Thursday, 20 September 2018

On long reigns, long equities and other addictions

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  • Peters 475px June 2014

Anthony Peters on a head who managed to avoid the chop.

“Long to reign over us….”

I know, I know….we all know that Her Majesty today sets a new record as the longest reigning British monarch at 63 years and 217 days. If, of course, it had been up to the HR department at any given investment bank, she would have been “put at risk” around 1978 when she was 52 and given three months to either find another role internally or pack up in order to spend more time with her family. Married to a foreigner of whom everybody knows he’s Greek but who carried a Danish passport and with four children, she might have struggled. In the end and to the benefit of this great nation (Scotland included), it did not come to pass and even I, at the ripe age of 61, have never sung “God save the King”.

Many congratulations, M’aam.

Real money

Meanwhile, Wall Street returned from Labor Day and the summer lull (what summer lull?) with a bang. The Dow rallied 390 points which represented 2.42%, the S&P rose by 2.51% and the Nasdaq, bless it, made 2.73%. Unusually, the VIX index was more cautious and although it rallied by over 10% (which is a useless number but it looks impressive) from 27.80 to 24.90, it is still a long way from being wrapped around 15 where it has spent most of its time since March 2012. Sure, it’s been up and down like those old proverbials but in that time it has not only averaged 15.30 but it has also looked comfortable there. The break-out up to 40 which we saw last month has been (so far) a one-off as even with all the slings and arrows created by the QE generated greed and withdrawal risk driven fear, the index only twice ventured above 20.

Despite the rally, the Dow remains around 7½% in the red, year to date but it might in fact take heart from Japan where the Nikkei 225 has been on a mission. What’s Japanese for: “If it moves, buy it. If it doesn’t, buy it ’till it does”? Closing at 18,770.51 points, the main Japanese index made 7.71% on the day. Repeat: 7.71%. The dollar/yen might have traded back below ¥120 again but that doesn’t tell us much.

What we are seemingly getting is what I had suggested a few weeks back which is the back-log of real money which had been stuck on the sidelines over the summer watching the shenanigans aggressively being put to work. Is this right or is this wrong? Hiroshi-SixPack has certainly spoken today.


Over here, on the other hand, it depends on whether you believe that the IMF’s plea to the Federal Reserve not to begin its tightening cycle now will fall on fertile ground or not. My chum, Bill Blain, of Mint Partners made a lot of sense on the telly this morning when he tried to get over the point that current monetary policy – QE and all that jazz – represents the unconventional and all the FOMC wants to do is to begin to bring some normality back into the world of monetary policy. You don’t cure a howling heroin addict by giving him another fix. It might shut him up but it does nothing to move him forward. So far, all the powers that be have done is to try to remedy the after-effects of the 2007/2008 bursting of the credit bubble is by re-inflating it again by way of ever more and ever cheaper credit.

It is said that addicts cannot begin the path to recovery until they have acknowledged that they have the problem. Until then, they are deemed to be in denial. The global economy is, in my humble opinion, in denial. “Give me one more fix and I promise I’ll stop….”. A little bit more stimulus in China, a little bit more stimulus in Europe, just hold rates a little bit longer in America and Britain….yeah, yeah, sure.

I recently visited a hedge fund where I took tea with the principal. He admitted, as most of them do now, that 2015 has been a challenging year. Challenging is not bad for I do know that for some players it has been a pretty disastrous year. The recurring theme is that investors are applying free market practices to a trading environment (I won’t call it a market at this point in time) which is governed by central banks and regulators who can manipulate supply of and demand of both kinds of liquidity at will.

Investors were happy to join in the free-for-all which cheap cash offered and to convince themselves and others that their terrific performance was due to their skill at finding alpha when all they were doing was cheaply leveraging beta but now they are trying to cry “Foul!” when the party is coming to an end an when they don’t know what to do next. Maybe ask William McChesney Martin? What they end up doing is to trade the momentum and, bingo, we have the volatility created by thousands of CFAs and MBAs knowing nothing better than to try to be long when its going up and short when it’s going down. How much do they get paid for that?

What, I ask myself, will make October or December better times to begin normalising the interest rate structure than September? One more fix and then I’ll stop? Are the members of the FOMC really that scared of their own mystique? What the volatility has shown though is that the top “this time it is different” product, the ETF, is just as exposed when things don’t happen as the quants’ models told them they would. Why it is that hundreds of thousands of highly skilled and highly trained professionals still believe that a derivative product will show the underlying cash product the way escapes me. What was it about PT Barnum noting that there’s a sucker born every minute?

The worries about China remain in my thinking and, so I read in that of Nouriel Roubini, overplayed. The US and Europe are sufficiently bound together so that if they both begin to recover of their own volition which they seem to be doing, irrespective of how fast to begin with, they don’t really need China all that much to maintain momentum. They sometimes say of artists who take their own life that they were scared of their own talent. I fear that we are sacred of our own ability to recover and grow without free money.

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