Ok, so former trader and current man who you can tell is only pretending to like you, Richard Breslow, is out with his first missive of the week and it’s chock-full of Breslow.
Richard has this thing where he kind of projects onto you a belief in some pantheon of trading gods who, depending on whether you are participating in the ongoing melt-up or railing against it, are conspiring for or against your book.
That’s the setup for Monday’s note, which you can tell he spent some time crafting. The upshot seems to be that Richard thinks the simultaneously rally in bonds and risk assets can’t be chalked up to risk parity (or “home brew” risk parity, as it were), but rather to everyone trying to participate in the euphoria while simultaneously buying bonds because it’s impossible to ignore all the scary headlines.
That, in turn, leads Richard to conclude that markets are more worried than they might appear because if you can’t explain bond buying by disappointing growth and/or central bank largesse, then there must be another explanation for it and that explanation might be headline risk.
Watching the markets playing out the latest version of what passes for investing these days, you have to wonder if traders have finally found religion. I don’t mean all those times we prayed with all our heart that a bad position would be saved. Or even, heaven forgive us, for something bad to happen which would be good for moi. Rather, when all other analysis seems to have failed, there’s this curious yet understandable, belief that God will provide. After all, what else sensibly explains the unceasing rewards from the accumulation of risky assets. Despite serial reminders that all may not be as copacetic as the price levels insist is the case.
- This is really just one manifestation of the more earthly, you can’t fight city hall. A twist in a post-vigilante world, which can’t bear not to believe that the authorities will deliver what our financial market investing thesis requires, while at the same time being utterly incompetent. Or worse. Tax cuts, structural reforms, peace and goodwill will inevitably be revealed as the true driver of these asset prices. How we get there, nobody knows
- Yet, be careful before you decide to dedicate your life to this religious path and conclude financial analysis is an archaic rite from a time before the great QE deluge. For in the highly unlikely event your personal deity does indeed follow the business section, it is far more important to remember that the Lord also works in mysterious ways
- It has been unarguably true pedal to the metal has been a great way to go. You know that’s true when people tell you, investing works best by not opening your account statements and being distracted. And in fact, pure risk trades have not only done great, they haven’t done anything wrong. Set the autopilot and enjoy your satellite radio. What’s not to like? And that’s been a very profitable point
- Models, by the way, are much better than humans at thriving in this type of environment. They love momentum and long-term stable correlation matrices. So then, what’s the bad news? I’ve no idea there is any for the moment. This isn’t one of those sell upon receipt of this pronouncement pieces. Except. Except, at this point in the economic cycle, it’s worth thinking long and hard why sovereign bond yields are this pathetically and worryingly low. This no longer looks like risk-parity trading but survival training
- Global growth is pretty good. Tapering and rate hikes are coming. And we aren’t in a world where endemically low growth and rates is a foreordained outcome, no matter who tries to peddle that story. But rates refuse to rise. And this goes way beyond the vagaries of the Phillips Curve, for which there are endless explanations
- This is the portfolio commingling of risk-asset buying to stay in business and bond- buying because, in reality, it’s impossible to ignore the front- page news. We get periodic episodes where one set of problems recedes from our consciousness as we move onto the next perceived crisis. But receding isn’t at all the same thing as having been fixed. And it does add up with the cumulative risk eventually rising exponentially
- Equities will do their thing until one day they violate enough technical levels that they don’t force everyone to buy. That’s unlikely to happen today. So everything is great, right? Not really. Until bond yields start to move back from levels that scream calamity, don’t confuse risky-asset buying with comfort or contentment. This level of rates needs a lot more explanation than continuous monetary policy largesse