Boaz Shoshan – Capital and Conflict (United Kingdom) –
Black hole sun
Won’t you come
And wash away the rain?
Black hole sun
Won’t you come?
Won’t you come?
– Black Hole Sun, Soundgarden (1994)
Watching one of the longest bull markets in history march upwards, mounting political obstacles and leaping off them to ever greater heights, one has to ask: when does it all end? When will we see a great reckoning, a black hole sun wash it all away?
A couple of weeks ago, I asked a fund manager from a well-respected investment house how business was doing. His response?
If the market doesn’t crash soon, they’re in big trouble. In fact, in his words, they need a recession right now.
What his firm does is try to generate returns that are uncorrelated with the rest of the market, so bear markets do not destroy its client’s capital.
It’s a cautious approach to the chaos of financial markets, and one that has garnered the firm much respect over the years.
But these days, caution isn’t popular – central banks have seen to that. As loose monetary policy has jacked up the stockmarket, people are pulling their money out of expensive wealth protection strategies.
One of the primary goals of quantitative easing is to push investors into riskier assets – in a way, his firm has become a casualty of the Bank of England.
As hedge fund manager Chris Cole of Artemis Capital said last year, “It can be hard to hang out with the designated driver when everyone is getting drunk from the monetary punchbowl.”
Drunk is the word. But for how long will markets continue their relentless stagger higher?
The VXO index, which is the market’s expectation of short-term volatility in the S&P 100, continues to wallow in the depths, moving opposite to the index itself:
While the S&P 100 has more than doubled since 2009, volatility has been cut in half… and then some.
“Markets take the stairs up and the elevator down”, the saying goes, which is why volatility can be seen spiking when the S&P declines.
A similar story can be seen in the bond market. The Merrill lynch Option Volatility Estimate (MOVE) index is similar to the VXO, measuring expected volatility in US government debt. It too is at all-time lows – while US Treasuries have been in a bull market; as their price increases, the interest they pay to investors is crushed (in green).
From a volatility perspective, it’s never been this dull. It’s no wonder that a managing director of Deutsche Bank recently remarked that 2017 could be “the most boring year ever”.
But for those invested in US equities and bonds, the year hasn’t been boring at all. In fact, this year has been a gift that just doesn’t stop giving, a grand party.
And one which they don’t think will end, either.
In a survey of its clients, Citibank discovered that 85% of them did not expect a US recession in 2017 or 2018.
Stocks at all-time highs. Expected volatility at all-time lows.
Is it time to bid farewell, and leave the party – sell stocks, and find refuge in cash and gold?
Akhil Patel doesn’t think so – in fact, he thinks this party is just beginning. Click here to see just how wild he expects it to become.
I’m not nearly so optimistic. Sooner or later I expect the market will vomit all the cheap credit it’s sucked down its gullet in a horrific unwinding of excess.
But the issue, of course, is timing.