What will be written about market history in 2018? There was the “too good to be true rally” in January followed by an early February plunge and then a rebound back to previous highs and now a massive melt down that is decimating asset values in every sector. Deutsche Bank reiterated 2018 has been the worst year in the financial markets since 1901 with all assets groups falling anywhere between 10% and 60%.
In my view there are two over riding fears. One is objective and could be immediately quantified and there is the subjective with an infinite number of outcomes.
Objectively, global monetary policy has changed, led by the US where QT (quantitative tightening) is on automatic pilot according to FRB Chief Powell. As noted many times, interest rates are the largest component of valuation formulas.
Subjectively, geopolitically and macro economically, the world has changed. Economic nationalism has replaced multi polarity and interdependency. President Trump is a symptom of this global change, change that is occurring in England, France, Germany, Finland, Sweden, Norway, Spain, Italy, Hungry, US, to name a few. Even the epicenter of yesterday’s prevailing economic philosophy of multi polarity is experiencing massive protests and possible regime change…Brussels Belgium. What will be the outcome?
I rhetorically ask will 2018 be viewed more significantly than 2008 when the face of American capitalism changed on a daily basis? Will 2018 be viewed as the year geopolitics and macro economics changed on a global basis?
Changing to a related topic about market mechanics and liquidity, the second area that it may be different this time, Treasury Secretary Mnuchin validated my long held thesis the markets are now dominated by technology based momentum trading. These trading mechanics have destroyed traditional market stabilizing forces. Mnuchin also stated the lack of liquidity, partially the result of Dodd Frank, is amplifying current conditions and “must be looked into.”
Many iconic market luminaries, names including Buffet, Soros, Druckenmiller, Bogle, Dimon, Greenspan, have lamented about today’s trading mechanics citing it is now impossible to distinguish an entry point. Will 2018 also be viewed as the year when algorithmic trading begins to be regulated and to the end of the massive over performance of passive investment funds, funds that have partially benefitted by this massive transition to technology based trading that emphasizes cost and speed of execution over liquidity and capitalization?
In my view, a view that is now shared by some high profile luminaries, because of today’s market mechanics, bids are virtually nonexistent. Some prices have experienced a waterfall decline that in some instances are now considerably below replacement values, an environment last experienced at the end of the grueling 1973-74 bear market.
Today shall too pass but the question is to when??!!
What will happen today?
Last night the foreign markets were down. London was down 0.35%, Paris down 0.70% and Frankfurt down 0.42%. China was down 0.96%, Japan down 1.11% and Hang Sang up 0.51%.
The Dow should open moderately lower. The 10-year is up 3/32 to yield 2.72%.
On a completely different note I would like to wish all a Merry Christmas and Happy Holidays!!
