Macro Investor: Never look a gift rally in the mouth

Like many investors, it seems, we were flummoxed by Ben Bernanke’s QE3 announcement last week, which essentially promised to keep rates ultra low, buy $US40 billion of mortgage-backed securities per month, and do whatever else it takes for eternity until US unemployment figures return to their pre-crisis levels.

Was it overkill? Probably. Was it reckless? Possibly. Will it work? Nah.

Still, unlike many investors, it seems, we were equally flummoxed by the reaction. Markets just aren’t taking this for what it is: free money! Forever.

As economic prognosticators, it’s our job to be the miserable permabears, not yours. And as signed-up members of the doom-and-gloom brigade, it’s our job to point out the risks, not the market’s.

But this market, after a brief and ultimately underwhelming rally on Friday that tapered out Monday, has put on the bear-suit and as such might put us out of a job. All a bit ironic when you consider that Mr Bernanke’s stimulus was designed to keep people employed.

Markets were concerned that the Federal Reserve was addressing a structural problem with a cyclical policy tool. Markets were also concerned that by providing an open-ended guarantee, the ultimate signal had been given to feckless Wall Street fat cats to double-up on moral hazard. Ben Bernanke was a hirsute Alan Greenspan by a different name and he was spiking the punchbowl.

But this gives a reason to buy, not to sell. Sure, the risks are still there, nothing has been properly addressed and the global economy is still woefully imbalanced, not to mention slowing, but without any trigger point save a wildcard in Iran or an upset in the Chinese leadership transition, there’s nothing in the short-term that should stop PE averages expanding from 16 to 20 to beyond. Risk is on.

Now of course, there is the small matter of China’s economic slowdown, which may claim its first victim in Fortescue if banking deals and asset sale don’t assuage the short-sellers, and there is the equally small matter of the US Republicans and their desire to follow Europe’s march to fiscal austerity, but when the music is playing you’ve got to dance.

So dismiss those worries in the Strait of Hormuz or the South China Sea. Don’t be afraid of food inflation, climate change or energy prices. Forget the fact that rich-world unemployment is structural, the results of a labour market that has failed to catch-up with the reality of globalisation and technological obsolescence.  And forget too that the same problems exist for Chinese workers, only more so.

Dismiss from your minds the futility of driving an economy built on debt into a cliff of the mass retiring baby boomers. Cast aside nagging thoughts of hung parliaments, poisoned politics and a legislative process run more by the media cycle then the commonweal. Don’t worry about the rescue deal in Europe that essentially ties bailouts to privatisation and the sacking of public sector workers.

Our national symbols may be the emu and kangaroo, but in this bull market we need to be the squirrel and the ostrich. Free money has been given and as net present values are put aside to the broom closet of financial analysis, we must buy up all the nuts we can and put our heads in the sand.

After all, the view is better from underground and when the rally fades you’ll need all the nuts you can get.

PS: None of this constitutes investment advice. Please see a financial planner before doing anything.

Michael Feller is an investment strategist at Macro Investor. Macro Investor is continuing its coverage this week of the best trading and investment ideas to take advantage of QE3 and our changing economic landscape. Click here for your free trial.

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Comments

  1. Great summary of the situation Flash. It’s all just total madness. Unfortunately economic academics, and indeed, pretty much, the whole profession are active participants in the increasing bedlam!

    “PS: None of this constitutes investment advice. Please see a financial planner before doing anything.”

    I reckon anyone would have trouble deducing any investment path out of your summation of the ongoing insanity so you are on pretty safe ground. 🙂

  2. but when the music is playing you’ve got to dance.

    Not so. As a former ballroom and Latin dancing devotee, I found that you picked up more ch*cks by sitting coolly on the sidelines, and only rarely stepping onto the floor.

    When the music playing has the wrong beat, sit it out. That’s how you score.

  3. PS: None of this constitutes investment advice. Please see a financial planner before doing anything.

    That is investment advice. And arguably of the worst kind.

  4. innocent bystander

    think you need a Classroom post on how to trade the illiquid wide-spread ETFs that have been getting a mention?

    • good idea. Although there are ca. 60 ETFs out there, only a few are “tradeable” (i.e in the short/medium term – long term, the spreads/illiquidity is a lower concern), like SFY/STW etc.

      Until CFDs are restricted I dont think we’ll see more liquidity in the ETF marketplace.

      EDIT: apart from the BEAR ETF, and the long pound/euro/USD ETFs there’s no shortable ETFs available, which heavily restricts the trading ability of them…again, no innovation in this space.

      • innocent bystander

        thanks Prince
        I was thinking of the couple that got mentioned in MI in the last few editions.
        sry for the double post, seemed to take a long time for the 1st to appear.

      • Just need to clarify that all the calls in the MI Growth portfolio that are called “speculative” are just that – they’re not trading calls per se (i.e based on a particular trading system), but a macro analysis/call.

        Although positions maybe similar – e.g we are long Oil in both Trades and Growth, the reasons behind them are different (macro/breakout technical trade).

        ETFs are really only useful for the speculative type calls and require a much different money management and risk management approach.

        Mmm..yes an article is required to explain this better.