How to turn a slowdown into a recession
February 7, 2018

Mint - Blain's Morning Porridge

People stop buying things, and that is how you turn a slowdown into a recession 

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.  

What a difference a day makes. As suddenly as it came, the mini-crisis VIX-Storm dissipated. Stock markets demonstrated incredible resilience – so strong some observers wonder if it might have been "enhanced" with a pharmaceutical-like shove from central banks (perish the thought!). If you didn't buy yesterday – and that's exactly what we're wondering: who did? – then maybe you missed the buy-the-dip opportunity? Most sensible money was sitting on the sidelines watching. What did fuel yesterday's strength? I guess a lot of hedge fund managers must be high-fiving themselves this morning… 

In fact, the day went pretty much as our stockpickers expected – a rally off the low yesterday, but they caution we are likely to re-test a new low in the medium term before any new direction is established. They see buy signals – but suggest stock markets will remain choppy in the meantime, so most folk will be watching and waiting – certainly through this week. This is not over yet.

What about bonds? The ten-year treasury back up to 2.77 percent, but there are sure fire signs its headed higher as the narrative changes back to inflation threats, overheating in the job markets, and normalization. If the global economy remains on the global macro growth alignment trend – and no real reason to think it isn't – then we're still going to see the bulk of central banks tighten this year, and rates rise. 

It's the BIG THEME of 2018 – the normalization trend. We're expecting rates to rise back towards higher "normal" levels – not towards the elevated levels you'd expect in overheated economies. (Well not yet anyway.) Bonds yields are going to rise – but the question is: when do they reach levels where yields are attractive enough to choke off the equity market?

It does worry me that we might be missing something. We talk blithely of normalized markets, but what about quantitative tightening? How much hidden damage and unintended consequences has the massive distortion of years of quantitative easing done to market-driven economies? Or, what about the amount of money that is now invested in passive exchange-traded funds (ETFs) and likely to prove non-sticky?

The unwind on the Short-VIX (volatility index) products demonstrates we never know as much as we think we do about what really underlies markets – although the rumoured US$8 billion losses on short-VIX are the kind of thing a naughty bank gets fined on a regular basis. Perhaps the losses on VIX ETNs (exchange-traded notes) will wake up the punters to ETF risks?

Rising bond yields will draw investors back to bonds – some say 3 percent US treasuries is as good a level as any in a market where inflation is more imagined than real – limiting the amount of cash rotating into equity. That's why we're watching announcements from the big money piles – like US firms repatriating cash – on where their money is going: for instance, share buybacks are good for stocks, but barbelling the bond market suggests others anticipate bonds becoming more attractive.

With stock markets now looking distinctly toppy – we're not expecting the dramatic gains of last year to be repeated long term, or for the lost month of January to be repeated any time soon – then the levels at which bonds look attractive again get lower!

The bottom line is nothing has really changed. We've got: i) a weak bond market, ii) a stock market that's looking fully priced, iii) expectations of growth, and iv) uncertainty about the effects of normalization.

My conclusion is simple. Buy assets that are correlated to global growth, but uncorrelated to financial assets (ie bonds and stocks).

It's easy to say, but what counts? Property, infrastructure, renewables, private equity, transport (including aircraft and shipping) would all be on the list. These are all real assets producing real returns – and some are as volatile as markets. The trick is finding exposure to them. As an example, if anyone is interested I'll give them an illustration of a transport asset correlated to growth showing steady 8 percent returns. All you have to do is call.. 

Meanwhile, the market is full of horror stories about inverse VIX trades… Last week it was the latest "Hot Wall Street Product".. ahem. I am reminded of a great scene in Guys and Dolls: One of these days in your travels, a guy is going to show you a brand new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider.

Nomura have apparently apologized after investors in low-vol ETN were wiped out, while Credit Suisse are liquidating VelocityShares.

Yesterday I put out a midday comment saying that you have to feel sorry for new US Federal Reserve Head Jerome Powell starting his new job yesterday: Powell is going to find he has three jobs: Inflation, Jobs, and Managing Trump who might well think a falling stock market is a Fed Plot to discredit him. Does that increase the risk of a policy mistake? 

Well, we all know what really caused the VIX Storm. It was Fed former Head Janet Yellen's parting gift to Trump. As she walked out the door of the Fed for the last time, surrounded by the media, she politely posed the question: "Don't you think stocks look overvalued?"

Don't underestimate the power of a very smart and clever woman with an axe to grind/ I'd like to think it was true…hell, maybe it is.. 

Back to the day job…. 

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

People stop buying things, and that is how you turn a slowdown into a recession 

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.  

What a difference a day makes. As suddenly as it came, the mini-crisis VIX-Storm dissipated. Stock markets demonstrated incredible resilience – so strong some observers wonder if it might have been "enhanced" with a pharmaceutical-like shove from central banks (perish the thought!). If you didn't buy yesterday – and that's exactly what we're wondering: who did? – then maybe you missed the buy-the-dip opportunity? Most sensible money was sitting on the sidelines watching. What did fuel yesterday's strength? I guess a lot of hedge fund managers must be high-fiving themselves this morning… 

In fact, the day went pretty much as our stockpickers expected – a rally off the low yesterday, but they caution we are likely to re-test a new low in the medium term before any new direction is established. They see buy signals – but suggest stock markets will remain choppy in the meantime, so most folk will be watching and waiting – certainly through this week. This is not over yet.

What about bonds? The ten-year treasury back up to 2.77 percent, but there are sure fire signs its headed higher as the narrative changes back to inflation threats, overheating in the job markets, and normalization. If the global economy remains on the global macro growth alignment trend – and no real reason to think it isn't – then we're still going to see the bulk of central banks tighten this year, and rates rise. 

It's the BIG THEME of 2018 – the normalization trend. We're expecting rates to rise back towards higher "normal" levels – not towards the elevated levels you'd expect in overheated economies. (Well not yet anyway.) Bonds yields are going to rise – but the question is: when do they reach levels where yields are attractive enough to choke off the equity market?

It does worry me that we might be missing something. We talk blithely of normalized markets, but what about quantitative tightening? How much hidden damage and unintended consequences has the massive distortion of years of quantitative easing done to market-driven economies? Or, what about the amount of money that is now invested in passive exchange-traded funds (ETFs) and likely to prove non-sticky?

The unwind on the Short-VIX (volatility index) products demonstrates we never know as much as we think we do about what really underlies markets – although the rumoured US$8 billion losses on short-VIX are the kind of thing a naughty bank gets fined on a regular basis. Perhaps the losses on VIX ETNs (exchange-traded notes) will wake up the punters to ETF risks?

Rising bond yields will draw investors back to bonds – some say 3 percent US treasuries is as good a level as any in a market where inflation is more imagined than real – limiting the amount of cash rotating into equity. That's why we're watching announcements from the big money piles – like US firms repatriating cash – on where their money is going: for instance, share buybacks are good for stocks, but barbelling the bond market suggests others anticipate bonds becoming more attractive.

With stock markets now looking distinctly toppy – we're not expecting the dramatic gains of last year to be repeated long term, or for the lost month of January to be repeated any time soon – then the levels at which bonds look attractive again get lower!

The bottom line is nothing has really changed. We've got: i) a weak bond market, ii) a stock market that's looking fully priced, iii) expectations of growth, and iv) uncertainty about the effects of normalization.

My conclusion is simple. Buy assets that are correlated to global growth, but uncorrelated to financial assets (ie bonds and stocks).

It's easy to say, but what counts? Property, infrastructure, renewables, private equity, transport (including aircraft and shipping) would all be on the list. These are all real assets producing real returns – and some are as volatile as markets. The trick is finding exposure to them. As an example, if anyone is interested I'll give them an illustration of a transport asset correlated to growth showing steady 8 percent returns. All you have to do is call.. 

Meanwhile, the market is full of horror stories about inverse VIX trades… Last week it was the latest "Hot Wall Street Product".. ahem. I am reminded of a great scene in Guys and Dolls: One of these days in your travels, a guy is going to show you a brand new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider.

Nomura have apparently apologized after investors in low-vol ETN were wiped out, while Credit Suisse are liquidating VelocityShares.

Yesterday I put out a midday comment saying that you have to feel sorry for new US Federal Reserve Head Jerome Powell starting his new job yesterday: Powell is going to find he has three jobs: Inflation, Jobs, and Managing Trump who might well think a falling stock market is a Fed Plot to discredit him. Does that increase the risk of a policy mistake? 

Well, we all know what really caused the VIX Storm. It was Fed former Head Janet Yellen's parting gift to Trump. As she walked out the door of the Fed for the last time, surrounded by the media, she politely posed the question: "Don't you think stocks look overvalued?"

Don't underestimate the power of a very smart and clever woman with an axe to grind/ I'd like to think it was true…hell, maybe it is.. 

Back to the day job…. 

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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