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iTrust Daily Insight

iTrust Daily Insight
Edition 10.3.2019

October 3, 2019: How discern whether we are having a Minsky Moment and what to do about it

Market data as of about 2pm PT, 5pm ET

  • Bitcoin:  $8,178 (down 16%+ in last 2-3 weeks) (Source: Coinmarketcap.com)
  • Digital currency price movement today: generally down 1-2% (Coinmarketcap.com)
  • Number of digital currencies with market cap over $1 billion: 11 (Coinmarketcap.com)
  • Market Capitalization of Bitcoin: $147.0 billion (Coinmarketcap.com)
  • Gold “F” futures contract: $1511 (source: Yahoo Finance)
  • Copper “F” futures contract: 2.5530 (Yahoo Finance)
  • Oil “F” futures contract: $52.27 (Yahoo Finance) 
  • DJIA: $26,201  (up about 0.5%) (Yahoo Finance)
  • S&P 500: $2,910 (up about 0.8%) (Yahoo Finance)
  • FTSE (main London stock index): 7,077 (down about 0.6%) (Yahoo Finance)
  • Shanghai stock index: 2,905 (Yahoo Finance)
  • Probability of 25 bps cut at Oct 30 meeting of US central bank (Fed FOMC): 90% (source: CME Group’s “CME Fed Watch Tool”)
  • Probability O/N rates are only 25 bps lower than now after Dec 11 FOMC meeting: 45% (source: CME Group’s “CME Fed Watch Tool”)
  • Probability O/N rates are 50 bps lower than now after Dec 11 FOMC meeting: 50% (source: CME Group’s “CME Fed Watch Tool”)
  • US 10 year Treasury yield: 1.537% (down 22+ bps in last 2-3 weeks) (WSJ.com)
  • US 2-10 yield difference: +0.15% (i.e., positively sloped — normal — yield curve) (WSJ.com)

Today’s big news and tomorrow’s big announcement

Over the previous two days the Dow Jones Industrial Average of 30 large cap US stocks was down over 800 points.  With that there was a lot of commentary surrounding how to position portfolios for sustained market losses.  Rationale for the losses in the press mostly surrounded the impeachment process in the US and the release of ISM (Institute for Supply Management) and sister organizations’ data showing warnings of manufacturing sector slowdowns in Germany, China and the US.  

The jobs report in the US will be a key factor for market price activity on Friday.  The jobs report is expected to be released at 8:30am ET (5:30am PT, 1:30pm London).  We and the markets will be looking for the “headline number” to be 145,000.  (https://www.cnbc.com/2019/10/03/fridays-jobs-report-should-show-hiring-is-slowing-but-not-that-a-recession-is-near.html)

Reasons why the jobs number is higher or lower than 145,000 will move markets. Other key information in the report will be hours worked, wages per hour and revisions of previous months data.

Today’s afternoon commentary:

Last night and this morning there were many articles about the decreased in equity market prices in the US and how traders and investors can position their portfolios for a sustained market sell-off.

We have previously written about what is a Minsky Moment and the psychology of how markets seem occasionally to “wake up” that a preponderance of risk had not previously been properly priced.  Market prices for “risk” assets go down.  Market prices for “risk free” assets such as US Treasury bonds — and also typically gold — go up.

Such events have occurred recently when the US markets “woke up” to the Asian Debt Crisis in October 1998, then again when Russia defaulted on its debt soon after and then again in Fall 2008 when Lehman Brothers declared bankruptcy.

What causes the wider markets to “wake up” and have a “Minsky Moment” and how can market participants anticipate them?

It is when market participants anticipate market behavior that they can position portfolios accordingly.  If market participants understand most other market participants are not properly positioned for future bad or good news they can take advantage of market prices that are too high or too low. In this way, they may not only outperform market indices but actually make strong absolute returns.

So how can traders, investors and other market participants anticipate such future price actions?

We will assume for this article efficient markets and that no one is cheating by trading on inside information.

It is also important to understand what we mean by “efficient markets”.  We believe most financial markets include the actions of professional investors in New York, Boston, Chicago, Tokyo, Hong Kong, Shanghai, London and Frankfurt all of whom have the job of providing better investment returns than all of their professional counterparts.  

So, how can anyone be smarter than all of those professionals with access to better analytics and better, faster access to information?

We believe all markets reflect dollar-weighted probabilities.

What do we mean by that?

If a person is right about the future prospects for a company and chooses NOT to own that company because that company looks overvalued but has very little money, it won’t matter to the market price of that stock.  However, if the “big money” believes the future prospects are better than will actually come to pass, then the stock will be overvalued.  In that case, the small investor can sell short the stock and take advantage of the high price.

Similarly, if the “big money” isn’t paying attention to some micro-cap stock, then the “small money” can own the stock of that company and own a company that provides a higher return on investment than the small investor otherwise would have enjoyed.

In the case of all financial markets, including for physical gold and digital (crypto) currencies, we see price fluctuations based on fundamentals (such as governments’ capital controls, the prospect of future inflation, and other “real world” factors) as well as technical factors — which may be more important for digital currencies than in other markets.  Technical factors are those involving the market itself — the number of wealth and opinions of the buyers and sellers on any given day or week.

So, in looking at whether a Minsky Moment is upon us: the key question to ask is: what did the markets miss?  

If the markets are likely seeing what you’re seeing, it is unlikely there will be a sudden price movement caused by market participants’ “waking up” to some news they had previously ignored.

However, if you believe the markets ARE missing something or that the markets are not properly anticipating some event which may cause prices to change, then there is an opportunity for profitable trading.

As always we are happy to discuss further if you like.  Please contact iTrust Capital’s Blake Skadron with questions and the economics team will get back to you as soon as possible.

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com.

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