Keeping the eye on the ball

As I came back from holiday I cast my support, if only temporarily, for the bearish side of the spectrum. I see few opportunities to add to existing investments, or to begin new ones, but plenty of upside in betting on the short side of global equities. So far the market has been undecided on whether my call will prevail. But I am confident that it will be slightly more difficult for the longs in the next few months. I also said, though, that I didn't see any indication that this would be the big kahuna sell-off forcing the S&P 500 to re-tag 666. A cop-out in the eyes of many I am sure. But I really don't think it is wise to spend your time trying to plot a path for the end of the financial world as we know it. Ask bears of the 2011 vintage how they're doing, if you are not sure what I am talking about.

I am pretty confident, however, what I am looking for in terms of signal to really hit the panic button. The following chart from JP Morgan landed in my lap this week, and it singlehandedly tells the story of the economic and financial market cycle since the financial crisis. 

 Remember what happened to Icarus?

Remember what happened to Icarus?

 

For anyone who hasn't been living under a rock since 2008, this story needs little introduction. The crisis left households and the banking sector tapped out, and government scrambling to pay for the mess. But non-financial corporates were waiting in the wings to lever up. In combination with yield hungry investors, it has created a toxic mix of overvalued asset markets and investor herding. This fusion, however, has become diabolical in nature due to the stream of regulation reducing liquidity in the very same markets that investors are piling into. It will blow up eventually, but I must admit that we have had plenty of near-misses already. I honestly thought that the panic in the energy sector in the wake of the oil price crash would set the world alight, but it didn't, at least not immediately. Then we have had the odd fund closure and redemption denial here and there, as well as the commercial real estate fund freezes in London following the U.K. referendum. But we have had no real "BNP Paribas moment," and the system has shrugged off the travails for now. I should emphasise that this clearly is good news. I don't know how resilient the edifice is, but it has proven sturdy so far. A reader recently asked me what I was looking specifically, and I told him the same as I have said before. It has to be one of the big guys; think Blackrock, Templeton, PIMCO or Aberdeen. If one of these guys suddenly has to lock up one or more plain vanilla corporate debt funds/ETFs—or any of their big ticket products really—I think we could be in for a nasty ride. Central banks would come to the rescue of course, but not immediately mainly because all their liquidity guns are not pointing to these markets. Like we have seen before, that vacuum of "reaction time" is the sort of price action that turns boys into men. 

In the end, the story above could well just be my version of a bearish fantasy that never happens. Indeed, I very much hope that it is. But as equity markets threaten to swoon, as they usually do at this time of year, I prefer to keep my eye on the ball. 

 

claus vistesen