Monthly Archives: January 2017

Lost in translation.

The more things change, the more they stay the same.

Gary Lineker synthesized the essentials of soccer in a memorable if somewhat simplistic quote. “Football is a simple game. Twenty-two men chase a ball for ninety minutes, and at the end, the Germans always win.”

When it comes to finance, the same postulate applies. Politicians, and Politburo members (read central bankers), or us fund managers and analysts of all kinds, come and go, but “Government Sachs” is the permanent result. As the French (Karr) would put it, “plus ça change plus c’est la meme chose”.

Trump is a teenage-minded social disruptor, not an economic game changer. Trumponomics, or reflation, are nothing new and are not going to be all that different. Expectations with Obama were even higher, and the economic result at the time was … more Government Sachs (with the Obamacare disaster as a poisoned heritage)! Trumpist honeymooners, please come back down to earth. Deflation or reflation, more QE, yield curve control, infrastructure spending, or some helicopter money, hardly matter -in the neglected long run.

No president can change deep secular trends. Like global warming, debt overhang, growth to debt increased dependency, the factual bankruptcy of not few sovereigns, aging society, technology-based job destruction, the deteriorated educational level of the workforce, or unfeasible promised entitlements. On these issues, Government Sachs people argue that the glass is half full. I won’t argue about it -it is not a worthwhile contribution to engage in estimating the degree of fullness or emptiness.

Half full or half empty, these issues are serious stuff. Changing the unnerving, deep structural trends, takes commitment, hard work, a couple of decades, and it sure implies turning things upside down. This US President and his Government Sachs team are certainly not interested in turning this “winner takes it all” economic model upside down. They want to remain on top. They are a club of smart, self-serving billionaires!

So, what’s all the market fuss about?

I talked about all those 2016 liquidity enhanced financial price swings in my last post, and I stated that the narrative follows the facts. I still think so. Let me add something else: behavioral economics runs the show today. The success of the ongoing (quasi aeternal) Central Bank put, and constant risk suppression by hyperactive POMO desks, has finally modified the behavior of economic agents. They feel that risk has effectively been outsourced to Draghi, Yellen, Kuroda, and Co. Consequentially, and for as long as we are in a context of negligible yields for IG bonds and Sovereigns, speculation with term premiums and equity will remain rampant. There is no alternative parking for the smart money, so the show must go on. We will bet the ranch on every twist and turn in whatever narrative “du jour“.

Sadly, it follows that liquidity pumped swings, fabricated credit booms (like the PBOC turbocharged credit boom in 2016), and outright POMO manipulation, have all but taken me to being “lost in translation”. So far, I still know where I want to go, but I wonder where and when the next surprising/unexpected move is going to flare up. Short term handling of the fund’s NAV has become exhausting -you never know what’s going to hit you next. Sometimes you are unable to find out what hit you last!

Market price swings are getting worse, and even more unpredictable. And it’s not a question of just being humble and looking up what somebody else has to say -in order to find the lost thread in your narrative. I do that daily, and, unfortunate as it is, I can see that I am not alone in my musings and contradictions. The latest “pissing” contest between Gundlach, Gross, and Minerd, on the TA limit needed to declare the end of the bull market in Treasuries, is a case in point. When it Is all about how to use the ruler to define your trades, it is an ominous sign for us all. With all respect to classic TA (I use it as a tactical discipline), rulers are becoming much too prominent. I crave for substance. Continue reading