(Macro Dilettante)
The festive season seems to arrive sooner every year. And yes, I do realise that each year represents a dwindling percentage of my mortal whole (long may it continue!); but it's not just me who's complaining this year. Christmas 2019 has come early for almost everybody who invests in everything – it's been truly an annus mirabilis.
But as we look forward to 2020, surely we should look back, too. Even in a 'fake news', MMT, post-QE financial world, context is a rather important lens when considering long term investment cycles.
Let us just compare 2019 to its predecessor, when according to DB research the percentage of assets with negative total returns in terms of USD was … 93%. So, I'd wait and see where we end 2019. But why just look back one year?
Yes, yes. I agree. The past is a different country; they do things differently there. But we mustn't forget our history lessons, nor the ghosts of our past. For me, I love a macabre story around this time of year. A creepy tale of horror, a bit of a fright. And sometimes a thing in plain sight is source of such a ghoulish frisson.
When I read the latest sage observations from the CIO of PIMCO (paragons of logic and thoughtful investment) that 'year-end volatility is possible, not probable'. I know it's a reasonable and fair assessment. I want a fright for Christmas. Not even statements like 'volatility is going to treble', 'equities are going down 20%', or 'PE is a roach motel and going down 25%' have the slightest effect on me anymore. My fear muscle is jaded. The market has climbed the wall of worry too many times, both with and without ropes. But like the evil in the ghost stories of M.R. James, there is a dark shape at the very corner of my eye.
Much of our enjoyment around 25 December is due to the Bank Holiday(s). We all look forward to them. So I am sure it would come as a huge surprise to practically all market participants that there is something much worse than lower prices. It's no prices. No market at all. No liquidity. Zero.
Don't believe it's possible? Let me just share this with you as a creepy Christmas present, a treat, a gift wrapped in shimmering goodwill.
For one whole week in March of 1933, every single banking transaction in the US was suspended by President Roosevelt issuing Proclamation 2039 in an attempt to stem a tide of bank failures and restore a semblance of confidence in the financial system.
So, the next time somebody asks, 'what is the worst that could happen?', remind them of Bank Holidays. Remind them of March 1933. And try not to lose too much sleep, but ask yourself this question: if it can happen for one week, why not one month?
As much as I hate to unwind the thread of this ghostly narrative, I'm afraid I must. Because anybody is entitled to ask: 'but how?' In other words, you've loaded the weapon, now explain how the trigger gets pulled.
The usual way is to try to imagine a sequence of events that could cause the triggering of unseen market tripwires; classic, logical path dependency. I think the best places to look are, in no particular order:
• Passive participants becoming forced liquidators following an aligned rapid momentum shift.
• Funding channels, i.e. CB plumbing springs a leak.
• Any significantly out-of-sample, rapid rise in inflation in US & Europe (etc., etc.).
We all have our favourites, from China shadow banking to rising credit default, or even collapsing recovery rates. All are valid. And in extremis they might be capable of triggering generalised carnage.
There is another way to explain how the trigger might come to be pulled – but I'll leave that to another note. It involves understanding quantum phase transitions and complexity. It would be too much to digest here. But don't be surprised if you get an early Christmas gift of quantum proportions.