Which Asset Classes Are Most Vulnerable To 'Policy' Disappointment?

Tyler Durden's picture

The lull in market activity over the past weeks is poised to give way to a multitude of events that could potentially determine the market direction for the remainder of the year. Policy responses from both sides of the Atlantic are awaited, though nuances rather than headlines may be more important. In the short run however, Deutsche Bank notes some indicators suggest that risky assets may be vulnerable. Specifically, relative to fundamentals they also find that the US equity rally over the past quarter has now been excessive relative to the US economic leading indicators. Looking at cross asset valuations by comparing the level of asset prices today vs. their peaks and troughs since Sep-2008 we also find that the S&P500 appears to be the richest relative to fundamentals.



Deutsche Bank: The cross asset view: Equities could be vulnerable in the short term

In the table below, we calculate a ‘pointer’ for each asset, corresponding to the position of today’s price relative to its historical peak and trough. A pointer equal to 0% means that the current price is equal to the historical trough, a pointer equal to 100% means the current price is equal to the historical peak. We use the pointer of the global PMI Composite as a benchmark (pointer of 68.5%). In this simple framework, assets with a pointer above/below this level have under-reacted or over-reacted to the deterioration of global fundamentals.


For the market to move further into a risk-on mode from current levels, positive developments regarding one or more of the following issues would be required:

  • Spain will need to make a formal application for the aid program, which, as Draghi mentioned, is a necessary though not sufficient condition for bond purchases by the ECB
  • Political developments in Italy signaling an intention to follow Spain in seeking aid via the ECB/EFSF/ESM bond buying program
  • Further clarity on the mechanism of ECB bond purchases: whether the ECB would target yields levels or pre-commit a potential size of asset purchases. Setting an explicit cap on yields could be politically contentious as it commits the ECB, at least theoretically, to unlimited bond purchases. In addition, a justification of the level of cap would be onerous
  • Draghi mentioned that the ECB is working to address the seniority issue of ECB bond purchases, though exact details are yet to be specified. Ultimately, there will always be a risk that, in extreme situations, ECB does not fulfill its pledge of not being explicitly senior. The ECB could nevertheless make its commitment more credible by either (1) an explicit specification of the parri-passu nature of the purchases via a guarantee from the EFSF/ESM for any ECB on these purchases or (2) by retroactively being more supportive of the Greek PSI by allowing T-bill issuance refinanced at the Greek central bank to pay for redemption of bonds held by the ECB
  • Resolution over the Greek negotiations: We maintain the view that a compromise agreement between Greece and the EU leaders is likely to be reached, with more time to Greece for fiscal adjustments. Recent political commentary does appear to suggest that a compromise may be feasible. Implementation, however, will continue to remain a concern, and Greece’s adherence to fiscal plans may be revisited again in the future.

Eventually, we do expect a resolution on the above issues and a support framework for Italy/Spain to be set in place; however headline risks may dominate over the coming weeks. Some of the key events which could impact market valuation in the near term include:

  • 30th August: Italian BTP auction
  • 31st August: Bernanke’s Jackson Hole speech
  • 6th September: Spanish bond auction
  • 6th September: ECB meeting
  • 6th September: Meeting between Rajoy and Merkel
  • 12th September: German constitutional court ruling on the ESM
  • 12th September: Dutch elections
  • 12th/13th September: Fed meeting
  • 14/15th September: EcoFin meeting

Given the deluge of potential new information in the near term, the risk reward perspective would argue to exit trades with high sensitivity to headline risks.

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Death and Gravity's picture

Q: "Which Asset Classes Are Most Vulnerable To 'Policy' Disappointment?"

A: Simple: Risk.

Because of centrally dictated andforcibly lowered interest rates, which are a combined indication of societys time preference (high interest: high incentive to forestall current consumption in favor of saving and consuming at some point in the future), and risk perception (high interest rate: a high social perception of risk in engaging in economic activity, including lending), societys economic actors have for decades engaged in far too much risk, and priced risk exposure far, far too low, and as a consequence of these, taken far too few steps to protect themselves from risks. Hence, stocks and HY credit, are far ovepriced, and would trade significantly lower in a non-centrally manipulated market.

These decades of foolishness are slowly dawning on the market (read: kids in suits with fancy titles and executive rights to massive stock portfolios) the same way that the hiccups in the heroin supply is dawning on a drug addict: Denial, shock and being too mentally 'out of it' to think further than the way to get the next fix, and getting its FAST, no matter the Faustian contracts they sign on.

Thomas's picture

There is an ad for RoadKill tee shirts with the largest breasts. Is this high quality targeted advertizing--advertizers knowing I'm a total perve--or do you all get that one?

Urban Roman's picture

I have ads for TXU energy, Comerica, Some "financial advice" service, and Allen Edmonds shoes.Occasionally I get the Snorg cameltoe.

I guess the Tumblr tranny pages didn't leave cookies that can be seen by the ZH ad servers.


donsluck's picture

I got nothin' but financial ads.

Popo's picture

And I've got nothing but ads for Ukranian porn sites.    I can't imagine why.

/ sarc

New_Meat's picture

"... advertizers knowing I'm a total perve..."

Thomas, so that's where all of the mind-readers went! ;-)

- Ned

glenlloyd's picture

While their argument has some merit it makes too many assumptions. It also fails to make distinctions between asset classes and changes in investor behavior.

I wouldn't do a lot of gambling based on it but it is a reasonable reference...

LMAOLORI's picture



Who needs food anyway (sarc)

We'll make a killing out of food crisis, Glencore trading boss Chris Mahoney boasts


Cognitive Dissonance's picture

Since when is fiat debt/currency an asset class? Man.......I really REALLY hate these long duration acid trips.

Are we there yet?

disabledvet's picture

Yeah, no shit. I think we've achieved full on "Cognitive Disorder" status this PM (that's stands for "evening" people...not precious metals in case ya' all were wonderin.) The whole market? REALLY? "It's all Apple's fault"? REALLY? Wow. "Far out, man." http://www.youtube.com/watch?v=EvGJvzwKqg0 we need to get this wagon movin' folks. how about this one:http://www.youtube.com/watch?v=xrCMlSWlDX8

fourchan's picture

can i be the new federal reserve?

IndicaTive's picture

I already called it. Then I kicked my kids' ASSES at Monopoly.

s2man's picture

Short, short game rules:

One player is selected as the Banker.  He/She wins.

chump666's picture

flash crash t-minus and counting...

rubearish10's picture

Remove the word flash and keep it under pressure for more than 35 minutes so the world pays attention next time.

fonzannoon's picture

futures green,, asia green...it goes on and on

chump666's picture

there is no volume in market + tight ranges + HFTs + risk from all angles.

central banks cannot control the oceans.

fonzannoon's picture

i hear ya chump but it sure seems like it's groundhog day a lot lately. gold and silver gaining some steam. only thing keeping me interested these days...

Ray1968's picture

Silver broke $31 a few moments ago. :)

ar01's picture

Options are dirt cheap these days -- seems like a sheer volatilty play is a no-brainer. 

DeFeralCat's picture

I recall hearing somewhere that the Bernake speech on Friday has something to do with the history of monetary policy since Lehman. It seems like a snoozer heading into the Labor Day weekend. He has the unemployment for August the week after. He will keep his options open. Ultimately, very few people- if any- believes that there is anything that he can do to impact aggregate demand. He can keep money loose but no one is actually demanding it to create demand. He knows this. Again, he is going to act because that is his job. The question real is "Will Bernake announce anything more dramatic than bond buying to keep interest rates low?" If one answers yes, then you are really implementing policy sixty days before an election whose primary impact will be to cause speculators to raise commodity prices impacting demand in a negative way. I don't see this happening. He will modestly act; the market will not find it sufficient given the global data points. Agree or disagree?

fonzannoon's picture

gold is laughing at bernanke right now. it's telling him i don't give a fk what you do and i know you are stuck. oil having a good laugh too.

DeFeralCat's picture

Good point. But what happens if his policy adjustment is modest? I think the telling chart of ZH over the last week was the velocity of money chart from the St. Louis fed which showed money velocity at depression like levels. This is not a gold bullish sign. Is gold up because of Bernake, shooting miners, Israel v Iran or a melange of the three? I think the ultimate action is modest because it would psychologically support growth but probably sell-off the speculative part of the commodities. But in this speech, he will only make the case to act. I don't see him acting unless he already knows the unemployment report and it is not good.

fonzannoon's picture

bernanke acting friday is completely out of the question imo. he does anything and crude runs and that does more damage.

DeFeralCat's picture

Bernkake's best case scenario is a sell-off of 3-4% based on a weak data point which then allows him to act in two weeks. The data points are actually there. The irony may be that the fudged US numbers showing an economy stronger than it probably is becomes the factor that does not allow him to act. I feel something is about to give. Could we see a levee burst in New Orleanes if Issac becomes a direct hit? How does Obama act if the scenario becomes more probable? What should be a mundane week could get quite interesting quickly in the next 48 hours.

chump666's picture

He has to do a trillion to get a sustained rally in equities.  Otherwise the market will sell his ass into that 'hole'.  Also, with stagflation rampant in China, oil goes bid,. China might test the west (hey that rhymes) by sending an armada across to the Straits of Hormuz, or South China Sea.

He is stuck, as is all central banks.  Ignoring oil inflation is deadly, that's a war trade right there.


DeFeralCat's picture

I don't think he will act on Friday. I think he will give a job justification speech that Castro would be proud of. It will be three hours with 113 powerpoints. He will make the case to act. I bet he does not even make the case to act big; he will make the case to act. It gives him more time; maybe the market sells-off on disappointment; it keeps the illusion alive for more information. I think he will get some help here because the bots can force a sell-off. They will make their coin. Take a piece off the top but they know action is coming to front-run two weeks from now. This is going to be a fascinating two weeks but tomorrow will be boring. This despite the fact the China is showing profit disappointment in its industrials.

chump666's picture

"I think he will give a job justification speech that Castro would be proud of."

hahahahahaha, oh man that killed me.

chump666's picture

Really dig Max Keiser, should watch it more often.

kito's picture

Fonz......Gold has an uphill battle without a massive lsap....its been above 1700 several times this year, no biggie.... and has not recovered from its highs since the world realized qe3 wasn't to be anytime soon...........

fonzannoon's picture

I hear ya kito and am inclined to agree but there is a small part of me that thinks the world is a bit anxious about the dollar and thats showing up in gold. but it could easily sell off and i could be wrong.

akak's picture

And yet, Kito, looking beyond the short-term view, gold has been "battling uphill" quite handily for the last 11 years ---- and for the majority of that time, and the majority of its rise in price, without any talk of QE, and even before the world financial crisis set in.  Also, totally heedless of swings in (nominal) interest rates. 

There is far more to gold's relentless decade+ rise than any recent or officially announced QE programs.

donsluck's picture

Or, maybe, sell on the news?

q99x2's picture

Maybe the ChairSatan won't come out of Jackson's Hole this year. I'd rather hear from the groundhog of Punxsutawney.

new game's picture

if it aint physically available, touchable, protectable i'm not interested.

all else too risky for me...

kito's picture

the u.s. economic output is about as strong as the piss stream of an 80 year old with an enlarged prostate...and IT SEEMS that the s&p is richly valued to fundamentals??????????......

ekm's picture

Your metaphors are hilarious.

vertexa's picture

Crude Oil+ Nat GAS Futures going Up amid Issac fears ? Not too significant yet, but what are your thoughts? http://finviz.com/futures.ashx

ekm's picture


I would say NONE. Here's why:

Both QE1 and 2 occurred when democrats were controlling House Senate and WH. QEs stopped when republicans won the house.

Since we all know that Obama wants to cubanize america by "spreading the wealth around", I think he has given an executive order to the Fed and Primary Dealers to buy everything. The goal: Government owning the means of production and providing for everything.

That's what QE is: QE is buying of assets by the government, hence government owning those assets, that's it, as simple as that.


More QE would mean more ownership of assets by the Gov. It seems to me that Obama won't allow the S&P or ANYTHING ELSE to fall and would like to buy everything. He's practically governing by executive orders, anyway.

The only thing that can ruin the plan: OIL PRICES, or better SHORTAGE OF CRUDE OIL. Saudi Arabia refusing to exchange a lot of oil for worthless electronic dollars thrown into the market as a result of gov owning assets.


That's why communism fell in Eastern Europe, SHORTAGE OF FUEL AND SHORTAGE OF FODD because gov owned everything and nobody cared to work since everybody expected the gov to provide without working hard.


donsluck's picture

Please revise your analysis. QE is run by the Fed which is, I'm sure you know, is not part of the government.

ekm's picture

My friend. The Fed is ENTIRELY part of government, just order takers.

Fed members and chairman positions are purely academic. Those guys are simply advisors.

They could be influential advisors, but ultimately simply advisors.

chump666's picture

nice bear signal coming out of Asia: Shanghai neg 1%, HK neg, USD bid, oil/gold/silver bid.

nasty, real f*cking nasty. 

Apostate2's picture

@chump666. I have appreciated your analysis since from my base of operations, it is copacetic.

chump666's picture

AUD risk proxy and sign of things to come, from FX wires:

*AUD/USD was sitting around 1.0415 before dropping like a stone on a large sell order from a UK dealer. Some speculated the algo's had gone crazy whilst others wanted to pin it on a weak China Yuan fix

ekm's picture


When world govs get together to buy and OWN assets, signs don't matter.

What matters is whether Saudi Arabia will provide crude oil in exchange for nothing. The answer is unknown yet. In the 70s they didn't. Hence shortages during Nixon times.

What matters is whether Hyundai and Kia will dump cars in France at below cost price. The answer is yes and french are pissed.


What finally actually matters is whether the countries producing commodities or offering slave labor will provide the commodity or the labor in exchange for nothing, since most of assets slowly are being owned the governments in general.

I think it could be leading to shortages of anything, like the 70s, Nixon times.

chump666's picture

I agree. But the signs, now are HFT orientated, as I personally believe we are speeding towards a major flash crash in the near term.   We blew all the upper resistance on no volume.  So AUD collapsing and small flash crashes with stocks as ZH pointed out are pointing towards something big.

What you are referring too is geopolitical tensions, trade wars and/or war.  Yes, I would 100% lock that in. 

ekm's picture

Do you think that the gov is not capable of preventing a flash crash? I think they can, just set the computers at Primary Dealers to buy EVERYTHING below a certain price which I think they've been doing since Nov 2011.

Don't you agree?

THEORETICALLY, if the gov is determined to BUY AND OWN everything, we may not have a crash of anything for a sustained period.