Wonder, Plato and Aristotle observed, is at the origin of philosophy. The amazement at the very existence of the world and the mystery of its origin, its complexity and its functioning are the basis of the attempt of philosophy (and science) to investigate what we do not understand and to find convincing answers.
The opposite occurs, we could say, in historical investigation. Here it is not wonder that motivates the study of history but rather the study of history that causes wonder. How could the civilizations and generations that preceded us believe in values that today seem incomprehensible or even absurd to us? How could they fail to notice the abyss they were falling into? And how were they able to recover and reinvent themselves and reach our present?
In its own small way, even the study of the history of the markets offers inexhaustible points of wonder. How was it possible not to notice the arrival of the great crisis of 2008? What was that investor or speculator who bought subprime or stocks at the top of the 2003-2008 big bull thinking? And what did those who sold shares have in mind, a few months later, on that day in March 2009 when the SP 500 dropped to 666? Did he think the world would soon end?
And, to come even closer to us, what terrible vision of the future did those who sold shares on February 11 with the SP 500 at 1810 have? And what luminous vision does anyone who buys them today at 2100 have? There is an unwritten rule in the markets. You never get upset with those who made a mistake, because what appears to be a mistake today could turn out to be a wise decision with the wrong timing in the future. If in a year the index should be at 1600 (the level that many believed to be quickly reachable in those February days) whoever sold at 1810 would appear more intelligent than whoever is buying today at 2100. On the markets, whoever laughs last laughs best, but the last one doesn't exist.
Therefore, without arrogance, but with legitimate wonder, one can ask whether we were mad in February or whether we are mad now. We would like to remind you that February was not a trivial technical correction, the classic storm that those who are on the markets know can arrive at any moment. And it wasn't even a limited crisis, however serious, like the Greek one in recent years or the Italian one in 2011. It was a global crisis at the end of the cycle, a paradigm rupture. Not necessarily a collapse of the system like that of 2008, but the entry into a new, unknown and formidable phase.
Instead, the winter of our discontent has been turned into a glorious spring by yet another European quantitative easing and some further Chinese fiscal measures. Even more important were the general stabilization of exchange rates (almost a fixed exchange rate regime), the freezing of the US rate hike and the return of oil to the level of August 18 when, interesting coincidence, the SP 500 was exactly where it is today , to 2100. In its own small way, the Atlante Fund has also made a contribution.
Apart from the Atlante Fund, it is as if everything had gone back to nine months ago. Markets and policy makers tried in January to look at what a normalized world looked like, with US rates rising, the renminbi retreating and the gradual reduction of stimulus doses in China and Europe. It was a kind of preview and the show that presented itself before the eyes was not reassuring at all, the world appeared in all its fragility and that is why, after some hesitation, the status quo ante was restored. We have returned to monetary and credit stimulus, not only the rate hike policy has been suspended but also the discussion around the issue.
The markets, for their part, felt contented, calm and confident again. We reset the clock to August 18, but something has changed in the meantime. Unemployment continued to fall not only in America but also in Europe. If we are still far from full employment (Germany excluded), in America we are now just a few months away from a recovery in wage inflation. One can stay long enough, even one or two years, under structural unemployment, but the longer one stays without moderating the exuberance of the labor market, the harder the subsequent slowdown must be in terms of rate hikes, with consequent risk of recession.
Let us therefore welcome this new phase of serene markets and moderately re-accelerating economies, but let us try not to forget that stable countries do not exist and that this immobility of rates and exchange rates, which stock exchanges and bonds like so much, cannot be eternal . If not eternal, then how long can it last? David Zervos observes that the last thing the Fed wants is to arrive under the November presidential election with a market situation similar to that of late August or January February.
It seems to us a perfectly reasonable hypothesis. The rate hike, although inevitable, can still wait until the end of the year. In the best hypothesis it can even be brought forward to June, but only if the markets are even stronger than now, if the dollar has remained calm and if the polls on the eve of it indicate a clear victory for the IN in the Brexit referendum. Among the other factors that could disturb this phase of truce we point out oil and, as already mentioned, the dollar. Crude oil, in the coming months, will have to avoid returning to its lows, but it will also have to limit its recovery so as not to create further embarrassment for a Fed that is already closing both its eyes to a possible recovery in wage inflation.
The fundamentals, fortunately, point in the direction of a further gradual recovery. As for exchange rates, in the last two months we have clearly seen how much stability at reasonable levels is positive for the markets. A dollar that no longer rises (without falling) calms the Chinese economy and financial markets and does not damage a Europe that is still enjoying the benefits of the 2014 devaluation. The weak link of the new semi-fixed exchange rate system is this point Japan, while the strong, even if not very strong, are the emerging countries, which still have a modest room for recovery for their currencies.
In this limbo phase, we remain invested in equities, credits and emerging markets without increasing our positions. Even if the bulk of the recovery is behind us, there is still room, 12 months from now, for some further improvement.
