Barclay Leib
July 30, 2016
Consultant at Sand Spring Advisors LLC

40 years of credit excess build-up constantly kicked down the road by Central Bankers will not end well

If there are so many imbalances in the world built up over the past 40 years by the central bankers, don’t come in every day just asking what 97% of the world asks: "What should I buy?"

Maybe investment managers would generally be doing better if they asked a different question: "What is the asset with best risk-reward opportunity -- long or short?"   

After all, arguably, some of the best and easiest opportunities of the past several years have started on the short side. For example, one might have easily decided first back in 2011 that copper at $4 with base-metal stockpiles building in China so rapidly was a ridiculous unsustainable “low hanging fruit” trade -- and thus shorted base metal producers Freeport McMoran, Cleveland Cliffs, Vale, or some copper ETFs, etc.   Then once base metals started to move lower, maybe one would have said, gee, this is not good for the commodity producing countries such as Australia and Canada and one could have caught short moves lower in those currencies.   If one had then been attentive to the oversupply of crude and natural gas from fracking revolution, shorting offshore drillers and energy exploration sections might have followed as a logical next position.   And once energy cracked, this was of course very stressful for the high yield markets where levered CLOs still abound, so shorting high yield markets might have logically followed next, together with the relative pressure on EM economies vs. the money still flowing to the U.S.   

The trick of course is to keep rotating short-exposure a bit tactically, while avoiding being short too early in the sectors where money is still flowing into as a safe haven – namely large cap U.S. FANG stocks. 

But to throw a party in the U.S. as the “least dirty white shirt” is a bad reason to throw a party and ultimately unsustainable. You can’t have a bubble in global credit, with credit senior to equities in the capital structure, and not ultimately have an equity market accident.

But where to express a short bet next? It is likely still too early to do so against U.S. equities where the money continues to pile up.   My nose leads me to be attentive instead to any Japanese Government Bond market weakness as the next "canary in the coal mine" that central bankers continue to lose control of the global economy.  Yes, shorting JGBs has been so-called “widow-maker” trade over the past decade,  but just because Abenomics has worked to preclude the JGB market from falling from grace to date, this does not mean that JGBs will hold up forever.  Last Friday's skid lower in the JGB market -- on the back of disappointment that BOJ stimulus plans weren't going to be more significant -- could be the start of something bigger. 

And overall, how did we get to this unstable point in time where the best "investment" opportunities equate to becoming a rotational short seller?  Read "Not My Grandfather's Wall Street" on the beach this summer for a better understanding.  See recent review below.

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