Note June 12,2019: Volatility Warp Adds Up to What – Into mid-2019 in this market cycle, it is appropriate to assess what volatility warp adds up to. At the systemic level, recent events and challenges of the last decade exist amid a creep of politics back more into monetary affairs. As opposed to trader activity that supplies liquidity to markets, investors have not always been as passively reverential as they appear today. Despite quantitative ease, to be considered at the fixed income level is the longer term impact on country and company financial structures of aspects like negative yields in benchmarks like Japanese JGBs and record low German Bunds. Being a safe haven did lead to challenges for Switzerland. To us, the ostensible stability of exchange rates between the U.S. dollar, the Yen and the Euro appear underscoring complacency and the Renminbi needs watching.
Equity pricing worldwide seems to vacillate but inconsistently almost daily or intraday recently, in so-called risk on/off versus fixed income, especially U.S. Treasuries. Equity valuation has a growth dimension and yet much continues to be made on just beating consensus. Issues of delivery loom that seem glossed over. Fears of slowing growth globally and trade tensions have affected emerging country investment, including of the long term direct variety. In public markets, the latest 2% annual growth in S&P 500 quarterly earnings compares to 7% long term growth and the double digit growth earlier in this earnings cycle. Bifurcation abounds.
We believe that volatility warp risks add up to a need for more selectivity and quality assessment than seems generally accepted as an investment principle today. We also see precious metals to be hedges, current skepticism notwithstanding.
At the systemic level, recent events and challenges of the last decade cannot be narrowly attributed but arise from broader changes that include broader global competition. It now includes a creep of politics back more into monetary affairs. Furthermore, even widespread assumptions have been seen to be broken in the past. One such was that of the late 1970s/early 1980s when assumptions of high inflation were broken with ensuing restructuring by companies (nascent and seasoned) and by countries (emerging and advanced) alike. It could be called central bank driven. Another salient break of assumptions took place in the mid-2000s when assumptions of credit liquidity (replete with the supposed dice-ability of risk into tranches) were made by central banks, governments and companies alike. In being found to be misplaced, it led to financial crisis followed by the still massive quantitative ease of today. In both instances, we recall complacency practically until after the fact of change. Today, central bank activity such as massive quantitative ease cannot be assumed to have continued efficacy. The same applies to Modern Monetary Theory (MMT) and which seems replete with controversy. Unlike sustained cohesiveness from the start of credit ease in 2008, central banks appear wavering today and even backtracking even about minor reductions in such ease. In not being limited to the United States where the volubility of discourse is much higher and unlike the prior two decades, from the Americas to Europe to Asia, even politicians in government today appear not hesitant to publicly wade into monetary affairs. As opposed to traders whose myriad activities act to supply liquidity to markets, investors have not always been as passively reverential as they appear today.
With the exception of Japan that has had quantitative ease for over two decades and in recent years included equities into its activities, the focus of quantitative ease by major advanced and emerging country central banks has been on fixed income. Such major central banks as the Federal Reserve, the European Central Bank (at the cusp of leadership change) and the Bank of England (with Brexit still evolving) have continued with quantitative ease. Similar appears to be the positioning of the Peoples’ Bank of China albeit with focus on credit due to domestic conditions. After clarity on reducing quantitative ease and on gradually raiding Fed Funds rates, since the end of 2018, more recent Federal Reserve commentary has appeared less clear by discussing its readiness to ease if needed. It may even lead to fears of political pliability in an election year in the United States.
Presumably momentum based on assumptions of succor from the Federal Reserve, capital markets worldwide have appeared again to rally in late Q2/2019. Despite quantitative ease, to be considered at the fixed income level is the longer term impact on country and company financial structures of aspects like negative yields in benchmarks like Japanese JGBs and German Bunds where yields have now gone to record lows. Such behavior does underscore a stretch for safe havens but it is also akin to that of Switzerland that did lead to challenges. To us, the ostensible stability of exchange rates between the U.S. dollar, the Yen and the Euro appears underscoring complacency. Renminbi exchange rates also need close monitoring as high stakes trade tensions appear between the United States and China.
Over this cycle, equity pricing seems to vacillate almost daily or intraday in so-called risk on/off activity versus fixed income. More recent myriad momentum forays at times have had equities moving in tandem with fixed income and then even just a day later, against the behavior of fixed income markets and of U.S. Treasuries in particular. Equity valuation has a growth dimension and yet much continues to be made about just beating consensus, however small. At the individual security level, numerous examples in different industries demonstrate the competitive difficulties in gaining revenues and of the imperatives of restructuring. Slowing global growth and trade tension fears have had impact on investments in emerging economies, including of the direct variety, an anomaly several years into recovery. Issues of delivery loom that seem glossed over in public markets, such as the latest 2% annual growth in S&P 500 quarterly earnings compared to 7% long term growth and double digit growth earlier in this earnings cycle.
We believe that volatility warp risks add up to a need for more selectivity and quality assessment than seems generally accepted as an investment principle today.We also see precious metals to be hedges, current skepticism notwithstanding. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.