Blain's Morning Porridge - Forget the Known Unknows, its the shocking surprises that are going t
Blain’s Morning Porridge – October Friday 13th 2017
“Bubbles don’t grow out of thin air, they have a solid basis in reality. But, reality is distorted by misconception..”
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…
And it’s a bad start to the week as my Bloomberg obliquely gave me the finger by refusing to log me on.
Markets don’t care about my travails. They continue on their unstoppable upward trajectory. (Remember that word – trajectory, often parabolic. Look it up.) Lots of folk warning about complacency, but markets pay no head. They prefer the global unlimited growth vibe..
Now, I know I sound like a broken record with my boring repeated warnings the market has gone overly frothy. I could counter with arguments about low volatility and short-tops painting a weakening technical picture. I could make arguments about how the short-term and long term business cycles all converge on weak indicators – I could even give you a lengthy discussion on how the Kondratief ultra-long cycle says “run-away!” I could refer to volume of money issues, or QE concerns. I could even point you to some astrological stuff…
Or I could point out what a worrying place the markets are. After reading through all the news this morning it strikes me we’re in thrall to a host of known unknowns. If you want to worry, then pick your choice: it’s a delightful smorgasbord of things to go bump from the anniversary of the Hurricane and Crash of 87, the right-wing in Austria, noise about Tax reform in the US, Norte Korea, Kurds vs Iraq/Turkey, Catalunya vs Spain, UK vs Everyone, Trump vs the Universe, and everything in between. (In my own case, tomorrow is exactly a year since the unpleasantness with my primary pump – just doesn’t feel like it’s going to be a lucky week!).
These things we know, and can predict how toxic they might be. The market is shrugging most of them off.. confident they’ll be resolved in a less bad than the worse-case scenario. Why worry?
However, it’s the unknown unknowns, the shocking surprises, the Black Swan events, that catalyse the tipping point moments.
These moments of doubt create consequences that literally cascade through markets causing dislocation, uncertainty and discombobulation on the Grand Scale. Like the failure of a couple of structured debt product funds in 2007 exposing the fundamental weakness underlying Florida sub-prime lending triggering a shutdown in money markets causing the failure of a UK building society in Newcastle – look where that led! Or the dramatic bankruptcy of Orange County in 1994 and shocked realisation treasurer Robert Citron had been dealing way out his depth, triggering a cascade of panic across markets as municipalities and banks tried to work out exposures.
It’s the cascade of unintended consequences that cause moments to spiral into doubt and panics to deepen into crashes – surprise and a desperate scramble to front run the consequences!
At this point, I’ll think I’ll give over the porridge to my colleague Steve Previs, who wrote this morning:
“The equity market has sucked in over $300 billion so far in 2017. And that’s just money that has gone into ETFs and passive index funds.
And everything, at the moment, is just great for investors as the market keeps going up. And the more the market goes up, the more confident investors become. Why heck, the market might just keep going up because there is no other place to put your money. Why would anyone want to sell?
You see, you probably don’t know this, but this time, it really is different! Forget about human nature. The algos, AI and the machines have taken over. They have been programmed to buy and buy and buy. And they will never sell.
So stocks can only go up, never down. This is the new paradigm so you better get used to it and hop on board this runaway express train that’s headed straight for Moneyville!
Ahem……if you really believe any of the rubbish above, we suggest you take two aspirins and lie down for a couple of hours. For we firmly believe that the longer the market continues it gravity defying rally, the more severe the eventual downturn will be.”
Steve goes on to predict another no-see-em unknown unknown – the bubble that is “the size and amount of bets against volatility.” He and others reckon the amount of money shorting vol through various approaches and instruments is ultimately going to spell trouble in line with 1987 and subsequent crashes.
I’m travelling the rest of this week, so if it does go bad, then don’t say I didn’t warn you. If it all blithely continues upwards, keep telling yourself I’m an idiot and don’t worry about what could possibly go wrong next week.
As for the Hurricane bearing down on my favourite part of Ireland, I wish them good luck. Of course the fact this looks the worst storm in 50 years, is the first one-in-200 year storm since 1987, and is the first proper hurricane this side of the Atlantic ever, definitely doesn’t mean anything is changing about the global climate.. Donald Trump has told us so!
(It does make me giggle how every global corporate tells its customers about how much they care about the environment, and how their latest must-buy product is polar-bear friendly… when legions of capitalists justify their actions by saying Global Warming is a con-trick… something don’t stack up..)
Have a great week…
Bill Blain