Well, former trader and man who has been trying really, really hard lately to keep from flipping the fuck out in his daily missives, Richard Breslow, is out with his latest and it’s a winner.
Richard’s Thursday piece touches on a variety of stories we’ve mentioned here over the past month, including the fact that the SNB is a giant hedge fund, and the fact that the largest SWF in the world is about to up its already high equity allocation to 70% (incidentally, you should really read that last linked piece – it’s important).
That, as Breslow puts it, means “equities have friends in high places,” which in turn means it’s probably not entirely logical to try and frame everything in terms of whether the BTFD crowd was or wasn’t… well … BTFD‘ing on a given day.
That’s duly noted, but then again, it also underscores the idea that we are indeed operating under a regime that’s in a certain respect “tyrannical.” One of the things that makes it possible for these (essentially) price insensitive mammoths to keep plowing money into equities is the notion that stocks no longer fall. That’s one of the points we tried to make in our post on Norway.
Of course stocks do generally rise on a long enough time horizon, but at the end of the day it still feels like everyone (central banks, day traders, SWFs, the institutional crowd, the passive crowd, and the 2 and 20 crowd) are all just riding the same wave without realizing their own roll in creating the very same wave they’re riding.
Anyway, long live Richard Breslow. Here’s more…
Via Bloomberg
When most asset prices go up or down we talk in terms of some investing dynamic thesis. There’s a theory, a set of facts and forecasts and then we see how it plays out. What iron ore or wheat futures end up doing today affects the P/L, if you have a position, but it doesn’t validate your worth as a human being. Not so with equity prices. Especially indexes. It’s become a matter of principle to equate falling prices as proof that the investing citizenry is finally taking a stand against tyranny and rising prices as a craven capitulation. Looking at the markets through this prism is a logical consequence stemming from the seeming failure of more mundane analysis to explain what’s going on.
- Commentators have fallen into the trap of assuming every equity investor is a day trader. The reality is only at the very margins are buy and sell decisions based on anything likely to be said or done today, tomorrow or even a year from now
- We see the market move and assume everyone is thinking the same way, has the same objectives and constraints, and will, for some reason, be forced to react. Except for the little people, equities have become the ultimate in long-term plays and that has to be taken into consideration no matter the laundry list of potential negatives it’s easy to concoct
- Norway enjoys the world’s largest sovereign wealth fund.
- It has steadily been increasing its percentage allocation to equities. And has been mandated to step it up even more. They’re looking to put another $100 billion into the market even though they already own 1.3% of global equities. That’s not a typo and it represents very sticky money
- Just listen to the comment from the fund’s deputy chief executive Trond Grande, “We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap.” They also share the investing attitude of Denmark’s largest private pension fund. Brace yourself, this might hurt. They spend less and less time thinking about current politics, because despite the news drumbeat, “politics and economics have decoupled a lot in recent years.” That was the comment from the CEO of the Danish fund, not me. And he has oodles of money to put to work
- And need I tell you that the SNB’s U.S. equity portfolio amounted to $84.3 billion at the end of June, up from $62.4 billion last November? Lest you think this is just another government entity throwing the dice on behalf of future generations, the SNB has private investors, too. Did you know that a German businessman owns over 6% of the bank?
- Looking at VWAP over some arbitrary period of time and concluding it will force investing decisions is the ultimate in mistaking the trees for the forest. Again, you can’t take a day trading concept and graft it onto the big picture. If any trading takes place based on it, there’s just a transfer of positions from weak to stronger hands. It’s a big part of why buying the dip always happens. It’s not done to frustrate you
- And then, of course, there are those pesky stock buyback programs. Whether they are ill-advised and dangerous, or not, they are a steady one way flow only increasing the scarcity value of the shares
- I’ve no idea whether the market is going up or down. I can see the benefits of both outcomes. Although I would note that in the face of great provocation, equities remain a lot closer to all-time highs than any other measure. I just would caution against using bad logic to analyze a market, whether it turns out to be correct or not
