The Man in the Sauna Hat

Dear Fellow Traveler:

It’s Day 3 of a physical and mental health challenge.

Ahead of this, I joined a gym right around the corner.

This place is three minutes away, compared to the 20 minutes I gave each way to the previous place… and would wait 15 minutes for a lap pool lane.

Few people are in the pool here, which is great, and it’s absolutely quiet on Saturdays.

Given when I wrote today at Postcards around the rewiring of Treasury markets, you could say I’m doing something with my time and energy.

It’s a little increase in my own balance-sheet capacity.

I end up with the same results as the market’s efforts. I get more time.

The best trades are typically boring, but they might also be the most interesting…

I came over here tonight just to use the sauna, as the pool closed early for weather.

Since wrapping up my deadline, I’d been thinking about this chart from Bank of America. It’s a fund manager survey, which. measures sentiment for August.

Last week, we were up very high in the atmosphere for this market. Everyone started the month bullish, deployed cash, increased exposure, and everyone felt good. As you can see, that more extreme level of optimism has a way of cascading like a wave fast.

I didn’t want to write about this chart with the typical perspective that you’d find in a sell-side research note, or a scribble on a SubStack post, or even in the usual way that I write about these sorts of things in a Chart Party.

I wanted to sit on this one for a while.

Which is a great thing to do in a sauna, since sitting is the entire product.

Just me and another man (who was very keen on pouring water onto the rocks repeatedly to the point that we might not know one another was in the room from all the steam) sat in the room.

I looked up and saw that the clock said 6:15 pm.

A second later, a bald man walked past the door wearing a towel and nothing else.

Three minutes later, that same man walked in wearing absolutely nothing this time…

With the exception of what looked like a Rastafarian fishing hat… He sat in the corner.

I kept my eyes through the glass, watching the other man pour more water on the rocks. I’ve since learned this was called a sauna hat, a piece of equipment usually made of wool to protect the top of the head from heat.

But at that moment, I was just a guy sitting in a hot wooden room wondering why the universe had sat me beside a naked fisherman.

And - as I thought for a moment - I allowed the universe to rhyme, even if this was the first, and possibly more random interpretation.

The Jackson Hole Symposium starts this Thursday. Fed Chair Kevin Warsh will speak on Friday, and people will hang on every word, while I parse through the research to understand how they plan to create more balance sheet capacity (after all the other analysis that I’ve done in the last few days).

One of the divine and random accidents in financial history is why Jackson Hole is the destination for this annual central banking summit. It started in Kansas City in the 1970s, but moved to Wyoming in 1982 for one reason.

The Fed Chairman Paul Volcker was a fly fisherman, and they wanted him to attend.

Jackson Hole is famous for trout fishing, so they made all the other central bankers, select media, and research staff fly to Wyoming, which isn’t typically a direct flight.

Volcker came, and 44 years later, everyone still goes to Wyoming to try to parse the great scripture of the Federal Reserve, partially because there was a gamble on whether that guest-of-honor would arrive.

And it’s all fitting, since the modern era of central banks convenes every August as bail. So, an hour ago, three feet from me, a naked man sat wearing what resembled fishing gear.

And so… as all thoughts go, I thought of fishing and finance, and quotes about both, and returned to a statement by Warren Buffett. He famously said that when the tide goes out in markets, we find out who has been swimming naked…

And that this man was not the fool in the room. He may actually have been the only person properly dressed for this week’s Jackson Hole event based on the chart above, where everyone remains in a state of perpetual bullishness.

This was a room… designed to strip everything away: no phone, no wallet, nor keys. Absolutely nothing to defend or something that could be a problem if conditions changed.

He just protected his head and sat there…

Now again… back to the chart… Fund managers were extremely bullish midway through August.

Cash levels fell to around 3.5%… and leverage had started to return… Everyone walked out pretty far into the water of these markets.

As Jackson Hole arrives, we will hang on every word… and the threats are here.

Warsh could sound even mildly hawkish.

Bond yields could keep pushing higher into year-end.

Yields could press quicker than the system rewires to allow that extra balance sheet capacity to absorb new issuances and new auctions.

These are all things that can lead to a dry patch in liquidity and for people to all start heading to the exits at the same time. There won’t be some announcement, as the water just suddenly gets shallower and starts to move from the chest down to the ankles… That’s where we find out what people were hiding under the river.

As I thought all of this, the man in the hat said nothing.

I stopped thinking for a moment, and looked back up at the clock.

It was still 6:15 on the face.

Turns out… the clock was broken… an appropriate conclusion to my time...

It’s all happening at once… Fund managers are bullish as Jackson Hole arrives…

Bond yields are screaming, while we try to make room for more collateral.

And fishing and finance (or even surfing and finance) find their collaborations.

It seems like time had stopped. After a few minutes I got up and left.

He stayed behind, still no movement.

Right now, I still don’t know which one of us understands the market better.

I’ll be back tomorrow with my latest version of What Are We Missing.

If you missed last week’s episode, it’s right here.

Stay positive,

Garrett Baldwin