"Believe it or not, one day this will all change," warns former FX trader Richard Breslow in a shockingly frank statement of fact that most (if not all) of the current crew of market-participants are unwilling to accept all the time "the music is still playing." Volatility will return, bond yields will find somewhere new to probe. Who knows, even equities might go down. Stranger things have happened. But frustration that it hasn’t happened yet, is no reason to go canary hunting without a reason. Being vigilant and studiously following events is one thing, and an important discipline for serious investors. But you need to avoid having it slide into paranoia and conspiracy theories that really don’t help decide the what and the when. Traders today are ill-equipped to be early on trades. Not the least of why is that the positions everyone wants to hate tend to require incurring negative carry to short. Do that for long enough and, rather than pressing your bet, you end up being first in line to buy that dip.
So the question you need to be asking isn’t whether something is mispriced, but what are the catalysts that will convince the market that it’s time to recognize it as so.
Weaving a tale of causality after the fact can be instructive, is often entertaining, may have some truth in it, but doesn’t help make money from the event. To do that, you need to watch how the market responds to stimuli and get some confirmation from actual prices in your charts. We’d all like to be a Zelig starring in The Big Short, but, hopefully, that was a once in a lifetime anomaly.
One thing that’s for sure is that it’s never one thing. These markets will need to be gang-tackled to change. It’s why everyone is speculating on whether the alleged global central bank conspiracy to raise rates will be the tipping point. The Fed raising rates on its own turned out to be a snore. Everyone pulling stimulus together, much more interesting. But you have to start seeing it more broadly and for more than a couple of days in the price action...
Today’s lousy bond auctions in Europe have finally gotten bund yields above 50 basis points. In some ways this is a really big deal. Says so on my chart. On the other hand, only if it’s contagious might we be on to something meaningful. It bears watching, but not conclusion jumping.
The credit market has largely ignored the sovereign yield back-up. And, so far, today’s new issuance has shown little evidence that investors are getting even a little more selective in their hunt for yield. If the great crack-up is here, you’re going to need to see it in credit, too. Stay tuned.
Today’s ECB meeting minutes from June may be a clue to where people’s heads are at. Nothing earth shattering was said and we learned nothing new. But that didn’t prevent the market from taking one look and figuring where there’s smoke there must be a taper....