INSIGHTS

On February 22, 2016

AAM Viewpoints - Acrimonious Acronyms: Feeding the Fear

Wall Street is notorious for defining not-so-simple messages with a catchy acronym that resonates in the listener’s mind. For former English majors, I sympathize with their eye rolling on the term introduced in 1998 from Goldman Sachs in their emerging market theme – “BRIC.” The acronyms stood for Brazil, Russia, India and China. It seemed (tongue severely in cheek) that egregious misspelling was finally rectified when we added South Korea to the countries we favored last year. Some might say that the prospects of these five countries may actually be sinking like a brick rather than building base from the ground on up.

Many may recall a few years ago about kicking Greece out of the euro. A country that dominated world headlines, but only made up a few percent of the Eurozone GDP. Recently, the United Kingdom (UK) has been negotiating with the European Union about the UK remaining in the Eurozone. Though it seems a deal has been achieved, there is still a large percentage of Britons who wish to leave the Eurozone. Maybe this will lead to a “Flexit” in which countries can come and go as they please.

We have actually seen tectonic shifts in expectations just in the last few years in interest rates. We moved from LIRP (Low Interest Rate Policy) during the last economic cycle bottom when rates remained at 1%. While we never saw a large heightened cycle due to the jobless recovery, we soon had to embark on ZIRP (Zero Interest Rate Policy). This was in response to a once-in-a-generation credit squeeze coupled with a recession that saw fiscal policy all but cancel out typical monetary policy. Many have misunderstood the relative and psychological nature of interest rates and consider it a number where a past rate can translate to a current rate. This led us to the NIRP (Negative Interest Rate Policy) where central banks in Europe and now Japan have set negative deposit rates. This absurd action, in my opinion, came about because of the large amount of public sovereign debt trading at negative yields. This is a stark and somewhat desperate action to unfurl the excess liquidity held in the banking and consumer balance sheets and force it into the system The thought being that maybe a consumer would like to purchase that good or service rather than earning zero or – heaven forbid – pay to have it stored for you. For banks, they are kind of in a tug of war where they are flush with liquidity and the central banks want them to lend. On the other hand, they are seeing an increasing scrutiny on their balance sheets to maintain liquidity in case a next once-in-a-generation credit squeeze happens twice in nine years.

This may lead us to the next in a series of PIRP (Plummeting Interest Rate Policy) or better yet, BIRP (Blasphemous Interest Rate Policy). On second thought, we may be there….

Here are a couple of other thoughts I have:

• OPEC (Organization of the Petroleum Exporting Countries) suffers from dyslexia; they should be COPE Costing/coaxing other petroleum exporters. The headline adjustments from Saudi Arabia that come about when oil drops below $30/barrel is very similar to “the boy that cried wolf.” As has been the case in past oil cycles, this too should correct itself and the price should be much higher than anyone would have thought….except for patient investors and newly added investments from large hedge funds and Warren Buffett.


• Maybe, lets get a GRIP (Global Recession Indexed Probability). Global recessions are rare but, once again, a larger contingent are calling for this unique event. While most indicators from the Fed GDP model to those from Morgan Stanley, Citigroup and JP Morgan, all estimate it from 10% to 20% chance of occurring. In particular, the Morgan Stanley model – which has yet to give a false reading – hovers around the 10% level. For those convinced this is a certainty, this article in Barron’s article (Barron’s subscription required) gives a very lucid account of how U.S. GDP could push much higher than consensus estimates.

While we use acronyms to convey and increase memory, we often go overboard. The market’s gyrations continue to create opportunity in the wake of FEARS (Fed, Energy, Asset prices, Recession and Sentiment).

CRN:  2016-0201-5144R

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