JP Morgan's Nikolaos Panagirtzoglou:
Markets become more brittle, risky: "The shift towards passive funds has the potential to concentrate investments to a few large products. This concentration potentially increases systemic risk making markets more susceptible to the flows of a few large passive products."
Crashes, when they happen, will be bigger and badder: "the shift towards passive funds tends to intensify following periods of strong market performance as active managers underperform in such periods of strong market performance. In turn, this shift exacerbates the market uptrend creating more protracted periods of low volatility and momentum. When markets eventually reverse, the correction becomes deeper and volatility rises as money flows away from passive funds back towards active managers who tend to outperform in periods of weak market performance."
Markets become less efficient: "if passive investing becomes too big, potentially crowding out skilled active managers also, market efficiency would start declining. In turn, this would present opportunities for active managers to extract arbitrage profits."
JP Morgan's Nikolaos Panagirtzoglou:
Ceresna Comments: The mainstream wealth management firms and the advisors that represent them firmly stand by the “Buy and Hold” mantra. This stance is firmly entrenched in modern portfolio theory. The idea that risk can be diversified away by owning a basket of uncorrelated assets. These models are anchored in the world of academia. This is the same world where negative interest rates and efficient markets make sense. The problem with models is that they must make assumptions to be able to be able to be computed. The problem is that these assumptions are unknowable and dynamically changing. The truth is that the markets adhere far more to behaviour finance than fundamental rigor. Investors are risk adverse and losses hurt. When investors endure losses, they lose the appetite to stay the course and often seek change or to stem further loss.
Topics: buy and hold
Ceresna Comment: The shortage of U.S. dollars globally has forced many central banks to start liquidating U.S. Treasuries to suppress the dollar rally. We believe that this is the single most significant macro event today. I think the question asked in the article below is quite relevant - "One wonders how much higher the USD will jump if and when China decides to halt its selling of US paper, and how much lower the Yuan will then tumble in response, leading to even faster capital outflows from China?" I would further add, the price suppression can only be sustained for so long. The only easy solution is for the Fed to provide liquidity, but as one can see, they are stubbornly focused on tightening.
Insults, invective and pandering have been poor substitutes for serious debate about the direction in which this country is going — or should be going. And a sound and sustainable fiscal structure is a key ingredient of any viable economic policy.
Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II.
Bank of America's Savita Subramanian issued an overnight note titled "Is it about time for a recession?". In the note, is suggests that they found evidence for an imminent recession. Suggesting that if data were to continue to weaken in line with the recent pace, history would point to a recession in the second half of 2017. Further explination suggests that not every bear market coincides with a recession, but the most painful ones do. But my favorite part is that they caution Bank of America's long-term oriented investors from going to far in reducing their equity exposure suggesting that unless you can pinpoint the peak of the market within a 12-month timeframe, you are typically better off staying invested.
Ceresna Comment: Let me summarize. There is risk and a lot can go wrong and it is imminent. But don't worry, just buy and hold for the long-term. Thanks for the advice Bank of America, but I think I will let you and your clients hold the bag on the way down.
John Hussman wrote a great article discussing the current market and the asymmetric risk facing
investors today. The "BOLD" is our emphasis.
John P. Hussman, Ph.D. www.hussmanfunds.com
Originally posted October 17, 2016