The genius consists in outlining with a few brushstrokes or a handful of words a concept, an idea, a feeling that would otherwise be very complicated to explain: Leopardi in Il Sabato del Villaggio managed to materialize almost visually the joyful expectation of the who comes from the countryside” for the day of the feast; even the carefree rush of the markets in the last six months could be told in a very effective way using the image of the "happy noise" of the children in the square. This (Saturday) in fact "of seven is the most welcome day, full of hope and joy". And how much hope and joy we saw in the vigorous upswing of the markets in January, certain that Saturday would last forever and almost with the fear of not being able to participate adequately in the great celebration (FOMO, fear of missing out).
Growth is strong and sustained globally, Central Banks can finally begin to look forward to a period of normalization (“the sapper with him thinks about his rest day”), Powell has arrived as guarantor of continuity of thought for the Fed, European banks are finally settled, capitalized as they had never been in the past and are starting to hope to even make some margins with steeper curves.
Finally, even a little inflation seems to be returning after waiting for years in which the deflationary specter continued to hover over the markets. Even Trump, after a year a prisoner of himself, has returned to take possession of the control room and between one tweet and another he has managed to bring home his first post-election success with the tax reform.
And yet, now that all the stars finally seem to have aligned for an endless party, one gets the feeling that someone has pulled the plug right at the climax.
Inevitably there remains a certain sense of frustration and disorientation almost like a "hang over" destined to return quickly because today is Sunday anyway, the sun is shining outside and you can easily rest a bit and recover your energy: maybe it won't be a electrifying Sunday from caviar and champagne, but still a dignified day on the sofa, slippers, a good book and a glass of wine; maybe a little less bubbles than expected, but then again
Diman sadness and boredom
Recheran l'ore, and to the labor used Everyone in his thought will return.
Obviously we are no exception, and we are calmly returning to the "used labor" aware that the phase of the cycle is still favorable and capable of offering opportunities at the cost, however, of increasing volatility. This increase in volatility appears to us to be something structural that we will have to deal with from here on out and obviously arises from the slow and gradual "disengagement" of the main Central Banks.
Albeit with significantly different timings, in fact it appears clear that the gigantic safety net set up by the Central Banks to allow the markets and the economy to find a balance after the deepest financial crisis in recent financial history is gradually being withdrawn; inevitably this process generates uncertainty and fears in markets that for the first time in a decade have the perception of being left to their own devices.
This sense of unease is exacerbated by a changed structure of the markets in which investment banks and hedge funds are no longer the main risk takers. Then there is also a personal factor, for which the vast majority of traders on the world floors are brilliant and ingenious thirty-year-olds who have never seen rates rise, who have never known the pangs of inflation and who have grown professionally by buying every market dip; there is a generation gap between those responsible for strategic allocations, who are typically aged between 40 and 50 and have lived through and bear the scars of at least a couple of financial crises, and those who, instead, populate the trading floors today and financial crises he has only seen them in the cinema.
This gap can generate schizophrenic reactions between those who are more concerned about managing top-down allocations and those who, on the other hand, with less inhibitory brakes, get their hands dirty daily bottom up in the trenches dug behind the Bloomberg terminals. In this phase, those structures appear to have an advantage where allocative and management processes sit very close to each other compared to perhaps more complex structures where the distance between who allocates and who implements is wide, with the risk of a dangerous bipolarity.
For the same reasons and exaggerating the concept, all "autopilot" structures, created on models calibrated and tested on the market over the last 10 years, risk becoming an element of endogenous volatility also due to their physiological pro-cyclical nature. To complicate everything, we have just added the thorny issue of duties in the United States and, in Italy, an at least complicated electoral result with a puzzle that is difficult to solve.
But we cannot forget that we are talking about retreating Central Banks and rising rates precisely because we are experiencing a moment of strong and synchronized growth, therefore, net of all the caveats and complications mentioned above, the market can certainly offer excellent opportunities also and above all in a context of active management free from pre-established schemes; on the contrary, precisely in a moment of such great uncertainty and great changes, dislocations are inevitably generated from which dynamic management can benefit.
This is also true in a bond world which at first glance may appear to be the most delicate segment in this phase of the economic cycle. The "condicio sine qua non" to be able to effectively and efficiently face the new challenge posed by the markets is to change the approach, primarily in the bond world, abandoning the idea of "remunerated parking" and accepting the stringent logic of investment guided solely by the analysis of the risk-return balance, a logic undeniably anesthetized by long years of Quantitative Easing. The awakening from the torpor of a hibernation that lasted for years can obviously be abrupt and painful, but since the process appears inevitable, then we might as well try to govern and manage it effectively.
°°°°Rocco Bove is Head of Fixed Income at Kairos Partners
