Tip of the hat to central bankers, who have now officially pushed risk appetite to the highest level ever on record.Analysts might argue over whether it was the new administration, the tax plan, the loosening of regulations, etc.
I’m partial to the notion that algos, driven by the manipulation of currencies, oil prices and VIX, have exerted outsized influence on a market dominated by passive, follow-the-leader “money managers.”
I’ve watched the effects slowly creep into the markets, gaining momentum over the past 7 years since I first founded pebblewriter. At first, it was the occasional stick save — big moves in USDJPY drove the yen carry trade between 2011-2015.After the USDJPY flamed out, a doubling of oil prices kept stocks on the rise. When CPI started accelerating and the twin shocks of Brexit and the US election threatened to kill off equities’ rally… …USDJPY took over again, registering its steepest spikes in recent history. And, when the yen fell so sharply that oil priced in yen almost doubled YoY (Jan 2016 – Jan 2017)… …the yen magically started strengthening again and VIX took over the job of triggering the algos, beginning an historic plunge below long-term support. A bonus: FOMC transcripts recently released confirmed the Fed’s role in crushing volatility.It has truly been an artful exercise in price manipulation which, ironically, has landed markets right back in the middle of another bubble. Yes, that’s me talking. But, there’s a growing chorus of like-minded academics, traders and investors who view the exuberance as irrational.
As the chart at the top of this post shows, markets exhibiting exceptionally high risk appetite rarely get a pass. There has almost always been a reckoning. But, it’s clear that central bankers and those who ride on their coattails have become really, really good at propping up stocks.
Toss in the corporations which are buying back their own stock hand over fist, facilitated by historically low interest rates, and you have a rally that’s hard to love. Consider the fact that prices have grown 70% since the 2007 highs, while GDP and sales have risen only 10%. The price:sales ratio recently eclipsed the 2000 highs.How long can this go on? As we discussed last week, the wild cards are inflation and interest rates.
Oil prices broke out in December. Gas prices are currently threatening to do the same. While core CPI, which ignores such trivial items, is flat… …CPI shows every sign of having broken out.Bond markets are taking notice and are also threatening to break out……which is probably prompting a fair amount of hand-wringing amongst central bankers tasked with coping with the consequences.
For better or worse, these assumptions continue to drive our price targets for oil and gas, currencies, VIX and gold.
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