Friends, I have been not that regular with my macro notes, only because I have been caught up with some personal issues. I still may not be that regular but for the present time there are some very interesting thoughts.
We may be at a crossroad in equities. I take all my cues from the US markets and at a point like what I am seeing now, the impact may be more negative for emerging markets.
As a disclaimer, I am currently fully invested in equities but I am fully prepared to make an about turn any time. We could be coming out of an almost 40 year secular trend so timings are not easy to predict. Nobody rings a bell at the top. I have been witness and part of four major crashes in equities and many major policy related and central bank initiated actions which created huge volatilities in the foreign exchange markets. One of them was a very big loss that I took which most of you won’t believe on Oct 7th 1998. I thought my career was finished but I am still here.
Many pundits and long term market watchers claim that they called the top or bottom at each major market turns and many may be true but what impressed me the most was in 1987 when Robert Prechter of Elliott Wave international asked about 150,000 of his news letter readers to get out of stocks completely two days before the crash on 19 Oct 1987. From that time on, I was interested in Elliott Wave Theory. Prechter became very famous then and was one of the most sought after speaker all over the world. It is said that even President Reagan called him personally and asked him, “what next?” The 1987 crash was one of the shortest crash as the markets recovered very quickly but it was biggest single day crash. The Dow and S&P indices dropped almost 22% in a day. Prechter made many wrong calls and right calls after that (more wrong than right, actually) but he will be always remembered for calling the top of the 1987 crash.
Unlike many other technical studies, Elliott wave theory is a forecasting tool. It is very tough to be a good Elliottican. The theory is never wrong. It is only after the fact that you can explain why you were wrong. To be a good Elliottician, you also need to have a good handle on fib ratios, cycles, sentiment analysis and market positioning.
In the run up in the markets since last one year, I have tried to call a top many times. But if anything it has been short lived and the markets have only continued to make new highs. Government and central bank policies have everything to do with it.
Until the pandemic response by the government to a 35% drawdown in markets, we never heard of a trillion dollar stimulus. But since then, it has become a common feature in the name of many programs. The medicine for the cure has been much more than what was required and it still continues. The excess liquidity has been finding its way in the stock markets one way or the other.
It was only day before yesterday that the Senate passed a $1.2 trillion infrastructure package. It will now go to the Senate for full ratification. While this is not fully done the Democrats will push through another $3.5 trillion spending bill in the name of budget reconciliation. This may end up with a tie breaking vote by the Vice President.
While all this stimulus and spending is reaching its crescendo, the Fed is also preparing the markets on a reversal in the monetary policy by 2022. Mind you a .25% rise in interest rates can crash the market now and the Fed will not do it. If anything, they want to withdraw quantitative easing and they will start that with monthly tapering. After all, a rise in .25 pct rates is a 100 pct rise from current levels.
So where am I going with all this. I think with the added stimulus we can probably see a melt up in markets for the next four or five months. It can be a rise of 20% to 25%. While inflation is picking up the full force of the inflation is not evident. There is a lag of six to nine months.
The turn around could be huge and with no real policy measures available for a future crisis one should be prepared.
Think I mentioned in one of my earlier letters that the great macro trader Stanley Druckenmiller, met with Senators to warn them against pouring more fiscal gas onto the economic fire. He even said that if he wanted to to destroy the US economy, pouring this $ 3.5 trillion into an already hot economy is exactly what he would do. Despite his best efforts , I think the bill will still pass. Large money managers like Paul Tudor Jones, Bill Ackman, Ray Dalio, Jim Rogers are already preparing for what is on the horizon.
I personally think this is not a time to initiate new positions but watch what you already have or even move slowly to cash. It is better to be a day early than a day late. Or else it will be like the proverbial story of the man who was falling from the Empire State Building. As he was descending and reached the 56th floor, a man asked him, “How’s it going? So far so good”, came the reply.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.