If the apocalypse comes…
February 12, 2018

Mint - Blain's Morning Porridge

If the apocalypse comes, tweet me.

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

That was an interesting week that was.... but what a hangover we face! What happened to the global bull stock market? Just as the party was looking likely to carry on forever, the music stopped. Reading through market the scribblers this morning, the consensus seems to be it was just a correction, and we should be buying the dips. I'm always a big supporter of buying dips...I'm not so keen on buying into a more secular decline.

Thing is, it feels there is nothing particular we can put the finger on as responsible for last week's stock market ructions. Bond yields rose a bit, inflation has gathered a bit of momentum, and economic fundamentals remain generally positive and are expected to improve in line with rising growth estimates. There is little threat of an oil shock. Folk have pointed out that with so much money likely to be invested in share buybacks and special dividends by US companies repatriating cash, the stock fundamentals look positive.

Central banks remain hawkish re normalization and higher interest rates - but modestly so. A world with moderate on-trend inflation, still low interest rates, and solid growth prospects should be positive. A screaming buy signal.  

Others say last week's pain was technically driven – on the back of a massive sudden and shocking unwind of "short volatility" trades. Others say if was due to artificial intelligence-driven algorithmic traders, while the Financial Times carries a story about insurance companies dumping massive amounts of stocks, triggered by rising volatility, linked to "managed volatility" variable annuities.

These two views, i) that fundamentals haven't fundamentally changed, and ii) that it was technical driving the sudden sell-off, suggest we should be doing what we always do at times like this – wonder when to buy the dips! And that's what the bulk of market commentary is about this morning – when to BUY THE DIP.

Most crashes reverse quite quickly - the really bad long ones require a very significant element of economic destruction or fundamental reassessment. Aside from catching a few foolish levered vol players, there hasn't been a fundamental product or sector destruction this time.

There are clues in trading patterns – lower highs and lower lows. Or the CNN Fear and Greed index spinning round 180 degrees over a few days into Extreme Fear Zone. My stockpickers say the last bear phase in February 2016 was a far more negative market phase than what we've just seen. Anyone that bought then has seen massive gains! Steve Previs comments this morning: "sure the market has dropped 10 percent, but it's not that big a deal. If the SPX breaks and closes below 2500, then something different may be taking place." However, he expects the market will remain highly volatile for at least the next few weeks.

But. But and But again. I'm not convinced. What drives the kind of fear we saw last week? There are the risks we can plan for and hedge against, and there are the Cygnus Atratus (Black Swan) events we can't. But, the biggest threats of all might just be things so blindingly obvious they are hidden in plain sight for no one to notice. A few years ago it was the silly notion that bundling up risk into mortgage pools or collateralized loan obligations (CLOs) made the risks go away. My first ever market crash was when buyers of perpetual bank bonds suddenly realised they were buying equity not credit. This time it might be the passive/docile cash tied up in ETFs…(exchange-traded funds) or something else completely.

Ten years ago central banks started playing with "extraordinary momentary policy" in their efforts to stabilize markets. Economists warned that printing so much money - which is what it was - would result in catastrophic inflation as money was transferred from the financial markets to the real economy – the convoluted theory behind quantitative easing.

Of course, that is not what happened. Inflation never occurred. In fact deflation became the threat. What if it is lurking elsewhere? The money central banks spent on bond purchases caused investors to arbitrage the buy programmes. It created massive distortion across financial assets and if you are looking for inflation - there it is. In stock markets and bond markets. QE is why bonds are so tight and stocks so high. And it's over. 

While it made little rational sense to invest in European peripheral sovereign credits because of their credit outlook, it made enormous sense to buy them on the basis the ECB (European Central Bank) was buying them (or giving banks free money from LTROs – long-term refinancing operations - to buy them)! Smart investors rode prices higher. What was there to worry about? Same is true across bonds and into equity.

The unintended consequences are now coming back to bite us. Yield tourists find themselves sitting on financial assets they barely understand, except to worry they look... overpriced. Now that QE is over - or soon to be over – they are wondering where we go next, and that's fuelling the current fear and uncertainty!

I reckon I've warned about the unintended consequences of QE and financial asset inflation over 500 times in the last ten years. Maybe I'm finally right? There is a great article by Bloomberg Gadfly Marcus Ashworth this morning on ECB corporate purchases – go read it and tremble.

Anyway… it's a fantastic morning here in London. My train ride in from Hamble was perfect (for the second week in a row), and Scotland beat France yesterday in the rugby championships. Life is perfect, except for the fact I've got the dentist this afternoon after breaking a tooth. It's going to hurt.

Just like the market.

Out of time…

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





This site, like many others, uses small files called cookies to customize your experience. Cookies appear to be blocked on this browser. Please consider allowing cookies so that you can enjoy more content across globalcustody.net.

How do I enable cookies in my browser?

Internet Explorer
1. Click the Tools button (or press ALT and T on the keyboard), and then click Internet Options.
2. Click the Privacy tab
3. Move the slider away from 'Block all cookies' to a setting you're comfortable with.

Firefox
1. At the top of the Firefox window, click on the Tools menu and select Options...
2. Select the Privacy panel.
3. Set Firefox will: to Use custom settings for history.
4. Make sure Accept cookies from sites is selected.

Safari Browser
1. Click Safari icon in Menu Bar
2. Click Preferences (gear icon)
3. Click Security icon
4. Accept cookies: select Radio button "only from sites I visit"

Chrome
1. Click the menu icon to the right of the address bar (looks like 3 lines)
2. Click Settings
3. Click the "Show advanced settings" tab at the bottom
4. Click the "Content settings..." button in the Privacy section
5. At the top under Cookies make sure it is set to "Allow local data to be set (recommended)"

Opera
1. Click the red O button in the upper left hand corner
2. Select Settings -> Preferences
3. Select the Advanced Tab
4. Select Cookies in the list on the left side
5. Set it to "Accept cookies" or "Accept cookies only from the sites I visit"
6. Click OK

Mint - Blain's Morning Porridge

If the apocalypse comes, tweet me.

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

That was an interesting week that was.... but what a hangover we face! What happened to the global bull stock market? Just as the party was looking likely to carry on forever, the music stopped. Reading through market the scribblers this morning, the consensus seems to be it was just a correction, and we should be buying the dips. I'm always a big supporter of buying dips...I'm not so keen on buying into a more secular decline.

Thing is, it feels there is nothing particular we can put the finger on as responsible for last week's stock market ructions. Bond yields rose a bit, inflation has gathered a bit of momentum, and economic fundamentals remain generally positive and are expected to improve in line with rising growth estimates. There is little threat of an oil shock. Folk have pointed out that with so much money likely to be invested in share buybacks and special dividends by US companies repatriating cash, the stock fundamentals look positive.

Central banks remain hawkish re normalization and higher interest rates - but modestly so. A world with moderate on-trend inflation, still low interest rates, and solid growth prospects should be positive. A screaming buy signal.  

Others say last week's pain was technically driven – on the back of a massive sudden and shocking unwind of "short volatility" trades. Others say if was due to artificial intelligence-driven algorithmic traders, while the Financial Times carries a story about insurance companies dumping massive amounts of stocks, triggered by rising volatility, linked to "managed volatility" variable annuities.

These two views, i) that fundamentals haven't fundamentally changed, and ii) that it was technical driving the sudden sell-off, suggest we should be doing what we always do at times like this – wonder when to buy the dips! And that's what the bulk of market commentary is about this morning – when to BUY THE DIP.

Most crashes reverse quite quickly - the really bad long ones require a very significant element of economic destruction or fundamental reassessment. Aside from catching a few foolish levered vol players, there hasn't been a fundamental product or sector destruction this time.

There are clues in trading patterns – lower highs and lower lows. Or the CNN Fear and Greed index spinning round 180 degrees over a few days into Extreme Fear Zone. My stockpickers say the last bear phase in February 2016 was a far more negative market phase than what we've just seen. Anyone that bought then has seen massive gains! Steve Previs comments this morning: "sure the market has dropped 10 percent, but it's not that big a deal. If the SPX breaks and closes below 2500, then something different may be taking place." However, he expects the market will remain highly volatile for at least the next few weeks.

But. But and But again. I'm not convinced. What drives the kind of fear we saw last week? There are the risks we can plan for and hedge against, and there are the Cygnus Atratus (Black Swan) events we can't. But, the biggest threats of all might just be things so blindingly obvious they are hidden in plain sight for no one to notice. A few years ago it was the silly notion that bundling up risk into mortgage pools or collateralized loan obligations (CLOs) made the risks go away. My first ever market crash was when buyers of perpetual bank bonds suddenly realised they were buying equity not credit. This time it might be the passive/docile cash tied up in ETFs…(exchange-traded funds) or something else completely.

Ten years ago central banks started playing with "extraordinary momentary policy" in their efforts to stabilize markets. Economists warned that printing so much money - which is what it was - would result in catastrophic inflation as money was transferred from the financial markets to the real economy – the convoluted theory behind quantitative easing.

Of course, that is not what happened. Inflation never occurred. In fact deflation became the threat. What if it is lurking elsewhere? The money central banks spent on bond purchases caused investors to arbitrage the buy programmes. It created massive distortion across financial assets and if you are looking for inflation - there it is. In stock markets and bond markets. QE is why bonds are so tight and stocks so high. And it's over. 

While it made little rational sense to invest in European peripheral sovereign credits because of their credit outlook, it made enormous sense to buy them on the basis the ECB (European Central Bank) was buying them (or giving banks free money from LTROs – long-term refinancing operations - to buy them)! Smart investors rode prices higher. What was there to worry about? Same is true across bonds and into equity.

The unintended consequences are now coming back to bite us. Yield tourists find themselves sitting on financial assets they barely understand, except to worry they look... overpriced. Now that QE is over - or soon to be over – they are wondering where we go next, and that's fuelling the current fear and uncertainty!

I reckon I've warned about the unintended consequences of QE and financial asset inflation over 500 times in the last ten years. Maybe I'm finally right? There is a great article by Bloomberg Gadfly Marcus Ashworth this morning on ECB corporate purchases – go read it and tremble.

Anyway… it's a fantastic morning here in London. My train ride in from Hamble was perfect (for the second week in a row), and Scotland beat France yesterday in the rugby championships. Life is perfect, except for the fact I've got the dentist this afternoon after breaking a tooth. It's going to hurt.

Just like the market.

Out of time…

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



Free subscription - selected news and optional newsletter
Premium subscription
  • All latest news
  • Latest special reports
  • Your choice of newsletter timing and topics
Full-access magazine subscription
  • 7-year archive of news
  • All past special reports
  • Newsletter with your choice of timing and topics
  • Access to more content across the site