Carl Weinberg says that when he talks about China quoting the official data on growth (good) and bad debts of banks (under control) everyone looks at him like crazy. Weinberg then asks what numbers his interlocutors have to say that China is on the verge of collapse. None, they reply to them regularly, but that things are going very badly is what everyone is saying. We can have fun replacing China with Italian banks, with global manufacturing, with the oil exposure of American banks that are falling at breakneck speed (they are the ones that should have risen due to the rate hike). Everything clearly goes wrong, but when asked to argue negativity, the answer is, invariably, that everyone is negative and therefore there must be something true.
Anyone who has read The Big Short (or has seen the film, The Big Short) will remember the figure of Michael Burry, the doctor turned manager who in 2005 takes the trouble to go and look at a series of subprime mortgages one by one and discovers that they are almost all unsafe. When he suggests going short on these stocks everyone looks at him like crazy even when he shows the data he found. The market is doing very well, say his interlocutors, and it is impossible for it to collapse. And why? Because that's what everyone is saying. We say it right away, we do not advise anyone to have the stubbornness of Michael Burry and we will never have the courage (which he had) to go against everyone by putting money and reputation into it. After all, for a Burry who holds out for three years and in the end takes home a mountain of money, there are a thousand who give themselves a nervous breakdown and close early, losing instead of gaining.
Keynes also discovered this, for he wrote, after losing nearly all of his money, that markets can be wrong for longer than you can afford to be right. Nor do we much envy the bondholders who refused to restructure Argentina's debt. Eventually they will have more money than they folded, but at the price of 15 years of hell. Instead, we prefer to follow the teaching of William of Baskerville (The Name of the Rose, Sean Connery in the film), the science-loving Franciscan who reminds his young disciple that it is useless to end up at the stake to defend one's ideas. Better to cultivate them with prudence, pay formal homage to the consensus and wait for better times. Translated into practice, it is a question of accepting 2016 as a year of retracement of the stock exchanges, of repositioning on more defensible levels, of less expansive US monetary policy, of profits that grow slowly, of difficult challenges for China which must manage liberalization in an orderly manner of capital movements, for Italy which must strengthen its banks and for Merkel who must hold together an unruly Europe in the east (Poland, Hungary), in the west (Spain, Portugal), in the south (Greece and perhaps Italy ) and to the north (UK).
It can also be conceded that expansionary monetary policies are less effective than previously believed. Finally, we can dutifully pay homage to the spirit of the time and accept a phase of penance and expiation for the excesses of recent years (very evident in raw materials, but not in other sectors). Having said that, no one is forcing us to repeat like parrots that China is about to collapse, that we will have unprecedented waves of bankruptcies, that the Eurozone is on the verge of disintegration, that Italy is worse than Greece, that America is advancing towards fascism or socialism, that oil will never rise again (and if it rises it will bury us in inflation), that the dollar will go to parity with the euro (bringing America down) or will weaken massively again (bringing down Europe).
And no one is forcing us to join the chorus of those who fear a bloody Fed that will resolutely raise rates despite so many ruins, a dollar that will collapse even in the presence of hundreds of millions of Chinese lining up to buy it or an ECB that March will make a very small maneuver even in the presence of a strengthening euro and a German industry that the stock exchange considers in free fall. If you have to think the worst, choose. Either drowned or on fire, not both. Let's say it quietly and let's even ignore the forecasts of the Monetary Fund (which predicts more growth in 2016 than in 2015) and those of top-down and bottom-up stock analysts, who still assume a small rise in earnings (and not so small for ex-oil earnings). We concede that in recent years economists and analysts have always shown themselves to be too optimistic and we hypothesize, out of prudence, stable rather than rising growth and profits. Let's also admit that the strategists of all the big houses, who give the SP 500 between 2000 and 2300 at the end of the year, live in the land of fairy tales and do not consider that it is correct to deflate the multiples if one assumes flat profits and no longer growing. And yet, from here to say that infinite misfortunes await us there is.
We also find it interesting that many of the most prestigious shorts fanning the flames are ready to declare that they will be happy to reposition themselves to the upside a ten per cent below current levels. It is an attitude that is far from the true desperation of deep bear markets and sounds more like the desire to make forays into a dazed and nervously fragile market. What to do then, buy? After all, among those who say they are certain of further reductions there are also those who softly admit, as does Laurence Fink of BlackRock, that there are already excellent buying opportunities today. But to us this looks more like a hold market than a buy one. For three reasons. The first is that policy makers do not see badly a 2016 of moderate retracement. What they don't want is for the retracement to be such that it negatively affects the economy. That is why, as markets began to overdo pessimism, we saw a softening of Fed positions and a more aggressively expansionary stance in Europe, China and Japan. And yet, while in previous years a week of declines was enough to feel the first reassurances, this time it took a month.
The second is that monetary policies are starting to look less effective. As Richard Koo has noted (for years), rates can go down, but they are of little use if no one feels like borrowing money and if everyone instead tries to repay their debts because they are still terrified since 2008. Let us add that banks are asked to lend more (with pressure from negative rates) but also less (with pressure from ever higher capital ratios). At this point, in a normal world, fiscal policies should take over. however, governments are paralysed, allowing themselves only small spending overruns but not feeling motivated to do more, at least for the moment. The third reason is that if the markets were ever to indulge in a recovery, for example by getting closer to the levels of the end of 2015, the Fed would go back to talking about raising rates and the downward runs would resume.
Only in the presence of a strong economy could we see high stock markets and tightening Fed at the same time. Hope is always legitimate. But at the moment we see a global economy doing quite well, but not so well. We remain strategically neutral on the dollar. The ongoing weakening is helping the US stock market, commodities, emerging markets and China. It does not help Europe immediately, but it will be able to help it in March when the ECB will have to launch a series of even more aggressive measures, aimed in particular at bringing the euro down
