This page has been archived and commenting is disabled.

Guggenheim On The Canary In The Coalmine

Tyler Durden's picture




 

Authored by Scott Minerd of Guggenheim Partners,

Ongoing monetary stimulus is leading to heightened volatility, and the bull market which has been in place since 2009 is becoming overextended. The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors.

Early coal mines lacked ventilation systems, so miners brought caged canaries into new seams to detect the presence of methane and carbon monoxide. If a canary stopped singing – or worse, died – the mine would be evacuated until the dangerous gas buildup could be cleared. Other animals were tried for this purpose, but canaries have become recognized for their natural ability to detect small but potentially lethal concentrations of toxicity.

The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors. Ongoing monetary stimulus is leading to heightened volatility, and the bull market which has been in place since 2009 is becoming overextended. To recount some of the recent disturbing developments, Japanese equities, which have nearly doubled since November 2012, fell almost 10% in three days in late May, and have continued to fall in June. This price move of approximately five standard deviations was eerily similar to the collapse in gold that occurred in April of this year.

The 12% crash in the Dow Jones Utilities’ Average, which occurred within an hour of market open on May 23, 2013, was largely overlooked. Several technical explanations for the crash were put forth, and the index nearly recovered by the end of the day. Oddly, a parallel series of events played out in the Flash Crash on May 6, 2010. Fat fingers were blamed for the outsized sell orders that swamped the market in that technical downturn. Equities, though, subsequently sold off to the lows of that day and eventually moved lower, despite the technical explanation.

RECENT MARKET CRASHES

Crashes that occur in bull markets, irrespective of their causes, do not bode well for short-run performance. The damage from April’s gold crash could take months or years to consolidate and repair. Investors should be prepared for this type of price action in other markets, including high yield bonds and U.S. equities.

Even U.S. Treasuries may not be immune from a sudden contraction. Between January 1, 2013 and June 3, 2013, yields on the 10-year Treasury note have risen from 1.76% to 2.12%. Yields on Japanese government bonds have almost tripled in recent months, indicating they are susceptible to further downside as well.

These dramatic swings are likely a consequence of the rapid expansion of central bank balance sheets and the uncertainty over the pace and size of future monetary accommodation. With new liquidity flooding the system, causing asset prices to rise, many investors believe they are “missing out.” This is especially true for investors who have been underinvested in risk assets such as equities and below investment grade debt, causing them to trail their benchmarks.

Nikkei and 10-Year JGB – Annualized 90-Day Volati lity *

Increasingly extended prices and nervous buyers and sellers have damaged the market’s psychology. Many investors now face a dilemma of whether to jump into the market after the robust rally since November 2012, or wait for a correction. Meanwhile, those holding long positions are becoming more concerned with the prospect that a minor adjustment to quantitative easing could result in a loss of profits accumulated during the past months.

The United States and Japan have improving economic fundamentals, but market participants know that continued monetary expansion is required to drive further positive performance. If the Federal Reserve allows interest rates to rise too much, it risks knocking the legs out from under the housing market, which is the main pillar of the current economic expansion. Investors in Japan are similarly aware that ongoing policy accommodation is necessary to maintain buoyancy in that market.

These waves of monetary liquidity are like the tides of the ocean. It is practically impossible to gauge the direction of the tide while standing on the beach, and certain waves may roll in more or less forcefully regardless of the direction of the tide. The Fed and the Bank of Japan have indicated that they will keep the printing presses rolling, so investors realize that no matter what happens in the immediate-term, the water level will climb over time.

This is where we are today. The tide is rising for U.S. and Japanese markets and asset prices will ultimately move higher. The size and violence of each wave that advances or recedes will continue to increase due to the surge of liquidity from central banks. These tides of liquidity are strong, as are the currents underneath. We must guard ourselves from the risk of being pulled under.

How do we do this? Reducing spread duration and increasing asset quality are two ways. Placement on the yield curve and relative value selection are also important contributors to performance in times like these. We must continue to have discipline as investors. Selling on strength as spreads tighten, and using backups to add to positions are tactics which are likely to serve us well. I do not anticipate that the next few months will be an easy ride, and it appears as though the canary in the coal mine has died. Those who remain in the mine without an evacuation plan are likely to die next.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 06/04/2013 - 22:06 | 3625227 takeaction
takeaction's picture

Just keep silver on sale please..Inflation is hitting hard if you look.  Gas is $4.00 Gallon of Milk (Organic) $6.88, also...2 steaks, range fed, no steroids...$23.00.  My health Insurance just went up again  $379 a month.  I buy this garbage dog food to feed the racoons and it has gone from $12.99 to $15.99 in 6 months.  I don't know how the average "Joe" is making it.  

Tue, 06/04/2013 - 22:09 | 3625240 otto skorzeny
otto skorzeny's picture

I know how-credit cards. Also- why do you feed raccoons?

Tue, 06/04/2013 - 22:27 | 3625284 mayhem_korner
mayhem_korner's picture

 

 

To fatten them up/get a better yield per 'coon?

Tue, 06/04/2013 - 22:29 | 3625287 otto skorzeny
otto skorzeny's picture

I thought that's what SNAP/EBT cards were for.

Tue, 06/04/2013 - 22:32 | 3625292 knukles
knukles's picture

LOL

Wed, 06/05/2013 - 00:59 | 3625466 dunce
dunce's picture

They do not taste like chicken, they taste like greasy pork.

Tue, 06/04/2013 - 22:35 | 3625297 takeaction
takeaction's picture

A 50 Pound bag of garbage Dog Food is $16.00  It lasts about a month.  8 of them come to my back door every night.  They are amazing animals.  Fun to watch!

Tue, 06/04/2013 - 23:56 | 3625394 AgLand
AgLand's picture

If they show up in my yard I discourage them with a BB gun.

If they show up in my neighbors yard they leave with a .45 slug in the garbage can.

I don't want my dog to get cut up or bit.

My neighbor does not like them in his chimney.

Wed, 06/05/2013 - 00:00 | 3625401 bahaar
bahaar's picture

So you got your 'coons addicted to QE. 

Wed, 06/05/2013 - 09:25 | 3625975 Stuck on Zero
Stuck on Zero's picture

A couple weeks ago a racoon tore a huge hole through my roof and got into the attic.  Can someone pass along some good raccoon recipes?

 

Wed, 06/05/2013 - 09:32 | 3626000 Bearwagon
Bearwagon's picture

Sorry, no recipes ready to hand here, but I'd suggest you make yourself a fine, warm bonnet from it's fur.

Wed, 06/05/2013 - 20:41 | 3628183 Lord Koos
Lord Koos's picture

Fun to watch until they figure out how to get into your house, kill your cat, or destroy your garden.

Tue, 06/04/2013 - 22:16 | 3625255 StarTedStackin'
StarTedStackin''s picture

YOU are buying your steaks at the WRONG place!

 

 

 

I sell quarters of grass fed/grain fattened for 2.35 a lb hanging weight......price does climb avery 6 mos. though.

 

 

 

Even the "crappy" cuts are succurent......

Tue, 06/04/2013 - 22:25 | 3625278 Bear
Bear's picture

Do you deliver?

Tue, 06/04/2013 - 22:27 | 3625285 knukles
knukles's picture

Sounds like he shops at Whole Foods....
'Nuff said.

Wed, 06/05/2013 - 05:35 | 3625593 libertard
libertard's picture

Local butcher has 2kg of nice beef for $20 nz. Not sure what that is in imperial/usd but it's pretty good. Far beter than the supermarket.

Tue, 06/04/2013 - 22:07 | 3625235 PeterLemonJello
PeterLemonJello's picture

Just collapse this bitch already. I know that I can never be completely prepared, but this endless drone of nonsense if disturbing my calm. We all know the final outcome, just not the how and when. Get it over with.

Tue, 06/04/2013 - 22:24 | 3625273 Bear
Bear's picture

Enjoy the ride or hibernate like The Bear

Tue, 06/04/2013 - 22:07 | 3625238 otto skorzeny
otto skorzeny's picture

"The US and Japan have improving economic fundamentals"-LOL

Tue, 06/04/2013 - 22:15 | 3625253 The Shootist
The Shootist's picture

The Ponzi schemes are accelerating so fast that they're each getting close to a reboot backed by sound species (gold.)

Tue, 06/04/2013 - 22:32 | 3625290 knukles
knukles's picture

And aside from that pabulum....

 

<crickets>

 

Stuffs going up longer term butcha gotta be careful because in the interim it might go down.
Thanks a bunch, Captain Obvious.

Tue, 06/04/2013 - 22:49 | 3625309 disabledvet
disabledvet's picture

Yeah no shit. First up "girls gone wild in the Hamptons." that's número uno here. Second if you were chasing performance two plus years ago because your job and life depended on it guess what...you got that performance. Simply put the Grim Reaper failed to show up this time around. Go figure. Third...we're still rallying! That says to me it's time to REALLY start going out on the risk curve...there is a point where alternative investment strategies really do have a Yin and Yang effect and an actual economic recovery is the result. Clearly the USA has won "this one"...all glory is fleeting however. "there always some terrorist out there ready to start something" as they say.

Tue, 06/04/2013 - 23:52 | 3625386 Scro
Scro's picture

That's the point where I stopped reading.

Tue, 06/04/2013 - 22:19 | 3625260 DormRoom
DormRoom's picture

Zynga laid of 20% of its workforce yesterday.  Also, it shuttered OMGPOP, a company it bought for $200M a year ago.  The corporate finance culture of build to flip, aided by cheap credit, and borrowing costs, has metastasize to nearly every industry (solar, real estate, media, tech, commodity, etc..).  Is it any wonder we have market crashes about every 7 years or so.

Tue, 06/04/2013 - 22:22 | 3625267 otto skorzeny
otto skorzeny's picture

I often wonder -what would old Hank Ford think about all of these bullshit companies that produce nothing and have NO profit yet are "worth" (on paper)billions?

Tue, 06/04/2013 - 23:08 | 3625332 HulkHogan
HulkHogan's picture

What a terrible stock. On a positive note, FB's PE is 1,980.

Tue, 06/04/2013 - 23:25 | 3625355 ToNYC
ToNYC's picture

Their games have too much kindness missing, and what's missing is coming back to bite their  mysogynist buns.

Tue, 06/04/2013 - 22:23 | 3625271 mayhem_korner
mayhem_korner's picture

Those who remain in the mine without an evacuation plan are likely to die next.

 

The most important aspect of an evacuation plan is knowing when to leave (or the corollary, knowing when not to go into the hole).  Since that is the penultimate piece of intelligence that no one really knows, this post is a pretty useless salad of obviousspeak, IMO.

Tue, 06/04/2013 - 22:33 | 3625293 Bear
Bear's picture

1 + 1 = 2 ... I think I'll stay in my office in the mining operation and go long on canaries.

Tue, 06/04/2013 - 22:34 | 3625295 Pimp Juice
Pimp Juice's picture

This tide feels like a mix of Hindenburg (read: disaster) and Heisenberg (read: uncertainty). Lots of dead canarys in lots of mines.....

Tue, 06/04/2013 - 23:25 | 3625354 q99x2
q99x2's picture

Nice article.

Made me think about the overall assets being puffed up in value without real wealth supporting it and what that might mean.

One thing it means is that the first ones out and into hard assets instead of paper transfers the puffed up asset values at the price they sell the paper into real wealth. They basically rob the central banks of their power (real wealth) which will cause the central banks to have to inflate asset prices faster.

So there is an end despite the central bankers computers being directly attached to stock market indexes.

FIFO the POMO

Wed, 06/05/2013 - 01:03 | 3625475 Dead Canary
Dead Canary's picture

Canaries are yellow, not blue numb nuts!

Wed, 06/05/2013 - 01:30 | 3625498 AON
AON's picture

"becoming overextended"??  you must be joking.  it was overextended months ago. there is no definition for what it is now.

Wed, 06/05/2013 - 01:58 | 3625514 KashNCarry
KashNCarry's picture

You guys have me laughing all the way to the epoc-o-lips!

Wed, 06/05/2013 - 07:49 | 3625688 ATM
ATM's picture

Nice to see some sruff from the Guggi-guy here on ZH.

Wed, 06/05/2013 - 09:34 | 3626003 Toolshed
Toolshed's picture

But why I ask, when the author pens absurdities such as this:

"The United States and Japan have improving economic fundamentals,"

Looks like more sell side BS to me.

"It's all gonna be ok, but you need to keep feeding our machine. Trust us to guide you through this."

PUHLEEEAZE!

Wed, 06/05/2013 - 09:22 | 3625962 djsmps
djsmps's picture

That's a Norwegian Blue, pining for the fjords.

Do NOT follow this link or you will be banned from the site!