Last February, as Chinese stocks and the Yuan were crashing every day, sending the S&P tumbling and government bond yields crashing to record lows, in the process aborting the Fed’s first attempt to hike rates, volatility was soaring and confidence in the economy was in the dumps: in short, the bottom appeared like it was about to fall off. And then, as if by magic, the Shanghai Accord happened, a few central bankers and finance ministers sat down behind closed doors and ironed out an agreement whose details are still unknown, and unleashed one of the biggest market surges in history, in the process once again fooling the Fed and central banks that (benign) inflation has again arrived, lead to not one but two rate hikes by the Fed this time. Indeed, unlike last February when pessimism rules, this time it is optimism about the economy and future that is seemingly boundless, even if the actual economy refuses to confirm this euphoric outlook.
And, if UBS is right, there is no reason to be optimistic. At all.
In a note titled “Separating reflation myth and reality”, the Swiss bank looks at the record gap in what has now become watercooler talk, namely that between hard and soft data surprises, and says that the gulf between the two series is now unprecedented:
The cause of the gap between soft and hard data is often put down to a lag. However, not only is the response from hard data more delayed than usual, the magnitude of the gulf between them is unprecedented. We believe understanding the reasons behind this gap is central to the identifying the nature of today’s reflation, and charting its future.
No surprise there: as noted above, this website was the first to notice the “unprecedented” gap between soft and hard data, only then ushering in the clown brigade of “serious economists” who promptly opined on this gap, ar first dismissing it, and only in recent days, sounding the alarm.
However, it was what UBS noted next that we found more important, because it ties the current euphoria to a market period that is still all too fresh in the minds of traders. This is how UBS compares the current period, in both the markets and economy, with what happened just over a year ago, when as summarized above, the bottom appeared to be falling out of global risk, and in retrospect was precisely the right time to BTFD:
Soft data momentum has been strong for some time, pulling expectations higher too. The 3m change in UBS global data surprises has reached levels it typically mean-reverts from. In the meantime, market volatility across all assets has declined sharply; the 3m change here is not far from its lows. This configuration, the opposite of that in Feb 2016, warns us against adding risk aggressively now.
It would be poetically ironic if just over 12 months after central banks cobbled together a global, if still unpublicized, rescue packge in Shanghai, that the would seek to pull the carpet from under the global economy, something which would happen under Trump’s watch – and for which he would get the blame – and come just as his Goldman advisers convinced him to flipflop on the key values of his core voters, assuring that when the market does crash, few will come to his support, and giving the Fed just the smokescreen to sneak away unscathed and without getting blamed for having blown the biggest asset bubble in world history.
And, if UBS is right and the anti-Shanghai Accord trade is coming, one can only hope that the coming plunge is, as some would put it, bigly.
