lasting than pure transitory. Under either scenario, the rough landing could turn out to be more damaging than under normal corrections due to the lack of perspective on either side of the trade (lenders and traders).
The Renaissance flourished after the Bubonic Plague in Italy. If a rebirth of the global economy (in the day after Covid-19) is envisioned to be established on new standards and whose infrastructure (physical, educational, technological, cyber, energy, legal, social, trade, financial) will be based on solid foundations, then it might be necessary to consider the consequences of commission as well as the consequences of omission as the foundations are contemplated. The Bubonic Plague spread to Italy from modern-day/Russian-occupied Crimea. The Genoese ships that carried the plague were arriving at ill-prepared ports. The cities (big and small) were not prepared for such social and economic devastation.
Agamemnon may have returned triumphantly from Troy (after a ten-year war), but was soon assassinated by his own wife. The Mycenean fundamentals (read today’s profits) were strong, but the plague was eating his kingdom from within. His home was fragile as his wife was carrying an affair. Agamemnon had sacrificed their own daughter to please the gods (the sin of commission) for favorable sailings as they were departing for Troy. He also forgot that auditing his home affairs is a prerequisite of a rebirth (the sin of omission). After his assassination, catharsis was needed.
Agamemnon’s young daughter (Electra) takes on the task of punishment and catharsis. But should the punishment fit the crime or the person who committed it? Is there room for utilitarian thought (chances of rebirth/reform of those who committed the crime, lessons of deterrence for others) when punishment is carried out? If economic and financial circumstances morph to an amalgam of unsustainable numbers, what form of punishment should the market expect? And would there be another Strauss to compose such a lyrical music celebrating her brother’s (Orestes) homecoming?
Market Perspective, Verisimilitude, and Punishment: Lessons from Euripides’s Electra
Author : John E. Charalambakis
Date : May 4, 2021
During a recent trip overseas, a client asked me why I admire Edmund Burk. The question should not have caught me by surprise as we frequently discuss the impact of politics on the markets, but my immediate reflection/answer was to quote W. B. Yeats whose poem “The Seven Sages” called “Burke’s great melody” the epitome of a lifelong struggle for the rights of those who have been abused by tyrannical forces of power. Burke’s political life is marked by the five causes he championed: His advocacy for the rights of American colonists, his fights for the peoples of India against the abuses of the East India Company, his defense of the rights of Catholics in Ireland, his foresight about the terror that the French Revolution could unleash, and his defense of the British constitutional system against royal encroachment. Let’s simply call all of that foresight Perspective. Morley’s tribute to Burke presents a person who made the right calls because he had the right judgment when pivotal issues were presented before him. It is difficult to find persons like Cicero and Burke who are grounded in realism and who can advocate the right politics based on philosophical beliefs.
The great Sienese painters of the fourteenth century cannot be considered part of the Italian Renaissance period of that era because they were still notably faithful to the Byzantine style of painting. The Renaissance produced, throughout Europe, a new style in painting that emphasized realism, naturalness, and a sense of an appearance of a painting that was coming alive and becoming real in front of your own eyes. Let’s simply call this Verisimilitude.
Someone might have questioned the Perspective and Verisimilitude of a market – nudged by the piles of liquidity – that is amassing huge amounts of leverage and margin debt to the tune of close to $840 billion (more than 4% of GDP). The recent failure of the Archegos family office (whose losses – due to leverage – exceeded $10 billion) doesn’t seem to register any concerns for an over-leveraged market. Moreover, the fact that the amount of leverage has doubled in just a year and is more than double the amount of leverage just before the financial crisis of 2007, doesn’t seem to raise eyebrows among the major players either.
More than ample liquidity and extremely cheap credit are the main culprits of such leverage drive. That liquidity is also the main driver of the extraordinary, annualized growth rate that was recently recorded, and which leads to record-breaking profits. Thus, from that perspective, valuation measures look justifiable, especially if the Fed pushes back rate hikes to late 2023 or even 2024. Even the bond market may be registering new perspectives on fixed income verisimilitude. Despite the greater-than-expected rise in consumer prices, the 10-year Treasury bond remains below 1.70%, assuming that such rise is transitory.
Speaking of price pressures, we should note that it was reported yesterday that the ISM Manufacturing Index dropped from 64.7 at the end of March to 60.7 at the of April. That drop in our reading implies shortages (given that the other economic indicators are robust) which, in turn, may be translated into price pressures. The backlog of orders stands at an all-time high, and the result is that the prices paid index rose from 85.6 to 89.6. Similar performances in the past are consistent with an inflation rate of more than 4.2%.
Overall, we would say that such confidence in market efficiency is, in our opinion, a sign of complacency which is never healthy when risks are involved. Those risks could be exacerbated if, indeed, the Fed is quietly releasing funds to the banking system via the Treasury’s General Account. If such liquidity is affecting fundamental metrics, then the prices of those holdings run the risks of a pretty rough landing when such liquidity starts being withdrawn from the system and/or if the price pressures turn out to be more lasting than pure transitory. Under either scenario, the rough landing could turn out to be more damaging than under normal corrections due to the lack of perspective on either side of the trade (lenders and traders).
The Renaissance flourished after the Bubonic Plague in Italy. If a rebirth of the global economy (in the day after Covid-19) is envisioned to be established on new standards and whose infrastructure (physical, educational, technological, cyber, energy, legal, social, trade, financial) will be based on solid foundations, then it might be necessary to consider the consequences of commission as well as the consequences of omission as the foundations are contemplated. The Bubonic Plague spread to Italy from modern-day/Russian-occupied Crimea. The Genoese ships that carried the plague were arriving at ill-prepared ports. The cities (big and small) were not prepared for such social and economic devastation.
Agamemnon may have returned triumphantly from Troy (after a ten-year war), but was soon assassinated by his own wife. The Mycenean fundamentals (read today’s profits) were strong, but the plague was eating his kingdom from within. His home was fragile as his wife was carrying an affair. Agamemnon had sacrificed their own daughter to please the gods (the sin of commission) for favorable sailings as they were departing for Troy. He also forgot that auditing his home affairs is a prerequisite of a rebirth (the sin of omission). After his assassination, catharsis was needed.
Agamemnon’s young daughter (Electra) takes on the task of punishment and catharsis. But should the punishment fit the crime or the person who committed it? Is there room for utilitarian thought (chances of rebirth/reform of those who committed the crime, lessons of deterrence for others) when punishment is carried out? If economic and financial circumstances morph to an amalgam of unsustainable numbers, what form of punishment should the market expect? And would there be another Strauss to compose such a lyrical music celebrating her brother’s (Orestes) homecoming?