To use Bob Dylan’s legendary lyrics, for better or worse, “the times they are A-changin”. Just in case you hadn’t noticed: Central Banks do not want to change. But you can’t stop the species’ evolution, and holding on to an obsolete model is not a viable strategy. They ought to know better.
Let’s forget Central Banks for a while. When talking about embracing the future, citing Cinderella has become a classic. Had she walked back to recover her shoe, she wouldn’t have married the prince. To all appearances, she did best not looking back. That is, provided she wanted to become a princess, because, in fact, she never asked for a prince -but a more mundane night off (and a dress). Any doubts? Read the story once again!
That goes a long way to corroborate that we never know what’s next, and, even if we did, we might be unable to single out the best available option, or the one that will work best for us. The world is now moving really fast, and my perception is that tectonic social and economic moves are accelerating. An unfortunate outcome indeed, because I don’t like where we are heading (nobody should), and because the speed of events inevitably unleashes some unwanted bad vibes. We all like to move at a more leisurely pace, particularly when facing deep and unpredictable social and economic changes. And we all feel the fear of change as well, even though, as Roosevelt once said, the only thing we should fear is fear itself.
Life is like cycling, to keep our balance, we have to keep moving. It takes courage to do so because, in times of change, moving can be jeopardous. Trading markets today generates feelings similar to sailing on a reach, flying our maximum size asymmetric spinnaker, on a thirty-knot breeze. Exhilarating, and, of course, great fun -but emotionally tiring if it goes on for long.
Constant adrenaline shots are unhealthy, and if you’re not careful, following very tiring days, you end up sleeping on your toes as well. Asian markets provide their fair share of trepidation. We get sparse moments of rest, even in these stalemated markets. No matter the reassuring establishment messages, we are all aware of the precarious state of both our global social contract, and global business model -low implied volatilities, and CB controlled markets do not fool our inner traders.
The result is we humans trade less, a lot less. Trading volume in equities came off a time ago, and bond and currency volumes are taking a beating as well. Only cyber traders subsist, they do not suffer angst, and they do not need a full night’s sleep. To CB delight, we, independent money managers and individuals, are trading less and less in this hazardous environment, and that facilitates rigging operations. Banks are not that happy about it.
It does look as if CBs are still in control. So, in the midst of this precarious, uneasy calm, it comes as a surprise to see more and more global strategists at core establishment banks changing sides ostensibly, and making sure everybody makes a note of it. Bank of America, JPM, Citi, and belatedly even establishment darling Goldman Sachs, are signaling a clear risk-reward imbalance for equity investing. They are flagging risks the traditional way: “small upside, large downside perspective for equity investments”. No VaR nonsense this time around (we all know implied probability inputs are POMO desk massaged figures). The result is that smart money ebbs out of equities in the US, for 14 consecutive weeks, and even buybacks are weakening.
Hard to believe, the reality is that, amazingly enough, prices haven’t budged, even as recession probabilities mount, and FOMC members put rate hikes back on the table. POMO desk price control is doing fine. Nothing comes for free though. As a downside for extend-and-pretenders, market intervention is taking place more and more in the open. Above certain levels of intervention, stealth techniques are no longer possible. We now see what looks like a direct intervention on a nearly daily basis. You know the adage: if it looks like a duck, swims like a duck, and quacks like a duck, it is probably a duck. The S&P 500 is rigged!
I think the FOMC’s actual policy stance was implicitly exposed by some Williams (San Francisco Fed) comments on the risks of a market plunge because of policy normalization. They are trying to put interest hikes on the table again while controlling market moves exhaustively. They probably think that if they can handle the initial headline impact, as a market mover, everything will be OK. To me, this is wishful thinking again. Market pricing follows valuation rules that are only invalidated when monetary aggregate variation takes a front seat. It is thus an impossible feat to maintain a pricing level related to previous printing and ZIRP levels, once these are gone. If the headlines do not move the market, market players will, only later on. Markets, like water, always end up finding a way forward. They only need time. Continue reading