Wednesday, January 29, 2014

2015 selloff can be fairly severe

Beyond this next few months, and with the caveat that the VIX index hitting 10 is a prerequisite, I stick with the view outlined in my November note – that over the rest of 2014 and into 2015 we could and should see a significant reversal of the bull-run since March 2009. 

Not necessarily in terms of systemic panic (à la 2008), but more in terms of the normalization of the (real) cost and availability of capital, of (the true levels of) market volatility, of growth expectations, of valuations, and of incomes and earnings expectations, resulting in the "NPV-ing" of all these factors once markets accept that current (central bank) policies are neither credible, sustainable nor consistent with real economy success.

The only real "success" of these current policies is to create significant investment distortions and misallocations of capital, at the expense of the broad real economy, leading to excessive speculation and financial engineering. 

If I am right about the final outcome over 2014 and into 2015, the non-systemic three-year bear market of early 2000 to early 2003 may well be a better "template". Of course the S&P lost virtually the same amount peak-to-trough in both bear markets, and in real (as opposed to nominal) terms actually lost more in the 2000/03 sell-off than in the 2007/09 crash.