Tuesday, September 18, 2012
We are sure that the poem IF has been done to death by us before, but are in half a mind to rewrite it with "being long dollars" as the theme, as it would appear that if you can stay long dollars whilst all about are losing theirs, then indeed you will be a man, my son.
We are now at Day 4 AQE3 (Anno QE3) and the new era, indeed epoch, has seen the bears thrown out of the temple and the rush to get back into everything that normal QE rules dictate should go up (or down). Being short of USDs is one of them, but TMM have seen these QE Econ 1.0.1 knee-jerk trades before and never seen them play out to maturity, well certainly not in a straight line. Indeed the DXY is much where it was pre the Lehman event and stocks have been down just as much as up after the previous bouts of QE. Bonds historically have done better on QE, but the reaction this time is to pile into stocks, sell the usd and leave bonds lower to flat displaying a hope (or fear) that this QE IS different and will completely inflate the economy launching a spike in inflation and the collapse of the dollar.
Is this time different? Well it is "open ended", but then so is the invitation from our Great Aunt to pop in for tea anytime, but it doesn't mean we will. However for Team Macro Man the difference isn't the inflationary impact. Much of the inflation side of expectations is derived from the expectations themselves. Expect inflation and you buy commodities and the resulting price rises reinforce inflation fears. Selling of bonds and the buying of Gold on inflation fears leads to media morons pointing to their resultant price actions as evidence of inflation fears which must mean inflation is coming. But until wage price inflation feeds through into the economy the rest is just expectations. And this must surely be one of the key points. For wage prices to experience inflation the labour market has to improve and as soon as the labour market improves there is no need for QE and it stops, cutting off the source of the inflation fear loop. The next question should be "ah .. well is it possible to react quickly enough to switch off QE between the first signs of an improved labour market and lagging QE impacts accelerate things?" That we don't know but flooding the market with a load of dodgy bonds that the FED has previously bought should be pretty effective. In summary, TMM think the inflation trade has got way ahead of itself .. again.
TMM think the impact of QE3 is of much greater importance to the sentiment balance between bonds and equities. Where as we don't think deflation is near breaking point, we do think that the weight of investment that the sovereign global bond market can bear is. Just how much more 1% or 2% returns an investor wants with decreasing credit profiles and an increasing supply side is to us debateable. Whilst equities, the scourge of the bear and also of the younger investor, could just do something extraordinary. They may just become the next darling of the market. Could they become the next comfort food?
Here TMM will digress for a moment. We have long felt that fashions in styling are driven by economic background and go beyond the height of hem lines. Booms provide a security that allows one to wander from comfort zones. The 60s saw the rise of minimalist furnishings and stark spaces just as the 2000s have. Yet a turn in fortune and suddenly the old comforts of the parental home become reassuring again. The strife of the late 70s and early 80s we saw a return to pine, cluttered rooms, house plants and "Laura Ashley" busy patterns. Art Deco's 1920s boom faded away in the 30s and 40s yet saw a resurgence into the 60's. If this pattern is to be followed, really TMM ought to be going short Swedish furniture companies and instead loading up barns with antique furniture and investing in floral print design co's. But we just wonder whether the forgotten world of equity investments, having been dwarfed since 2001 by property, credit, bonds and commodities is suddenly going to see a resurgence in fashion. We don't just mean in professional fund manager space, we mean on the streets, in the salons, at the dinner parties, in the bars and finally in the taxis.
We may have started already. To TMM, the fact that we can have a US equity market rally as much as it has this year (despite the doomsayers) only JUST be joined by a professional consensus swing to "Well you have to own equities" leaves us thinking that we are only just in the lower to middle part of the rising "S" that spells the shape of most bubbles. NO NO NO .. we did NOT say it's a bubble! It's far from being a bubble. Equities are so despised by the Nuevo post-2007 black swan hugging investor that it cannot possibly be called a bubble at least until Hero Zedge are writing articles about down moves being conspiracy and we see BMW driving 25 year olds bragging about their equity portfolios (TMM at this point have just realised that all bubble tops are signalled by BMW 3 series driving 25 yr olds bragging about their portfolios. Remember property?).
But as ever markets are a blend of the long, medium and short term views. And though TMM do agree that equities and things corporate are the way to go, they have been long for a while but are a little dismayed at the quality of some of those who have just joined their carriage. To the point that we think we may just get off and wait for the one behind.