18 Jun THINGS LAST UNTIL THEY DON’T
Last week I wrote it is human nature to extrapolate the current into infinity. What we think we can foresee is often nothing more than what we have recently seen. “More of the same” is the sensible default prediction in politics, baseball and markets. The past continues until it does not.
Yesterday’s WSJ wrote about this theme opining that the vast majority of people are fooled by prevailing opinions extrapolating the current success into infinity. Some of the notable examples the Journal cited was the 1950s jet age thinking morphing into a 1960’s dreams of space age utopia (Think The Jetsons)
In the 1960’s TRW forecasted manned lunar bases in 1977, autonomous vehicles by 1979 and intelligent robot soldiers by the 1990s. (Think Star Wars) And then there was the oil crisis of 1973 and hyperinflation of the late 1970s.
One of my favorites is the 1970s population bomb and the mid 1970s mantra that we just entered into a mini ice age. (I still have cover of Time Magazine that heralded such an event, perhaps the result of several consecutive very cold winters, and the massive income redistributions implications of such)
I can write volumes about the tech bubble and the belief of massive diversification will limit mortgage risk.
Today all are extrapolating the current advances in technology where in my view all over estimate the viability of the absurd where dreams becomes hallucinations.
The Journal writes technology develops in S curves: things start slow, go into hyperbolic growth and then roll over.
Wall Street is known for boom bust. In my view today’s thinking is not different from yesterday’s thinking. What is different is the massive change in trading mechanics that has decimated liquidity. There is no “other side” of the trade. The regulatory entities have ensured that the “other side” does not exist in their attempt to strengthen the financial system.
It is often stated tomorrow’s crisis is the result of the reforms from the last crisis.
Many Wall Street veterans have warned about a potential liquidity crisis which to date has fallen on deaf regulatory ears.
Tomorrow is the conclusion of a Fed meeting. No change in monetary policy is expected. As noted several times, the markets are suggesting the overnight rate will be lowered by 0.75% by year end, a dramatic reduction. Wall Street economists are only suggesting a 0.25% drop by year end.
I will argue the markets have over reacted, the result of the lack of liquidity in the proverbial “melt up” scenario. I ask what happens if the Committee’s outlook is interpreted as nominally hawkish?
At the time of this writing, the market is suggesting a 20% chance of cut tomorrow, 82% in July and September is virtually guaranteed. Six months ago the inverse was expected, meaning that rates were all but virtually assured would be going higher.
Last night the foreign markets were up. London was 09.0%, Paris up 1.50% and Frankfurt up 1.31%. China was up 0.16%, Japan down 072% and Hang Sang up 1.0%.
The Dow should open moderately higher and the ECB said additional stimulus may be need if the economic outlook does not improve. I ask how much more stimulus given the record amount spent since 2008? Perhaps there other issues such as over burdensome regulatory state that is grossly in debt, the result of massive entitlement programs which are nothing now other than voting buying schemes? The 10 year is up 21/32 to yield 2.02%.