Revisiting Long Held Beliefs
We have said it before, and we will say it again. The primary arbiters of asset values have been the central banks since their balance sheets swelled many years ago, and investors that have remained in the market have needed to come to terms with that reality. This fairly simple belief can be taken a step further when one has faith that the central bankers are wary to allow volatility to spike in the market. This has effectively firmed the belief of the existence of the central bank put, while leading to periods of abnormally low volatility that are followed by rapid spikes in price moves that quickly get tamped down. We saw this pattern several times this year, with volatility at the start of the year created by the possibility of a disorderly devaluation of the Renminbi, which resulted in a CB led weakening of the USD which completely reversed the worse start of the year environment for many asset classes. The period of calm was shaken by the Brexit vote, which saw historic currency moves for sterling, while the global risk off trade presented itself once again. Rapid promises from central bankers once again improved the mood of fickle investors as we saw yields plumb new lows globally, while stretching valuations throughout the summer. This tamping of volatility resulted in some of the least active markets from a volume and price perspective in decades, with equities, fixed income and FX all experiencing unnaturally narrow trading ranges.