Wall of Worry
While we are sure there are considerably more major events that deserved "worry" status in 2013, the following 10 'crises', as LPL Financial notes, represent the tempests-in-a-teapot that sum up the wall of worry in 2013. Of course, for your convenience, we provide a hint at what 'calmed' the anxiety as anyone fearful was instantly water-boarded by a pipe of Central bank liquidity the likes of which has never been seen...
The risk of a more meaningful reversion is rising. It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout. Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to. This is the danger that exists today. Are we in the third phase of a bull market? Most who read this article will immediately say "no." However, those were the utterances made at the peak of every previous bull market cycle. The reality is that, as investors, we should consider the possibility, evaluate the risk and manage accordingly. With the current bull market now stretching into its fifth year; it seems appropriate to review the three very distinct phases of historical bull market cycles. While the current bull market cycle may not be set to end tomorrow; it seems sensible to take a pause to question mainstream beliefs.
For all expectations of a big jump in US futures overnight on the largely priced in Janet Yellen nomination announcement which is due at 3 pm today, the move so far has been very much contained, as expected, with a modest 90 minute halflife, as the markets' prevailing concern continues to be whether the debt ceiling negotiation will be concluded by the October 17 deadline or if it would stretch further forcing the government to prioritize payments. There is however some hope with Bloomberg reporting that some possible paths out of the debt impasse are starting to emerge with less than a week before U.S. borrowing authority lapses after Obama said he could accept a short-term debt-limit increase without policy conditions that set the terms for future talks. Whether this materializes or just leads to more empty posturing and televized press conferences is unclear, although as Politico reports, the stakes for republicans are getting increasingly nebulous with some saying they are "losing" the fight, while the core GDP constituency is actually liking the government shutdown.
Here are six things to ponder this weekend:
1. Inflation Debate Continues
2. The Obamacare Nightmare
3. The Disconnect Between "Main Street" and "Wall Street"
4. Payroll Number Become Even More Manipulated
5. Congress Living The High Life At The Taxpayers Expense
6. What If The "Fear Trade" Bubbles Up?
- China, the single biggest contributor to global growth over the past decade, slowing markedly.
- World trade now flirting with recession.
- OECD industrial production in negative territory YoY.
- Southern Europe showing renewed signs of political tensions as unemployment continues its relentless march higher and tax receipts continue to collapse.
- Short-term interest rates almost everywhere around the world that are unable to go any lower, even as real rates start to creep higher.
- Valuations on most equity markets that are nowhere near distressed (except perhaps for the BRICS?).
- A World MSCI that has now just dipped below its six month moving average.
- A diffusion index of global equity markets that is flashing dark amber.
- Margins in the US at record highs and likely to come under pressure, if only because of the rising dollar.
Importantly, Cypriots and other Eurozone citizens who own gold saw the value of their holdings rise 2% in euro terms.
The demise of gold and the "death of the gold bull market" is "greatly exaggerated" says Mr. O’Byrne.
He said that while the risk from Cyprus has abated, in the light of capital controls in EU country and the treatment of Cyprus, there are now huge question marks over the future of the European Union itself.
A dispassionate discussion of the impact of the sequester and implications for investors. I look also look at how the dollar has performed since QE3+ was announced and it is not what many might have expected.
In the 40 years or so since the end of the Bretton Woods system, we have seen competitive devaluations occur again and again. However as SocGen notes, it appears Japan just keeps coming out on the losing side. Based on Real Effective Exchange Rates (REER), Japan's currency is 80% stronger now than in 1971 while the US (and South Korea interestingly) are about 40% weaker. The Euro has remained in a relatively stable band as the rest of the world has de- or re-valued itself. The 20% or so drop in the JPY so far under Abe's guidance appears a blip on the REER radar screen compared to its peers but, at the other end of the spectrum, SocGen suggests the USD is notably under-valued on a Purchasing Power Parity (PPP) basis - even as 'the strong dollar policy' remains verbally in tact.
With central banks sponsoring their own (and each other's) bond markets, and every financial entity owning its own and each other's bonds, Santelli pops his lid over the Pollyanna business leaders (like Bob Lutz - proclaiming GM's European business is troughing because Goldman Sachs is buying European bonds) are pointing to market-based bond prices as indicative of optimism and that economically the worst (must) be over. "Forget the wall of worry, this is the wall of weakness", Rick rants, and the interconnectedness of global markets now means if Goldman is right (as we noted yesterday) that Treasuries are 200bps rich then how does that reconcile with growth that is just bumbling along as evidenced with today's GDP prints from around the world (and surging unemployment). Just what is the Fed going to do to save the world this time? - buy $160bn more per month if we see global weakness restart? How do traders react to slowing global growth? Buy Treasuries? Indeed, the good is bad but bad is better meme seems back and being a trader is, as Rick notes, nigh on impossible.
Divergence in thinking.
Still long-term bullish as nobody notified us that the Fed has withdrawn QE3.
Citigroup's macro risk aversion index just tested record lows (i.e. record high complacenecy levels with regard investors' view of macro uncertainty going forward). Coinciding as it did with Bernanke's all-in moment we wonder if we just saw the 'peak complacency' moment as the wall of worry was officially scaled only to find that the grass is indeed NOT greener on the other side. For sure, it would appear that all the talk of bearish sentiment as the driver of the nextt 'secular' leg in stocks seems just that - 'talk'.
The best gains are behind us especially in the wake of the Fed's vacuum and the lack of any meaningful and sustainable upside catalysts.
While we are bombarded with talking heads telling us that there is money-on-the-sidelines and everyone is so bearish with the market climbing a wall of worry, the reality - as we see across multiple asset classes - is that investors are overweight risk assets (e.g. credit investors overweight IG and HY and mutual fund cash at record lows), near-extreme levels of bullishness (AAII and Put-Call Ratios), near extreme levels of non-bearishness (AAII), and yet credit investors believe markets are overvalued (though still buying) even as IG and HY bonds are seeing near-record highs in advance-decline.
A week ago, after peripheral European bonds soared and yields plunged on more hype and more promises that the ECB may monetize debt on the one condition that insolvent countries hand over sovereignty to the Troika ala Greece, we were not all surprised to learn that "suddenly, nobody in Europe wants the ECB bailout." And why should they? After all, The whole point of the gambit was to lower bond rates, which happened, which would allow insolvent government to stack even more debt courtesy of lower rates on top of record debt, taking the insanity of the old saying "fixing an insolvency problem with liquidity" one step further, and revising it to "fixing an insolvency problem with more insolvency." Furthermore, if the mere threat of the ECB stepping in and crushing any shorts or supporting longs was enough, why even bother with actual intervention. Simple: even infinite monetary dilution has its limits. That limit is and always has been cash flow, because a central bank can only dilute wealth, never create it. And for Spain said limit is approaching fast.