Twenty-five years ago he died Massimo Troisi, wonderful mask of the most beautiful and poetic Naples, worthy heir of Totò and Eduardo. In his farewell work, "Il Postino", there is a passage that I have always found brilliant: in conversation with Pablo Neruda, he confesses that he has fallen in love. Neruda replies paternally that it's not a serious thing and that there is a remedy… and the postman Mario, in his immense simplicity and poetry, says to him: “No, no! What a remedy, I want to be sick…”. Maybe with less poetry, but even the market seems to embrace Troisi's idea, somehow drawing strength from this now perennial and constant state of "illness".
A condition of chronic weakness it distances the moment in which the convalescent will be asked to get up on his own strength and face the rehabilitation process towards the full recovery of normality. After a disastrous fall on the first attempt to get up, it is as if the market found comfort in the idea of a now chronic disease that indefinitely postpones the possibility of trying to get back on one's feet. It is as if the medical staff and the entire managerial structure of the hospital had realized that the patient's condition is too fragile to run the risk of letting him go on on his own: here is the not too veiled promise of a new round of painkillers and antibiotics at the first sign of relapse. So the idea of a Fed ready to cut rates and right now a 2-year Treasury plummeting to XNUMX% doesn't scare, but it does support a market that "wants to stay sick."
After all, if we incorporate the expectation that low rates are no longer a tactical element and therefore the result of a strong but limited intervention in time, and that become structural and inevitable in a world without growth and without inflation, the entire logic on which the valuation of financial assets is based is completely distorted. Thus, for example, everything that appeared very expensive just six months ago, in a large global rate normalization scheme, today becomes extraordinarily appealing. Obviously, however, a context of low growth physiologically increases the idiosyncratic risk in an economic cycle that is starting to show inevitable signs of fatigue.
The balance between growing credit risk, nominal rates not sufficient to adequately compensate the investor in the medium term and the simultaneous presence of negative real rates which forcefully push towards forms of investment which, by duration or credit quality, are able to offer returns ex ante positive, it creates a logical short circuit in which the rational investor struggles to find the correct positioning. The blanket inevitably appears short and the impossible balance, as in a painting by Escher: in the new reality of the markets the role of Escher's graphic genius, which makes the impossible possible, is played by the Central Banks with their renewed promise of almost unconditional support. This is how the May sell-off becomes once again a buying opportunity and the market once again draws strength from its own fragility.
After all, in this Goldilocks trade of 2019, it appears quite clear that the dominant theme remains caution and traders move slowly, with small and gradual positioning adjustments: last year's wounds still appear too fresh and deep to be reconstructed for long convinced. Still stealing with both hands in Troisi's filmography, it is as if the market, in choosing between a lion's day or a hundred sheep's day, had opted for fifty teddy bear days.
The article is taken from the column "Thoughts in Freedom" on the Kairos Partner website.
