One day after mocking vol. longs by noting that according to the dot plot, anyone betting on volatility’s triumphant return will be rewarded in “just” three “short” years and exactly a week after comparing failed macro fund managers to the Cassini spacecraft, Cameron Crise now thinks maybe investors should pinch themselves and make sure they’re not “asleep at the wheel.”
In a way, Crise’s Friday missive echoes Morgan Stanley’s recent contention that this year has been characterized by “a general lack of macro catalysts.” Here’s Crise:
2017 has been a very different year from its predecessor. Last year featured electoral shocks in the U.S. and U.K., whereas mainstream candidates triumphed in the Netherlands and France.
That implicitly assumes that everyone knew ahead of time that Geert Wilders was destined to disappoint and that Marine Le Pen had no chance of winning. But if 2016 taught us anything, it’s that when it comes to the rise of populism, nothing is certain and the lack of significant spread widening around this year’s European political hurdles has everything to do with PSPP and CSPP (i.e. ECB asset purchases) and exactly nothing to do with everyone trusting that this time, the pollsters were right. That is, Crise is probably correct to say that one reason things have been calm since May is that the outcomes in the Netherlands and France were market-friendly, but that doesn’t explain why markets were calm in January, February, and March. But if you look at deviations from the capital key on ECB purchases in and around the elections, you can find some clues as to why the angst in bond markets and credit was contained.
On Trump, the situation is immeasurably worse than it was in November. Remember, part and parcel of the “Trump trade” that drove stocks, yields, and the dollar higher in unison after the election was the idea that the new President couldn’t possibly be as inept as he seemed and would thus be able to swiftly implement his agenda thanks to the fact that his party controls the government. At the same time, the notion that he would end up starting a nuclear war was more a joke than it was a real concern. Fast forward nine months and he has achieved literally nothing on the legislative front and is now engaged in an increasingly absurd war of words with Kim Jong-Un – a war of words which this week hit a new low after Trump called Kim “Rocket Man” and Kim called Trump a “mentally deranged dotard.” These are two men with nuclear weapons.
So no, there has been no “shortage” of macro catalysts as Morgan Stanley contends and no, there is no “extent [to which] the market’s resilience is justified” as Crise contends.
But Crise is right about one thing, 2017 has indeed “been a very different year from its predecessor.” After all, every year is “a very different year from its predecessor” by virtue of being a different year. On top of that though, the world is a considerably crazier place this year than last and the fact that the only real positive anyone can name on the geopolitical front is “real Nazi didn’t become President of France” speaks volumes about how low the bar has been set.
Don’t forget about the populism meter:
Anyway, read more below from Crise who, in the final analysis, at least acknowledges (if only tacitly) that the “monsters under the bed” may be real…
Was it really only last year that the U.K. voted for Brexit? That Donald Trump won the presidency? That Leicester City defied 5000-1 odds to win the Premier League? Yep, though it feels like a long time ago. While it’s true that 2017 has seen plenty of headlines that would have seemed unthinkable a few years ago — think of the U.S. president trading nuclear threats with North Korea –markets have lost their ability (or at least willingness) to react. To some extent the market’s resilience is justified; in other cases, however, it looks like a case of when rather than if potential shocks get priced in.
- 2017 has been a very different year from its predecessor. Last year featured electoral shocks in the U.S. and U.K., whereas mainstream candidates triumphed in the Netherlands and France. With Angela Merkel seemingly certain to win a fourth term as German Chancellor, this has been a good year for the political status quo
- This in turn appears to have made financial markets relatively immune to political considerations. Last year “Brexit meant Brexit” and sterling tumbled. On Friday Theresa May offered a view of the negotiations that was long on hope and short on detail. When you need to repeatedly cite the need for “creativity” in talks, that’s usually a sign that you’re nowhere close to getting what you want. Yet the FX market has barely shrugged — for the time being, Bank of England monetary policy is what currency traders care about, not Brexit. That will eventually change, but apparently not today
- The Fed delivered a hawkish surprise that many journalists apparently found difficult to swallow. The same holds true for markets, as the dollar has struggled to build on its initial gains. Last year a NY Fed study that underlying inflation is above 2% and rising would have been the stuff of a rip-snorting dollar rally. This year? It barely merits a yawn
- To some extent it makes sense that markets place less weight on politics given that there are fewer surprises. Moreover, it’s easy to whip out your pocket Freud guide and dismiss the U.S./N. Korea tensions as unlikely to result in tangible danger. It’s even possible to downplay the importance of current monetary policy makers given the “unusually poor visibility”
- Not every shock from 2016 will return. Leicester City, for example, currently languishes in 15th place in the 20-team Premier League.
- Yet that doesn’t mean that none of them will. Investors would do well to consider which risks are just a fictional monster under the bed — and where the market is asleep at the wheel