Fine and dandy

9 min read

Whatever word is German or, if it existed, European for “taper tantrum”, we got it yesterday with 10-year Bund yields rising by over 50% to 0.37% from 0.24% and on the back of unexpected comments by nobody less than St Mario himself.

Having reaffirmed the ECB’s loose monetary policy as recently as Monday, he shocked yesterday by highlighting the increasing strength of the eurozone economy and by adding that disinflation driven by the supply overhang in energy markets should not be overvalued.

The kick-back was pretty instant with the euro leaping from US$1.1185 to close at US$1.1340. With a 12-month intraday high of US$1.1366, the single currency is now within a whisker of breaking new ground.

But this big move was not alone in shaking a marketplace that is becoming obsessed with risks. More and more one finds the arch bears being quoted – the very same ones that have been predicting the mother and father of all stock market crashes for at least the past two years – and any event and any correction is immediately hailed as the beginning of the end.

Googly balls

Funnily enough, the closest we have come to sighting a black swan was in fact the news yesterday that the European Union has decided to fine Google €2.4bn for doing what it does, which is to use its proprietary systems to generate revenues. Next they will be fining Mercedes dealers for not offering BMWs and Jaguars, or Bayern Munich for buying the best players and winning everything, thus denying FC Castrop-Rauxel a fair crack of the whip.

The problem is not in what Google does but in the arcane EU competition regulations, which might more or less work for chocolate bars but don’t do so necessarily in cyberspace. Google took the news like a man and laconically commented that it “respectfully disagrees” with the findings and that it might consider an appeal. Don’t get me wrong, I don’t back anything and everything that tech giants do, and I understand the EU’s inferiority complex but there is a bit of King Canute in this, a position the EU seems to take up far too often. Not only that but it is dealing with an America run by Trump the Disruptor who is planning to make America great again. Something nasty and unpleasant in the tit-for-tat revenge space has to be expected and if there is one thing we Europeans don’t need now, then that is a trade war with emotional and irrational Yanks.

Trigger happy

Film buffs will surely remember the seminal scene from Howard Hawk’s 1948 movie Red River when the restless herd breaks into a stampede because a cowboy knocks down a pan while licking the sugar cone. My old chum Beat Matzinger of Julius Bär very neatly lined up a whole row of sugar cones, each of which could, if the circumstances were right, trigger a stampede in financial markets:

“First … it is the 10-year anniversary of the catalyst of the beginning of the bear market, the 100m loss which Bear Stearns’ hedge funds took in June of 2007 … But the market did not really start to go down until the fall, and bottomed after Lehman …

Second … junk bond spreads are at narrow ranges, about 350bp points over Treasuries, not a good entry point for sure …

Third … the yield curve versus the new highs in equities … a flattening yield curve is indicating either an approaching recession (I don’t see that) or lack of opportunities with volatility so low, again not a good sign …

Fourth … in the last 20 years VIX volatility has closed below 10 on a total of 11 days … 7 of those have been in the past month …

Fifth … Argentina had no trouble getting over US$10bn in orders for their US$2.75bn 100 year bond last week, a country that has filed for bankruptcy three times in the last 25 years …

Sixth … the Hindenburg Omen (after a long time it’s worth googling it again) was triggered last week. While it does not always mean a correction is coming, no correction has happened without triggering this omen …

Seventh … the S&P Index’s realised volatility is at its lowest level since 1966, according to Goldman …

Eighth … the flash crash in Ether, the digital currency on Ethereum, whose price plummeted from US$300 to as low as US$0.10 last week … yikes … Cryptocurrencies, only an idiot would not take the time to read into the subject … I have done … I don’t think I have understood a third of what I have been told … “

What Beat makes clear is that there are now probably more moving parts to market analysis than we can realistically digest and draw rational conclusions from. Markets are simple creatures driven by fear and greed. The obsession with packing them full of engineers and mathematicians who still believe that there are quantitative answers to the questions posed by plain human sentiments adds little to understanding market dynamics but it surely increases confusion as well as the cost to the end user.

The Google fine, for example, knocked twice as much off the share price of the company than the fine itself is worth which in turn led to what some articles referred to as a rout in tech stocks. Rout? These guys don’t know what a rout is. Sure, the index took a 100-point loss on the day though it still closed at 6,146.623, about 170 points below the all-time high of June 8 but still around 350 points above the three-month low and 70 points above the average for the period. Rout?

The big question, however, won’t go away. Are markets topping out and has the time finally come to put those hedges back on? In Nasdaq terms, the stop-loss ought to be placed at 6,000 points but not before. In the risk and opportunity space, as has been noted in this column repeatedly this year, going defensive too soon has only cost money.

Salsa and guacamole

There has barely been a better buying opportunity in the past five years than the one that was presented by the taper tantrum of June 2013 and I would bet my bottom euro, if I had one to spare, that in a week or two those Bunds will be back where they started and that investors who were scared off will be kicking themselves for the opportunity missed.

On a less confident note, the Bank of England’s stability report made depressing reading. Yes, the banking system is more robust than it was going into the last crisis – well, they would say that, wouldn’t they? – but it warns of the risks embedded in what it called everything other than reckless lending in the unsecured consumer loan space. At a time when the UK is preparing to go off to explore the white bits on the global economic map the banks shouldn’t be stuffing Kevin and Tracy SixPack full of debt and the bank is right to be questioning developments.

Conservative economists would probably look for the roots of the global financial crisis in the democratisation of credit that began during the Reagan years but which did not really take root until Bill Clinton was in the White House and when the mortgage market was fully opened up. In the UK the comparable trigger points occurred under Thatcher and Blair.

There was a time when the raising of an eyebrow by the Old lady would have had senior bank executives running for cover. I suspect this time they won’t give a toss as a tightening of credit conditions would immediate be decried in social media as a move by the rich and elite few to impoverish and deprive the many. Isn’t that sort of what the Jeremysaurus was preaching at Glastonbury to the cheering crowds? The bank may be right but it was in many ways the creator of the problem during the ZIRP period. It opened Pandora’s Box and is now expecting the commercial banking community to close it again.

Meanwhile, buy the dips.