I don’t want to spend a ton of time on this because it should be self-evident, but I feel like it might be getting lost in the shuffle amid the myriad attempts to explain why everything seemed to come apart at the seams in October.
It’s a lot of fun to parse the various macro narratives for clues as to what’s driving asset prices and when it comes to the intersection of geopolitics and markets (my raison d’être), you’d be hard pressed to point to a period in history when understanding that nexus was more critical than it is right now.
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In the same vein, the inherent perils of modern market structure are manifesting themselves in outsized drawdowns and wild swings as systematic flows and computerized market making collide with the dynamics engendered by the proliferation of passive products that allow anyone with an E*Trade account to access intraday liquidity (or, perhaps more aptly, the mirage of liquidity) in asset classes where retail investors have no business being, let alone day-trading.
Whenever we get manic trading and adverse conditions like those which played out last month, everybody attempts to incorporate all of the considerations listed above into a kind of unified theory of everything. I’m just as guilty (if not more so) of that than anyone.
But if you’re an Occam’s razor type and someone asked you to explain exactly what’s going on in a world where nearly every asset class seems to be struggling to perform, you’d probably be inclined to just note that USD “cash” is now an attractive alternative for the first time in as long as anybody can remember.
More simply: TINA is not only dead, but buried as well. Nowadays, there is an alternative. And that alternative is “cash.”
Here’s a chart:
(Bloomberg)
As Citi’s Matt King put it back in August, “rising vol and meagre YTD returns are suddenly being complemented by renewed awareness of how single-name blow-ups can at a stroke wipe out months of carryâ€. That “sucking sound†you’re hearing “is the irresistible lure of 2.5% on $ cash – risk-free – pulling money from your asset class”, he continued. That “sucking sound” has only become louder since then.
Meanwhile, 10Y real yields in the U.S. back above 1% are a real challenge for risk. “Since mid-August, the rise in 10yr Treasury yields has mostly been due to an increase in real rates [and] this has been another form of tighter financial conditions for the market”, BofAML writes, in a note dated Thursday, adding that “historically, rising real rates seem to have been a fairly good harbinger of ‘risk-off’ episodes for the broader market.”
Again, there’s nothing particularly profound about any of the above, and that’s precisely the point – Occam’s razor.
Totally agree. A treasury Direct account offers convenience and attractive returns. Buying 4 week bills every week has been very, very good to me for the past several months.
Every day I learn something new. I didn’t know that in US it was possible for retailers to purchase bills directly from the Treasury.
Or differently said there are not enough dollars in the world. And so its price rises relative to other asset classes. Less dollars for assets that instead keep increasing in quantity: bonds, stocks, EM currencies, €. So dollar rises vs those assets. Something had to give. This month the FED started sucking out 50 bn/month. And in January the ECB stops pumping in the system (not yet sucking out). This makes 85 bn $ less a month starting Jan2019. One trillion a year.
Retailers? Exactly who are the retailers?
When a large swath of folks came to the conclusion they could use their savings to lever up their investments with the unspoken guarantee of the federal reserve (who is not a government entity nor has it any reserves).
Good piece but 99% of the time Occam’s razor is applied to human endeavours (markets, economics etc), the answers tend to be rubbish
As a tactical trade based on concern about future fundamentals (cash flow) and valuations i can understand the thinking. But the after tax after inflation (real yield) looks unattractive on a long run basis (through a cycle or two). Even buying a 25x FCF stock with flat FCF which is unlikely would provide better returns. Now if you make the case that margins will decline and capital needs increase and/or revenue is challenged then I would agree more but that gets us back to fundamentals. Yields are a good excuse but i think it is more of an excuse/tepid explanation rather than a sustained driver. Ultimately it is the fundamentals that drive future CFs that determine returns and they tend to beat cash over a reasonable time horizon. Of course determining future CFs (fundamentals) is not easy but a diversified equity portfolio run by smart people will do well and beat cash over the next 10 years in my opinion but if the fundamentals change pay attention. Good luck and be smart.