Blain: "It Worries Me That The Market Is Massively Short VOL Again"

Submitted by Bill Blain of Mint Partners

“There were plants and birds and rocks and things, there was sand and hills and rings..”

An interesting evening’s play in prospect when we get the long anticipated 25 basis point March Fed Hike to 1.75%. But, what matters will be what JP tells us in terms of guidance. How hawkish will he be? Is it a 3 or 4 hike year? How will he reconcile full employment and the Trump fiscal stimulus? How will he play market risks vs stability? Place your bets. Bear in mind the Fed will simply lead the pack of Central Banks normalising. The BoE will likely follow in May, and even the ECB will get on board in time. Rising rates are nailed on – another reason to consider bond markets at risk.

In terms of effect, Powell’s degree of Hawkishness is not an easy call. Markets have been nervous since the VIX/VAR vol shock in early Feb, and are now slowing into the Easter and Jewish holidays. A good number of big institutional investors fear higher rates will trigger a stock sell off. It’s nearly quarter-end, so activity is likely to remain very muted. Thin markets have the capacity to over-react. It worries me when I read research telling me the market is massively short VOL again – sounds like another correction/pimp-slap is coming.

In terms of expectations and sentiment, it’s a real series of battles between the positive Macro story of Synchronous Aligned Global Growth vs possible slowdown, between unconventional fiscal, geopolitics and politics vs the end of the the QE era, and a general concern that financial assets look overpriced, illiquid and volatile. Speaking to my chief stock augur this morning, Steve Previs showed me a graph with lots of bright red lines pointing down to the right, suggesting US stocks will test long-term moving averages and the recent lows. (All of which means get ready for a real buying opportunity if it happens…)

Unconventional geopolitics is one major theme in the news – what will Trump’s threats of tariffs and restraints, plus cajoling the Chinese achieve? While the president may think he’s on the right track to ensuring fair trade with China (and, despite being who he is, he actually makes some valid points), the market may not necessarily agree – raising a significant risk of market dislocation. Another great article on the risks of a US / China trade spat reminded me of the Powell doctrine: “never start a conflict you don’t know how to get out of.”

Meanwhile, down on the coal face of the big-data society, the Micro picture looks distinctly muddy.

One of the defining issues of the last 10-years has been “accepting the premise” of disruptive technologies, getting comfortable with strange new business concepts, believing six impossible things before breakfast, and forgetting everything we ever learnt about firms making profits… conventional valuations have become a mind trap for old-school thinking. Suddenly the “Millennial” approach looks increasingly under pressure.

First up is Facebook – darn, you never figured how they were making money or how adverts were making their way into your in-tray? And now it looks likely they’ve been as careless with our data as we’ve been with ours. It would appear Facebook faces something of a Ratners’ Moment – that moment in time when a company gets caught doing something so fundamentally daft/dangerous/stupid that it deserves to be closed down. (It comes from the chief executive of UK jeweller Ratners admitting his company’s earrings were “cheaper than an M&S prawn sandwich but probably wouldn’t last as long”. The company’s image and brand value went negative in a trice.) And if Facebook wobbles – who else slips in its wake?

Or how about Oracle struggling with the cloud… what is that? It’s a bright sunny Spring day out there…

And then there is the genuine tragedy of a cyclist killed by a driverless UBER test Car on Monday. Sure enough, there are headlines screaming: “is this the end of driverless tech?” and politicians jumping up and down about ending the driverless experiment here and now. I’ve written myself that driverless and drone technologies may prove too difficult – after all, if we can’t make trains work after a 180 years of going forward, backwards or stop on a rail, then how can we possibly control activities in multiple vectors?

Back in 1829 the Rainhill Trials saw the technological giants of the day do battle for the right to supply engines to the new Liverpool – Manchester railway. We all know Stephenson’s Rocket won the event and set the base for the railways and the industrial revolution. Sadly the new railway also resulted in the first railway fatality when William Huskisson MP jumped out his carriage to say hi to the Duke of Wellington, and was crushed under the wheels of another train.

The industrial revolution followed on. Reading more on the Uber accident, it seems like a tragic unavoidable event. If we can learn more from it – then it’s a plus. But it will be unlikely we see the current revolution slow.