Here is this week’s “anecdote” courtesy of Eric Peters, Chief Investment Officer Of One River Asset Management
Anecdote
“We’re trapped in an unstable equilibrium,” said Simplicity.
“The Fed gets hawkish, the dollar rallies, stocks fall, the Fed gets dovish, the dollar falls, stocks rally, and the Fed gets hawkish,” he continued, dizzy, walking Occam’s razor edge.
“This year’s money will be made when the cycle breaks.” A stubbornly hawkish Fed could break the cycle, raising rates in a determined fashion, enduring a dollar rally, weaker equities. A persistently dovish Fed could interrupt the cycle, letting asset prices run, supported by a weaker dollar. Or an exogenous shock, like Brexit, could break the cycle too, reorienting the world.
“Your choice this year is to trade the cycle or sit and wait. I’ve chosen the former, and it’s been much harder than expected.”
Two weeks ago, the Fed was hawkish, hiking in June/July, the dollar rising, stocks falling. Then in a flash of the jobs report, the world spun.
“To trade the cycle, you must be comfortable holding positions that’ll profit from an eventual break. Which means every time markets turn, you’ll risk giving back everything you’ve made, maybe more.” That’s the price you pay for being positioned for a big move.
“The cycle may also break because the Fed hikes and stocks rally in spite of it, while the dollar falls,” said Simplicity, dizzy.
“But the biggest move comes if the Fed is overtly dovish and yet stocks fall, the dollar rises.”
This last possibility is the most dangerous for global asset markets. Because the Fed is the world’s last credible central bank. The European Central Bank and Bank of Japan have eased in extraordinary ways for the past year, but markets have defied them; their equities declining substantially, the Euro chopping sideways, the Yen surging.
“Frankly, I don’t care what happens. I just know something will,” said Simplicity, wandering away.
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