I remember being pitched to at my trading desk in London in early 2007 by a young, freshly-minted MBA. I was heading up commodities but had drawn the short straw and had to look after the grad interns. He was adamant the bank should be selling Credit Default Swaps (CDS) against these triple-AAA rated mortgage packages. Easy passive income, no risk... I wasn't so sure but knew I was getting older. I was only 34 but he was 20-something and he had the buzzwords. I knew that selling derivatives into a low volatility market was asking for trouble. We didn't do it and several months later those who did were staring at huge losses as the credit crunch swallowed them whole.
Since then I've managed to slow down and enjoy life in Hogsback, living according to Aristotle's mantra that "Happiness belongs to the self-sufficient". Of course I trade every now and again and the below chart should scare the pants off anyone.... It was inevitable that we would get here of course, such is the nature of momentum. And it may not even be that bad, but it sure is not going to be a rosy 2018 for equities. The vol we're seeing now is just the start of it. Basically, a monthly chart on the Dow is showing short-term momentum having broken below medium term momentum. This is like the wind blowing against the current, causing choppy sideways conditions. Of course this has happened before, in July 2011 and Feb 2015, but those occasions weren't too bad.
Something inside feels different this time. Never before in the course of human history has so much passive money been thrown blindly into the market, expecting outsized returns. In 2011 and 2015 the Fed was in the throes of QE, now it is easing, and rates are starting to shoot up. The trusty 2-10 year US Treasury spread is almost negative again, a sure sign of recession to come. The US is firing on full employment but no-one is any richer, and US citizens are about to start feeling a lot poorer, as the dopamine effects of zero interest wear off.
I'm not predicting a crash, just a lot of sideways bouncing around for now. The crash will come when the US can't refinance its $21-trn debt, even at 5% interest. And at 5% guaranteed interest, what investor is going to want to be in uncertain equity markets moving sideways? The markets sense this already, and are jumpy. Because when the short, medium and long term money all start pulling out the market together, it will be mayhem.