Bat Shit Crazy

2016-01-25 10am EDT  |  #Saudi Arabia #sovereign wealth funds

Remember how energy dominant countries’ sovereign wealth funds (SWF) were being saved for when the oil ran out?

And the oil would not run out for quite a while, so these funds were justified venturing out the risk curve. If you don’t have to sell for another twenty or thirty years, what’s the point in sitting in riskless treasuries yielding almost nothing? To top it off, the Federal Reserve seemed to have your back and Bernanke was practically begging investors to buy risky assets. For sovereign wealth funds, this trade seemed like a no-brainer.

But like all no-brainer trades, it was taken too far. Much too far.

Now the unimaginable has happened. Instead of being “patient long term money,” these sovereign wealth funds are forced to sell.

On Friday after writing my piece about the potential problems associated with the Saudi Arabian Riyal’s peg, I received a lot of feedback. A couple of those comments included rumours about the stock selling on the exchanges. Of course no broker that has the order would email me to let me in on the secret, but traders are a canny bunch. Bit by bit they put the pieces together, and when you sit on an institutional desk and there is a client executing a trade in size, it quickly becomes common knowledge among the shrewd traders. I have little doubt there was substantial sovereign wealth selling over the past week.

Although it’s nice to get confirmation, I didn’t really need it. All you had to do was look at this chart:

The selling has been relentless, and completely illogical. Straight down in such a stair step manner was the result of a humongous sell order. Every time it seemed like the market might get up off the mat and take a breath, the sell order came back.

I don’t know which sovereign wealth fund is puking, and it doesn’t really matter. All that matters is the knowledge the selling over the past couple of weeks has originated from these funds.

Do you think it is a coincidence that oil and the S&P 500 have been joined at the hip during this period?

Although the bulls might take solace in the fact the selling has been mainly driven by one group of over enthusiastic oil bulls that got over their skis, I am not nearly as heartened by this development. I believe the past couple of weeks has shown the dangers of governments intervening in the risk markets. These clowns are bad enough currency traders, the last thing we needed was them venturing into stocks and other risk assets. Yet this is exactly what they have done over the past half of a decade.

I have zero doubt all the Central Banks that have loaded up on stocks will do no better a job trading than the energy countries’ sovereign wealth funds. You just know they will buy the highs, and sell the lows.

I have said it many too many times, but monetizing your balance sheet with foreign equities is just bat shit crazy. The past couple of weeks has given us a taste of what will happen when these funds are forced to sell instead of buy. Wait until the BoJ or the SNB walk into the square with pink tickets…

Thanks for reading,
Kevin Muir
the MacroTourist