The Global Bear Market Nobody Talks About (3 min read)

Everywhere you look – and even if you aren't looking at all – you will have noticed the collapse of something in recent years. It’s global. It spans politics, society, governments, countries, markets, employers, and employees.

Dare I say it? It’s trust. That’s right, trust. It’s just not there anymore. Not between electorates and their legislators, between employees and employers, Central Banks and governments, regulators and the regulated. Even the simple trust between one human and another is stifled in an age of internet communication and fake media.

Of course, trust issues aren’t new. A lack of trust is a part of the human condition. It helps us to survive – to assess danger, judge threats, and to choose allies. But this fundamental glue intermediating all our interactions seems to be at an all-time low. A threshold has been breached, it seems. And the deficit in trust has begun to have fundamental consequences.

What I’m really talking about here is the ‘Great Quickening’ of our age: the rapid expansion and evolution of tech, data, and media. It’s here, and it’s here to stay. And the principal characteristic of all these systems – be they technical-economic, or social – is rapid, non-linearly increasing complexity. There are those of an older generation who built their assumptions and behaviours during the period before all this, and who now are facing significant challenges as their strategies are proven out of date or simply wrong. And it’s the trust between them and the younger generation of thinkers that I’m talking about.

I’m a father of two teenagers, and my greatest concern is that the tensions between age cohorts once limited to a social circle are starting to spread globally. And the political and financial ramifications of this are beginning to bite.  Analysis from the UN suggest that these tensions are only just beginning. Demographics is one lens through which we can anticipate the future. The share of working-age cohort in overall population is falling.  This Dependency Ratio is where the demographic rubber meets the road.

But I don’t want to disappear down the demographics rabbit hole. Plenty of macro weasels hunting down there already.

 

Here are a few things I find worrying in a purely financial market context:

  1. We are close to historic tights in credit
  2. We are close to historic low yields in bonds
  3. We are close to historic highs in the share of passive mgmt vs active mgmt
  4. We are close to historic highs in equities
  5. We are close to historic lows in volatility across all asset classes

 

I could keep going, and it’s hard to tell which is the biggest risk. But apart from a huge shrug of our collective shoulders and a mumble of ‘so what?’, is there anything we can do? I’ve seen a few things change over the years so here’s my suggestion.

There is one thing that links them all: fundamental assumptions unchanged for years.

Here’s an example. In a world dominated by interventionist Central Banks, what’s the biggest assumption about them?

No, not their credibility. Not their ability to discover a new acronym or new ‘tool’. Its mandate's stability. ‘But how often does that shift?’ I hear you cry. But we’re in a new, post-GQ world of accelerating complexity in systems, accelerating changes in frameworks, and accelerating declining trust in systems and frameworks – as I mentioned before. It could happen.

So apply a well-known principle: proper planning prevents particularly poor performance.

Currently, the response of the entire world of finance to any new factor is to build an updated system, add more code, and add a few more macros to the spreadsheet. What I am recommending is philosophical. Examine all of your principal assumptions before it becomes too late. Consider your risks qualitatively before trying to incorporate error bars around your quantitative models. Get ready for your assumptions to be wrong, for previous relationships to break down. Get ready for equilibria to ‘flip’ and for salutatory moves, for continuity in both liquidity and value to become discontinuous. The financial markets cannot escape the behavioural changes which are already in evidence in their constituent parts: people, policies and frameworks.

If you have the time or inclination, try to look up Quantum Tunnelling, Critical Systems, The Strange Attractor. Physics can help us understand how Laws can combine with fundamental uncertainties and that seemingly entirely stable systems are all subject to periods of destabilisation.

I think that is exactly where we find ourselves now. Recognise, accept and embrace the broadening decline in trust. Anticipate its inevitable corollaries by preparing for the new.

Written by the Macro Dilettante. One time Jackson Hole symposium attendee. He has traded since 1988, was a macro hedge fund portfolio manager from 2002 to 2015 and is currently a senior figure in the European pension fund industry.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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