Financial journalists have had to resort to clichés in the past few weeks to describe the reality that they’re being paid to report on. At the start of December, Financial Times’ Robin Wigglesworth invoked the “everything rally” to describe a market "too hot to handle”, while Bloomberg’s Marcus Ashworth and Mark Gilbert have gone for the idea that markets will “defy gravity”, again, in 2021. The industry’s most widely watched investor survey— the BofA's GMFS—chimes in with the observation that "asset allocators are underweight cash first time since May’13; triggering FMS Cash Rule “sell signal,” a sentiment supported by the opening line in ASR’s recent study; “this is the most bullish result we have seen in the six year running our asset allocation survey.” The bull market in equities is paved with the irrelevance of such skeptical analysis, but sometimes the truth is in fact staring you in the face. This market is flirting with danger, and will soon suffer a significant correction. The more pertinent question, however, is whether I, or anyone else, have the tools or wherewithal to pick a tradable top, and following from that, whether a correction will mark the beginning of a more sustained downturn in equities, and other financial asset prices? As far as the first question is concerned, luck is a thing, but trying to pick even relatively obvious intermediate tops in this market isn’t easy. As a friend on the buy-side likes to remind me; “my put options are melting like butter in the microwave.” In terms of a more dramatic shift in the trend and narrative, we won’t be able to perceive it when it happens, but I don’t think such a shift is imminent.
Read MoreThis week, I’ll stitch together some thoughts on our ticket off the Covid-19 train, also known as the “vaccine”. I am prompted by Georges Pearkes’ challenge to come up with why it might be a bad idea to given people $1500, or another monetary amount, as an incentive to take the vaccine. First things first, it’s very possible that our main problem next year is that we won’t have enough of this thing. Paradoxically, the prospect of a vaccine dealing a killer blow to the virus in the middle of next year has created an incentive for authorities to maintain tighter restrictions in the short run—well into Q1, at least—while we wait for the shot. After all, if the virus is gone tomorrow, the cost of an infection today increases, a lot. A reasonable counterpoint is that governments aren’t masochists, and some form of reopening will happen in Q1, but the point I am getting is simple in the end. Assuming the vaccine is rolled out by early Spring, on the back of a miserably semi-locked down winter, it’s more likely than not that people will be scrambling for a jab, especially in an environment where the vaccine becomes a ticket to otherwise restricted activities via a form of passport. In such a situation, we won’t have to pay people to take the shot. We’ll have to make sure it isn’t hoarded. As for the counterpoint, I am not convinced that the rise of anti-vaxxers—known in the literature as "vaccine hesitancy”—can be applied to predict a threat to the effectiveness of Covid-19 vaccine efforts. That said, early survey evidence suggest that hesitancy might be an issue, especially at the margin where the line between failure and success is drawn.
Read MoreIt’s been a week on the wild side in markets, though amid all the confusion and commotion the main story is simple. The uplifting vaccine news from Pfizer has invited markets to consider how a world without the virus looks like. Taking the initial reaction at face-value, this is a world basking in the glory of reflation—and accelerating nominal GDP growth—higher long-term interest rates and a sustained rotation from growth to cyclical and value stocks. Let’s start with the obvious point. There is now a chasm between those basing their world view on an effective vaccine, and the end of Covid-19, and those staring down the barrel of a still- uncontrollable spread of the virus, and associated lockdowns to contain it. As far as the economy goes, forecasters now have to pass Fitzgerald’s test for a first-rate intelligence. The near-term outlook for developed economies is not pretty, and as restrictions encroach on December, the Q4 GDP forecasts are sinking without a trace. We’re currently living in a start-stop economy. The question economists have to answer is whether this situation has to be assumed for 2021? It’s certainly possible in Q1 and Q2, but Pfizer’s news has thankfully made such an outcome less likely. The problem is timing and whether we have to be on lockdown-lite through parts of H1, as we wait for the ‘shot’. The best case scenario is that the population at large gets the shot in the first half of the 2021, but that’s a Hail Mary. Take it from me, a professional economist whose day job it is to put numbers on the state of economy over the next six- to-12 months, we don’t know.
Read MoreI meant to publish this entry before I went on holiday, but time got the better of me. My initial impression of markets and the economy as I get back in the saddle is that I haven’t missed much. As such, after hitting F5 an awful lot of times to pull my spreadsheets into the present, I am left thinking about the same themes that I have since Covid-19 ripped up the script. Actually, I am pondering the same themes that I was mulling before the virus too. Economists and analysts are running out of ways to describe the current regime, but in a nutshell, the state of play is as follows. The virus was the straw that broke the camel’s back, prompting policymakers to double-down on the fascinating experiment they have been flirting with, in some form or the other, since the onset of the great financial crisis. How much fiat currency can be created before it either destroys capital markets via inflation, or perhaps more likely, sows political disaccord, if not outright kinetic conflict? I am neatly leaving out the prospect of policy actually getting it right, which is to say; the idea that a new equilibrium is obtained which allows monetary and fiscal policy to seamlessly leave the stage. After all, why would policymakers give up the power that they’re currently being offered by economic events? Luckily the answer to the first part of this question seems to be a very long time, and quite possibly well within the investment horizon for many investors. As a result, investors are being invited to pick up dimes in front of the proverbial steamroller, at gunpoint for added effect. History suggests that they will do just that, until something breaks.
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