Friday, January 7, 2022

Morning Note: Acknowledging and Hedging Precariousness

Seems like we've been kinda playing (or implying) the "what if?" game herein this week.


"As we've made clear, we're not in the business of predicting bear, or bull, markets. We are, however, in the business of measuring and managing risk.
Russell Napier, in his insightful book Anatomy of a Bear, teaches the reader how to spot the bottom of a bear market (i.e., the time to load up the truck with stocks).

Here he spells out the conditions that signaled the bottom of the 1921 bear market. Take note of the areas I bolded and ask yourself, is there anything about today's setup that rhymes with the setup back then? In other words, are today's conditions at all consistent with the classic conditions that tend to precede extended bull markets in stocks?
"How was an investor to know that 1921 was the opportune moment to invest?
As we have seen, there was a combination of signals in the summer of 1921 suggesting it was time to buy: improving demand at lower prices for selected goods, particularly autos; commodity price stabilisation; improving economic news being ignored by the market; rising volumes on a strong stock market; falling volumes on a weak stock market; a rising short interest; a final fall in equity prices on low volumes; reductions in Fed controlled interest rates; a rally in the government bond market; a rally in the corporate bond market; positive signals from the Dow Theory.
This is the checklist of features one needs to focus on if one seeks the bottom of the bear market."
Well, as you've noticed, while demand for goods remains healthy, we're definitely not talking "at lower prices, particularly autos." The volume action has been opposite the above for quite some time (i.e., falling volume on rising prices, rising volume on falling prices). Short interest overall is relatively low. The Fed's looking to raise their "controlled interest rates" going forward, and transportation stocks have actually been flat since mid-last year (Dow theory reads bullish when transports match or outperform the broad market).

SP500 top panel, SP500 Transportation Index bottom:

Again, no prediction here (other than volatility). Just noting that the underlying setup may not entirely jibe with the prevailing bullishness..."


Even then?
"In 1931, Adolph Miller would testify before the Congress that the easing of credit in the middle of 1927 was “the greatest and boldest operation ever undertaken by the Federal Reserve System, . . . [resulting] in one of the most costly errors committed by it or any other banking system in the last years.”
Some historians, echoing the views of Hoover and Miller, see the meeting on Long Island as the pivotal moment, the turning point that set in train the fateful sequence of events that would eventually lead the world into depression. They argue that by artificially depressing interest rates in the United States to prop up the pound, the Fed helped fuel the stock bubble that subsequently led to the crash two years later."
--Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World


"Here's macro expert and consultant Felix Zulauf making sense in a Grant Williams interview on December 17th:

emphasis mine... 

"We have seen the biggest stimulation, fiscal and monetary ever in many countries, particularly in the U.S. And we have seen the reaction after the market crash, markets rallying virtually in a straight line up to this day and to new record highs.
And this has been a far away from normal, extraordinary thing. And people usually forget that the markets are action and reaction. And if you have an excess in one direction, you see a response with an excess in the other direction.""


That's right, inflow to stocks over the past 12 months exceeds the inflow of the past 19 years combined. Yeah, there's quite the "what if?" there! 

Not to start the year all doom and gloomy, mind you, let's think of this as just recognizing the historically-unusual/rare circumstances we find ourselves in, and acknowledging their precarious nature. And, why -- while taking advantage of the opportunities that exist in perhaps the out of the way places (yet remaining diversified) -- we're actively hedging against that precariousness! 


Just one on inflation (h/t Jesse Felder):

As we've discussed, wage rates are sticky...

More on the employment picture in this weekend's macro update...

Asian equities leaned green overnight, with 10 of the 16 markets we track closing higher.

Europe's struggling a bit this morning, with 10 of the 19 (two are shuttered) bourses we follow trading down as I type.

US major averages are trading lower: Dow down 71 points (0.20%), SP500 down 0.39%, SP500 Equal Weight down 0.04%, Nasdaq 100 down 0.83%, Nasdaq Comp down 0.77%, Russell 2000 down 0.55%.

The VIX sits at 20.21, up 3.06%.

Oil futures are down 0.03%, gold's up 0.19%, silver's down 0.20%, copper futures are up 0.30% and the ag complex is up 0.36%.

The 10-year treasury is down (yield up) and the dollar is down 0.37%.

Led by Viacom/CBS, AT&T, energy stocks, Latin American equities and financial stocks -- but dragged by AMD (chip maker), SOXX (more chip makers), water stocks, tech stocks and MP (rare earth miner) -- our core allocation is down 0.03% to start the session.

I highly recommend Strauss and Howe's insightful (if not enlightening) book The Fourth Turning:
"If Awakenings are the summers and Crises the winters of human experience, transitional eras are required. A springlike era must traverse the path from Crisis to Awakening, an autumnal era the path from Awakening to Crisis.
Where the two saecular solstices are solutions to needs eventually created by one another, the saecular equinoxes must be directional opposites of one another.
Where the post-Crisis era warms and lightens, the post-Awakening era chills and darkens. Where the cyclical spring brings consensus, order, and stability, the autumn brings argument, fragmentation, and uncertainty."

Have a great day!

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