Over the many years, more than 10, I’ve had a pretty good records of big index calls. In fact I’ve been remonstrated with for being daring. However what is the point of hedging. The only thing you really need to know about the market is the trend direction. If its going up you are free to buy, if its going down you should probably shuffle towards the exit.
I am completely out of the market as I write which is incredibly rare and painful for me. The markets have been wonderfully good to me so its like being away from a loved one for me to be all cashed up.
There is only one reason for this.
Reverse QE.
QE made the markets go up and Reverse QE will make them go down.
Its that simple.
Reverse QE started in September 2017 in a tiny way and is building to $80bn amonth by this autumn and then onwards at that pace till the Feds balance sheet is back to some kind of normality or the wheels come off the whole Charabanc.
My portfolios have historically given me early warnings of bad markets on the horizon. They simply start to disconnect with the indices and I believe this is a signal of the breakdown in market correlations caused by something subterranean happening in the bowels of the market. This started to kick of this winter and then Februaries disjuncture kicked off I pulled the trigger on everything.
I didn’t crash as I feared but this chart tells the story of a market that had fundamentally changed in nature.
This is a truly shocking chart. It is as if the market has gone from peace to war. It feels to me it should be clear to anyone that we have entered a completely new market dynamic.
I cant be bullish about that.
Without a doubt the central banks of the world are locked into managing and perhaps micromanaging asset prices. The will be desperate to try and tighten monetary policy without crashing the makret so it is possible this wild volatility wont degenerate into a crash. The Dow toed this kind of line in 2000 while the Nasdaq imploded.
As such we may become stuck in a wildly gyrating range without the fat crash we could normally anticipate.
In any event the trillions coming out of the money supply via reverse QE will be a huge hurdle for assets prices even if valuations we not so elevated already.
Under the hood, property prices are the core to the whole system. While stocks are important, it is the value of real-estate and its leverage that is key to managing central banks balance sheets down. If property starts to correct the impact on the system is giant. This is the area to watch as interest rates rise, because as money and credit get more expensive and less plentiful the treat to the system would come from diving property value not stocks. One would of course hit the other and its falling financial dominos that the worlds financial regulators will be looking to keep standing as they start ,to drain money out of the system.
I personally would love a short sharp crash so we can all get back to work in a cleansed market place, but the days of market forces in command is long gone and for now and until further notice the economists have got the market by the ears and look firmly in control, even if the coming period is not going to be a comfortable one.
Yet reverse-QE is going to be a tightrope walk for the Fed. Too much and the wheels come off, too little and the markets will consider ‘moral hazard’ a fantastic route to underwritten profit.
It is therefore no surprise that the market is in spasms, because a new era has dawned and no one know how it will pan out.
So what is my outrageous call for the Dow. 20,000
Volatility is not the investors friend.