MORNING BID – Climbing the Wall

June 26, 2014

Eventually, lack of volatility, rock-bottom rates and this accommodating monetary policy will realize the build-up of excesses that causes some kind of market crack that devastates people – particularly in areas where many do not expect it. But it won’t be today, and investors should continue to ride that so-called Wall of Worry through the 2,000 mark on the S&P 500 before long.

Goldman Sachs strategists note in a piece overnight that volatility is likely to remain lower for longer, but the slowness of the economic expansion and the additional regulations as a result of the financial market crisis of 2008 mean that the buildup of those speculative excesses is happening at a much slower rate. That’s not to say they aren’t out there – Brian Reynolds of Rosenblatt Securities is adamant that we are now in a “runaway bull market,” which of course usually ends in tears for someone, but again, not today.

But back to Goldman: their head of credit strategy, Charlie Himmelberg, notes that bank regulation and other issues have reduced that so-called accelerator, where activity in the economy amplifies risk-taking in credit markets and use of leverage, and vice versa. So that’s adding some drag to the system, which can be seen through, well, the fact that the economy plods along – contracting by a ridiculous 2.9 percent in the first quarter – without any real sign of taking off. Again, there’s merit to this in that it means a recession is far off because we’re so far only about midway through the business cycle, at best.

The emerging signs of additional spending on capex are there, and investors, per Bank of America/Merrill Lynch, are practically begging for more capex – the long-term spending that follows lots of buyback and dividend activity and then after the M&A activity that we’ve seen a lot of in 2014. The company’s global fund manager survey currently shows a net 60% plus that want more capex — and the last 12 months capex growth rate is up to 5.6 percent from 2.2 percent in the previous quarter, so investors are getting what they want.

What that portends, though, is an eventual shift in volatility. That hasn’t happened yet, and some measures, like Credit Suisse’s measure of fear, where they look at the cost of put options versus call options, show a lot of fear – but that’s because the price of calls has collapsed, meaning investors just don’t see a reason to bet on higher markets. They’re not really increasing bets on lower markets – so that’s the ultimate signal of boredom. Which is a merit of sorts.

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