Adam Parry – A tale of headless chickens, inflated markets and eggs benedict

Monday 12th Oct 2020|London

November 16, 2016 A dull and dank Monday in London. But for this particular writer a shining light was about to be illuminated. For this was the day that a thirty one year journey in the financial markets finally came to an end. I had been a government bond trader for twenty of those thirty one years, and a lowly scribe writing about a variety of markets and asset classes. But on November 16 a year later , all of that ceased to be of any importance for a new world beckoned.

There were myriad reasons to bring a glittering – alright, perhaps not so glittering – career to an end. Firstly there was the dreaded commute at ridiculously early o’clock to the desolate wasteland that is Canary Wharf, a place so devoid of character that most of its inhabitants walk around to concrete canyons in a zombie-like state.

Secondly, it just seemed to be utterly futile trying to make any sense of the markets. That had been the case since global central banks waded into the markets from 2009 in an attempt to stave off what those of us in the know had been predicting for years. Case in point Greece. From early 2010 most people in the bond markets realised that Greece could not possibly pay its debt commitment and yields soared. Then in May of that year we got the first bailout from the EU, IMF and ECB and everything was alright. Except it was not. Another bailout followed and then another. And six years down the line those bandages were just about covering the gaping wounds in the Greek economy. The same could be said in Italy in 2011 when the yield curve inverted dramatically. The same could be said in Spain, with its soaring unemployment. The same could be said in many other EU member states.

But there was no need to worry because Mario Draghi said that he would do everything he could to save the single currency – which, by the way will go down in the history book as an historic failure despite Super Mario’s heroics.

And so the headless chickens that trade the markets these days poured their hard-earned cash back into beleaguered markets. And they did it across the globe after the Fed, BoJ and BoE invested trillions in an attempt to kick-start the economy. At best these various actions could be passed off as the central banks manipulating the markets for their own good. At worst they could almost be seen as fraudulent by those on the outside.  

In short, equity and bond markets had been artificially inflated by the central banks to a lunatic degree. As we headed to the middle of the second decade of the twenty first century, many of those asset classes looked toppy. But that did not deter the headless chickens. They just shut their eyes and carried on buying, even when the Fed started to taper QE and then tick rates higher. For and old dog like me, it made no sense whatsoever.

Thirdly, the markets were becoming so over-regulated thanks to the shenanigans in 2007 that lead to Lehman’s downfall a year later that they had become almost untradeable. Liquidity was bad and getting worse and the ancient notion of a two way market was rapidly going the way of the dodo. There is simply no point in trying to call the markets when it is all one way. Grind higher for weeks on end and then a sudden correction erodes confidence for a nanosecond, during which time all of those bids run for cover and you can’t sell anything at market levels. Then a central banker pours oil on troubled waters and all those that wanted to sell minutes earlier pull the offers and it all goes bid only again. Madness.

From all those perspectives, the business had been grinding me down for a few years and I was desperate to go and explore avenues new. But as ever it is better the devil you know. So imagine my glee when I was summoned to a meeting room in the concrete palace in the Wharf and informed by a simpering woman from the Human Resources department that the company would be paying me a reasonable amount of money to depart the parish. I almost bit her hand off.

So I slipped back to the English countryside to contemplate my next moves with a lifetime in the City now behind me. Firstly I embarked on a lifelong ambition to write a novel in the style of Wilbur Smith and Jeffrey Archer. And I banged out two by the middle of April 2017.

Secondly, I was a keen cook for years, and just failed to make it onto Masterchef as the subprime crisis really hit in the summer of 2007. So when the position of breakfast chef came up at my local pub a hundred yards up the road, I applied and was given the job. Six months of full English breakfasts and eggs benedict later and I morphed into a proper chef on busy lunchtime services. And shortly after that I worked at a Michelin rosette place in Cambridge. It was great.

But as ever life throws a curveball. I was basically a house-husband and my wife was forced to go to Hong Kong at the beginning of 2019 with me in tow. And so we spent six months in a tiny flat in Central. Coming back in the summer, there was the cricket World Cup, the Ashes and the rugby World Cup to attend to, which was all far too important to return to the ennui of the markets.

But at the beginning of 2020, I decided that maybe it was time to get back on the fnancial horse. And we all know what happened next. Coronavirus.

To be honest, you did not need to be a rocket scientist or indeed a washed-up old has been to realise that the pandemic was going to crucify the global economy. But six months down the line, where exactly are we? And has anything materially changed?

Well my editor here has decided that we are going to be asset agnostic (whatever that means). So let’s take a look at a variety of instruments and see where we were 4 years ago, 6 months ago and what the state of play is now and where we might go.

Looking at the above we see a very clear pattern. The majority of asset classes suffered the Covid 19 toxic shock in the spring. And to be honest that was quite correct given the long term harm the virus is going to inevitably have on global markets, a fact that is more than adequately demonstrated by the extremely low levels of 30 year bonds.

But with the central banks going back to injecting huge stimulus packages to prevent a total rout, equity and credit markets are pretty much back to where we were before the lockdown measures were put in place.

So where do we go from here? In the immortal words of the 1980’s pop group Haircut 100, it could be down to the lake I fear. Virus infections are soaring across the globe, which will almost inevitably lead to new restrictions and hit the economy again. Markets are stretched and overpriced, and October is traditionally a poor month for what are seen as riskier assets (1929 and 1987 spring to mind).

Take a look at selling equity indices and buying credit indices for what could be a fairly major correction. Do it via the options market to minimise downside risks.

One suspects that any sell-off will not be quite as severe as in the Spring, but it should still bring some reward.

Anyway going back to the original premise, has anything materially changed since that glorious departure in 2016? Nope. And it probably never will. Illogical market price action seems as if it is very much the new normal. To coin all journalists current favourite phrase.

The Week Ahead:  

  • IMF and World Bank hold their annual meetings: Both expected to call on G20 economies to extend a freeze in debt payments from the world’s poorest nations that is set to expire at the end of the year.
  • Fed’s Clarida and Quarles are scheduled to speak on Wednesday and Thursday at IIF event.
  • US retail sales and industrial production on Friday.
  • China returns from Golden Week with trade data on Tuesday.
  • UK employment on Tuesday expected at 4.3%
  • Euro area final CPI for October expected at -0.3%

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