Ok, former trader Richard Breslow’s latest daily missive is out and he’s returning to a topic that’s near and dear to his heart: two-way price action.
See very much unlike you, Breslow doesn’t think it would be such a bad thing for markets to revert to a state of affairs that allowed for both buying and selling.
That’s not to say he’s in the camp that thinks we need some kind of “glorious” reset characterized by creative destruction on a massive scale (there are some bloggers who have been waiting on that for nearly a decade and trust me when I tell you that they’ll be waiting on it for at least another decade before it ever happens).
Rather, Breslow believes that a correction in risk that exhibits some semblance of rationality in terms of how discriminate market participants are (i.e. people aren’t throwing out babies with bathwater) is just fine.
Put differently: Richard hasn’t heard anyone give a plausible explanation for why a little spread widening and a little haircut for stretched multiples suggests that evil spirits have taken control of traders’ minds.
Repeat After Me, the Sky’s Falling And It’s Good
It would be a very therapeutic exercise, and much more useful analysis, to keep reminding ourselves that asset prices, which are commonly identified as barometers of where we are on the sentiment scale, can go up or down for reasons other than just panic versus greed. It’s a shame that we remain locked in a post-apocalyptic mindset where if credit spreads widen or equities sell off it must mean that evil is stalking the trading rooms of Wall Street. On the other hand, just because equities went up one percent yesterday, doesn’t mean the world was suddenly grooving to the dulcet sounds of the all-clear claxon
- Picture this scenario. The economy hangs in there. The FOMC announces its taper plans and even hints that there’s room for the rate hikes they’ve yearned for. What do you think is going to happen to “risk?” And then try to explain why that’s so obviously bad
- The only bad thing is if the speed of any correction is swift. The direction is not important. Or indeed, should be looked at as a positive development. Listen to the tapering message in speeches. Doing it or not really isn’t still up for debate. Only how well it will be managed. Opinions differ
- Italian spreads have widened out to Germany somewhat impulsively over the last week. There has been some news over a dual currency regime. Reads great in the papers. It isn’t bothering or motivating traders. But as tapering gets closer, suddenly the easy and tasty carry that has driven that spread all summer is smelling just a little off. ECB President Draghi was singing only off Capital Key this morning when he cautioned central bankers and investors to remain flexible going forward
- Investors are being prudent, lightening up from recent extreme tights. In the scheme of things, this move isn’t all that dramatic and isn’t being driven by some new European political crisis. Building in a concession for next week’s dual auctions is how markets are supposed to function. And as Italian yields back up, there is knock-on pressure on the CDS–which is not trying to scream like a canary. Even if it makes a nice narrative
- And try not to forget that while investors may be marked-to-market at the last price, they didn’t acquire their entire positions at these levels. These abnormal asset prices orchestrated by your local central bank got here over years. A decade in fact. Commentators lust after calling a top, but that isn’t the goal of actual portfolio, let alone reserve, managers. Benchmarks work both ways, don’t you know?
- Tomorrow, I’m going to tell you where equity prices are going. Every time I’ve planned to this week, I’ve run out of space