"Would I say there will never, ever be another financial crisis?" Federal Reserve Chair Janet Yellen said at a London conference last week. "You know probably that would be going too far, but I do think we're much safer, and I hope it will not be in our lifetimes, and I don't believe it will be."
- Barron's, 7/1/2017
I am not certain about the context of this quote (it was probably an answer to a question from her audience), but I will speculate that Chairman Yellen was speaking of a financial crisis a la 2008/2009. Why? Because existential meltdowns like that (i.e., 1929) are generational in nature as opposed to garden variety collapses that anyone who has been around the market for a while has become accustomed to. Some version of '08-'09 will happen again, guaranteed, but they generally take a long time - decades maybe - to bubble up. Over the years, people will always forget the hard lessons learned from the last debacle, greed will trump common sense, and the finance crowd will create a new way to blow up the economy... usually based on the overextension of credit. It is the way of the world.
Randall Forsyth, in this week's Barron's, gives us a brief run-down of some of the more run-of-the-mill crises we've experienced in the past five decades:
"To review some these greatest hits, there was the Penn Central failure in 1970; the failure of Franklin National Bank and Germany's Bankhaus Herstatt in 1974; the collapse of the Hunt Brothers' silver bubble in 1980; the Mexico financial crisis in 1982; the collapse of Continental Illinois in 1984; the Black Monday crash of Oct. 19, 1987; the savings-and-loan crisis that crested in 1990; and in 1994, the mortgage-backed-securities plunge, the bankruptcy of Orange County, Calif., and the Mexican peso Tequila Crisis."
- Randal Forsyth, Barron's, 7/1/2017 ("Yellen's Famous Last Words: No More Crises" - to view you need to subscribe)
Just think, if a person had been so unlucky as to own the Dow Jones Industrials at its peak in the late 1960s (around 1000) and suffered all the above calamities, they'd only be worth 21x more, not including a boatload of dividends they would have received in the interim. How awful!
With Forsyth, there is little perspective. For him to conflate the existential with the run of the mill is ridiculous, but it does get eyeballs to his column. And it reinforces the pervasive fear that the next (existential) market debacle is just around the corner... fear that has kept many investors underinvested or on the sidelines for years.
Speaking of pervasive fear...
There's a crowd out there saying the market's low-volatility, slow grind upward is a sign of growing complacency. I may not have the constant contact with the public to provide an accurate read, but one of my favored weekly reads, Fear and Greed Trader, does. F&G is an independent financial advisor/professional investor. Here is what he had to say on the subject in this week's post ("Secular Bull Market Continues Despite Indecision On Short-Term Outlook"):
"Complacent? As far as I am concerned, that is a buzzword used by many that don't seem to have their eye on the ball. Can someone step up and show us the so-called hoards of market participants that are not worried if not downright scared of the ongoing political situation. Every client conversation about the stock market starts with that issue. Then, there are the concerns about the flattening yield curve and the Fed's recent interest rate increase. Oil prices have spiraled lower with concerns now that they may be related to global growth.
Then, we hear the commentary that there has been no corrective activity for so long, and this economic recovery is way overdue for recession. The list of client worries goes on and on with the summary ending that the VIX is too low, concluding that something has to be terribly wrong with this entire picture. Again I say, complacent? I guess I am looking at a different stock market than most pundits.
It then comes down to what is really happening; the wall of worry has been, and still is, firmly in place."
Also worth noting in F&G's piece are his comments on our secular bull market, when it began and where we might anticipate it is over time.
This market is really skittish! I saw some really crazy action in the market last Tuesday and could only attribute it to really stupid algorithmic-based computerized trading or spooked money managers trying to beat their peers out the door at the first sign of withdrawal of the significant quantitative easing by the European Central Bank (ECB). Oh yes, the icing on the cake, Alphabet (GOOGL, GOOG) was to be fined $2.7 billion for unfair competitive practices in the eurozone (subject to appeal). This double negative cost the S&P 500 a .88% decline and the Nasdaq a decline of 1.6%.
The Treasury market got whacked with prices falling and the yield on the 10-year moving up from 2.13% early Tuesday to nearly 2.26% today (6/30 - closing at 2.30%). Meanwhile, the dollar dropped sharply closing at its lowest level since October. All because of what European Central Banker, Mario Draghi, had to say.
What did Mr. Draghi have to say?
Speaking to a conference in Portugal, ECB President Mario Draghi said the ECB could adjust its policy tools of sub-zero interest rates and massive bond purchases as economic prospects improve in Europe. The euro rose about 1.5 percent, its biggest daily percentage gain against the dollar in more than a year.
But any change in the bank's stance should be gradual, as "considerable" monetary support is still needed and the rebound in inflation will also depend on favourable global financing conditions, he added.
"The move today is really being driven by the hawkish pivot from Draghi," said Mazen Issa, senior FX strategist, at TD Securities in New York. He said the euro would likely trade in an elevated range of between $1.10-1.15 in the near-term following Draghi's comments.
"Hawkish Pivot"… Give Me A Break!
How did this "any change in the bank's stance should be gradual, as 'considerable' monetary support is still needed" morph into a hawkish pivot? Or, how could anyone whose had seen the United States experience and the extraordinarily measured tapering of Quantitative Easing panic on these words? For both Bernanke and his successor, Janet Yellen, it was always "data dependent," and it was always very cautious. Draghi was delivering a similar message.
On May 23, 2013, I posted Kort Session 36 - "Futures Slump as Fed Threatens to Yank Stimulus Rug." The title was taken from a CNBC story. The S&P 500 was about 1000 points below today's level, and the media and punditry corps were obsessed with and wringing their hands over the tapering of quantitative easing... the same way many are fearful over the withdrawal of QE today.
I believe our experience in "the taper" of QE should be a pretty good template for others. It was not disastrous for us, and it should not be a disaster for us as the eurozone begins the process.
Famous last words (for this post):
"It ain't over till it's over."
- Lawrence Peter Berra