Wasn't all hell supposed to break loose if the ten-year ticked at 2.9% or above? Wasn't that supposed to be the ONLY metric that really mattered and everything else was just noise?
What really mattered, it turned out, is what often really matters after a strong run: large clients who are out of position and end up flailing and destroying the very markets they were supposed to be investing in.
Now we all know that we might be in for a delayed reaction now that the ten-year is at the verge of 3%. I have been among the majority who said that the breakout in rates was impactful. But I have been in the distinct minority about the notion that it is the strategies that dumb accounts put into place, artificial strategies that used leverage to boost returns, that are the real drivers of prices.
Or, in other words, we would keep going down as long as the VIX and its derivatives, notably the (TVIX) , (UVXY) and (VXX) , kept spiking and wiping out those who were short "vol" as they all like to say it, and long common stocks.
You see, what I realized that a lot of others didn't is that these markets aren't built for big volume. They are rinky-dink and weren't supposed to ever impact the underlyings.
But those of us who remember the darkest hours of 2007-2008, know what it is like to see these crazy instruments overwhelm the common stocks. Did anyone remember how the bank stocks bottomed back then? It wasn't just Bernanke saying he was done with the bank failures on 60 Minutes. It was also the end of the ability of the bank-stock derivatives to drive prices lower because of some short rules that were put into place.
Now, I am not pro or anti-short. What I am is cognizant of any one product that can overwhelm common stocks and how that is something, per se, that is not in the public's interest.
I know it sounds atavistic, but before the money in politics became so big, before the lobbyists became so powerful, before the regulatory agencies got so captured, we used to think what's in the public's interest when it comes to securities.
The government created the SEC as a watchdog for the public. The public is served best with orderly, strong markets.
Anything that destabilizes that market -- too much borrowed money that can overpower common stocks on the way down, too much leverage in the system via instruments that appear or take on the appearance of an asset class that needs protecting in itself -- should be given extra scrutiny. The SEC should be willing to admit it made a mistake in allowing massive leverage to be used to try to capture small gains in the VIX that might eventually be magnified to trounce the actual markets that the VIX is trying to gauge.
But none of that occurred. We just had a bunch of runaway trains -- the accounts doing this stuff -- that ran over all of the rest of us.
Now what's really a shame is that once again, we saw tens of billions of dollars leave stocks as we saw the asset class was too thin and brittle to be considered a responsible place to invest.
What's wrong, is that it wasn't the "fundamentals" that played havoc with the asset class. Earnings got better. Cash flow improved. Against that we had a slight tick up in rates. These are always going to be going at it hammer and tongs when an economic expansion picks up speed.
What we didn't realize was that so many accounts were augmenting their performance by investing in "volatility" strategies -- if you want to call something a strategy that has no place in being -- that they, themselves, became the real fulcrum. The fog of war became the war itself.
Now the fog is lifting. What do we see? Higher rates versus better earnings. A ten-year at 2.91% versus amazing numbers from Applied Materials (AMAT) and Cisco (CSCO) . A slightly heated CPI versus big buys of common stocks by Warren Buffett, notably the despised Teva (TEVA) and "over the hill" Apple (AAPL) .
These are fair fights.
The TVIX v. the SPX. Not a fair fight.
I am glad it is ending. I just wish those people who left would come back. But they know no one will protect them or even acknowledge their aggrieved status.
So why should they?