martes, 21 de noviembre de 2017

martes, noviembre 21, 2017

Heisenberg The Uber-Bull

by: The Heisenberg


Summary
 
- You want an ironclad bullish thesis for stocks?

- Well, look no further than my articles on this platform and elsewhere.

- Let me recap this for you using a series of colorful charts and a double-dose of Heisenberg "charm".
 
 
Every week, on Friday evening, I revisit the recent articles I've posted on this platform and scroll through the comments. Generally speaking, I try to check them over the weekend as well. 
 
During the week, I have a hard time keeping up with them. Heisenberg Report consumes the vast majority of my time, and the comments over there are multiplying as is my presence across platforms. That's all fine and good and I guess it's an example of "be careful what you wish for" because frankly, it's exhausting on weeks like this one where there's a lot going on both in markets and on the political front.
 
One of the things I'm not particularly enamored with when it comes to comments on this platform is the extent to which a non-negligible percentage of them seem to suggest a lot of folks aren't actually reading the articles. That's discouraging. And not so much because it invariably leads to comments that don't contribute to the discussion, but rather because I write this stuff because I want people to read it. Now you'd think that would be common sense - writing and reading are two things that work well together like peanut butter and jelly. But apparently, some people are convinced that I have some ulterior motives.
 
I could understand that contention if I were say, writing about individual stocks or if my articles weren't the very definition of thorough. But if you've read more than a half-dozen or so Heisenberg articles either here or on DealBreaker or on my own site, then it's probably occurred to you that there is no conspiracy here. The idea that someone would spend as much time as I do writing entertaining posts that include everything from deep-dives into complex derivatives to pop culture references to tales of nights spent conversing in broken-Albanian at sake bars if the overarching goal wasn't to engage readers is laughable. Plus, you have to understand that there are only a handful of people on planet Earth that are capable of moving markets with macro analysis and Heisenberg is most assuredly not one of those people.

Of course, allegations of ulterior motives aren't the only thing that gets lobbed at me by readers.
 
There's another crowd who likes to contend that based on my disclosures at the end of the articles and based on the sheer volume of content I produce across websites, there's no way I could actually be trading.
 
A couple of things there.
 
First, with the possible exception of placing a bet and losing everything immediately, there is no better way to evaluate a trade than writing about the thesis behind it and thereby implicitly soliciting feedback from millions of people on the internet. Just ask my buddy Kevin Muir, who does that all the time. Kevin shares his trades. The fact that I don't is my prerogative as long as I don't lie in my article disclosures, something I have never done and something I never will do.

But you want to be careful about reading voluminous analysis that sounds some semblance of sophisticated and then somehow coming to the conclusion that a person who posses that level of acumen isn't actively using it.
 
Second, it is my long-held contention that no one should be implicitly or explicitly telling other people how to allocate their money without having an intimate understanding of other people's financial situation. That's my opinion. Other people have a different opinion, and indeed, I understand that "actionable" articles are part of what makes this site unique. But just because someone doesn't explicitly tell you what to buy/sell and when to do it, doesn't mean the information provided isn't actionable. I provide a veritable treasure trove of macro analysis that, to someone who knows how to use it, is the very definition of actionable. And that brings me very neatly to the title of this post - "Heisenberg The Uber-Bull."
 
It is absolutely critical that you understand the extent to which dumping $14 trillion in liquidity at the top of the quality ladder (as central banks have done since 2009) drives people down that quality ladder and out the risk curve. That isn't a "theory", and if it was a theory prior to 2009, it has certainly moved into the realm of "fact" since. You don't just drive rates on risk-free assets to zero and below without pushing people into riskier assets like stocks (SPY). Relatedly, the only way creating a scarcity of available assets doesn't drive up the price on those same assets is if there's a concurrent drop in demand. Absent an offsetting drop in demand, shrinking the size of the asset pool drives up asset prices. That's just all there is to it.

Now, if what you want to do is go back and try to write your own narrative about what other factors might have served to accelerate the rise in asset prices (and those factors can include anything from earnings/revenue growth to whatever you think you can divine from looking at lines on a chart), well then that's certainly fine. But what you can't do is pretend like reducing the supply of purchasable securities doesn't drive up prices.
 
Given all of that, and given the great lengths I have gone to in an effort to exhaustively detail the extent to which central banks are acting on both the supply and demand side of the equation (on the supply side by purchasing assets and on the demand side by pushing yields lower and thereby sending everyone off on a quest for returns), you could very plausibly say that there is no bigger bull than Heisenberg.
 
Additionally, I have repeatedly outlined how an exit from these policies is made virtually impossible the longer they remain in place. That contention goes back to what Deutsche Bank's Aleksandar Kocic has called "the permanent state of exception." The market is under what amounts to martial law, and the dynamics that creates in terms of embedding feedback loops that optimize around the existing state of affairs means that lifting martial law becomes an increasingly far-fetched proposition as time goes on.
 
Clearly, this cannot go on forever. That's where "Heisenberg the uber-bear" comes in. At a certain point markets will literally break. And indeed, the JGB market is close to reaching that tipping point.
 
But in the interim period, an enterprising person could very well take everything I've said over the past 15 months on this platform and make the most bullish case imaginable.
 
If you wanted to take it up another notch, you could throw in the perpetual motion machine created by ETFs on the way to claiming that selling has now become a logical impossibility - something I only half-jokingly suggested earlier this week.
 
Have a look at this chart:
(Deutsche Bank)
 
 
I'm running out of ways to put this in the face of a veritable barrage of claims being made on social media by market pundits with literally millions of followers. Between the BoE, the BoJ, and the ECB, central banks are still buying $150 billion worth of assets every single month.
 
And here's the thing: these are not estimates derived after the fact. I mean, with the ECB you always have to go back and check on exactly what was bought because the capital key complicates things a bit, but what I'm trying to tell you here is that this buying is preordained.
 
It is policy. It is programmatic. You can read all about it on their official websites.
 
So there is no "end" of QE. Additionally, what you see in that chart doesn't even include any flows from Norway's $1 trillion SWF, the SNB, or any EM central banks that increase their FX reserves in a given month. If that's not a bullish thesis, well then, I don't know what is.
 
Here's a breakdown of how the previous ECB taper (so, the one before what was announced on October 26) affected asset purchases broken down by corporate bonds versus sovereign debt:
 
 
(BofAML)
 
 
CSPP was never really tapered. Which means the ECB has never really slowed the pace at which it's creating a scarcity in the € corporate credit market. Here's a more granular look:
 
 
(BofAML)
 
 
Do you see what I mean? What do you imagine that does in terms of spreads and credit vol.? That's a rhetorical question. Here's a short excerpt from a new BofAML note:

ECB = the steamroll of vol. Additionally, it further reinforces our view that the market will continue to operate in a “buy-the-dip mentality”, especially as there is scope for the CSPP to remain strong well into the tapering phase of 2018. Note that the CSPP buying pace is only slightly lower compared to the pace it started 18 months ago, despite tapering from €80bn to €60bn last April. 
Scarcity of bonds will remain a key tailwind for spreads and credit vols, on the back of too much money chasing fewer bonds.
Now look at spreads in Europe:
 
(Goldman)
 
 
And if that's not poignant enough for you, have a look at this:
 
 
(Deutsche Bank)
 
 
"Oh nothing, just European junk bonds trading inside of US Treasurys."
 
So you kind of have to connect the dots here. What do you imagine happens when you get those sort of distorted dynamics in one market? Well, naturally investors simply go to other markets.
 
Witness this:
 
(Deutsche Bank)
 
 
Ok, so guess what happens next? What happens next is that all of that demand drives down yields in the new locale. Of course, that demand is also met with supply, and guess where the proceeds from that supply end up?
(Deutsche Bank)
 
 
Surprise! It's all one trade folks. It's all one giant global QE trade.
 
And see this gets back to what a lot of people still don't understand. I don't present this kind of analysis in an effort to prove that I am "right." When central banks come out and tell you that they are going to do something (in this case, print $14 trillion in money out of thin air and drive investors into riskier assets in an effort to reflate the global economy) and then they go out and do just that, there is no sense in which I am "right" to document it. Rather, this just is what's happening. I am no more "right" to point it out than I would be "right" to point out that the sun rose in the East again today.
 
When something as simple as supply and demand is at play and the people who control the printing presses are distorting the supply/demand balance and telling you they're doing it at every policy meeting they hold, it makes no sense to say that anyone who discusses that is providing "proof." Rather, the burden of "proof" rests on anyone who claims that somehow what's going on isn't responsible for what you see in terms of asset prices.
 
Spoiler alert: trying to provide that "proof" is impossible. There is simply no way that someone who is bullish based on a thesis that differs materially from the dynamics laid out above has any hope of making a plausible argument to support the contention that there is a factor or even a set of factors with more explanatory power than the deliberate distortion of supply and demand by people armed with printing presses.
 
That's not to say that one cannot come up with a long list of contributing factors that may play a role in supercharging what would be going on any way, and indeed, I myself have added several things to that list, including the effect of passive investing.

But if what you are looking for is an ironclad, bullish thesis, it is literally impossible to find a better one than that which I have laid out on innumerable occasions in these pages and elsewhere and which I have just documented again for you above.
 
Nothing further.

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