Today’s guest commentary comes from Andy Lees, who sits on a macro derivatives sales desk at UBS in London. Andy delivers some of the most consistently interesting and provocative commentary to come out of the sell side.
He emailed these comments to clients last week — note that the very long term trend lines in the broad Wilshire 5000 are now at risk. As the historical charts show (especially the Dow) when this trend line gets broken, markets get especially volatile.
Andrew Lees, 8/21 6:37:48
The Wilshire 5000 is now just 2.5% above the post 1974 trend line, which comes in at 12,632.60 – (the break was in 1982 as Mexico blew up). Similar trends exist in the S&P, Nasdaq and Dow (see charts 2, 3 & 4 attached), with the 30 shares of the Dow being a little more volatile around the trend than the larger indicies.
The trend has been going for almost 35 years, so surely that just means that the economy has continued on a similar development path for the whole of that period.
That trend however has been based off decling demographic dependency ratios, outsourcing, and ofcourse the availability of cheap energy. All of these trends look as if they are set to reverse; the dependency ratio with certainty (with the 2ndry effect of pension funds selling down assets) and the cheap energy & therefore outsourcing, almost certainly.
There are of course other trends such as technological improvements and efficiency gains, as well as debt growth etc, but these are themselves totally reliant on the bigger trends mentioned above; ie they cannot happen in isolation.
The trend is your friend. Theoretically you should not bet against that trend continuing, and that is what a lot of people will say; why will it be any different this time? The point is betting that the trend will break is infact betting that things will stay the same. The trend in equities is just a reflection of the underlying fundamentals, and given that we know that these are changing, then betting that equities will continue to go up whilst these underlying fundamentals are changing structurally, is completely illogical. Its not only illogical, but its also expensive, as life and pension funds with liabilities the other side, will tell you.
At some stage the printing presses will be turned on sufficiently far that the equity fall just becomes a derating rather than a nominal fall, but for now my bet is that this trend is likely to start to break down.