Four of last week's five daily trading sessions saw the Dow move by more than a hundred points. The wide fluctuations of the index reminded investors of the unsettling market volatility of last year. In the process, and after a wonderfully strong first quarter, questions multiplied as to whether stocks would again be subject to a mid-year correction.
By looking at the factors behind the recent volatility, including how it played out in different segments of the global markets, you will see that a big part of the answer depends on policymaking here and in Europe -- a particularly uncomfortable situation for those who rightly believe that valuations and correlations should reflect underlying fundamentals.
The renewed volatility in stocks was due to conflicting signs of additional central bank liquidity support, both in Europe and the US. By providing time (and hope) for economic and financial fundamentals to heal properly, such support is seen as critical to sustain the recent rally in risk assets.
Yet, in listening to different voices here and across the Atlantic, equity investors come to different conclusions as to whether additional liquidity will indeed be forthcoming.
Some officials seem committed to renewed unusual central bank activism. Others feel that this would only postpone the inevitable adjustments required on the part of governments, companies and individuals. And there seems to be no way, as yet, to get both groups on the same wavelength quickly.
Market volatility has also been accentuated by competing narratives about the economic outlook.
Last week, several companies' quarterly earnings reports, led by Alcoa, were supportive. The problem is that they conflicted with the more worrisome macro data, including a Chinese growth slowdown (though 8.1 percent would be deemed great anywhere else in the world), the undershooting of a much-followed US sentiment indicator, and mounting signs of recession in Europe.
These two narratives are, once more, finely balanced; and the tug of war will continue until one side asserts itself -- either through a policy breakthrough or through a policy breakdown.
No wonder so many analysts are warning that stock market volatility may be with us for a while. In understanding the implications, it is good to reflect on what other market segments are telling us -- particularly global bonds where last week's differentiation was both noteworthy and insightful.
Compared to stocks, US Treasury bonds experienced less volatility (both in absolute and relative terms). This was partly due to a measurement issue: As only the bond market was open when the disappointing March employment number was released, yields reacted on that Friday while stocks had to wait for the following Monday.
But even when adjusting for this by extending the comparison to two weeks, the contrast is still there. Investors in the Treasury segment appears less conflicted. This market segment signals a muted growth outlook, and one that may even trigger additional Federal Reserve intervention in the form of a new QE.
Signals of a challenging outlook are much, much louder in European bond markets -- and rightly so. Last week, yields on peripheral government securities went from flashing orange to again flashing red, with Spanish risk spreads near or at record levels (as measured by credit default swaps).
All this speaks to the unsettling situation of markets that remain highly dependent on policymakers who, themselves, are stuck in the muddled middle: unable to deliver sustainable outcomes or to exit from their market interventions. This is the unfortunate reality of an "unusually uncertain" outlook, blunt policy tools, and a rather dysfunctional political context.
Mohamed El-Erian is the co-CEO of Pimco, which oversees nearly $1.8 trillion in assets and runs the Pimco Total Return Fund, the largest bond fund in the world.
Cross-posted from CNBC.com
Dylan Ratigan: Is the Federal Reserve Coming Clean?
Let's be realistic and call them major players or more precisely, the major financial institutions around
the world that control the stock market and many other forms of the financial market. They are the ones
that can move stock and commodity prices any which way they like at a time they like . They are also the ones who need government subsidies when they are down because they are too big to fail. We have a situation where the Feds in Europe and here are held hostage while they are still expanding instead of becoming smaller in size. They are also the ones who reject any kind of financial reform.
1) When investors in the market get their nerve back and start pouring money back in "the only game in town": that can address inflation, is it like that shell game where players get sucked in and when the pot gets really big, the bottom falls out again finagled by the guys who rig the market?
2) Can regulations be devised that are fail-safe so investors can invest with the confidence that the Crony Capitalists don't dirty-deal again (and again)?
3) And then those entities deemed too big to fail get bailed out by the government again (and again) at the expense of We the People taxpayers?
4) Have measures been taken to address the shenanigans of our rigged financial system abetted by paid-off legislators?
5) Are claims that regulatioins curb creativity of capitialists true or not? Are there smart regulations that can thwart Crony Capitalists?
Watch the volume-it means everything.
The historical risk/reward ratio favoring equities is not evident.
Far too much risk, far too little reward.
Time to harvest and run. That's what I did last week.
Take GM auto sales in China: if they grow by 10% a year, they will be double in seven years. That same 10% growth means GM is selling twice as many cars per year as they were 10 years ago, and that is what matters. If unit sales increased same amount every year, the growth rate in percent would actually decline. Take it from a software engineer: don't use percents, they are misleading.
At 10%, an original sum doubles in 7.2 years, not 7.
But you are close...if you are playing horseshoes.
If Gates sold even a fraction of his MS stock, the price would plummet and he would sell it at the low price. Same with buys, large stock purchases immediately drive up the price and you end up buying at the top price. Large holders of stock can't manipulate the market. They can't get out in time either, and they didn't in 2008. The mere act of them selling caused the market crash, and maybe 2% got sold before the crash.
Day traders do through shorts and longs, basically short-term bets. But only a small amount of money is involved so it can't do much. And eventually it fails. Shorting stocks drives down the price, but eventually it rises again and if you haven't "covered" the short you lose everything.
The stock market is based on supply and demand, just like oil prices. Just because they vary wildly doesn't mean they are being manipulated. Markets are chaotic like weather. Unpredictable, and not manipulated. There is no God controlling the weather or speculators controlling the stock market. The tendency to see either goes together, the religious are more likely to believe in conspiracy theories. Almost all scientists and engineers believe in neither, including me.
Oil prices will continue to rise. Gold is like real estate, the amount in the world is fixed and doesn't change much. But oil is real estate that gets used up, there is less of it in the world every year. There are no new reserves, only known ones to expensive to tap until prices get high enough. That includes shale oil.
Saudi Arabia will have nothing but desert when its oil is gone in about 50 years. They have a right to charge whatever they want for their oil, it's all they have. Oil is black gold, silver and gold are useless but pretty.
You can be sure that it is not good news.
Sadly, it all means that Wall Street owns Main Street and all this so called volatility is just a show.
So few people even begin to understand that.
Are you a Suze Orman fan?