Friday, 22 September 2017

Cash is oversold.

If I was selling a trade idea I would be now composing lots of arguments as to why I am getting really nervous about the markets. But I can’t. Call it a trader's instinct or some unexplainable subconscious human pattern recognition, but I am nervous about the markets. To the point that I have started shutting down long-term positions, even my long-term favourites in commodities, emerging markets, and dividend yields.

The clues are like flitting shadows in my periphery vision but ones I can more clearly identify are -

Metals - A nicely bubbling speculative play on growth rarely sees metals sell off and copper and iron are really off.

North Korea - news stories work like investments and have their own cycle of overland under response. More attention is paid to the speed of change than the underlying slow grind. The easiest things to miss are the quiet unobtrusive trends which don’t have a 'Wow - look at that 10% move’ bringing them to general attention. North Korea is a slow-burning fuse on a potential powder keg.

Fed - A few years back I stopped getting excited about Fed meetings as the hot air to true impact ratio has always been too high. This latest one has left the market a bit confused apparently with excuses being attached to ‘unexpected’ market responses. I’d rather read this as a confused market that is grasping at straws. An indication that any new feature or price drive can easily pick up a new herding.

EU - Growth is wallpapering over the cracks in the EU allowing Juncker to assume the role of Caesar with his federalist plans. The European markets are buoyant, the spreads of periphery against core are getting to the point where they appear to be discounting convergence with no chance of independent default. All are discounted as well with EU, so how much more good news can there be?

One of the greatest trends of the past years has been the issuance of debt rather than the issuance of equity. To the point of frustration as nearly all the fruity projects I’d like to invest in are, quite rightly, held in-house. Why issue stock when you can issue debt to a closed group without all the aggravation of coping with a slew of irritating nonparticipating shareholders. The only time you ‘ll get a slice of the pie is once the idea has been maxed out for the early investors.

But if there is going to be an end to the underwriting of debt by central banks then the risks change. I think we are at the start of the great reversal here all that debt that has been issued to buy back stock gets reversed.

Do I want to hold bonds? No. Do I want to hold equities? No. Do I want to hold a guaranteed return paying above inflation? Yes. But the number of government renewable energy schemes that guarantee that is reducing fast and it’s unfortunate that the surest way to receive an inflation-busting sure fire yield is through an arbitrage of misplaced government subsidies.

So what do I hold? There is one chart that I have never seen but would love someone to produce. It is effectively the inverse of an index of every investment there is. It would be the price of fiat cash. Not having seen such a chart, but imagining it and imagining the work technical analysts could have with it, I would not be surprised for them all to be saying that cash is in dangerously oversold territory. With the accompanying ‘we haven’t seen cash this cheap since xxxx” commentaries.

Who does hold fiat cash these days? Everything is invested in a scheme. Or a new version of cash which isn’t cash. The fallout from the 2008 meltdown was a complete distrust of banks which has spawned the growth of pseudo banks that have much higher risk than traditional banks but are perceived not to as they are not banks. Cash is not king at the moment, apart from places that have been devastated by natural disasters leaving them without the power needed to make electronic payments. The dependency of the monetary system on power infrastructure is often overlooked.

But I am going into cash. It is very oversold. There are probably clever ways I can play hedges but the best hedge is to exit your position. Or buy one in a garden center.

14 comments:

Asian Trader said...

Good piece/good thoughts. Agree and have been doing same - also gut feel more than reason supported by observations/"tells".

Good point you made previously about corporations switching from issuing debt to buy back stock to issuing stock to buy back debt.

In terms of where to invest cash it is right under your nose - you even mentioned it! Have you considered buying a whole garden centre rather than a hedge from one? They are cash cows.

Asian Trader said...

...................Add: Hedges might not behave as expected if this breaks - too many things without precedent built up to huge proportions. Also unprecedented high correlations may hold

Eddie said...

GMO's Montier pointed in a similar direction some time ago. You can download it here it you have access to GMO research (it's free).

A Value Investor’s Perspective on Tail Risk Protection: An Ode to the Joy of Cash

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/a-value-investor's-perspective-on-tail-risk-protection-an-ode-to-the-joy-of-cash.pdf?sfvrsn=0

BlackRaven said...

Although they are small economically I've found the evolution of the peer-2-peer lending to be absolutely terrifying. There's probably only been about £5bn lent in the UK, but the decline in the credit quality over the last 18months I've seen is worse than I've seen in other credit cycles. Creditors getting only 8% for 5yrs anonymous loans based on management accounts of loss making businesses that working capital problems.

Unknown said...

What cash? GBP or USD (or something else)?

Unknown said...

I meant what cash have you switched to.

Also, for guaranteed above inflation returns have you looked at RPI linked ground rents?

Shawn said...

@Eddie--I count myself as a disciple of Montier, but he does have a long-term love affair with cash.

Which isn't to say he is wrong here--I posted some similar thoughts, looking at the flows and valuations of different asset classes--I think the lusty move towards private equity by pension and endowment funds illustrates how they don't see value in public markets and think they can beat the system by re-allocating to private equity.

Bottom line, implied future returns on capital are low.

http://macro-man.blogspot.com/2017/07/question-for-class-what-are-unloved.html

Polemic said...

Shawn really sorry to have missed that post when it came out. Very nice.

Unknown . GBP it's my home currency and I dont want any FX risk right now, especially as GBP has just done the bounce I have so long been waiting for.

Eddie that link is asking me for passwords so though interested I'll pass.

I retweeted some cuttings from Jim Leitner on cash. which were apt.

anyway ..
biggest news for London is not Brexit but the Uber news. More millennials upset by that than brexit.

Unknown said...

Google the link and you will see it in pdf format. It's a bit old, from 2011. The main theme still applies although unlike then tail risk strategies are not in fashion (perhaps the opposite if anything).

Unknown said...

https://www.trendfollowing.com/whitepaper/JM_TailRisk_611.pdf

Polemic said...

Thanks for that link.

Al said...

I really like this post.

(reading this comment back, I feel like I've turned into a bot...but a bot I'm not, I'm Al)

Polemic said...

Thanks AI. You Notbot.

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