Over the past few weeks, one recurring theme has been that experienced traders and analysts have simply given up trying to figure out the market, and no longer have an idea how to trade what for the past 7 years has been a centrally-planned policy vehicle. As a result they are getting exasperated, confused, desperate and simply angry. First it was Richard Breslow; then it was Albert Edwards who was clearly disgusted when he uttered the following appeal:
I’m not really sure how much more of this I can take. So here we are 5, 6 or is it now 7 years into this economic recovery and it still remains pathetically weak. And so it should in the wake of one of the biggest private sector credit bubbles in history. The de-leveraging hangover was always going to be massive and so it is. Quick-fix monetary QE nonsense has made virtually no difference to the economic recoveries other than to inflate asset prices, make the rich richer, inequality worse and make Joe and Joanna Sixpack want to scream in rage. They are doing so by rejecting the establishment political parties and candidates at almost every electoral turn and seeking out more extreme alternatives at both ends of the political spectrum. And who can blame them apart from the chattering classes?
I have not one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result. The only people who will benefit are not investors, but anarchists who will embrace with delight the resulting chaos these policies will bring!
Today, we get more of the same, when first Richard Breslow once again rages at a “market” dominated by central bankers, followed by Eric Peters, CIO of One River Management.
Here, first, is Breslow with “Market Can’t Assume Away the Coming Volatility“
Central bank reaction functions don’t break. They’re just frequently and miserably misunderstood. Say what you will, strict rule-based decision making can’t work. Analysts discuss ad nauseam what policy makers are getting wrong and then are shocked that decisions don’t fit their narrative.
There is idea paralysis, intractable conflicting imperatives and cost-benefit analysis, both domestic and international, that flies way over the head of some economic number.
The unwillingness or in fact, inability, of those setting monetary policy to always “feed the beast” on cue, is merely a sign that QE has led to dangerous addiction. “Unconventional easing is above all an expectations game, where it is necessary to shock markets,” Goldman Sachs wrote yesterday. If that’s all, it won’t fix the real economy, only buy time while waiting for enlightened fiscal policy. But we knew that.
Also destroyed is investors’ concern and sense of responsibility about evaluating significant geopolitical risks. It’s become market conceit to assume that QE will always provide.
Much ink is rightly spilled on the investing implications of the U.K. referendum and the U.S. election. Before they’re assumed away. The South China Sea, Middle-East and Latin America are treated as having no broader market ramifications. They’re hard subjects and destroy the buy- risk-indiscriminately story line.
China can’t be both savior of Western capitalism and a threat to the accepted world order at the same time.
The European Monetary System was a pain but, at the extremes, worked as a policy brake on craziness. Now we look at Spanish bonds and equities and conclude perpetual 20% unemployment coincides with an economic miracle. The lost generation really is on its own.
We’re condemned to serial bouts of severe volatility having been trained to dismiss real and knowable risks as just improbable black swans.
And next, here Eric Peters of One River:
“Things got so nasty in Jan/Feb that it’s hard to even remember the anxiety,” said Roadrunner, the market’s top volatility trader. “S&P 500 at 1820, the VIX at 28; the pendulum had swung too far,” continued the elusive bird, glancing left, right, up. The VIX recently touched 12.6, a 9mth low. “Thurs and Fri showed the first signs of life in volatility since late-Feb.” The pendulum’s swinging back. “The VIX at 18-20 makes much more sense given all that’s happening in the world. And I’m eyeing gold; there’s options activity for the first time in ages.”
“The Icahn comments about an approaching day of reckoning in stocks was interesting,” continued Roadrunner. “But guys like him always want that. No matter how much stock they already own, they have money to buy more in a panic. That’s how they win big,” he continued. “And Thursday’s BOJ meeting was interesting. But despite the market’s disappointment, it feels like the right thing. Healthy. Central banks can’t keep giving markets everything they want, or the volatility in the end will be catastrophic.” And off he sped.
Perhaps the lament increasingly more hedge funds – and their investors – have about underperforming the market, and the “2 and 20 model now being off the table” has little to do with the inherent talent of traders, and everything to do with the mockery that central banks have reduced the market’s so called discounting mechanism which has now been relegated to the scrap heap and all that matters is frontrunning these very central bankers, who unfortunately have been revealed to be as clueless about what happens next as everyone else.
