Tuesday, 18 September 2018

The dangers of being outside of the pack

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Anthony Peters on the herd mentality in markets.

One down and two to go. Monday felt pretty aimless as investors and traders alike try to play as close to home as possible ahead of the FOMC meeting on Wednesday. Today and tomorrow will no doubt be similar. That does not mean that there was nothing going on.

Although the unrelenting decline of the euro paused for a breather, the trend doesn’t appear to be broken which was in turn reflected in another staggeringly good day for German equity markets. The Dax still predominantly contains the stocks of companies which make things which can be exported and the weaker the euro gets, the better they look. Added to the easier terms of trade from which Germans generally benefit more than others, incomes from off-shore plants also increase in value. Thus the Dax enjoyed another barnstormer, rising 2.24% on the day and closing up 24.09%, year-to-date. Even with the weak euro to contend with, the performance translates as +8.95% in dollars and +14.00% in sterling.

Mind you, after a period of increased volatility US stocks had a decent session. The shift of investment activity towards stocks continues apace and yet the VIX index is far from being a sea of calm. At 17,997 points, the Dow closed last night 875 points above its 12-month average and only 311 points below the all-time high.

The VIX, on the other hand, closed at 15.61 points, well off the 12-month low of 10.32 and also a full point above its own 12-month average. Rising stock prices and higher vol – we own it because we have to but not necessarily because we want to. Why, if the Dax is on fire on the back of loose money and a cheap currency isn’t the Dow going the other way given the prospect of tighter money and a higher dollar?

It would appear that once again it is safer within the pack than being out there alone, as contemporary investment theory and performance measurement tends to favour the existence of the wildebeest over that of the lion. And, as we all learnt from all those wonderful documentaries about the Great Rift Valley and the Okavango, one red-blooded lion alone can make hundreds or even thousands of wildebeest very nervous indeed.

Impatient recovery

I am still staggered by the markets’ anally retentive focus on the FOMC’s use of the eight letters “e,a,c,i,p,n,t,e”, though not necessarily in that order. Sure we need to know how Janet Yellen and her Merry Men see the world and the risks posed to the US economy by Greece, China, Russia, the euro, the yen, oil, gold, President O’Bama’s improving golf handicap, the suspension of Jeremy Clarkson as well as the spat between Elton John and Dolce & Gabbana. Most of them – that’s the markets – could do worse than to see what Ian Shepherdson of Pantheon Macroeconomics has to say on the subject. Sad but true that one of the most incisive Fed watchers happens to be British but I guess that figures since his old boss, the American Carl Weinberg of High Frequency Economics, has one of the most lucid views on Europe.

Shepherdson has a lovely, understated British sense of irony and reflected on the weaker than consensus National Association of House Builder’s index for March by tweeting “Anyone who expected homebuilder sentiment to rise in the NAHB report today clearly possess neither a thermometer nor a window.” Nice one, Ian.

Europeans would do well to look at the signs of nascent recovery within the eurozone with satisfaction but not blind optimism. Japan has been pumping money into the economy for decades and yet, even with all of Abe-san’s arrows, is still going nowhere in a hurry. The BoJ is still faced with 0% inflation. That said, the falling price of hydrocarbons has to be taken into account – WTI made a new closing low last night in New York at US$43.88 and opens today in European time at US$43.47 – but even so, all the stimulus in the world cannot and will not rectify structural faults.

Thus, once again, ECB President Mario Draghi has been on the wires appealing to national governments to use the opportunities granted by ECB policy and the resultant nascent signs of growth to implement reforms and to, in his words, effect a “quantum leap in institutional convergence”. He know as we know that a single currency without unified taxation and rigorous fiscal discipline is a lost cause and his appeal, read between lines, states quite clearly “converge or die”.

Yes, we are moving forward but we are moving far too slowly and the ECB cannot for ever prop up the edifice. He has, of course, been preaching this since he was appointed. I suspect, in light of French resistance to implementing the disciplines they themselves helped to define, he is getting rather bored and rather fed up. Can’t blame him.

George’s bazooka

Here in the UK, preparations are being made for tomorrow’s annual budget speech by the Chancellor of the Exchequer. Most of it has already been leaked – until recently a career ending misdemeanour – although the game is now guessing what has not been leaked. It’s expected to be a self-satisfied George Osborne who will rise who will give a grand “steady as she goes” account of himself ahead of the elections in May. He won’t want to stand accused of giving away too many goodies in order to buy votes but I’d be surprised if he hasn’t got at least on big bazooka hidden up his sleeve. I guess we’ll just have to wait and see.

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