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.
No wishful thinking allowed today: we must not forget the Fed is still on top. They have unlimited amounts of money to spend, so they can buy the entire market, and consequently, we may finally postpone a recession and a market price disruption again. That won’t help Janet, for sure already in a personal depression. She must feel very lonely in the Eccles building when she realizes she is the only “wealth effect” upholder left (save for old pal Heli-Ben). Don’t you worry Janet, it’s not personal, you should have known that “nobody wants you when you’re down and out” (Lennon). From now on it looks as if you are mostly on your own, as Keynesian priests jump ship “en masse”.
Actually, every single time I hear of a new convert to Austrian economic thinking, it makes me wonder. Is this the good one, when obsolete Keynesianism finally dies, or is it just a new iteration of a time-worn contrarian signal. If everybody gets bearish, the market will not fall because there’s nobody left to sell. On the other side, if the missionary (the Fed) holds on to his credibility, the common knowledge game might endure. And this ridiculous mispricing will have to stop at some point. I can’t see an end to this, but an end there must be … sometime, somewhere over the rainbow!
If that sounded like tortuous reasoning, it was. Like Cinderella, I’m sick and tired of all of this, desperately need a couple of nights off, and do not really know what will turn out to be best for me in the short run. Well, a prince for sure I don’t want. Maybe it is best for me to help postpone the urgently needed global macro-medicine for as long as I can -after all, my actual standard of living is more than decorous. I may even have to thank Heli-Ben for these extra years of stupendous living! Never say never to something you never dreamed of doing!
In the Keynesian reviled long run, I do know what I want. I can easily describe my dreamed economic nirvana. Getting there is the problem because we have to go through a profound depurative process -with multiple purposes. We must achieve an improved wealth and income distribution, generate a substantial risk repricing, introduce decent real interest rates, and ensure vast debt deleveraging. To cut it short, those ambitious targets with “beautiful names”, imply massive losses for the financial system, and a global overhaul of the establishment. There is no alternative. We can’t postpone change forever. Somehow, I feel uncomfortable in the red and want to cut my losses, because I see the easy money trade as a negative alpha generator. I’d like to pay the piper now and get out. My inner tactician says we are sailing the wrong side of the course. We have to tack asap!
Looking out five years after this depurative process (whenever it takes place), things won’t be easy either. The tough part will be done, but it will take some time for the new socio-economic environment to adapt to some new trends. Going from big to small, and from ponderous to nimble, is the new central trend of the game.
Scaling down everything is a must. From population growth to global institutions (UN. IMF. WB. etc), Countries, Parliaments, Governments, Public Sector overhead, too big to fail corporates, and more. We will also have to wave goodbye to productivities of scale and return to classic, human creativity driven, productivity growth. Easier said than done.
A nimble and careful use of environmental resources is an inevitable Hobson type of choice, that can’t be delayed much longer. And we have to achieve that, together with a renewed thrive for educational excellence. A return to the creativity of the well-educated individuals as opposed to Corporate, profit inspired research and development target areas. Not difficult to implement, if social media transmit this message ad nauseam to the global population
I have written about this in the past (see “small is beautiful”). I am still there in the concept, even as an individual. With age, we all go somewhat overweight, and scaling down, every now and then, is an indispensable prophylactic measure. More on this global lean and mean proposition, in other posts to follow.
A market update is mostly unnecessary. Things have not moved much over the last three weeks, and we are still waiting for Godot. I will give you some flashes on my view of things.
- The last stream of hawkish messages from FOMC members validates my USD bullishness. They will try to control the upside, but EURUSD is a short, and USDCNY a cautious long. I would not use heavy leverage because this is a CB controlled market and they can move the dollar in any direction fast. Anyway, no USD shorts for me, save for very short term trading windows.
- Choppy, sideways action in most currency pairs is set to continue. SNB and Riksbank will continue to devalue their currencies as much as they can. The SNB could push EURCHF all the way to 1.15 but the Riksbank does not have as much leeway. I think 9.50 is a top, and if you are patient nine even is still a commonsensical target.
- No credit risk or duration risk at this stage. No duration shorts either. Short term expect more flattening of curves, but long term, a system reset would bring back “normal” rates.
- I still think credit spread wideners are a (long term) great trade. I made some decent money in my bund-OAT/BTP spread widener while playing counterpart to one of Goldman Sachs trades of the year, and I am still there.
- Shorting equities is a standard routine for me. I am constantly trying to position myself for the big short, but I am permanently on my toes. “Sell and hold your shorts” is incompatible with decent sleep. Any minute a wave of easy freshly printed money can project us above the July 2015 market top.
- The real economy is not doing well. China, Japan, and southern Europe are an accident (a serious one) waiting to happen. The US economy would not be able to cope with any of those black swans. They are not that well off themselves.
That’s it for today. Let’s try to enjoy this spring, and make good on life’s mandate to enjoy the present, because, as Yogi Berra once said, the future ain’t what it used to be.