'Eerily reminiscent' of pre-GFC conditions

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#1
'Eerily reminiscent' of pre-GFC conditions
Date
June 3, 2014 - 10:27AM
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Ambrose Evans-Pritchard

Retail investor trades are easier to detect and hence more lucrative for HFTs.
The warnings are similar to those voiced by the ECB's Jean-Claude Trichet in January 2007, when he told investors to brace for trouble. Photo: Bloomberg
A storm alert today from Simon Derrick at the Bank of New York Mellon. He cites three warnings from leading central bankers, all alarmed by the remarkable disregard for risk in the equity, credit, and currency markets.

The Bank of England's Deputy Governor Charles Bean says the lack of volatility is "eerily reminiscent" of the run up to the financial crisis in 2007-2008. Investors are turning a blind eye to a large fact: that central banks are intent on extricating themselves from QE and emergency policies come what may, and this is going to be a painful experience.

Italy central bank Governor Ignazio Visco issued a similar warning on Friday: "Volatility on the financial markets in the advanced economies has subsided to well below the historic norm, reaching levels that in the past sometimes preceded rapid changes in the orientation of investors."

In America, Dallas Fed chief Richard Fisher has been warning for several weeks that the decline in the VIX index measuring volatility is an accident waiting to happen. One almost has the impression that he is itching to inflict some "two-risk way" into markets to shatter this complacency.

Mr Derrick says dash for yield is all too like the last stage of the carry trade just before Russia and East Asia blew up in 1998, and again in the summer of 2007 when investors seemed to lose all fear. Both episodes ended with a bang, at first signalled by a surge in the Japanese yen.

Today's warnings feels very like those of the ECB's Jean-Claude Trichet at Davos in January 2007 when he told investors to brace for trouble. He said risk spreads had been compressed to dangerously low levels, though the boom was of course to run on for many more months.

Greek 10-year yields ultimately traded at just 26 basis points over German Bunds. Anybody who held on to those Greek bonds lost roughly 75pc.

Willem Buiter, a former UK rate-setter (now at Citigroup), was even blunter at the time. "Current risks are ludicrously underpriced. At some point, someone is going to get an extremely nasty surprise."

My own view is that ever rising equity prices today are incompatible with ever sliding bond yields. The two markets are each telling a different story about the state of the world.

I notice the heroic efforts to justify this on the grounds that falling inflation raises real incomes and profit margins. To which one can only say that falling inflation – and therefore falling nominal GDP growth – also lowers the forward trajectory of equity prices, at least compared to what they were assumed to be. Investors are latching on to one part of the story they like, but ignoring the other part.

Split personality in bonds and stocks can happen for short periods. This rarely lasts. One or the other is going to face reality before long.

Telegraph, London
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#2
There is a somewhat related article by Carl Richards that talks about investors becoming more indifferent to risk.
I think he is talking in the US context, but it may apply to Singapore too, considering the recent run up in prices for both established and penny stocks.
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It’s Easy to Forget About Risk in a Stable Market
CARL RICHARDS JUNE 2, 2014
http://www.nytimes.com/2014/06/02/your-m....html?_r=0

Stability itself is destabilizing.

This is one of the defining ideas of the economist Hyman Minsky. And it matters because when we have periods of relative stability or happy results in the stock market (like now), we start to tell ourselves little stories. For example, we might believe that the stock market will behave like a bank certificate of deposit but pay us double-digit returns year after year.

We forget what normal market risk feels like, and we get comfortable with more and more risk. That makes it easier to borrow more money, because it’s all good. We say, “Risk? What risk?” as we move more of our 401(k) allocation into the stock market.

Forgetting about risk and pain is a wonderful human trait. Without this amazing ability, I doubt there would be many families with more than one child, and I’m certain that very few people would sign up for a second marathon. Forgetting pain has been good for us as a species, but it’s bad for us as investors.

As a result of forgetting our most recent investing pain in 2008-9, we see things like:

· Serious interest in penny stocks

· Retail investors setting new trading records

· Greece issuing bonds worth 3 billion euros with yields of just 4.95 percent — and investors buying it all

· People saying REITs and utilities are substitutes for bonds

· Volatility hitting almost historic lows, with the Volatility Index (VIX) dropping to 11.36 in May

· Housing in expensive areas selling like crazy

Then, there are the advisers who are trying to convince clients to get back into stocks even though many indexes posted enormous gains in 2013. According to Doug Wolford, the president and chief operating officer of Convergent Wealth Advisors, this resistance comes from “recessionary post-traumatic stress.”

Even those who are supposed to be professionals aren’t behaving very well. The Wall Street Journal analyzed the top bond funds, and it found “among the 10 largest U.S. bond funds at the end of 2013, the four with the fastest growth in assets since 2008 held an average 20 percent of their investments in bonds rated below investment grade, also known as junk bonds.”

According to Jeffrey Gundlach of the DoubleLine Total Return Bond Fund, “Who wants an index fund that yields 2 percent?” Mr. Gundlach said that investors “want exposure to these high-yield distressed securities, and they’ve become comfortable with what we’re doing.”

Does this sound at all familiar to anyone? It sounded really familiar to Charlie Henneman from the CFA Institute. In a Twitter exchange on the topic, Mr. Henneman said, “Haven’t you heard? The real risk is missing the rally. It’s incredible we’re back at this place.”

So here we are again, lulled into thinking everything is fine. The things we used to see as risky suddenly look really attractive, and the only risk we do see is the possibility of missing the rally we expect to continue.

We’ve gotten so comfortable with the current stability — while remaining obsessed with our rate of return — that we’re treating risk like it no longer matters. And the crazy thing is it’s true. Risk doesn’t matter — until things change.

And change they will.

I’m reminded of Nassim Taleb’s story about the turkey in his book, the Black Swan. For a turkey, life seems pretty good. Like clockwork, a kind man comes by every day to feed him. It becomes a stable pattern for the turkey. The turkey has no reason to believe anything will change. But then one day, instead of food, the kind man has an ax. Surprise! Things suddenly change for the turkey.

At the moment, a lot of us are acting like turkeys. But there’s one key difference. We shouldn’t be surprised when a seemingly stable pattern suddenly changes. Of course, it won’t surprise me if that’s exactly what happens. Things will change, and people will be shocked when the new normal comes to an end.

I’m not predicting that we’re in for another series of events like in 2009, but I am suggesting that now would be a good time to stick with a disciplined approach to our finances. It means doing simple things like staying diversified and rebalancing, even though it’s not cool. It means being conservative in our spending and taking on as little debt as possible. And it means remembering that at some point, risk will return, and the stories will switch from how boringly stable the markets are to how wildly volatile they’ve become.

There is one prediction I’m prepared to make. At that moment, when markets swing from stable to volatile, I’m pretty sure the past pain of too much risk will come rushing back. Then, we’ll swear (again) to never get lulled into thinking risk has disappeared, at least until the next time.
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#3
(03-06-2014, 09:46 AM)gzbkel Wrote: There is a somewhat related article by Carl Richards that talks about investors becoming more indifferent to risk.
I think he is talking in the US context, but it may apply to Singapore too, considering the recent run up in prices for both established and penny stocks.

I have a different observation.
Quite a fair bit of our valuebuddies already taking shelter.

If you recalled, one favourite Valuebuddies sold out his shares and started to talk down on those shares that he owned before.

So, I doubt that we are immure to pain because our VB already taking actions to mitigate their risk (or some says selling their stocks that's no longer under value)

However, deep inside, I had a feeling that most of the retail investors are not in the market or only tip-toe.
This is reflected by the light volume and weak SGX share price.

If my guts feeling is true, then there is no one to sell to when the market crash now.

A better way, is to engineer a bull run and get the retail investor to participate.

At this moment, you guess is as good as mine.

Heart LC



my life is powered by ValueBuddies dot com!!!
感恩 26 April 2019 Straco AGM ppt  https://valuebuddies.com/thread-2915-pos...#pid152450
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#4
Majority of the retail folk r still stuck w the penny shares from last oct rout.
No more $$$ n no heart to participate in sgx nonsense anymore
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#5
(03-06-2014, 12:05 PM)funman168 Wrote: Majority of the retail folk r still stuck w the penny shares from last oct rout.
No more $$$ n no heart to participate in sgx nonsense anymore

until.... the big boy engineered another bull run.

then, they will jump in and then get caught at the tail end again.

Frankly speaking, you just look at the news, nothing will encourage you to buy. right?

Think carefully before you choose your actions.

Doing nothing is actually a choice too.
Heart LC


my life is powered by ValueBuddies dot com!!!
感恩 26 April 2019 Straco AGM ppt  https://valuebuddies.com/thread-2915-pos...#pid152450
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#6
(03-06-2014, 12:05 PM)funman168 Wrote: Majority of the retail folk r still stuck w the penny shares from last oct rout.
No more $$$ n no heart to participate in sgx nonsense anymore

until.... the big boy engineered another bull run.

then, they will jump in and then get caught at the tail end again.

Frankly speaking, you just look at the news, nothing will encourage you to buy. right?

Think carefully before you choose your actions.

Doing nothing is actually a choice too.
Heart LC


my life is powered by ValueBuddies dot com!!!
感恩 26 April 2019 Straco AGM ppt  https://valuebuddies.com/thread-2915-pos...#pid152450
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#7
(03-06-2014, 09:30 AM)Ambrose Evans-Pritchard Wrote: My own view is that ever rising equity prices today are incompatible with ever sliding bond yields. The two markets are each telling a different story about the state of the world.

Split personality in bonds and stocks can happen for short periods. This rarely lasts. One or the other is going to face reality before long.

Telegraph, London

Stocks and bonds have done well together on a recurring basis before: early 1986, mid 1989, late 1991 and sporadic bursts in 1995. Both have done fine going forward for the next 1 year. An exception however was 2007.

These 2 events are not necessarily mutually exclusive based on historical precedents, and usually bode well for the future.
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#8
Tink I will give most sgx counters a miss in future.
Sgx only blue chips n reit can buy...
I am venturing into overseas bourses..e.g. Hkse n lse

(03-06-2014, 12:41 PM)chialc88 Wrote:
(03-06-2014, 12:05 PM)funman168 Wrote: Majority of the retail folk r still stuck w the penny shares from last oct rout.
No more $$$ n no heart to participate in sgx nonsense anymore

until.... the big boy engineered another bull run.

then, they will jump in and then get caught at the tail end again.

Frankly speaking, you just look at the news, nothing will encourage you to buy. right?

Think carefully before you choose your actions.

Doing nothing is actually a choice too.
Heart LC


my life is powered by ValueBuddies dot com!!!
Reply
#9
if the market crashes now like 2008/2009, the short sellers or short specialists are the most active group, i think.
Plus some of us who have been keeping money waiting to "burn" to turn to gold when the Market bounces back again.
The most important question is will the market bounce back?
If so when?
Can you last so long?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#10
A lot of people don't seem to understand what caused the last financial crisis. The center of the problem is that a lot of money(trillions) mispriced a product called subprime mortgage, rated with AAA, but actually junk worth of trillions of dollars.

Is there misprice in the market now? Sure, but there is always misprice in the market. But how about magnitudes? None large enough to cause any panic at the moment.

HFT has no major effect on financial market. It might cause temporary volatilities, but the scale of it is so small(HFT has very little open positions overnight) though volume could be huge. The market won't be rocked by a few billions dollars. So what all is lost? Just a few billions only.
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