e've been bearish since the start of this year. But we'll have to confess, that did escalate quickly. In today's snippet we lay forth very briefly our premise for being short risk assets and long quality and liquidity. Recall that just a week ago, we beggared the notion of 2016 being the Year of The Bear. Fast forward a week later, our directional bias hasn't changed one bit, but we're more confident in levering up our betas after what we've thus far seen.
Firstly, take note that several of the charts presented in this snippet are about 24 hours outdated. We just didn't have the time to refresh our printing presses in the flurry of market activity. Yes, our trading desks have been a frenzied disco party lately but it's no surprise for any active trader.
We reiterate our call with more bass this time. Markets all across the world are getting hammered. Many are officially in bear markets. A bear market is defined as a decline (from a cycle high) equal to or exceeding 20%. Almost every emerging market (EM) is in a bear market; China, Russia, Brazil, India, Russia, ect.... An increasing number of developed markets (DM) have also slipped into bear markets; most recently the UK and Japan, while Europe, Hong Kong, Singapore and the like are already in theirs.
Bond yields, or should we say yields on quality government debt (such as those on German bunds, USTs, JGBs, Swiss bonds) have collapsed to pre-'Black Monday' lows seen in August last year. In the fixed income and corporate credit space, there has not been a dearth of bloodshed either. High yield (HY), and investment grade (IG) credit have been crucified under an exodus of capital as markets now demand up-in-quality names and safety. Inter-market rotational forces and global fund flows have absolutely wrecked havoc in the credit markets.
And we cannot exclude the outperformance of cash in the current environment. Liquidity, or cash is a position. Having no 'position' in the markets is a position by itself. Recall that our piece titled "Here's Why Dumping Risk & Buying Cash Might Be The Smartest Move This Year" outlined the importance of cutting exposure before the margin calls start coming in.
Although we have little inkling as to the rough figure of assets that have so far been liquidated as a percentage of worldwide AUM, we reckon that the figure is still minutely small. Which means that should the selling persist through even lower prices in risk assets, more and more of highly levered positions will have to be squared. It would then be too late to put on hedges. That should have been done in the first week of 2016 at the latest.
An overly supplied global oil market is not giving crude prices any chance to catch their breath. The incessant selling, shorting, and outright cussing is totally reminiscent to the 2012 gold bubble; 'investors' had gotten gold terminally wrong but chose to hide from the market's forces in sad denial. The same applies to today's situation in oil. Fundamental are very much supportive of low prices, how low we cannot and will not speculate.
When the news of Iran finally being liberated of its decades long western sanctions, we knew prices would crap all over themselves once word of the gulf nation's willingness to boost production by more than 500,000 barrels/day in a "matter of weeks". And so they did without much ado. WTI and Brent are trading at 2003 lows, while a few other lesser watched composites are already at record lows.
Finally to cap it all off, on why we are remaining bearish, we cannot in all seriousness come up with more than a handful of reasons to be bullish. On the flip side, the reasons to be bearish spew out without a heave of hesitation. Sometimes, a little common sense works, even in very complex markets we now find ourselves mired in.
But to call us pessimists is quite a felony. We are never optimistic or otherwise about anything that has got to do with the financial markets. What happens, happens for reasons. Reasons that we sometimes have to wrap our heads around to figure out. Reasons that sometimes are blatantly obvious. When we play both the role of an active market participant with real positions, and the role of watchmen, we tend to develop our own set of forward looking biases.
We are bearish, still bearish, and will be trading accordingly.