In light of the only thing that matters for markets (that would be Donald Trump for those who have slept through the past three months), here are some salient thoughts from the latest weekend notes by One River Asset Management's Eric Peters, whose uncanny ability to put a unique spin on events in third person continues to impress.
Beep Beep: “The world got caught in its own trap,” said Roadrunner, the market’s biggest equity volatility trader. “Traders got it wrong before the election, and continue to get it wrong today.” The VIX touched 10.50. “You see the tweets, the media battle, illegal voters, conspiracy theories, Mexican feuds, European taunts, border walls, fake news, and lies,” said Roadrunner, looking left, right, up. “But be careful what you watch. There is only one thing that doesn’t lie, and that’s the price,” he said. “Look where the price is, what it’s telling us.”
“VIX tells you that there’s someone in charge who’s not a madman,” continued Roadrunner. “He speaks and acts like he’s crazy, but the market is wiser than all of us, it’s smarter than everyone combined.” He paused, contemplating our new surroundings. “Barnum and Bailey closed just ahead of the inauguration. How could they compete with this circus?” The wall is a show. Our world is now theatre. We’re all extras. “Of course at some point vol will explode, but for the moment the market is saying maybe America First will work.”
“Dollar rally doesn’t seem close to done,” said Roadrunner. “As rates head higher, they’ll hurt equities.” It won’t be Goldilocks forever. “When vols fall to these levels it’s because people got too long and slowly get squeezed out.” We’ve begun to see the first signs of animal spirits returning, but not of the intensity to signal a bull market high. Volatility is cheap, pretty much everywhere, though of course it can always go lower, for a time.
“What I’d like to see is a scramble for S&P calls before I get really bearish,” said Roadrunner, and darted off.
Next follows an interlude on human hypocricy:
“My wife screamed today, hysterical,” he said. “Said she’s giving a ton of money to Greenpeace. So I asked why? Said she’s going to help anyone that opposes this man. I almost asked how that’ll help, but knew better than to argue. I left for work, then a biz dinner. Told the story, and turns out I’m not alone. Everyone’s wives are wearing pink hats. They took buses to the DC March. They’re excited, angry, outraged. And I dare not tell her that no matter how much she gives to Greenpeace, we’re richer, because this man made us a fortune on our bank stocks.”
Finally, some observations on why this time may be different:
“Complete garbage,” cried the professor from Edinburgh University. “I’m appalled by what’s being published in Science,” he continued. You see, some Ivy League nerd claims to have created a miraculous super-conducting material. “It’s the first time solid metallic hydrogen has existed on Earth,” boasted the pioneering Harvard scientist. He’d inserted hydrogen atoms into a synthetic diamond anvil at a pressure of 495 gigapascals; which any moron knows is equivalent to bench-pressing 5mm earth atmospheres. Do that at -270 Celsius and magical things happen – Presto! - hydrogen atoms share electrons, creating a crystal lattice, just like a metal. But the Edinburgh propeller-heads are skeptical. They demand more proof. Rightly so. These kinds of breakthroughs are rare, they transform the economy, society. And they’re happening more often now than ever before.
You connect 7.48bln hungry humans, stand them atop the shoulders of giants, compress them into a shrinking planet, warm things up a few degrees, and magic happens. ISIS happens too. All sorts of unexpected things happen. Like quantum computing, the rise of robots, green energy, declining birth rates, shrinking labor forces, growing inequality, secular stagnation, rising nationalism, anti-globalism - a return to policies made famous in the 1930s, with utterly disastrous consequences. But these things we already know. Yet global equity markets continue to rise. Despite chants of America First, emerging market equities are inexplicably outperforming on the way up. The VIX index grinds to levels seen only during periods of supreme calm. Perhaps something else is happening here. Something less pernicious. Positive. It’s vital to keep an open mind. After all, it may be the first time solid metallic hydrogen has ever existed on Earth; and our countless other innovations, accelerating inexorably. “Complete garbage,” cry the economists, political scientists, appalled, with history firmly on their side.
But humanity has never experienced a time quite like our present.
And with that, here's looking forward to tomorrow's new all time highs in the S&P 500.