This special guest commentary was written by Peter Atwater of Financial Insyghts.
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And Then There Were None
Over the past several months we have watched as the stock market has narrowed. Big Tech, for example, became just the FANGs and then just Amazon. Then this week investors in the last of the Big Tech holdout, Tesla, finally capitulated to reality. Elon Musk’s promise of big news on Sunday turned out to be one tease too many. The stock of the electric car maker collapsed like a mid-2000 dot.com stock. While Tesla’s cultish followers won’t go down without a fight, I think we can finally call the Big Tech peak here once and for all. Silicon Valley, it was great while it lasted.
Given how far and wide the entourage of Big Tech reaches here, though, I would not underestimate the breadth of pain ahead. Media, communications and other industries are going to be hit hard, as are organizations across the entire technology food chain – both domestic and foreign. Then, of course, there will be the ripples into finance. Venture capital, private equity and the rest of the “this time is different” investing in-crowd will be crushed. “Blitzscaling,” a topic I wrote about elsewhere this week, will be mocked just as subprime lending was a crisis ago – a case of collective hubris and self-assured certainty gone too far once again.
At the same time I can’t shake the feeling that central bankers have once again thrown water on a fire that was moments away from self-extinguishment. This week’s Fed meeting minutes suggest that just as the markets are finally peaking, folks at the Fed appear to be worried about “elevated financial asset valuations.”
I think we have to ask, “Was last week’s jawboning noise or yet another case of policymakers’ ill-timed attempt to slowly let the air out of the markets that will result in a balloon pop instead?”
The bond market sure thinks it’s the latter this week!!
As I cautioned in last week’s Commentary, the bond market and its narratives are critical clues here. Given current complacency, what was a “taper tantrum” in the past could easily become a “taper tsunami” that takes out stocks and bonds – not to mention the whole risk parity crowd – in one fell swoop.
One place where problems are already afoot – or should I say awash – is Japan. Western central bank jawboning and growing fixed income investor bearishness has put the Bank of Japan in a very tough spot. With a 0% interest rate target for 10 year JGBs, the BOJ was forced to intervene aggressively this week as yields rose to 15 bps. I thought it was very telling to see the Wall Street Journal already using words like “slap,” “squash,” and “punch” to describe the BOJ’s actions.
The concern that I have with the BOJ is that it was the last central bank to the extreme interventionist party – the “subprime” as it were. As the worst always appear last and then fail first, the BOJ is likely to lose control of its financial markets before other major central banks. If the BOJ is kicking and screaming now, just wait!!
I would pay extremely close attention to JGB yields, as they go so will go investor perceptions of global central bank omnipotence.
And again, I can’t emphasize this point enough: Central bank potency is binary. They either have all or none. A central bank with a limited arsenal is a meaningless central bank. While I don’t wish the BOJ misfortune, having gone all-in – to both stocks and bonds – at the peak in price, it is especially vulnerable here. And if it goes, the Swiss National Bank won’t be far behind.
Finally, and related, I think congratulations are owed to the team in the finance ministry of Argentina, who brilliantly called the top of the emerging market bond bubble with their thrice-oversubscribed 100 year bond offering. But please appreciate, that the Argentina deal also called a major low in global rates, too. Since the country’s bond offering, the yields on US Treasuries, German Bunds, Greek debt and other sovereign bonds have risen sharply.
What I am afraid few have put together is that the rate rise we are now witnessing is across all categories of borrowers. Yields are now rising for the public sector which, in turn, will impact all other sectors of the economy. What has been a tailwind of lower debt costs is reversing.
Nowhere is the rise in rates going to be less welcome, however, than in the US municipal bond market. While overleveraged cities and states don’t realize it yet, they have a big problem. Rising rates and falling tax revenues are an awkward pairing, but that is what the future holds. If you think states had a hard time agreeing on budgets this year, just wait until next year.
But this where we are. Rates are rising anew. With most investors still believing that a weakening economy will lead to lower interest rates, the next several months could get very interesting.
I Spoke Too Soon
The sharp decline in Gallup Economic Confidence that I highlighted last Saturday reversed. What was -7 at the end of June has moved up to +3. Whether the improvement was a function of a four day weekend remains to be seen. For now, though, it looks like I was premature with my forecast.
Good and Plenty
Earlier today, Paul Vigna of the Wall Street Journal offered a column on the latest financial market craze: “Initial Coin Offerings.” This “unregulated fundraising method that has no connection to Wall Street and is based in the world of cryptocurrencies” has generated more than $1 billion in capital year-to-date, “10 times the amount raised in 2016.”
Per Mr. Vigna:
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"Buying into a coin offering is like purchasing a ticket to a Broadway show months or even years before a performance hits the stage. If the production is the next “Hamilton,” the ticket, or in this case the coin, could later be sold for multiples of its initial purchase price. If the play isn’t produced, though, or if it turns out to be a flop, the ticket would be worthless. The same could prove true for some coin offerings. Coin offerings are more like crowdfunding campaigns than a traditional securities offering. Most offerings don’t have a detailed prospectus, rather companies typically publish a so-called white paper outlining their project or idea. Sometimes the offering are handled through a nonprofit foundation – such as the Zug, Switzerland-based Tezos Foundation – to further distance them from the characteristics of a security." |
While nothing exceeds like excess, the Wild West nature of the current cyptocurrency ecosystem suggests that full froth can’t be far away.
And speaking of full froth, the ETF market appears to be at an equally ebullient moment. Two weeks ago, a Quincy Jones ETF was announced and this week we have FANZ – an ETF backed by shares of sports-related companies.
Today I read an article from syndicated columnist Chuck Jaffe that noted that a company named Exchange Traded Concepts offers “ETF-in-a-box options for money managers who want to start new funds. They’re the conduit for a money manager seeking a turnkey way to ramp up something new.”
ETF-in-a-box options!!! Somehow Justin Timberlake comes to mind.
Maybe Exchange Traded Concepts can work with the Zug, Switzerland-based Tezos Foundation to come up with a new ICO ETF with the ticker symbol “WTF”!!
I know. I know. Finance does as finance can.
Party on folks. Party on.
Peter Atwater
Position in SDS and SH; Creditor of JPM
EDITOR'S NOTE
This is a Hedgeye Guest Contributor note written by Peter Atwater, founder and president of Financial Insyghts. He previously ran JPMorgan’s asset-backed securities business. He is also the author of the book Moods and Markets (FT Press, 2012) which details how investors can improve returns by using non-market indicators of confidence. This piece does not necessarily reflect the opinion of Hedgeye.
