Market Thoughts: All The Dull Things To Say About 2019
Halfway into January of 2019 and if you feel a little stupid, stunned or sheepish from the shell-shock of 2018, you should not feel alone. We can only console ourselves with mild embarrassment that there are those of our human species who aggressively defend the Flat Earth theory and those who believe that it is safe to eat raw cookie dough.
No, we do not eat cookie dough or believe that the Earth is flat or have a single Bitcoin to our name but we bear the emotional scars of 2018 markets into 2019.
2018 was a journey of self-discovery into how stupid everything can get and nothing left unscathed in the market turmoil caused by stupid algorithms, stupid presidents, stupid trade wars, stupid central banks, stupid investors, stupid hedge funds, stupid Bitcoin and all.
Only stupid Cash outperformed the markets for the year but we do not know why stupid people are upset because cash still massively underperformed in the last 5 years or last 10 years for the matter.
Source: Pension Partners
What do others think of 2018?
We asked friends to send us their thoughts in words or pictures and got the following responses.
Fund Manager 1: “More political turmoil, more market uncertainty. Fiscal bump only appears in the rear view mirror now and the long term effect is a small rise in investments at the cost of a structurally enlarged US deficit. Trade War along with the inherently unstable dramatis personae on both sides have introduced lasting idiosyncratic risk not seen since the GFC. Markets, and more problematically, the Fed have difficulty quantifying and hence pricing the long term effects leading to positions with little fundamental support. Increased two-way volatility with leads/lags to persist into 2019. Only a Trump impeachment or a revolt by the Senate Republican caucus (probably the latter is necessary for the former) will put markets back on the post-GFC trajectory. Singapore will be increasingly affected by these and had already rightly refocused 2018 policy efforts on domestic growth. The SGS premium to UST has been previously present during late cycle periods though our growth rates are no longer as divergent. MAS snipped the property bubble in the bud so the 2018 UST-SGS spread should not have been so wide, yet it seems that markets really rewarded SGD safe assets with a premium. Lacklustre SGD credits on wider spreads were the price to pay.”
Fund Manager 2: “A Broken Year. Bonds trading in cash prices, illogical credit spreads with liquidity absent for a good part of the year.”
Trader 1: “2018 looks like the start to the end of QE driven growth marked by extreme moves in financial markets and breakdown in asset correlations. As volatility increases around events, margins will be increased bringing risk-taking appetite lower which will further translate into more extreme moves in financial markets.”
Trader 2: “I wish it ends asap.”
Trader 3: “Higher interest rates, trade wars, China slowing (Forex + GDP + onshore currency weakness), tighter valuations from 2017, Libor rate (funding) short squeeze, strong USD and oversupply of credits.”
Trader 4: “2018 was a year of chaos. Headline trading based on Trump and Trade wars. The Fed led the way in hikes. Stocks up, up, up and then down, down, down. Emerging markets were on a one-way risk aversion mode.”
Private Banker 1: “2018 was a year that started so brightly for many and fizzled out at the end. Banks and bankers rode a big wave for the last 2 years to only see gains wiped out in the final 6 months. The big worry now is that without a buffer of profits to start with, how is 2019 going to pan? With so much uncertainty and volatility going forward?”
Private Banker 2: “With the exception of declining vols, the FX market has been kind to products that leverage on sideway market, interest rate Pivot TARN.”
Forex Sales Chap: “Finicky fed, over hawkish at the start and sending dovish signals now despite strong data. It is clearly the end stage of the cycle with perhaps one last equity rally as a dovish fed (or at least not a hawkish) fed gets priced in.”
Stock Broker: “2018 was a roller coaster ride. Don’t know how to react to world events anymore. Basically numb to any news. I believe 2019 will still be a good year regardless.”
Layman Investor: “Yo yo on a string, from a layman.”
Private Investor (who trades Bitcoin too): “Bitcoin price decline. Chinese stocks decline.”
Retired Trader: “We know more about carrot cake than markets.”
Roller coaster or its equivalent was the most mentioned word and some are less unhappy than others, the stock broker would be the most optimistic and least resentful while some do not care.
Interesting was the united front the responses presented, for everyone had suffered in their portfolios and at work to forge a certain solidarity against the pack of “big bad wolves” led by the market’s favourite bogeyman, Donald Trump that could possibly be displaced, if some would have it, by the naughty Algos, should we have another repeat of Dec-Jan’s market swings.
What about 2019, we ask?
Fund Manager 1: “Hug the benchmark and recalibrate after every event. A binomial, probabilistic approach is necessary and no one trading strategy will win.”
Fund Manager 2: “Market liquidity conditions to worsen.”
Fund Manager 3: “2019 US rate curve will see inversion then massive steepening. China being able to inflate M1 is the key but so far they are unable to.”
Fund Manager 4: “2019. A year of two halves… Expecting 1H to continue to be bad for Asia credit, likely to see some reprieve in 2H.”
Portfolio Allocation Manager: “Winter is coming.”
Trader 1: “2019 is the year to be patient for levels, in poker terms, to play it tight aggressive, waiting for the right cards and positioning to come.”
Traders 2,3 and 5: Silence.
Trader 4: “Rising defaults in China, US debt ceiling, curve inversion, funding issues and trade truce. Will cash outperform again? Will the rate hike cycle peak? Credit analysis will be key.”
Credit Analyst: “I am still bearish on risk but most government bonds may hold up due to flight to quality. There is an ongoing structural global shift from old system and uprising of populism after the Lehman crisis as the main street are fights against globalisation and capitalism thus volatility will be elevated during this transition.”
Forex Sales: “In forex, EM shocks will be the key takeaway into 2019 for the corporate clientele.”
Private Banker: “Banks are getting worried. Yet our targets are still based on our record-making numbers of 2017 and 2018. It’s gonna be a tough year. You will see many bankers quitting and changing banks cos they can’t hit their numbers.”
Private Investor (who trades Bitcoin too): “Trump leaves office.”
Stock Broker: “I think will still be good. Favour Chinese banks and developers.”
How different it is from 2018. We are at a stupendous loss for words.
For one, we cannot find a single stupid person who does not believe that we will not have a significant slowdown or recession in the next 12-24 months, if not 2019 then 2020. The opinions differed as to how bad things would get and the trajectory of monetary policies and many are still optimistic that we will come to a soft landing without offering much explanation because the puzzle just has too many moving parts.
Not a stupid idea from the headlines so far with nearly half of U.S. CFO’s surveyed by Duke University to believe a recession likely by end 2019, an argument that can be bolstered by the collapse in global M1 money supply and a flattened to inverted yield curve.
Yet, we will not have time to spare to think about the economy because the stupid market is not the economy as 2018 has proven to us.
Entering into 2019, we need to constantly look over our shoulder in fear as we embrace the heightened volatility as a new norm.
Trust is all but lost in the system at the highest levels, as it has been eroding away over the years. Never has public dissatisfaction with the global elites of the world been so high, as trust in central banks and regulators go down the drain. Trust in corporations like Facebook, Amazon and Google continues to collapse as we realise even the richest man in the world, Jeff Bezos, cannot prevent his dirty “sexts” (marital indiscretions) laundry from public knowledge or Singapore’s prime minister who had his health records hijacked in a hack.
What sort of inspiration can we possibly derive from the loss of privacy as countries are now desperately trying to weed out every single Huawei server and Chinese chip on their shores in the name of national security with the paranoia extending to suspicion on offers of Chinese infrastructure loans?
In financial markets, anger at those stupid algos are growing, conveniently blamed for the wild swings that only the best traders in the world can handle. Traders such as Bluecrest’s Michael Platt who returned 25% in 2018 (54% in 2017 and 50% in 2016) when he stopped managing client money, to be able to trade more freely.
Disruptions and disruptive technologies will continue to extract their price on the markets and the once mighty will continue to tumble. Firms like GE, Ford, Toys R Us, Sears and even the disruptors themselves, like the Indian and Chinese shadow banks.
There is an eerie calm as we continue to wait for stupid robots to come for jobs, mentally and emotionally prepared for the bad news even if financially helpless.
That is if stupid trade wars and protectionism does not rear its ugly heads for social stability to crack when people start to feel the pinch in their wallets as we have witnessed in France and the Yellow Vest demonstrations which have been acknowledged by the French Prime Minister as a “sign of Europe-wide anger over financial woes and government indifference”.
It was similar in India last week, and 200 million striking workers is not a laughing matter, although the previous record was 180 million in 2016 and nothing came out of it. There is also little information on Zimbabwe since the internet was shut down this week.
Anti-migration sentiments should not be stupid in aging populations with exploding public debt and deficits like the U.S. which is seeing fertility rates plunge and life expectancy drops, partly due to drugs and suicides (because a fifth of millennials in debt think they will die before they ever pay it off).
Stay Calm, This is the Stupid Problem
We can talk till the cows come home but the main theme for 2019 is Money Makes the World Go Round, and we appear to have run out of money setting ourselves up for a debt crisis.
Remember this time last year when we talked about the $15 trillion in equity gains, $11 trillion in real estate gains and bond market gains from negative interest rates, that the wealth created would need a home?
It is very safe to assume that some of those 2017 gains were lost in 2018.
Furthermore, there is even less USD cash to spare as the Federal Reserve began its balance sheet reduction in earnest in 2018, leaving the market to absorb (buy and hold) the trillions of US treasuries the Trump government is issuing to fund the US deficit.
The impact could translate into weakness for stock markets, as Morgan Stanley predicts the S&P 500 would take a hit.
The debt situation in the US is looking worse with supply projected to rise $0.5 trillion in 2019 and rise again into 2021.
Globally, the IMF has also warned on global debt which grew to $244 trillion in 3Q18 with non-banks and governments leading the way just as corporate leverage becomes the chief concern for the first time since 2009 amongst global fund managers.
Going ahead, it is hard to see where all the extra money to buy bonds is going to come from when we have global M1 money supply in freefall.
We would guess Fear will rule markets in 2019, making newer lows as Greed makes lower highs which sums up 2018.
It really cannot be about Greed anymore after the bashing in 2018 and really little to hope for when faced with slowing growth, lower profits and a possible recession in times of record debt.
A Stupid Parting Shot
Making sense is about one of the hardest thing to be able to do this year. It is almost like the paradox of the cancer survivors who get nastier, a problem a friend presented to us recently.
Yes, we have disruptions, aging, the wealth gap, cybersecurity, populism, discrimination, environment issues, rising sea levels, natural disasters and so much to think about these days. And we have the algos, the central bankers, the politicians, the regulators, the hedge funds and the corporate scandals.
To think too hard about them would be an alienating prospect and stupid because Facebook is mostly about the best carrot cake in town or the latest holiday.
Yes, 2018 has left a mark on the markets yet Lamborghini sales have nearly doubled in Singapore which is a good sign but it just makes everything look stupid when we think about it.