Consistently inefficient

When I read the following in FT, I could hardly suppress a smile:

Chinese economy gets a shot China’s central bank injected a record Rmb570bn ($84bn) into the country’s banking system on Wednesday in the latest effort to boost liquidity and promote increased lending. Global markets responded favourably. (FT)

Stock markets react positively whenever major economies boost liquidity. It is not that stock markets reacted negatively much when the bad news out of China was pouring out. Perhaps, other central banks were pushing liquidity then!

But, they are into lazy investing. Low interest rates and liquidity are what they care about. If you are in doubt, read this interesting article published in New York Times on 10th January and download the original paper too. Investors just do not read annual reports even if they contain information (hints) of bad or good tidings to come. They react only when the actual news breaks out months later. So much for the market’s informational efficiency. 

It is breathtaking that someone got a Nobel Prize for calling the stock markets efficient populated as they are by humans who are anything but. May be, the efficiency of the Swedish Riksbank’s selection committee has to be questioned!

John Authers

I used to read Jason Zweig regularly. I have slipped now. Have not kept up with him lately. But, I do read John Authers. He is probably the most thoughtful market commentator writing currently. He was with Financial Times and he has moved to Bloomberg.

Without exception, his columns make you think. In more recent times, I will single out two pieces:

(1) ‘Don’t discount China’s role in the stock sell-off’. He is arguing that China’s economic weakness could be one underlying factor. Perhaps, he might have contradicted himself in the following piece where he writes about investors looking for ‘excuses’. He too might be looking for ‘excuses’ when he attributes a market move of a single day to a larger issue. There is a difference between catalysts and reasons. The reason for market crash: they are too expensive. They just cannot levitate at these levels. Expectations have gotten far ahead of reality. Period. No other reason needed. Everything else is a catalyst for this cause to create the effects.

In any case, I was more impressed with his analysis of Brexit.  He is absolutely right that ‘remainers’ cannot put the genie back into the bottle. He does not say it in so many words but things can never go back to being the same, even if a second referendum were held and it results in ‘Remain’ vote winning this time:

A second referendum seems more likely than it did. A lot has happened in the last two years, and much has been learnt. It seems reasonable to put the question again. But there is a real risk that this would result in a deeper nightmare scenario.

A second referendum might be as close as the first. A narrow victory for “Remain” would leave the country in the EU and almost half of the country with a lasting sense of injustice. A repeat of the first result would leave the country no further forward. Uncertainty would rise during the process. If the polls suggested that the country had now overwhelmingly turned in favor of staying in the EU, this calculation would be different, but there is no such evidence. [Link]

This reminds me of something that I tend to forget: sometimes, we cannot reverse certain decisions, even if we technically reverse them. Once the objective conditions have changed for good, it is impossible to restore them. So, some policy decisions cannot be reversed, even if we are open-minded about evidence and are prepared to swallow pride and reverse them. That puts the onus on getting it right the first time and also teaches us to be humble about unintended consequences and uncertainty in general.

While on the topic of Brexit, you should read Mervyn King’s op.-ed. too on the topic. He asks the UK Parliament not to endorse the deal (or, no-deal) that the British PM has arrived at. He says it is a ‘heads I lose; tails you win’ deal that UK has given the EU. It is a bit hard to sympathise with the plight of the Brits. I am reading ‘The Indian summer: the secret history of the end of an empire’. What one learns makes it hard to feel sympathetic for their travails now.

Apart from that, Mervyn King states publicly what we all know about the European Economic and Monetary Union:

the political nature of the EU has changed since monetary union. The EU failed to recognize that the euro would demand fiscal and political integration if it was to succeed, and that countries outside the euro area would require a different kind of EU membership. It was inevitable, therefore, that, sooner or later, Britain would decide to withdraw from a political project in which it had little interest apart from the shared desire for free trade. [Link]

(2) The second recent John Authers’ piece that I liked is the one titled, ‘Behind the Market Turmoil Lies Nothing But Excuses’. These conclusions are valid:

My best guess is that people were in need of an excuse to buy bonds Monday, catching others in a “short squeeze,” as many had been betting on higher bond yields. Plenty of others wanted to escape the stock market with gains while they could, and that carried on until prices had fallen enough to trigger the algorithms to buy stocks.

After years of central bank quantitative easing, there are lots of positions in markets that make little sense. Their holders have been awaiting for excuses to unload them. Keep tuned to see whether there really are convincing reasons to buy bonds or stocks. This week has been a litany of excuses. [Link]

Searching for fundamental reasons for market action is futile, especially for a market that has been rising for so long on the back of enormous leverage-based stock buyback aided by extraordinary global monetary accommodation. It simply had to end.

Hope over logic

Just happened to come across this news-story in Bloomberg. According to stockbrokers and investment banks, emerging markets will have better times in 2019 than in 2018. Simple rule of thumb is that if forecast did not materialise, simply forward it to the following year!

Correction in American stocks has just begun. There will always be whiplash rallies as happened on Monday. Corporate credit and leveraged loans markets are dangerously unstable. The risks in these markets are yet to play out.

Political risk in emerging economies is not to be discounted. Almost all the major developing economies have fragile political stability now – Turkey, Brazil, South Africa, India and China – for different reasons.

In this milieu, it is hard to nod vigorously to this cheery prediction which is, of course, the default option for these institutions.

On the contrary, if they had turned negative, it would be rather necessary to seriously examine the possibility that these markets had bottomed out.

Preference or prediction?

Saurabh Mukherjea has written two thoughtful pieces. One is on the possible end of ‘Peak Finance’. I like it and I endorse it. But, I am not sure if, in my case, it is a matter of preference or prediction. I suspect that the same question could be asked of Saurabh Mukherjea too.

He is spot on with this post-mortem:

In September 1981, the US 10 year Government bond yield hit a post-World War II high of 15.4%. In September 2016, it touched an a 50-year low of 1.6%. This epic downward trend in the world’s risk free rate has defined most of our careers. Had it not been for this downward trend, it is doubtful whether Emerging Market equities or Private Equity or Real Estate for that matter would be as big an asset class today as it has become. In fact, in the broader scheme of things, the “financialisation” of the global economy which has taken place in our lifetime has been underpinned by this epic bull run US Government bonds. 

While this post-mortem is definitely a valid explanation, in my view, I am not quite sure – much as I wish – that the phenomenon is ending because a lot of forces want this to continue, including President Trump! Candidate Trump railed against it but President Trump is aghast that the Federal Reserve has taken him seriously!

Allied to this is another piece that he has written for Bloomberg Quint on the return of alpha in stock market investing. Again, I hope, he is right. Only when the tide runs out, we would know who was wearing swimming trunks or not. But, will the tide really run out or will central banks blink and keep the punchbowl topped up? I am not sure we have clarity that they are truly independent – of financial markets, even as they wag their fingers at politicians.

A (t)horny issue and other links

The Swiss sure have their problems!! The rest of us will only be too happy to trade ours for theirs. Referendum on cows’ horns is coming up in Switzerland! [Link]

Augustin Carstens called the bitcoin ‘a bubble, Ponzi scheme and an environmental disaster’ way back in February. Well said [Link]. The value of bitcoin has collapsed and I suspect that the benefits of ‘Blockchain’ are vastly overstated.

Paul Tudor Jones sounds the alarm on corporate credit in the United States:

If you go across the landscape you have levels of leverage that probably aren’t sustainable and could be systemically threatening if we don’t have . . . appropriate responses [Link]

IMF had chipped in with its own (eloquent, doubtless) warning on leveraged loans, little realising its own culpability on the matter. It warned central banks against raising rates ‘prematurely’ from 0.0%. The truth was that in 2015-16 the world was in dire straits. Hence, their warnings, perhaps, on premature tightening. But, then, it means that the programme of zero short-term interest rates and QE (which held down long-term rates) were a failure. Why persist with them? So, they created the mess that they are warning against now!

Did they earn their stripes?

Nov. 14 2018 — Stripe Inc.’s $245 million capital raise was the clear highlight of U.S. financial technology fundraising in the month of September, weighing in at more than four times the next-highest raise. Stripe’s massive round even stood out in comparison to other sectors, ranking in the top 15 of all U.S. private placements during the month.

The latest raise values Stripe, a payments company founded in 2009, at $20.25 billion on a post-money basis. The most recent valuation is a massive increase from November 2016, when a $150 million infusion valued the company at $9.15 billion. But on a percentage basis, an even bigger jump in valuation came from May 2012, when the company was valued at about $100 million, to January 2014, when its valuation skyrocketed to $1.75 billion. [Link]