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Matt King: Global QE And “ETFs Everywhere” Have Created An Unstable, One-Way Market

Matt King: Global QE And “ETFs Everywhere” Have Created An Unstable, One-Way Market

While the financial industry remains divided over what precisely is the cause of the malaise that affects modern markets, characterized by plunging volumes and trading activity, record low volatility and dispersion, a relentless ascent disconnected from fundamentals, and generally a sense of foreboding doom, manifested by an all time high OMT skew – or record high price for crash insurance – as discussed previously

… it can agree on one thing: it has something to do with the interplay of QE, the artificial force that has disconnected market prices from values for the past 8 years, and ETFs, which as some prominent investors have said are “devouring capitalism.” They also agree that the combination of QE and ETFs have made the market almost entirely “one-sided”, and thus prone to collapse when conditions finally reverse.Indeed, as Citi’s Matt King – our favorite sellside cross-asset strategist – writes in his latest report, a growing number of institutional managers, from Oaktree to Elliott to  Bridgewater, have recently been expressing concerns not only about elevated valuations and the potential for a correction, but in many cases also about the potential for herding and the risk that markets have grown one-sided.

King points out a trend observed among the financial literature over the past 2-3 years (starting with Howard Marks’ March 2015 note in which he asked, rhetorically “What Would Happen If ETF Holders Sold All At Once? Howard Marks Explains”), “everyone’s number-one suspect in potentially creating such a tendency seems to be ETFs. In Paul Singer’s memorable words, passive investment through the likes of ETFs “is unsustainable and brittle” and “is in danger of devouring capitalism”.

Overcapacity “will be even greater than in 2009.”

Overcapacity “will be even greater than in 2009.”

“I would be open to the possibility” of reducing the fed funds rate “even further” and go negative, explained Minneapolis Fed President Narayana Kocherlakota on Thursday. Some folks just don’t get it.

Here are the results of seven years of global QE and zero-interest-rate policies:

Global demand is going from sluggish to even more sluggish. Emerging market countries are leading the way, it is said, and China is sneezing. Brazil and Russia have caught pneumonia. Japan is feeling the hangover from Abenomics. Even if there is some growth in Europe, it’s small. And the US, “cleanest dirty shirt” as it’s now called, is getting bogged down.

And here’s what this is doing to the shipping industry, the thermometer of global economic growth.

On one side: lack of demand.

Due to the “recent slowdown in world trade” shipping consultancy Drewry on Thursday slashed its forecast for container shipping growth, in terms of volume, to 2.2% for 2015 and lowered its estimates for future years. BIMCO, the largest international shipping association representing shipowners, issued its own, even gloomier report also on Thursday:

On the US West Coast, it’s been slow all year, starting with the labor disputes that weren’t resolved until mid-March. Since then, year-on-year growth in the second quarter was almost on par with 2014. But for the first half year alone, inbound loaded volumes dropped by 2% according to BIMCO data.

On the Asia to Europe trades, volumes were down by 4.2% in the first half of the year as 7.4 million TEU (Twenty-foot container Equivalent Units) was transported. Northern European imports fell by 3.6%, while the East Med and Black Sea imports fell by 4.8%.

Intra-Asia shipments remain a stronghold with ongoing positive growth around 4-5%, but the increased uncertainty surrounding the economic development in China adds doubt as to whether such a strong growth rate can be sustained for the full year.

…click on the above link to read the rest of the article…

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