The Land of Confusion

Blondemoney attended the ever-excellent Albert Edwards annual black-swan-searching rock concert yesterday and was left with the very distinct impression that this year it is different. Not in Albert’s always thought-provoking analysis, but in the mood music of the post concert cocktails. (Actually, why were there no cocktails? Mr Edwards pls take note). Usually there’s a strong feeling amongst participants: euphoria that they’ve nailed the potential pitfalls but relaxed that they won’t happen this year (2013); anger over central bank’s obsession with lower-for-longer (2014); and discomfort that volatility might be about to pick up (2015).  This year? Pit of the stomach confusion. Why? There is a growing sense that the sands are shifting beneath our feet.

1. Stock markets

Some felt a correction was overdue After all, Andy Lapthorne helpfully pointed out at last year’s event that the S&P500 had then gone over 800 consecutive days without a 10% loss. But then the worst start to a year for the Dow EVER? Like, EVER EVER? That doesn’t tally up with our narrative. We know the bad times, we always use them in our stress tests: 2008, 2001, 1987, 1929 etc…. This isn’t that bad. Is it?

2. China

China has been due a hard landing since the Xin dynasty, or at least it is one of those ongoing market worries that pops up every single year on the ‘”known unknowns” risks to my portfolio’ analysis. So, if you were already worried about China, you still are. If you weren’t, you listened to the doomsayers and felt it might happen some day, but not this day, and so what’s the point in worrying? But this time… things are clearly changing. The Chinese are rebalancing their economic model. What does that mean for the rest of the world? Well Albert already flagged up currency wars and the exporting of deflation from China last year, including the tightening impact of EM countries running down FX reserves. So, we feel we should know this one already. But we weren’t ready for this.

3. Deflation

Again, we thought we nailed this one. Oil lower was the 2015 story wasn’t it? OPEC induced, wasn’t it? Geopolitically designed to drive out US shale producers, wasn’t it? Why does it keep going down then? And why are all commodity prices still tumbling? And now things like the Baltic Dry Freight shipping index and Railroad numbers are back in vogue. Weren’t we worrying about deflation because of its impact on monetary policy and the risk of pumping up asset bubbles? What fresh hell is this??

The thing is, we’re confused because the drivers are changing. The narrative this year will no longer be about repairing bust banks, boosting liquidity and encouraging spending. Nor even about the failure of the Philips Curve and the relationship between unemployment and inflation. Those were all monetary policy related issues, driven by central banks being at the centre of the piece.

This time it is different. It is about China, insofar as its rebalancing will contribute to a decline in global trade. It is about deflation, insofar as the decline in trade continues to hit commodity prices in a vicious circle. It is about much more volatility ahead, insofar as this shift will take place with the backdrop of much less liquidity in financial markets.

I leave it to Mr P Collins to explain further :

Too many men
Too many people
Making too many problems
And not much love to go round
Can’t you see
This is a land of confusion.

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