Legendary hedge fund manager Stan Druckenmiller lamented whether or not the markets will ever return back to a normal macro trading environment? Many iconic market luminaries are commenting about the “disturbing machination of the equity markets over the past several years” where speed and cost of execution is paramount to everything else. There is no rational thought given that 60% of equity volume is done by algorithms according to Blackstone’s Byron Wien. Steve Cohen commented liquidity is all but absent.
Unfortunately the industry did this to itself in an attempt to capture as many assets as possible using cost of execution as the only variable. A race to the bottom always ends ugly.
Unfortunately it will take a crisis to effect change.
Because of today’s lopsided environment, JP Morgan is suggesting the averages will not have any returns over the next 10 years. There are other bulge bracket firms, including Goldman that has made similar pronouncements.
This circles back to the introductory sentence as whether or not the markets will ever return back to a normal macroeconomic trading environment? I believe the markets are in the very nascent phase of such a return given the decimation of many algorithmic trading models. The only strategy that has not imploded is indexing. IfGoldman’s and JP Morgan’ forecast of 0% return during the next 10 years is accurate, indexing/passive investing will die an inglorious slow death.
Speaking of a slow death, the Dow was up almost 175 points early yesterday only to close lower by 100 points. The NASDAQ also opened higher by over 125 points to close almost unchanged. Typically such reversals indicate selling into strength and lows are not yet visible in the immediate future.
Speaking of lows, oil plunged over 8% yesterday, the biggest drop in three years and is now the most oversold on record according to Bloomberg. Five weeks ago long positions were at a near term record and $100 oil was all but a certainty. Today prices are down about 25% and “shorts” are around a near term record.
It is a massive five week reversal that I will argue is the result of the machination of the markets. Did all capitulate in the oil market yesterday? As discussed several times the speed and the depth of the current decline is a record.
I shudder to think if such a decline were to occur in either equities or Treasury market. If such did occur I am certain there would be calls for a change in market mechanics.
What will happen today? The CPI is released at 8:30. Will it confirm the inflationary implications of last week’s CPI?
Last night the foreign markets were down. London was up 0.06%, Paris down 0.36% and Frankfurt down 0.25%. China was down 0.85%, Japan up 0.16% and Hang Sang down 0.54%.
The Dow should open nominally lower. Oil edged higher. Will FRB Chair Powell make any market moving comments as he is scheduled to give a speech today? The 10-year is unchanged at 3.14%.
