Market Thoughts – How About Secular Complacency ?

The noisy minority continues to bleat … “secular stagnation”, “complacency”, crash, crash, crash is coming.

“secular stagnation” was brought up by Larry Summers in December last year and I have been quite a subscriber of that idea since. I can relate that to aspects of life and markets I observe around me – that people have stopped talking about the next condo launch, not many of my friends are at looking at new cars (although some cannot live with a new handbag or semi precious trinklet or even, a new watch each month).

With a wry smile, I note that CNBC has just published a short report on the new theory that is making FOMC members lose sleep – Secular Stagnation ? 8 months later, and not surprising.

And CNBC notes that Fed’s “Kocherlakota is planning to host a November symposium that directly addresses the issue of secular stagnation by name”

I am not sure how many people secretly agreed that the economy was going nowhere in December but, being creatures of optimism, faithfully stuck to their faiths in the Fed, and were rewarded when the S&P 500 made historical highs and corporate profits soared as the deficit contracted and unemployment tumbled this year.

And the rest had to join in the ranks, pushing junk bond spreads to dangerously tight levels, throwing all caution to the wind that the Fed had to point out in June that they saw signs of over complacency in investor behaviour.

Since then, the media has been vociferously harping on the investor complacency issue to some avail, as junk bond ETFs saw their largest outflow on record, branded as a 6 sigma, out of this world, event.

This herd behaviour reeks of complacency too and there are no people more at fault than the key influencers of the market, the economists.

Forget Soros, Faber, and gang. The public knows best to take their words with a pinch of salt. The economists with their Phds and laureates are the ones who count and an article out Project Syndicate by Dani Rodrik pointed out that a recent survey by the University of Chicago has unveiled that, in general, economists are unanimous in their many of their views.

I am increasingly convinced we are in a period of secular complacency, top down and inside out. There are no 2 ways about it because deviants who diverge are punished and exposed as frauds and charlatans by the market moves.

Like I said in Apocalypse Now : 2014 From The Future,  the past is always fraught with mistakes but we often see our present as faultless and, I suppose, the future as glowing. I like to see the mistakes we make now become the past, because Warren Buffet said something along the lines of how the markets are the result of a series of human mistakes.

The drums are beating louder for a correction which is continuously being postponed in favour of secular stagnation that has got investors scurrying for the safe haven protection of bonds and fixed income.

Yet the correction will take its time in coming in a world awashed with cash, as it is the ECB’s turn to to turn on the tap of their new TLTRO offering next month.

My favourite paragraph of the week is this one, taken from Charles Hugh Smith.
Much of the supposedly godlike power of central banks is participants’ faith in their powers to control not just finance but the real world that can be leveraged by finance.

The Grand Narrative of the global economy since the 2008 financial meltdown has been: whatever the problem, zero interest rates and more credit will fix it. Too much debt? Zero-interest rates and more credit will fix that. Government spending far exceeds tax revenues? Zero-interest rates and more credit will fix that. Economy sluggish? Zero-interest rates and more credit will fix that. Few jobs being created? Zero-interest rates and more credit will fix that.

Had a bad hair day? Zero-interest rates and more credit will fix it.”
A tipping point in near and it is pretty useless analysing what bonds and stocks are going to do because, as an article in Zerohedge sums it, “stocks and bonds are not telling you two different things, they are telling you the exact same thing: There is a bunch of cheap money sloshing around the financial system Thanks ZIRP and QE Infinity!”
And as Charles Hugh concluded, it is only as good as the faith the masses have in the godlike powers of the central banks.
My personal Jaws of Death indicator has gone bonkers recently. After my last assessment on 9 July, the S&P suffered a small setback but the 10Y bond yields collapsed.
jaws of death
I sat it out then and when I returned from my break, I mentioned selling on a relief rally.
Looking at it real hard now. S&P target 1,900.