Tuesday, September 18, 2012

Comforting Antequities

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.


Bob_in_MA said...

A revival of the cult of equities here in the U.S. is a very long way off.

I think you are discounting the appeal of bonds to the average investor. They aren't looking at the yield, they'd have no idea what the yield is. They're looking at the performance of funds in their 401k.

For a lot of boomers, the cult of the bond fund is alive and well.

Anonymous said...

I am not surprised by your "stand aside" view.In terms of the moneyflow and sense of urgency to buy we have already seen considerably more than might have been expected during the course of the summer months.Hence, we arrive at the strange position of QE arriving with it's typical kneejerk kick,but where art the follow through? Already in?

Anonymous said...

Thats one of the best posts here for years. Thank you.

Charles Butler said...

Never quite made out the connection, but horse racing (in NA) never did manage to recover from the Volker recession. Once took up one or two broadsheet pages daily - can't find it now.

Polemic said...

Bob - I just have a feeling that anything that starts to run grabs retail. Nothing like fear of missing out to counter fear of losing. I ve always felt taht there was a 7 year cycle of bonds-equities and commodities but in the mean time Joe Public has invented other forms of money ( namely houses ). Equities are dead as a fashion but with everything else being toasted or toppy just perhaps, and i know its a perhaps, retro fashion may kick in. CNBC I agree can go stuff itself but their may be an MTV version ahead. All ponderings.. and the above post was written on the fly anyway as musings with no great thought attached.

Charles, the vaguest of connections was meant to be the "comfort" return to the womb investment of equities as a comfort class. but I really like your example of horse racing never recovering.

C .. well that thats the point . But we do know an awful lot of people that want to be longer. whether its the dip to buy, that we are aiming for on some relaxation for "best case scenario" expectations to China/japan/spain/mid east/earnings you name it its all in the bottom of the toy box waiting to be played with again excuses.. or just a scream higher, It does not feel like core is back to where it wants to be.

Anonymous said...

Maybe you dont frequent zero hedge as often or its lost between "here comes world war" or here comes "doom of japan" or their anti semetic drivel but they've been harping on the overpriced nature of the stock market for a while now.

Anonymous said...

C says'
I hope the post at 5.55 was not referring to my post because it wasn't deserving of it,no special insights at all.
The fact is, after a kneejerk jump to monetary policy it isn't unusual to see the market hold back for a few days to swallow the action because nobody likes to chase price action from days like that .That is probably even more applicable when markets have already done so much by way of anticipation.However, once swallowed there is still a decent chance of follow through.My comments yesterday about follow through were simply a comment on why I could understand TMM being wary,they would be part of a bigger wait and see crowd.
Likewise I share Pols comments about "being longer",I'm one of them.
Really it's a timeframe issue,very short term giving the market a chance to swallow what it has been anticipating so well and then longer term staying on the train because the laternative of govt debt still leaves me absolutely cold.In terms of conviction I doubt I have in living memory felt so strongly about not wanting to hold an asset group and the alternatives by way of correlation are obvious.

abee crombie said...

forget the cult of equities, the cult is in HY! Emerging market bonds, HY corporates all are going to keep getting stronger and spreads compressed because the economy is crap, but still OK for big business and CBs will keeps rates low

When something finally changes (my guess is as good as yours) either duration will kill or credit spreads.

Wage and inflation expectations are already increasing in EM as China changes its development model. If we only pay attention to employment/wage stats in the developed world I think we will miss it. It should show up in lower profit margins...

Leftback said...

10Agreed. Yield huggers have priced HY for perfection, too many new punters have crowded in there who don't know what a credit spread is.... at some point this will get messy.

Anonymous said...

At some point this could all get "messy".Seriously,have you (and certainly I) got any bloody idea what anything is really worth anymore in preparation for the day the central banks might have to take away "put"?
Meanwhile,can any of us afford to say no thanks and do a Hussman and stand aside waiting patiently for that day to come so that we may be vindicated?

It's all become a game for the greater fool and hope that he doesn't turn out to be you.

Anonymous said...

Get longer if you wish but note that we are still in a secular bear market. Whether u feel equities are safer than government debt it wont matter much when the next crisis hits because everyone and their mother will be flocking to US treasuries. This thing isnt over until the 30 year tsy gets down to 2%.

Leftback said...


Reasonable point, especially re: the US market which I am simply avoiding, b/c at the moment I can't value anything and I prefer Europe. I am not doing a Hussman, I am about 50% long and 50% cash, looking for opportunities but not seeing any.

There is a reasonable possibility of a slowdown in the US, and this is 100% certain if the Fiscal Cliff materializes. If Fed Ex guidance is right about the US consumer and business climate in 2013, that will cause a lot of assets to be re-priced, and may indeed drive Tsy yields lower, perhaps reaching Japanese levels of 1% on the 10y.

Before the usual abuse begins, every time we have mentioned Japan in this space over the years, someone much cleverer than me says "can't happen", after which all of these things have in fact happened (ZIRP, QE, QE2, 2% 10y, QE infinity...).

Dee Dee Humberside said...

Speaking of things we like to mention in this space, I had a good chuckle seeing as how Faust references have now become explicit in Germany.

Poor Jens, longing for Gretchen ...

Dee Dee Humberside said...

As for HY, agreed with the above. Spreads are a-OK, but all-in yields are, well ... some of the "good stuff" is now in the 4% ... nuff said

All fine and dandy while corp defaults are low and short rates are anchored. But holy shit, that's a serious amount of duration risk. And I guess this is being shifted to those guys worst equipped on the liabilities side to deal with a blowup there ... yup, pension funds.

At least, if you have to do something, buy floaters in that space.

Tradebot said...

Equities? Uh huh. I respectfully disagree. My reason is that equities are an old hat when it comes to bubbles (TMT circa 99/00), start from lower base, reach highs fuelled by leverage and have some dynamic driving the story.

I can't see anything like that in equities.

I think the precious metals/commodities are more likely to take off when central banks lose their creditability with mainstream market.

abee crombie said...

anyone want to buy columbian 2041 paper(29 yrs) in USD for 4.039%

the women are beautiful there but I doubt that will end well.

As an aside for equities, I do wonder how much earnings growth plays into the picture. Seems to have stalled.

Retail can push spos and other markets higher, along with a record number of mutual fund managers and hedgies underperforming (chasing beta now). But as much as I see storm clouds for equities I cant really get pessimistic until the largest gadget company ever is trading at 15x or more and makes a blow off top. Thats the ultimate guidepost for me.

Leftback said...

Sentiment and participation in equities are far from bubble levels, which is not to say there will not be some declines along the way to whatever wondrous new high is ahead of us.

But you'd have to say that this market can go higher, and there is still room for a lot of late arrivals to join the party, especially when the bond market serves up a bit of pain to retail investors in the shape of a sharp spike in yields that has them crying over their Q3 statements. That usually has them heading for the exits and rushing into stocks, - sometimes entering at exactly the wrong moment.

Anonymous said...

NSC warned - the transports are truly not confirming this rally. How much longer until reality sets in?

Anonymous said...

Agree that equities arent at bubble levels but we dont have to be at bubble levels to be topping. Remember 2007? Equities were not at bubble levels before mkts topped out. The transports are weak as evidenced by FDX, NSC, CNW. At what point is the hope going to become reality? When has QE or monetary policy ever stopped an economic slowdown? CB's have been trying for 100 years and have never been able to prevent a recession. Yes this is hussman-like talk but there is some truth in it.

Secret.Sauce said...

While I have no doubt that equities will once again be in fashion and rally mightily, I do not think that it will be from this point, which, although not bubbly, is marked by very rich valuations. I think that there will be a better entry point, strategically speaking. Still, QE(n+1) does afford good tactical opportunities.

gutscheine zum ausdrucken said...

very good post

Anonymous said...

Ol' dirty bastard says...

C, Leftback,

I really liked the "do a Hussman" part. From my side of the pond it didn't seem like this guy is so well known but obviously he is. Methinks he's got some interesting ideas but the overall impression was a little obscure.

Just my 2 bps.

Anonymous said...

Here is a question for you guys as I think you guys are way more knowledgeable than I in this matter -

What exactly is the QE transmission that causes equities to rally? If the Fed is buying tsy/MBS stuff from players like PIMCO, the banks etc. then is it true that the funds obtained from selling these securities are parked into equities? Isn't it true that most of the funds the banks have received from QE have been used to shore up bank capital requirements with the remainder parked right back at the Fed or used to buy similar types of securities like more Treasuries? Which in a sense is a circular mechanisn which just results in the Fed financing the Treasury department by taking up new issuance.

I don't see the link between QE and *new* funds going into equities. It seems more psychological without any real evidence that shows newly created money flowing into equities.

Perhaps I am mistaken but I would welcome a clarification.

Dee Dee Humberside said...

In a nutshell, those who have succesfully (or not) front run the QE announcements proceed to sell their MBS/USTs to the Fed, using the proceeds to move further out the risk curve. The squeeze on yield moves from one asset class to the other.

Whether the initial funds end up being parked back at the Fed doesn't change the fact that the central bank removes a lot of duration from the market, so supply> yield hunters have to chase longer/riskier assets for the same juice.

Leftback said...

Modest dollar rally and profit taking are not entirely unexpected, especially heading into US equity options expiration and the week after the Wizard party. Will probably inspect EURUSD for a variety of short term support levels and fib retracements and look to take some punts on the long side in Europe next week.

Is fading this week's "exit rally" in Treasuries the easiest trade one could imagine? Looking at the chart, one might be forgiven for thinking this one is a tap-in (insert: "lay-up" for US readers).

Changing the topic, the financial media have started noticing that Chinese equities are seriously in the tank and at 2009 lows, which has me watching the Shanghai index very closely indeed, and even considering donning Chinese Kevlar gloves.

So, next week, long Europe, short the long bond, and long China?

Anonymous said...

Well we love the diversity of opinion.It's what makes market function.
What always surprises though is how adamant some people are and how precise they can be about where the future is going to be. If I have ever expressed myself with that kind of cetainty I must not have been making myself clear.

For equities,given we have already heard what is against them.
With few exceptions contained labour costs,for sound businesses (and worryingly some not so sound) dropping financing costs,very favourable tax policies in many places and finally decent balance sheets on the whole much better than govts.

Europe a la dominoe style has seeped out around the world in dampeneing growth this year. The question is,is the worst of that already over?

Anonymous said...

C says'
Prior to my entering weekend mode I leave you with these thoughts.

Much has been said about equity and valuation and proximity to historic highs in earnings.

Nothing much has been said about the confluence of policies driving macro economics that makes such a state of affairs rational.See above.

Nothing much has been said about the uniqueness of global macro economic policy.Yes the trap "this time is different".Well sometimes events are different.Someone please point to me the time in living memory when global debt issues were has they are today and where central bank monetary policy and govt fiscal policy was consequently so supportive globally ?

Anyone know what level of taxation corporates are paying these days compared to days of old? let's think balance sheets people.

There will almost inevitably be a correcting of misallocation to come from these kind of policies,but guessing where and when and what scale is in my view impossible and that view is backed by the experience that I see no one getting this kind of guessing game right other than has a one off event that presumes to then make them some form of tea leaf reader to be relied upon in the future.If only!!

There are all kinds of strategies for dealing with the markets we have had ,but none of them make much sense without equity exposure.Whilst that will no doubt change all i can say for the moment is,in the ending words to a well known film, "Not yet my friend,not yet".

abee crombie said...

well it looks like Kotock of Cumberland, a pretty big and knowledgeable buy side guy is on the same page at TMM. http://www.cumber.com/commentary_archive.aspx

arguing in a low rate world we could see market P/E's of 20x...i'm staying open minded but not pounding the table on the equity trade

Anonymous said...

Kotock of Cumberland sounds like Jeremy Siegel and the dow 30k camp crew.

Leftback said...

P/E is notoriously useless when rates are zero and the floodgates of liquidity are open. I often use a "fair value" calculation of 13 x EPS, but that doesn't mean to say I expect the market to sit there.

Kotok's not an idiot but he is one of those people who got Europe wrong repeatedly in 2012.

Polemic said...

Interesting that those who like to call a collapse in the dollar also decry calls for indices higher. If usd halved in value, all else being equal (which yes i know it never is) then dow would be at 27k as it is measured in dollars.

Leftback said...

Quite, we are yet again in a period of ONE TRADE, where you either hold dollars or sell dollars and buy X (where X is more or less any old equities, emerging FX or commodities you happen to fancy).

Dollar Collapse fetishists peddling the usual logically inconsistent hyperinflationary chaos scenarios. Such predictions have been wrong 999,999 times out of the last million, Weimar and Zimbabwe being exceptions.

Leftback said...

The recent rhubarb over "flation" debates is nothing new, see the parallels during the Great Depression.

Flation Fears 1930s Style

abee crombie said...

Kotock is no soros or Dalio but he does speak to a lot of Fed/CBers and buy side ppl and has been decently calling the market lately (luckily, who knows)

anyways no soothsayer knows what will happen, but the more QEfinity arguments permeate the sidelined retail or asset allocators the bigger potential it has

2 Fears in the market. Losing money and missing out. Right now it feels like missing out is ruling the day. As opposed to last 2 fall periods which melted up, opinion then was that markets would be range bound for rest of year.. this year it seems like calls for new S&P500 highs are getting to be the norm.