Tags: investors | stock markets | risk | coyote moment

Complacent Investors Will Find Their 'Gravity Lesson' Is a Hard Fall

Monday, 06 April 2015 07:49 AM Current | Bio | Archive

Friday’s March non-farm payrolls numbers at 126,000, down from 264,000 the month before, certainly have raised some eyebrows.

Nevertheless, the broad measured unemployment rate remained unchanged at 5.5 percent while average earnings were up 2.1 percent on a yearly basis.

Not stellar numbers, but certainly not a situation that’s falling off a cliff. Let’s first wait and see what comes out over the next few months.

That said, the futures at the Chicago Mercantile Exchange (CME) now expect the first fed fund rate hike of 0.25 percent in October of this year and then the next one in March 2016.

About how markets could perform from here on, I can’t read the stars.

What I know is what I see and what I’m able to understand, which defines my limits.

Therefore, trying to understand somewhat "more" and looking back at the first quarter for obvious “warning” signs in markets behavior we can’t overlook what happened in the “always highly liquid” currency markets of the world’s dominant currencies when on March 18th the Federal Open Market Committee’s (FOMC) statement was published and thereafter Fed Chair Yellen gave her press conference.

That day it all came down to the creation of a new "perception" the FOMC might hike only once the fed funds rate this year rather than twice, which caused a very rare huge spike in volatility in the dollar index, which measures the value of the U.S. dollar relative to a basket that is composed of the euro (57.6 percent), the Japanese yen (13.6 percent), the British pound (11.9 percent), the Canadian dollar (9.1 percent), the Swedish krona (4.2 percent) and the Swiss franc (3.6 percent).

On March 18, volatility of the dollar index when measured on an Open/High/Low/Close (OHLC) basis gave a reading of 32.2 percent, which we haven’t seen since the aftermath of the liquidation in 1998 of Long-Term Capital Management (LTCM), which was a U.S. hedge fund management and since in 2008 we had those two memorable spikes when the financial crisis was headed for a total disaster and, last but not least, when we got earlier in the UK that infamous “Black Wednesday” on September 16, 1992, when the UK was “forced” to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) that had been put in place in preparation for the introduction of the euro.

Yes, these were all extremely serious events, which can’t be said of what happened at the FOMC on at all March 18.

So, a legitimate question remains on why that FOMC statement and that press conference caused such an out of range volatility spike in the dollar index.

There is no doubt markets have become disproportional sensitive to Fed monetary policy news/hints in their search for yield, which is not a sound attitude when we all already know the path to “normalization” will be slow and with small rate increments only.

What is worrisome is in the meantime markets show a growing insensitivity to non-financial market risk.

The day, and that day is unavoidable, we’ll have a serious and unexpected e.g. geopolitical event, markets will have to face (1) out of range volatility in many sectors and places and (2) simultaneously a total lack of liquidity, which have always been the perfect combination for crashes.

When we add to that margin debt at the New York Stock Exchange is at present at an historical peak and well above the peaks of 2000 and 2007, you don’t have to be a rocket scientist to know “The Coyote Moment”  is coming and many complacent speculators as well as investors will experience, once again, their “gravity lessons” the hard way.

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Many complacent speculators as well as investors will experience, once again, their “gravity lessons” the hard way.
investors, stock markets, risk, coyote moment
Monday, 06 April 2015 07:49 AM
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