By Eric Kraus, a Strategist at Otkritie Financial Co.
It will come as no revelation that T&B (Truth & Beauty) was wrong-footed by the current wave of market havoc; in a magnificent confirmation of Murphy‟s law, pandemonium broke out in the financial markets within literally hours of the release of our last, somewhat more bullish report. As we go to press, this renewed wave of self-reinforcing panic threatens to become the second “once-in-a-century-event” of the past couple of years.
In our own defence, we had repeatedly warned that what is unsustainable (e.g. the sovereign debt bubble) would ultimately not be sustained, and that timing the end of a bubble – or even of an “echo-bubble” – is a major challenge. Alas, we may have become a bit complacent, assuming that in the face of the continued provision of ample liquidity by the global central banks, and with near-zero benchmark rates almost everywhere, the markets would continue to blithely overlook the gapping economic chasms opening up at our feet.
Having employed the simile “picking up not nickels but dollar bills in front of a steamroller” we are currently feeling a bit flat. On the one hand, our oft-reiterated preference for Russian dollar-denominated Eurobonds has proved foresightful; thus far at least, the bond market has proved the haven of stability we had expected. On the other hand, the Russian equity market recently suffered substantial (and frankly irrational) collateral damage from the Greek imbroglio, confirming the RTS's reputation as a very high-beta casino offering efficient short-term betting on global market trends.
Some of our peers now seem to be in “I told you so” mode. Oddly, scanning recent reports in our inbox, we cannot recollect anyone having warned that markets were about to go spiralling back into the abyss a la 2008. Certainly, T&B failed to do so.
Our usual road-runner analogy is appropriate: markets will reliably run off a cliff, continuing to run along on thin air until, for whatever reason, they suddenly focus upon an underlying threat – at which time they suddenly switch from “blithely indifferent” to “panicked obsessive” and come crashing down to the valley floor. Indeed, in a world faced with obviously unsustainable imbalances, mediated by a financial system apparently scientifically engineered to fail, the question becomes not “if” but “when” and the strategist‟s stock in trade – predictability itself – may no longer be attainable.
In the short run, the question is whether this is simply a correction, or whether we are about to revisit the panic mode last seen in September 2008. Our best guess is that the volatility has already crested and, absent any new and fearful surprises, it shall blow over – in retrospect proving to have constituted yet another great buying opportunity.
That said, Prof. Frankenstein‟s experience could sooner or later prove germane – a dangerously intercorrelated and overleveraged financial system could run totally out of control, based upon little more than its own perverse internal logic – resulting in massive, perhaps irreparable damage to the underlying economy and to the societies which live from it.
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