The Price Of Peace

“Summer melt-up continues,” read one headline, on a sleepy Wednesday afternoon.

I don’t know, maybe it wasn’t sleepy everywhere. Bonds were somewhat lively, especially for this time of year. But it was sleepy here. Days of oppressive heat gave way to an entirely agreeable ~85, which felt more like 80 courtesy of a steady breeze that tip-toed over dunes and whispered through my wicker porch furniture. I’m not one for naps, but if I were, I’d have surely availed myself.

If that sounds idyllic, that’s because it is. I won’t lie to you. A few days back, a reader inquired as to my whereabouts. For anyone who’s new, “the island” isn’t some allegory. My personal anecdotes aren’t literary devices. But fair warning for anyone with designs on replicating my circumstances: The price of peace is solitude. And there’s no deus ex machina. No long, lost friend willing to drop their own life to join you in blissful isolation.

For markets, the price of peace is still $120 billion in Fed bond-buying per month — and worsening inequality. The S&P is now in its longest stretch without a 5% pullback since Janet Yellen’s short vol bubble in 2017 (figure below).

“Global central banks have spent $834 million every hour buying bonds since COVID and the US government is spending $875 million every hour in 2021,” BofA’s Michael Hartnett said, by way of further quantifying how much we’re “paying” for serenity.

Those are seemingly among Hartnett’s favorite statistics. He habitually uses them to set up iterations of the following (somewhat glib) quip: “Little wonder everyone believes in BTD.”

The soundbites sourced by the mainstream financial media for their boilerplate daily market wraps were caricatures of themselves Wednesday. “There’s a very, very strong buy-the-dip mentality,” one chief equity strategist told Bloomberg, over the phone. (Thanks for that. That’s why they pay you the big bucks.)

Recall the chart (below) which shows you just how somnolent things were prior to last week’s fleeting bout of tumult.

As noted, that was as of August 13. Two weeks, one Taliban takeover and a minor vol spasm later, and we’re right back to the same “steady grind higher” described in the subheading on the visual.

“It ‘feels’ like the spot SPX tape will keep grinding out small +15 to +20bps daily returns [and] keep pinning around the large $Gamma strikes,” Nomura’s Charlie McElligott said Wednesday (see the figure below).

“Somewhere between short-covering and summer doldrums,” read the title of a note from the desk of SocGen’s Kit Juckes. “Markets are focusing on a Jackson Hole symposium that may be a non-event, and Fed tapering which only starts a long countdown to rate hikes and may not be announced for another month,” Juckes wrote.

I’m not sure if that was supposed to count as dry humor, but if it wasn’t, it certainly could have.

The irony is that the longer the inexorable grind higher for equities lasts, the more ominous things feel, as each new record on the benchmarks is juxtaposed with extreme readings on virtually every measure of downside tail demand.

“Perversely, it’s making everybody incredibly uncomfortable,” McElligott remarked, referencing “perma-bid” index vol skew and “nosebleed” term structure against negligible interest in the right tail.

So, ours is a perpetually uneasy peace. And so is mine.