Fresh off suggesting that investors are “a great passel of hogs” who may end up getting summarily “slaughtered,” former trader and current man standing behind you in the checkout line tapping his foot as if you’re responsible for the slow cashier, Richard Breslow, is back on Friday with his final missive of the week.
There are some familiar themes in today’s installment, including the idea that equities are in part being propped up by the passive crowd and by SWFs who are largely price insensitive and barring some kind of catastrophe won’t sell.
Importantly, Breslow notes the fact that risk assets have become completely disconnected from geopolitical risk – a state of affairs which will again be tested over the weekend in Spain.
Recall that the AfD’s stronger-than-expected performance in the German election last Sunday combined with more rhetoric from North Korea on Monday served to remind investors that between the Catalan independence push, the Kurdish referendum, and the still-tenuous situation in Italy, there’s plenty to be concerned about on the geopolitical front.
More from Breslow below…
If there’s one theme running through many of the conversations I’ve had this week, it’s that people are really unsettled about not having a clue where asset prices are going. Every move is portrayed as obvious, meaningful and sustainable–until it’s not. Traders have very strong opinions but no conviction. Which is actually the definition of a day trader rather than investment manager.
- This is relevant because it helps in trying to provide a little context for what is playing out. In a world of passive and massive investors, real underlying trends change at a glacial pace but the noise surrounding them becomes deafening. Yet ultimately dispositive of nothing. This is so because the paramount sources of liquidity are removed from the day-to-day, or even month-to-month for that matter, clearing of the market’s business
- In this environment the direction of the marginal positioning becomes more important, and dangerous, than ever. What you need to add to the list of indicators you must watch is the short-term risk and opportunity that comes when momentum wanes. And it doesn’t mean just becoming a slave to RSIs. It didn’t take a mathematician to realize that EUR/USD was struggling at every foray above 1.20, yet analysts remained maximally bullish
- The German election was a big deal in many ways. But markets have been characterized, sensibly or not, by not really incorporating geopolitical news very emphatically. The voting results weren’t so much an earthquake for traders but like something jumping out from behind a tree and yelling, “boo.” The euro is up 15 big figures this year and has given back two. Is this marginal response a gift for sellers to do their thing? I don’t know, but it does show that nothing as yet has changed
- Equities on the other hand are much more complicated. Unless you embrace the notion that passive and sovereign wealth funds just have had no reason to sell. The S&P 500 keeps making new highs yet has no momentum whatsoever. These slow grinds drive everyone to distraction unless you check your statements only so often. Which is exactly what your are supposed to do with your 401(k)
- Bonds too have exhibited the same behavior. No matter what you think about dots or central bank credibility, this is all about playing your role as a method actor. Keep asking yourself what is the motivation. Until that changes, whether 10-year Treasuries are above or below some moving average is largely irrelevant in the big picture
- This weekend brings the Catalan referendum on independence. I’m told to take it very seriously. Yet markets don’t seem to care less. The IBEX looks all right and the yield spreads have been completely calm. This is another case of what will seem in the moment big news versus investors believing the grand experiment will out. We’ll get to see whether or not, this time is different