“The more you are willing to accept responsibility for
your actions, the more credibility you will have.” (Brian Koslow)
One Message, Several Angles
For a long-while, the
narrative of the Federal Reserve was being severely questioned by some. Now, a
broader audience within the financial services is beginning to question the
creditability of central banks, especially the Federal Reserve, which, now, has
been caught with inconsistency. Last week may have triggered further discomfort
with the Fed’s message. Frankly, pundits and observers are realizing how
the Central Bank is not firm and overly
wishy-washy. Finally? In other words, the prior “misleading” realities
by the Fed are now highly exposed (to those that still had faith in the Fed’s
plan).
From the fuming anger in
the current political climates of Western countries, to ever so growing
rumblings of nationalism, to ongoing fragility in Emerging Market,
clearly, “global growth” is convincingly weak. From a sentiment
perspective, nervy mindsets are plaguing the investor base from “Brexit”, to
earnings, to bank stocks that swing on rate hike anticipation. Absurdly, the
sentiment never reaches a new high, but even the creative Fed had to calm the
tone regarding growth. Confronting the truth is the only path for
survival for those exposed to some market related risks. Amazingly, stock indexes were reaching
psychological hurdles, as showcased when the S&P 500 Index peaked at 2,100,
yet again. Similarly, US 10 year
Treasury yields failed to hold 1.90% a few times and now is closer to 1.50%
than 2%. Basically, the bond markets are stating that there is no noteworthy
growth and a rate-hike is not feasible, as it lacks basis. This reinforces that public markets are
not budging to the “misleading” narrative that the Fed spewed for so many
months before.
Uncharted Territory, Again
The suspense continues regarding Britain staying or
leaving the European Union. Yet, regardless of the decision in this key macro
event, there are key fundamental changes since 2008 that need to be acknowledged.
The global growth weakness has been long apparent and slowdown is well
recognized. Eurozone troubles are quite evident, especially when looking back
at the 2011 crisis. And China being a mess affects both Western and emerging
market economies. Thus, the anger in Western nations over weak economies is
leading to a further demand for nationalism. At this point, hardly a shock, but
the business world is scrambling with the unknown. How are profits going to be
impacted? What happens to trade agreements? How do investors respond to all
this? Questions that were not covered in many risk management meetings a decade
ago are being asked.
In some ways, Central banks “numbed” the investor
community with indirect messaging and enhanced trickery. However in 2016, the
undercurrent realities of weakness are now coming to the forefront on both
political and economic discussions. Blaming “Brexit” for market demise is not
an accurate description, as the symptoms have been long-brewing for those
courageous enough to explore the truth.
Importantly, we’ve entered a post-globalization era where the inter-connected
world is not as fruitful as before. The future of globalization is facing
its darkest hours filled with debates, as new paths are being ferociously
explored. At the same time,
democracies are struggling with leadership, cultural vision, long-term goals
and demographic realities.
Managing
Expectations
Rate hikes appear less likely in the US given the less
than compelling economic numbers. The rush to safety is on as risk-averse
assets continue to gain some traction, while yields are much lower. In some
minds, fear has been “overblown” in recent years in which the market showed
resilience in overcoming various concerns. Others may claim that Commodities
and Emerging Markets felt the pain recently and that’s enough of a correction.
Recently, the US stocks volatility index revived from a deep sleep, signaling
increasing worries, but still tame relative to 2011 and, of course, 2008. The short-term challenges are plenty,
but visualizing how the dust settles is the wildcard and a rewarding event.
Underestimating risk is more dangerous than
overestimating crisis-like possibilities when managing money. This cautious
stand maybe laughed at during bull markets, but when reaching a cycle of plenty
of unknowns, it is good to admit that markets are known to humble the overly
confident as much as punishing the overly bearish crowds. The narrative
needs a “reset”, truth needs to be confronted and a few shocks need to be
absorbed. Until then, suspense will linger, and that’s toxic for
long-term planners who’ll sit on cash or wait before taking more risk (i.e.
deploying capital for R&D, innovation or general growth). Corporations have
been mostly buying back their own shares or overpaying to acquire new companies
rather than develop from within. To restore confidence, a genuine reset of
risk/reward and valuation is urgently needed. Perhaps, these suspenseful summer
months can produce a reality check which provides further direction for
longer-term planners.
Article Quotes:
From 1992, prediction on how the Eurozone will fail:
“What happens if a whole country – a potential
‘region’ in a fully integrated community – suffers a structural setback? So
long as it is a sovereign state, it can devalue its currency. It can then trade
successfully at full employment provided its people accept the necessary cut in
their real incomes. With an economic and monetary union, this recourse is
obviously barred, and its prospect is grave indeed unless federal budgeting
arrangements are made which fulfills a redistributive role. As was
clearly recognised in the MacDougall Report which was published in 1977, there
has to be a quid pro quo for giving up the devaluation option in the form of
fiscal redistribution. Some writers (such as Samuel Brittan and Sir Douglas
Hague) have seriously suggested that EMU, by abolishing the balance of payments
problem in its present form, would indeed abolish the problem, where it exists,
of persistent failure to compete successfully in world markets. But as
Professor Martin Feldstein pointed out in a major article in the Economist (13
June), this argument is very dangerously mistaken. If a country or region
has no power to devalue, and if it is not the beneficiary of a system of fiscal
equalisation, then there is nothing to stop it suffering a process of
cumulative and terminal decline leading, in the end, to emigration as
the only alternative to poverty or starvation.” (London Review of Books,
Wynee Godley October 8, 1992)
“China
is renegotiating billions of dollars of loans to Venezuela and has met with the
country’s political opposition, marking a shift in its approach to a nation it
once viewed as a US counterweight in the Americas. Venezuela is
facing one of the worst crises of its 200-year history, with a collapsing
economy and political deadlock stoked by the oil price slump. China, which is
Caracas’s biggest creditor and has loaned the country $65bn since
2005, has already extended the repayment schedules for debts backed by oil
sales. Beijing
has also sent unofficial envoys to hold talks with Venezuela’s opposition, in
the hope that if President Nicolás Maduro falls his successors will honour
Chinese debts, sources on both sides of the negotiations told the Financial
Times. Its recognition of Mr Maduro’s fragile position and the rising clout of
the opposition, led by Henrique Capriles, is another sign that the diplomatic noose is tightening around
Caracas’s socialist government.” (Financial
Times, June 19, 2016)
Key Levels: (Prices as of Close: June 17, 2016)
S&P 500 Index [2,071.22] – After failing to hold above 2,100 in April and
June, the index continues to consolidate. There is critical resistance that’s
plaguing the index at this junction.
Crude (Spot) [$47.98] – Staying above $50 remains a near-term
challenge. A minor pause appears at this junction and it is too early to
determine if the recent run has lost its momentum.
Gold [$1,290.70] – Hovering
around $1,300, gold follows a strong run this month, mainly driven by the rush
to safety. Interestingly, gold failed to hold at current levels in summer 2014
and January 2015. This is a major test for goldbugs at this particular point.
DXY – US Dollar Index [94.02] – Index is settling in
between 94-96. The dollar strength theme continues to showcases muted
responses. In the near-term, the dollar is set to have several swings, but well
defined ranges are intact.
US 10 Year Treasury Yields [1.60%] – Once again, yields failed to hold above 1.80%,
especially with a sharp-drop last week as rate-hike chatter slowed down. This
is further signal of weak economic climate and a Fed that lacks basis for
raising interest rates.
Dear Readers:
The positions and strategies discussed on MarketTakers
are offered for entertainment purposes only, and they are in no way intended to
serve as personal investing advice. Readers should not make any investment
decisions without first conducting their own, thorough due diligence. Readers
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believed to be reliable, its accuracy or completeness cannot be guaranteed, nor
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