Blain: "We All Know What Really Caused The VIX Storm"

Submitted by Bill Blain of Mint Partners

Stock Resilience - why, and how to avoid an earful of cider

"People stop buying things, and that is how your turn a slowdown into a recession."

What a difference a day makes…

As suddenly as it came, the mini-crisis VIX-Storm, dissipated. Stock markets demonstrated incredible resilience – so strong some observers wonder if it might have been “enhanced” with a pharmaceutical-like shove from Central Banks (perish the thot!). If you didn’t buy yesterday – and that’s exactly what we’re wondering: who did? – then maybe you missed the buy-the-dip opportunity? Most sensible money was sitting on the sidelines watching. What did fuel yesterday’s strength? I guess a lot of hedge fund managers must be high-fiving themselves this morning….

In fact, the day went pretty much as our stock pickers expected – a rally off the low yesterday, but they caution we are likely to re-test a new low in the medium term before any new direction is established. They see buy signals – but suggest stock markets will remain choppy in the meantime, so most folk will be watching and waiting – certainly through this week. This is not over yet.

What about bonds? – the 10-year Treasury back up to 2.77%, but there are sure fire signs its headed higher as the narrative changes back to inflation threats, overheating in the job markets, and normalisation. If the global economy remains on the Global Macro Growth alignment trend – and no real reason to think it isn’t – then we’re still going to see the bulk of Central Banks tighten this year, and rates rise.

It’s the BIG THEME of 2018 – the normalisation trend. We’re expecting rates to rise back towards higher “normal” levels – not towards the elevated levels you’d expect in overheated economies. (Well not yet anyway.) Bonds yields are going to rise – but the question is: when do they reach levels where yields are attractive enough to choke off the equity market?

It does worry me that we might be missing something. We talk blithely of normalised markets, but what about Quantitative Tightening? How much hidden damage and unintended consequences has the massive distortion of years of QE done to market driven economies? Or, what about the amount of money that is now invested in passive EFTs and likely to prove non-sticky? The unwind on the Short-VIX products demonstrates we never know as much as we think we do about what really underlies markets – although the rumoured $8 bln losses on short-VIX are the kind of thing a naughty bank gets fined on a regular basis. Perhaps the losses on VIX ETNs will wake up the punters to ETF risks?

Rising bond yields will draw investors back to bonds – some say 3% US treasuries is as good a level as any in a market where inflation is more imagined than real – limiting the amount of cash rotating into equity. That’s why we’re watching announcements from the big money piles – like US firms repatriating cash – on where their money is going: for instance, share-buys backs are good for stocks, but bar-belling the bond market suggests others anticipate bond becoming more attractive.

With stock markets now looking distinctly toppy – we’re not expecting the dramatic gains of last year to be repeated long-term, or for the lost month of January to be repeated any time soon – then the levels at which bonds look attractive again get lower!

The bottom line is nothing has really changed. We’ve got: i) a weak bond market, iii) a stock market that’s looking fully priced, iii) expectations of growth, and iv) uncertainty about the effects of normalisation.

My conclusion is simple: Buy assets that are correlated to global growth, but uncorrelated to financial assets (ie bonds and stocks).

Its easy to say, but what counts? Property, infrastructure, renewables, private equity, transport (including aircraft and shipping) would all be on the list. These are all real assets producing real returns – and some are as volatile as markets. The trick is finding exposure to them. As an example, if anyone is interested I’ll give them an illustration of a transport asset correlated to growth showing steady 8% returns. All you have to do is call..

Meanwhile, market is full of horror stories about inverse VIX trades… Last week it was the latest “Hot Wall Street Product”.. ahem. I am reminded of a great scene in Guys and Dolls: One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider.

Nomura have apparently apologised after investors in low-vol ETN were wiped out, while CS are liquidating VelocityShares.

Yesterday I put out a mid-day comment saying: You have to feel sorry for new Fed Head Jerome Powell starting his new job yesterday: Powell is going to find he has three jobs: Inflation, Jobs, and Managing Trump who might well think a falling stock market is a Fed Plot to discredit him. Does that increase the risk of a policy mistake?

Well, we all know what really caused the VIX Storm:

It was Janet Yellen’s parting gift to Trump. As she walked out the door of the Fed for the last time, surrounded by the media, she politely posed the question: “Don’t you think stocks look overvalued?”

Don’t underestimate the power of a very smart and clever woman with an Axe to grind… I’d like to think it was true.. hell, maybe it is.

Comments

mailll Jumanji1959 Wed, 02/07/2018 - 09:14 Permalink

And more than just coincidence on Monday that Powell was sworn in and the very same day the Dow dropped a record 1175 points.

The Fed needed to remind Trump who is in charge of the world finances so he doesn't think he is in charge of it.

International bankers = the great whore (of Babylon) who is seated on many waters, with whom the kings of the earth have committed fornication?  Who knows.

 

In reply to by Jumanji1959

Occams_Razor_Trader truthalwayswinsout Wed, 02/07/2018 - 08:04 Permalink

So hold on- a 3% treasury yield which would match "real" inflation, would cause people to sell equities and buy bonds- driving up bond prices and driving yields back down. So you potentially are looking to stay even with inflation?

Wouldn't it be wise to gamble on pro growth policy and the resultant future rise in equity values?? 

I just don't see "normalized" rates as a lure for big money- quarter basis here, quarter basis there- doesn't add up.

Yellen was just pissed the "Vagina Vote" thing with Hillary didn't work out, so she kicked Trump in the shin on the way out.

In reply to by truthalwayswinsout

Endgame Napoleon northern vigor Wed, 02/07/2018 - 10:09 Permalink

Over 5 years ago, people were saying the stocks were overvalued. So, do they go one way all through their tenure in the job, trying to people-please when they are in the limelight? Then, right before leaving, they reverse course, so they can say that they intentionally shifted the policy, knowing it was the right time to change. That is having cake and eating it, too. 

In reply to by northern vigor

Endgame Napoleon Occams_Razor_Trader Wed, 02/07/2018 - 10:36 Permalink

Barnake O’balma just copied Clinton / Bush, adopting the same economic policies, like the global offshoring of millions of middle-class jobs and [simultaneously] potential SS contributions just before the Baby Boom retirement, mass immigration fueled by pay-per-birth welfare & womb-productivity-based tax welfare and giveaway stimuli galore for dual-high-earner parents in the upper middle class and for some citizens, legal and illegal immigrants at the rock bottom, specifically the part-time-worker womb producers who make sure to stay below the earned-income limit for monthly welfare and the cut off for refundable child tax credits by what is known as “workin’ the system.” The idealistic “community organizer” hired Timothy Geithner. The community-organizer thing was just a flavored PR coating to make Establishment policies go down easier for the infantile voters.

In reply to by Occams_Razor_Trader

Endgame Napoleon Dratpmurt Wed, 02/07/2018 - 10:15 Permalink

Do POTUSES control stocks? Over time, they probably do. The globalization policies, set in course by Billy Clinton, probably enabled the top 20%’s 30-year stock-a-thon, the middle-and-falling 40%’s stress parade and the bottom 40%’s poverty-industry-controlled blight. During the post-WWII period of one-earner households with well-paid breadwinners, more Americans could afford stocks. 

In reply to by Dratpmurt

Harry_Truman Wed, 02/07/2018 - 07:47 Permalink

She's the real reason for a the booming economy that started early on in Obama's administration. I know its difficult for most of  you in this forum to acknowledge this.

gatorengineer Solomonpal Wed, 02/07/2018 - 08:18 Permalink

Turning the printers up to 11, created a veneer of an economy.  Meanwhile the middle class was annihilated.  Bushes actually gets the ""credit"" for turning on the machines, Bammy for turning them up.  Remember cash for clunkers, GM bailout, etc, etc.....

We are well past the point of no return, its just which front WW3 will start on to end it all.

In reply to by Solomonpal

cheech_wizard Harry_Truman Wed, 02/07/2018 - 11:21 Permalink

You're way out of character there Harry...

Don't you remember writing this?

Had ten minutes conversation with Henry Morgenthau about Jewish ship in Palistine [sic]. Told him I would talk to Gen[eral] Marshall about it.

He'd no business, whatever to call me. The Jews have no sense of proportion nor do they have any judgement on world affairs.

Henry brought a thousand Jews to New York on a supposedly temporary basis and they stayed. When the country went backward-and Republican in the election of 1946, this incident loomed large on the D[isplaced] P[ersons] program.

The Jews, I find are very, very selfish. They care not how many Estonians, Latvians, Finns, Poles, Yugoslavs or Greeks get murdered or mistreated as D[isplaced] P[ersons] as long as the Jews get special treatment. Yet when they have power, physical, financial or political neither Hitler nor Stalin has anything on them for cruelty or mistreatment to the under dog. Put an underdog on top and it makes no difference whether his name is Russian, Jewish, Negro, Management, Labor, Mormon, Baptist he goes haywire. I've found very, very few who remember their past condition when prosperity comes.

In reply to by Harry_Truman

buzzsaw99 Wed, 02/07/2018 - 07:56 Permalink

she should know, she blew the bubble in the first place.  this is yellen's bubble, not trump's.  trump is an asshole, but he didn't cause the stock market to go full retard, not as much as his dumb ass might have tried to take credit for it anyway.  stable orange genius should fuck with congress full time and shut his yapper about the fed fucked up markets.