As a part-time financial pundit, I have so much to say, and usually such little incentive to say it outside of the pages of RiskReversal and the TickerDistrict. For the most part, viewers of CNBC and peeps on the Twitter want to hear the sort of commentary that makes them feel comfortable about the risk assets they own. The chorus of unoriginal voices, who have been right on direction (at least for stocks) for years are starting to lose a little bit of their mojo, with fewer and fewer bullish theses backed by evidence of the sorts of things that should help drive the value of risk assets higher. You know the old saying, that which can be asserted without evidence, can be dismissed without evidence. The more I listen to financial pundits in 2015, the more frequently this phrase is echoed in my head. That’s kind of here nor there as the burden of proof will always lie with those calling for a correction.
Regular readers know that I have a tendency to get a tad verbose in this space, particularly when it comes to challenging the conventional wisdom in the markets. Before I lay into what I feel is an overwhelmingly complacent environment towards invest-able risk assets, in the face of no shortage of warning signs, let’s review one very important concept; that 95% of the people and institutions that you look to in a effort to formulate your investment outlook are massively conflicted by the fact that they or the institutions that they are employed by, do the best when risk asset prices go up. Plain and simple. Yeah, yeah, over time most risk assets spend most of their time in an upward trajectory, but I would argue that the mistakes investors make in and around inflection points are the ones that put in them in the hole (buying tops and selling bottoms) in a manner that it becomes hard to work out of once a bull market is re-enlisted. Oh and there is one small problem about that buying tops and selling bottoms thingy, no one rings the bell at those levels.
For the better part of 2015 I have been fairly steadfast that warning bells are ringing all around us, and the complacency exhibited by investors in U.S. risk assets has now been manifested in a fairly lazy range-bound equity market that seems programmed to trade within a 4% range in the S&P 500 (SPX – 2050 to 2140).
At this stage of the bull market and economic recovery, after 7 years of unprecedented monetary and fiscal easing the world over, the global economy appears weak at best. As for the evidence, there is no shortage in the financial press on a daily basis:
Europe: Weak eurozone data underline fragile recovery from FT.com 8/14/15
Brazil: Brazil’s Political Crisis Puts the Entire Economy on Hold from Bloomberg 8/17/15
China: China Turned to Risky Devaluation as Export Machine Stalled from NYT 8/171/5
Russia: Russia struggles to shrug off China slowdown from FT.com 8/17/15
U.S.: US economic growth gauge takes a tumble from CNBC.com
Some would add that this all known, and incorporated into the current prices of risk assets. And I would say it is here in the price of crude oil:
or here in the yield on the 10 year U.S. Treasury:
Or here in the price of copper:
No shortage of pundits have dismissed the volatility in Chinese equities, but it seems obvious to me that the Shanghai Composite will ultimately crash under its own weight and that the recent bout of intervention will only exacerbate the problems, 3000 is coming to a theater near you, and who knows where from there:
Its easy to dismiss all of these external factors when looking at our stock market, and its easy to join the NBD (no big deal) club when considering our multi-nationals exposure to emerging markets, but make no mistake, there are no shortage of external factors that are screaming warning-signs for our late stage bull market in stocks. Oh and your favorite Fed Whisperer from the WSJ John Hilsenrath stated it loud and clear in this morning’s edition that the Fed may have exhausted its bag of tricks: U.S. Lacks Ammo for Next Economic Crisis
So back to incentives about sounding cautious about the current investment environment. You will most definitely continue to listen to the chorus of conflicted perma-bulls, they will remain so all the way through the next correction or crash, or you can take a few minutes here and there to contemplate what the potential holes are in the bullish arguments that are so pervasive in the financial media.