If you think “way” back to last night, I reminded folks that on November 16, JPMorgan’s Marko Kolanovic essentially predicted everything that’s happened over the past two weeks both in terms of the Fed’s dovish shift and the trade truce.
The note was in fact just a handful of sentences long, and as it turns out, that was just the right length because in retrospect, Marko managed to capture the entire narrative in just five sentences.
Incidentally, Marko Kolanovic somehow divined two momentous shifts in the narrative from a one-sentence Clarida soundbite and an off-the-cuff Trump remark to a reporter 2 weeks ago. Marko literally called all of this in a 5-sentence note dated Nov. 16… pic.twitter.com/OCq06IL8is
— Walter White (@heisenbergrpt) December 3, 2018
Admittedly, I was skeptical that Clarida’s CNBC interview (in which he effectively refuted Jerome Powell’s “long way from neutral” boondoggle) marked a sea change in the Fed’s reaction function.
I was even more skeptical of the notion that Donald Trump’s off-the-cuff comments to reporters in the Oval Office represented anything more than the President riffing on familiar talking points, as he’s wont to do.
I expressed that skepticism in a series of posts that day and then, after reading the lines excerpted in the tweet shown above from Kolanovic, I penned a short post suggesting I might have been too cynical in my interpretations of both Clarida and Trump.
In that latter linked post, I said the following:
Depending on how you interpret Friday, it’s possible to paint Clarida’s comments and Trump’s remarks as the first signs that both of the “responsible” parties for the October rout are now attempting to correct their mistakes.
So, again, maybe I’m wrong.
Maybe we saw the light at the end of the tunnel on Friday.
Time will tell.
Time did in fact “tell”.
Fast forward a couple of weeks and as it turns out, Kolanovic’s assessment was remarkably prescient. Clarida’s remarks to CNBC did presage a shift in the Fed narrative and while I would still suggest that Trump’s comments to reporters on Friday, November 16, were nebulous (at best), the end result was a trade truce between Trump and Xi over the weekend in Argentina.
Well, it apparently is not lost on Marko Kolanovic that his call was prescient because he’s out with an update on Monday afternoon.
“Two weeks before the G20 summit, we forecasted significant progress on the two largest market risks: the Fed and Trade”, Marko writes, before noting that “both of our views [have been] largely confirmed by Powell’s speech, Fed minutes, and what we see as significant progress at the G20.”
Indeed. Next, Kolanovic reiterates something we discussed at length on Monday and also over the weekend: the “pain trade” from here is higher thanks to a combination of positioning and CTA re-leveraging as key levels are breached.
“We think that the path for near-term market upside is largely clear and the pain trade is on the upside”, Kolanovic says, adding the following about the dynamics:
Current investor positioning is very light. Equity exposure (beta) of global hedge funds (HFRXGL) was higher than the current level 98% of the time historically, and trend followers (CTAs) are net short equities (beta of -0.25). These trend followers may need to buy given that signals are now turning positive. The performance of defensive factors vs. cyclicals is in a bubble and the Put/Call ratio is very low, both of which point to near term market upside risk.
Marko doesn’t include charts in his Monday piece, but here’s the beta of the HFRXGL to the S&P:
According to Kolanovic, JPMorgan’s clients have been asking about “the recent uptick in news stories with negative market sentiment.”
Marko attributes that phenomenon to a couple of factors, the first of which is the media chasing stories in order to “fit the recent price action.” In other words, equities are falling, credit spreads are widening, volatility is elevated, so there must be a story to tell and the media being in the story-telling business, they’re of course going to oblige. Kolanovic also suggests that managers who have underperformed are effectively attempting to justify that by conveying negative views.
But a particularly interesting bit comes when Marko says this:
There are specialized websites that are consistently spreading misinformation on geopolitical, social, and market issues.
As we’ve said in these pages on too many occasions to count, market participants should be careful about where they get their news. We go out of our way to present a balanced view, but other portals do not.
Importantly, Marko also notes that the narratives being pushed for 2019 simply aren’t consistent. It’s hard, for instance, to reconcile a synchronized global slowdown with ongoing Fed hikes and unrelenting escalations on the trade front. Here’s the problem with that, from Marko:
This view has a simple logical mistake: these 3 events are not independent (higher likelihood of one, reduces the likelihood of the others).
It’s pretty hard to argue with that. In order to make those three events consistent, you essentially have to posit that all of the actors involved are irrational. While there’s a case to be made that one of them is (Trump), the rest (e.g., Powell, Xi, etc.) are most assuredly in full possession of their faculties.
There’s more in the note on the prospects for trade going forward and we’ll touch on that later, but for now, we would gently suggest that you take heed to all of the above and bear it in mind as you parse the daily cacophony of market news and analysis.