MorningWord 10/22/14: Fear is Good, Fear is Right

by Dan October 22, 2014 10:01 am • Commentary

Last night, I was on a panel of market participants appearing in front of a group of self directed investors with considerable assets.  One that I met after the event had recently won the lottery to the tune of hundreds of millions.  No crap, won the freaking Powerball!   Whether these peeps had one large or 100 large of invest-able assets, it was not my sense based on the QnA and the chatting afterward over cocktails that they were there to hear a panel of cheerleaders argue in favor of indiscriminately investing in equities. This made me feel warm and fuzzy inside.

Let me be clear, I am not rooting for equities to go lower so that those (including myself) long equities will lose money.  I am merely longing for that level playing field (largely imaginary) when it comes to investing in risk assets, whether it be stocks, bond, real estate or the currency in which you conduct your daily business.  There was an elderly woman in the front row who actually might have been invested in stocks during every crash since 1929 who interestingly brought up the point about the growing income inequality in America and how the actions of the U.S. Federal Reserve to inflate risk assets since the financial crisis may have aided in dramatically widening the gap in such a short period of time.  I found her statement interesting because it speaks to the byproduct of the Fed’s grand experiment that started with the crisis response in the form of asset purchases in an effort to keep the global financial system afloat and has turned into monetary policy.

And this is where we get back to a level playing field. As the Fed has all but concluded QE, many market participants have feared that the gravy train could be over, this at a time when there are serious concerns about global growth.  We have seen Japan, China and (in rumors) Europe pick up the stimulus baton in the last year.

So if you ask me whether yesterday’s bounce was a healthy, I can only wholeheartedly say it was not. Enough already, let the global economy find its own footing for a few months, let’s see where we are, let’s get a sense for just how enthusiastic investors are to bid up risk assets without the implicit backstop of central banks.

As an explanation point, this story in the NY Post on Monday made me ill ” ‘Plunge protection’ behind market’s sudden recovery” stating:

Mysterious forces were trying their best, but they couldn’t keep the stock market from swooning Wednesday.

They failed in the morning, despite massive purchases of stock index futures contracts. Within minutes of the market’s opening, the Dow Jones industrial average was down 350 points. Later in the day — after a lot of shocking ebb and flow — the Dow bottomed out with a decline of 460 points.

It was only in the last hour of trading that the market saviors managed to trim the Dow loss to just 173 points. And they succeeded only after Janet Yellen’s private, upbeat remarks about the economy were leaked.

Whether you believe that this sort of garbage goes on, it really doesn’t matter.  There are procedures in place by the powers that be to ensure that markets are orderly, which for investors in risk assets should be reassuring.  But the point to me is WTF? When the S&P500 was merely 8% from the all time highs made just a few weeks early, what are they afraid of? A crash?? If they are, then better express the thought process behind the “plunge protection.”  Is it because the Fed knows how fragile a footing this mirage of an economy rests on?

It’s like we are living in some sort of financial “Matrix” that few are willing to acknowledge, and even fewer want to end.  So when I reflect on yesterday’s price action in U.S. equities, up 2% on the rumor of ECB bond buying, it makes me far less interested in playing in a rigged game. I don’t say this as a short who got squeezed (I covered most trading shorts last week here), but I say this as someone who remembers the notion of fear relating to investing in risk assets.  From where I stand, a little fear (for a lack of a better word) is good.