S&P 500

“I Keep Getting Asked, ‘When Will This End?!'”

"I keep getting asked 'When will this end?', which is a very different question than 'How long can this continue?' On the one hand it implies that investors are seeing it but can’t quite believe it."

One of the interesting things about the recent run up in stocks is the presence of this kind of lurking strawman argument that people seem to be constructing to make themselves feel smart about the fact that they’ve stayed long and rode the wave.

That is, when you hear the bulls talk about feeling sorry for those who the rally left behind, as yourself this: who the f*ck are all of these people that missed out? And where are they? Because I sure as hell don’t see them.

The very fact that the benchmarks are where they are suggests that there are more people on board than people who missed the train.

Indeed if you underperformed your benchmark in this environment then you probably shouldn’t be allowed to manage money. Think about it. You’ve got plunging stock and sector correlations which, despite the fact that low realized vol has kept a lid on dispersion, should still be conducive to alpha. And if you’re too stupid to pick winners from losers, you can always just join ‘Sharon‘ on the SPY bandwagon.

That said, I suppose there are some “pros” out there who are vexed by the fact that the reflation trade combined with geopolitical event risk has upset the central bank-inspired “correlation always equals 1 across all assets all the time” go-to narrative. As former FX trader Richard Breslow writes this morning, some folks are discovering that they weren’t global macro experts after all.

Further color below (the point about SWFs is particularly notable).

Via Bloomberg’s Richard Breslow

I keep getting asked “When will this end?”, which is a very different question than “How long can this continue?” On the one hand it implies that investors are seeing it but can’t quite believe it. It also means that they feel nauseous at the prospect of having been, once again, under-invested to their benchmarks.

  • My response is always, “What do you mean by this?” To which I inevitably am either accused of being daft or unhelpful. Don’t I know about the Trump trades? Of course I do, but it’s a bad conceit to lump every asset class into one basket that will sink or swim together
  • We all fancied ourselves as global macro experts in a world where the financial crisis and then central bank policies drove so many correlations toward one. You didn’t need to know the subtleties of a market, just whether it had strayed or not. Which one doesn’t belong became a trading methodology rather than a parlour game
  • Unless your base-case view is we’re going to sink back into a state of global malaise, it would be best to start weening yourself away from those omnipresent matrices. It won’t be easy and algorithms will fight it for a good long while, but there’s no lasting future if you don’t adapt
  • If you believe in the global growth and re-inflation story than rotating out of bonds makes obvious sense. Higher yields in the U.S. means higher yields elsewhere. They reinforce each other. It’s not going to be nearly as clear sailing for the dollar, where trading will depend on which country or region jolted the surprise index last
  • Love emerging markets? They’ve had a great run. On the theory that higher rates and dollar reflect the rising-tide theory. The recent economic numbers have made this a clever trade
  • But these countries have also thrown caution to the wind and keep issuing, with ease, dollar-denominated debt. If the Fed does kick it up a notch while, say, commodities stumble, that virtuous circle could turn into a desperate scramble. Something to at least consider as the Bloomberg commodity index is testing interesting support levels
  • Do you despair that soaring equity prices keep making everyone else rich? Even though you have studied the ill- effects of protectionism. And they’re very real
  • The next time you wonder just what P/Es are justified, ask yourself when the last time was you saw one of the gigantic sovereign wealth funds say they were putting less money into equities. That’s the great reserve rotation which makes their position releases far more important than any Form 13F report. And most economic numbers. And you thought the Bernanke put was dead
  • It’s going to take a lot more sweat to continue being considered a “big thinker” as the world begins to move on

3 comments on ““I Keep Getting Asked, ‘When Will This End?!'”

  1. It feels a lot like 1999, right? What could go wrong?

  2. Anonymous

    I think you should have a recurring feature. WWSDN (What would Sharon do now).

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