Ain’t Pretending…

The good news, as we’ve been reporting herein of late, is that the credit markets — while ticking ever-so-slightly tighter last week — have calmed down markedly since the Feb-March panic. I mentioned in a post yesterday that while another equity market selloff from these levels could come swiftly and invoke fears of another liquidity event (all babies going the way of the bathwater), it’s our view that the Fed has the liquidity risk properly attended to. And, therefore, such an event we (PWA) would likely exploit to gain exposure to what we’re presently after at more opportune prices.

Now, from a longer-term perspective, we have to remain cognizant of the fact that the measures that were necessary to solve this year’s liquidity crisis and to bring optimism back to financial markets were/are the definition of extreme. 

According to the International Monetary Fund’s June financial stability update, global central banks had by that time increased their balance sheets by over $6 trillion. Notably more by now…

Of the news/information/research I’ve digested this morning, two items jumped out at me — as they served to truly illustrate the starkly diverging views around the present state of market and macro affairs.

At the bullish extreme is an article on Bloomberg this morning featuring a portfolio manager who launched his tech-focused asset management firm literally three months before the bursting of the late ’90s tech bubble. 

Well, the gentleman managed, remarkably, to survive that tech-sector nightmare and remains in business to this day, which, thus, in the opinion of the article’s author, “makes him as qualified as anyone to judge the current tech rally.” And, boy, judge it he does.

Here’s what he has to say about today’s naysayers:

“The only people who say, ‘Yes, it’s like the 1990s’ are hedge fund managers who are net short and annoyed. To say it’s like the 1990s — they have no idea.”

Hmm…. well, I’m not a hedge fund manager, and our clients, while hedged, aren’t net short. Although I have likened the present in many ways to the 1990s… No big, I wasn’t aware of Mr. Jacobs either until reading this morning’s article.

At the other end of my morning research spectrum lies the IMF’s above-referenced Global Financial Stability Update

I’ll summarize using bullet points the gist of the IMF report (it’ll ring familiar to clients and regular readers):

  • Global financial conditions have eased significantly since the Feb/Mar meltdown.
  • Unprecedented central bank measures explain the market recovery.
  • The financial markets rebound has spawned investor optimism over the prospects for a speedy economic recovery.
  • Central bank measures have pushed investors further out the risk curve.
  • Fiscal spending measures have helped support sentiment as well.
  • This renewed optimism is predicated on strong policy support amid huge uncertainties going forward.
  • The canyon separating markets and the real economy creates the risk of another sharp correction in markets should investor appetite fade.
  • A number of triggers could spark another correction:
    • The recession could be deeper and last longer than presently priced in.
    • A second COVID wave.
    • Expectations in terms of measure and length of global central bank intervention could be too optimistic.
    • Resurgence of global trade tensions.
    • Broadening of social unrest due to rising inequality.
  • Other worries:
    • Unmanageable corporate and household debt burdens should the recession persist.
    • Insolvencies will hit the banking sector hard.
    • Nonbank financial companies may face further stress.
    • Many emerging and frontier markets face high external refinancing requirements.
Ultimately the IMF warns:

“Authorities need to be mindful of the intertemporal risk implications of this support. The unprecedented use of unconventional tools has undoubtedly cushioned the impact of the pandemic on the global economy and lessened the immediate danger faced by the global financial system. However, care needs to be taken to avoid a further buildup of vulnerabilities in an environment of easy financial conditions. Once the recovery is firmly underway, policymakers should urgently address financial fragilities that could sow the seeds of future problems and put growth at risk in the medium term.”

While I appreciate the effort in that last paragraph, there’s little if any evidence that the U.S. Central Bank, for example, given its promises, its actions, the additional measures it’s considering, and its forward guidance is remotely concerned with addressing “financial fragilities that could sow the seeds of future problems.” In fact, clearly, its lack of — or lack of follow-through on — such prudence in the past largely explains how we find ourselves in the present debt mess to begin with…

So, back to the notion that those of us who see ’99-style risk right here “have no idea”, well, nah, it’s definitely there! And I’m not about to pretend it ain’t…


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