If you’re looking to explain “what happened” in 2018, there are a variety of factors you can point to in the course of documenting why it was that virtually nothing managed to perform for investors.
One of the simplest explanations, though, is that USD “cash” became a viable alternative again for the first time since the crisis.
We’ve been over this dozens of times if we’ve been over it once and as noted on November 4, this is a scenario where the simplest answer is perhaps the best. Here’s what we said in “Occam’s Razor” after documenting how “theme overload”, Fed miscommunications, systematic flows and modern market structure all contributed to the October rout:
Whenever we get manic trading and adverse conditions, everybody attempts to incorporate all of the considerations listed above into a kind of unified theory of everything. We’re 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.”
Period.
Of course there are myriad reasons why cash is a viable alternative again (with Fed hikes obviously being the overriding factor) and we’ve been over those here as well. But in the interest of simplicity, the bottom line is that when “riskless” USD “cash” becomes viable and US real rates are rising, the bar is commensurately high for risk assets in terms of competing for flows.
Goldman underscores this in a new multi-asset strategy piece for 2019.
“It was a particularly bad year for multi-asset investors as nearly all assets returned less than US T-Bills – in the last 100 years there have been very few times when this has happened to the same degree”, the bank writes, on the way to presenting the following rather stunning visual:
(Goldman)
Goldman goes on to note the obvious. “The reward for investing in most assets was quite low and there has been very limited benefit from diversification across assets”, the bank laments, adding that “the competition from cash has of course increased due to four Fed hikes in 2018.”
Right. And all of the above explains why the ETF flows picture for 2018 looked like this:
(Bloomberg)
Interesting that Goldman Sachs’ freudian slip. From exhibit 4 “Very few asset outperformed USD cash in 2019”. Not 2018.
I miss Gandalf.