Thought for the day
“Don't be afraid of missing opportunities. Behind every
failure is an opportunity somebody wishes they had missed.”
-Lily Tomlin (American, 1939 - )
Word for the day
Dandy (n)
A man who is excessively concerned about his clothes and
appearance; a fop.
(Source: Dictionary.com)
Teaser for the day
If RaGa, NaMo and AK are all challengers – who is the defender
in these election?
Make hay while sun
shine but get back home ahead of cows
I had stated earlier that we are witnessing a good trading
opportunity in Indian equities. The opportunity is presented by a multitude of
factors. The primary being (a) likely reversal of rate cycle in US that may
lead to large scale rotation of money out of US bonds and into risk assets
including EM equities; (b) maintenance and likely enhancement of monetary
stimulus by central banks in Japan, EU and China; (c) cyclical up move in some
Indian macro indicators against notable deterioration in other major emerging
economies including Russia, Brazil and China; (d) likely change in political
regime in the country raising hopes for accelerated economic reforms, faster
execution and complete recuperation of administrative paralysis seen in past two
years.
But as I said these factors do not confirm any structural
change in global or Indian economy in near future. The resulting up move in
Indian equities is therefore a trading opportunity much like 1999. Mistaking it
for a structural shift or beginning of a secular bull market might be a
mistake.
Nonetheless, it is desirable to avail this sizeable
opportunity with adequate precautions. Remember, on most earlier occasions such
trading rallies have retraced without according any exit opportunity to traders
hence causing tremendous losses.
It will not be out of context to quote two recent views of
Seth A. Klarman of Baupost Group and Jeremy Grantham of GMO regarding fragility
of the current economic and financial environment.
Seth A. Klarman, Baupost Group
“Welcome to “The Truman Show” market. In the 1998 film by
that name, actor Jim Carrey is ignorant of the fact that his life is a hugely
popular reality show. His every action, unbeknownst to him, is manipulated
while being broadcast to millions of TV viewers worldwide. He seemingly lives
in an idyllic seaside community where the manicured lawns are always green and
the citizens are always happy. These people are, of course, actors. The world
Truman inhabits turns out to be phony: a gigantic sound stage created for a
manufactured “reality.” As Truman starts to unravel the truth, his anger erupts
and chaos ensues.
Ben Bernanke and Mario Draghi, as in the movie, are the
“creators” who have manufactured a similarly idyllic, if artificial,
environment for today’s investors. They were the executive producers of “The
Truman Show” of 2013. A global audience sat in rapt attention before this
wildly popular production. Given the U.S. stock market’s continuing upsurge,
Bernanke is almost certain to snag yet another People’s Choice Award for this
psychological “thriller.” Even in “The Truman Show,” life was not as good as
this for investors.
But there is one fly in the ointment: in Bernanke’s
production, all the Trumans – the economists, fund managers, traders, market
pundits – know at some level that the environment in which they operate is not
what it seems on the surface. The Fed and the Treasury openly discuss the aim
of their policies: to manipulate financial markets higher and to generate
reported economic “growth” and a “wealth effect.” Inside the giant Plexiglas
dome of modern capital markets, just about everyone is happy, the few doubters
are mocked and jeered, bad news is increasingly ignored, and markets go
asymptotic. The longer QE continues, the more bloated the markets is pure
Truman Show; according to the Wall Street Journal (12/20/13), the Federal
Reserve purchased about 90% of all the eligible mortgage bonds issued in
November.
Like a few glasses of wine with dinner, the usual short-term
performance pressures on most investors to keep up with the market serve to
dull their senses, which makes it a bit easier to forget that they are being
manipulated. But what is fake cannot be made real. As Jim Grant recently noted
on CNBC, the problem is that “(t)he Fed can change how things look, it cannot
change what things are.” According to John Phelan, a fellow at the Cobden
Centre in the U.K., “the Federal Reserve has become an enabler of the financial
havoc it was designed (a century ago) to prevent.”
Every Truman under Bernanke’s dome knows the environment is
phony. But the zeitgeist is so damn pleasant, the days so resplendent, the mood
so euphoric, the returns so irresistible, that no one wants it to end, and no
one wants to exit the dome until they’re sure everyone else won’t stay on
forever.
A marketplace of knowing Trumans seems even more unstable than
the movie sound stage character slowly awakening to reality. Can the clued-in
Trumans be counted on to maintain their
complicity or will they go off-script? Will Fed actions reliably
be met with the desired response? Will the program remain popular? Could “The
Truman Show” be running out of material? After all, even Seinfeld ended.
Someday, the Fed’s show will be off the air and new programming
will take its place. And people will debate just how good it really was. When
the show ends, those self-deluded Trumans will be mad as hell and probably
broke as well. Hopefully there will be no sequels.
Jeremy Grantham of GMO
“Central banks have created an enormous bubble in stocks, by
holding rates too low.
We do think the market is going to go higher because the Fed
hasn't ended its game, and it won't stop playing until we are in old-fashioned
bubble territory and it bursts, which usually happens at two standard
deviations from the market's mean. That would take us to 2,350 on the S&P
500, or roughly 25% from where we are now...
...But to invest our clients' money on the basis of speculation
being driven by the Fed's misguided policies doesn't seem like the best thing
to do with our clients' money.
We invest our clients' money based on our seven-year prediction.
And over the next seven years, we think the market will have negative returns.
The next bust will be unlike any other, because the Fed and other centrals
banks around the world have taken on all this leverage that was out there and
put it on their balance sheets. We have never had this before. Assets are
overpriced generally. They will be cheap again. That's how we will pay for
this. It's going to be very painful for investors.”
With these cautionary notes, I will discuss my trading strategy
on next Tuesday.
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