Last week’s price action was one for the history books, or at the very least, it will be up there among the more “memorable” sessions. Events like this leave investors and analysts dazed, confused, and probably, a bit bruised too. The obvious question now is: what happens next? To which the only obvious answer is; who knows. That said, I reckon this question itself has to be answered in two parts. The first is whether it’s time to buy the dip in risk assets, a question that invites all sort of cliches. It probably depends on your timeframe, not to mention the more obvious point; do you fell lucky? For the record, I re-arranged the portfolio slightly last week, raising cash levels, and selling short-term U.S. bonds in favour of select forays into existing, and a few new equity positions. Time will tell whether this was a good decision. It certainly seems premature when considering the terrible Chinese PMIs released overnight Friday, though I think last week’s swoon has more to do with the spread of Covid-19 outside China. In any case, when Vix has a sniff at 50, I reckon that I have to do something. To evaluate whether to buy the dip a bit more thoroughly, I had a look at the put/call ratio on the S&P, which is now teasing short-term traders with the strongest buy-signal since the 2010 Flash Crash and the late summer panic in 2011.
Read MoreIt has become increasingly fashionable to direct scorn and ridicule at the so-called equity permabears. This is understandable, to a point. These hardened observers and investors have thrown everything at the market, only to see prices go higher almost tick-for-tick with the intensity of their objections. Their curse is increasingly obvious. They can succeed intellectually only if they bite the bullet and buy the very uptrend that they so despise. Alternatively, they can change their mind and embrace the bull market, which would probably have every other investor running for the hills. The market, by implication, would cave in, but they would not be able to claim intellectual victory as those who saw the crash coming, let alone profit from it. Whatever fate awaits the equity bears in this cycle, I am starting to warm to their disposition, at least for the purpose of judging equities in the next six months. As such, while the onus usually, and justifiably, is on the equity bears to explain why it is that the market is compelled to spontaneously combust, the burden of evidence is now increasingly shifting to the bulls. Why is it exactly that global equities are ordained to push ever higher in an environment where fundamentals and other markets suggest that they shouldn’t?
Read MoreBridgewater Co-CIO Bob Prince was ridiculed earlier this month for his comments in Davos that “we’ve probably seen the end of the boom-bust cycle.” Pundits were quick to draw comparisons to Irving Fisher’s infamous remark on the eve of the 1929 stock market crash that the equity market had attained “a permanently high plateau.” I sympathise with this interpretation of Mr. Prince’s comment. They come on the back of a 21% 12-month rally in the MSCI World, in an environment where trailing earnings have declined, by nearly 5%. In other words, the P/E multiple has gone from around 15 to just over 20 in the space of a year, and this in an environment where global growth has been slowing. To pile on even further, the recent performance of global equities has been ridiculous, with monthly returns over +2% since September. Naturally, the key for any medium-to- long term investor is to make sure to be long during such periods, but I under- stand if Mr. Prince’s declaration has contrarian investors running for exits. I can’t help but feel, however, that the world is upside down. The speed with which Mr. Prince’s comments was shot down seems to invalidate the contrarian position to me. I mean shouldn’t we be worried only if investors and analysts agreed with his comments.
Read MoreThe teaser from this week’s missive is posted below as usual, but I have a few housekeeping notes to start the year. First off, I know that I am doing less market-oriented stuff recently; I apologise. The good news is that I am diverting my energy towards a long-form essay on fiscal policy. It’ll be in the same type of format as my two previous essays on the Life Cycle Theory and the Balance of Payment. In short, I am appalled by the level of debate about economic policy these days, so I am trying to inject some context and colour on the current flurry about fiscal policy, what it is—as in what it really is—how economists think about it, and what it can and can’t do. This potentially covers huge ground, but I reckon that I have managed to distill the story into a coherent argument. It’s 80% done, and I hope it will be worth the wait. I expect to have the first draft done next month, and then it goes to the editor for a ruthless take-down. The final version should be done in March, with a bit of luck.
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