% of total
Total in USD billions
Anyone who thought that the Fed were solely guided by asset prices would be thinking that hey can now raise rates. But that would not be the cleverest thing for them to do because in doing so they would be telling the market that all they care about is asset prices. Which they don’t. If they did they would have raised rates in July.
The ECB appear to have lit the blue touch paper on bonds and equities and if it wasn’t October but January right now I’d say it was groundhog year, so let's settle on groundhog 9 months. The market has reached for its Jan 2015 play card and hoovered up European equities, bonds and everything ZIRP. At this rate even Bitcoin is becoming a carry trade vs Euro. But then so is sand, dust, old plastic bags, dirty needles and anything else with zero yield. The ECB rally has knocked on to all global assets as the ECB is now seen as the cash water-cannon quelling the globes financial riots. If that wasn't enough China has cut rates this weekend.
The price action has led to most shorts having to refer to the Kubler-Ross model to explain where they stand as surely this was not meant to happen. I mean China? Debt? High Yield? Earning season? Wasn’t this the big one? Well no, in financial asset price terms it has run pretty much as I was hoping, because down moves behave in just the same way as sharp up moves during investment mania, whether the 1890s railroad, 1998 internet, fracking or any first wave of the new paradigm. Doom moves are just the same. The first in mortgage the kids to invest in the next big thing that is a sure fire winner based on long term arguments. Yet though the long term argument is right, the investments are done on huge leverage that the embryonic paradigm is unable to support in the short term. The groundworks of infrastructure were laid in wave one but it is rarely the first investor who makes the big bucks. It's usually the second investor who picks up the assets for a song, once the first bows to debt load, who lands the sustainable profit.
So, I imagine, it will be with falls in asset prices. The new doom paradigm kicked in in August, the first wave went nuts managing to reprice the world 10% cheaper in a couple of weeks, yet the real economy didn't see a 10% slump in those weeks. Since then the squeeze has been on as the disparity between price and actual performance has closed up. With prices nearly back to where they were pre-dump it's as though the investor community can brush off the post-explosion debris, examine the scenario afresh, take stock and now properly enter the trade they think best.
Indeed, now that the market has weathered China, high yield debt, growth, emerging markets and earnings it might well be the time to start worrying about China, high yield debt, growth, emerging markets and earnings. Add to that the feeling that the world is fully discounting further ECB action and the picture may be near to complete as current expectation are for ECB cuts, Fed inaction, BoJ cuts and BoE dithering. The last few years has shown fading central bank expectation regularly pays off.
The market's reactions have been indicative of a rates response rather than a growth response and that is of concern. Until we get an uplift in demand expectation any rates linked market responses should be considered temporary. The way that commodities and particularly oil really didn't respond to other post ECB market moves leaves an important piece of the rally jigsaw missing.
For the first time in a long while I am actually short in stock indices, but am also now a tiny amount long a couple of dodgy oil cos to play a bit of performance spread.