Critical Threats To 2017's Bull Market - Part 2: Over-hyped Risks?

With The Donald J. Industrial Average surpassing new record highs every day, questioning this bull market"s continued existence remains heresy outside of dark little corners of the internet.

However, continuing his series, Bloomberg"s macro strategist Mark Cudmore dares to mention a few of the more prescient "known unknowns" that could hamper the meltup for the rest of the year... and in the case of today, some that may not.

Via Bloomberg,

Overhyped market risks provide just as many trading opportunities as genuine ones. It’s crucial to delineate what matters and when.

Yesterday’s piece highlighted threats that could cause a material correction before year-end.

Today’s column argues that other oft-cited concerns can be safely ignored for the moment.

Nafta is prominent in the news and any move by President Donald Trump to abandon talks and exit the deal would have global repercussions. Still, that worst-case scenario won’t be a 2017 issue. Even if Trump jumps, he has to give six months notice and Congress will fight to keep the U.S. in.

Will China increase its deleveraging focus after the Communist Party Congress? Probably, and that may hit domestic financial assets. But officials will not want to significantly hurt the real economy and have an impressive track record of slowing growth without killing it. That reduces the risk of a spillover into world markets.

Global yields breaking higher would have major consequences. With only two months of data to go before year-end, are investors suddenly going to believe in runaway inflation though? Given the skepticism shown by the flattening U.S. curve, a one-off print will be insufficient. There’ll need to be a significant change in the trend and there’s simply not enough time left for that in 2017.

Brexit? With expectations so depressed and in the context of a two-year process, it’s not a major near-term risk. It’s a U.K.-asset story, with minimal contagion elsewhere.

Tax reform failure? It seems unfeasible for this to be resolved either way in 2017 and expectations -- at least in the market -- for a successful passage aren’t high in any case.

A Kurdistan-prompted oil shock? The region just doesn’t provide enough supply to be a game-changer -- not with U.S. shale producers ready to ramp up production whenever prices rise.

A failure to form a German majority coalition? Like Brexit, it’s a regional story. A negative that may be underpriced in local assets but not something global investors will panic about.

So, says Cudmore, excluding a Black Swan event, only North Korea, Catalonia or a U.S. government shutdown have the ability to cause a 10%+ correction in the MSCI All-Country World Index by Dec. 31... and here"s why...

One Trader Warns: "Don't Confuse Risk-Asset-Buying With Calm"

CNBC"s Joe Kernen nonchalantly commented this morning that "Dow futures are indicated higher... Just like every other morning," and that just about sums up the current utopia as consumer and business surveys spike irrepressibly in line with a seemingly unstoppable meltup in US equity markets. However, as former fund manager Richard Breslow warns this morning, investors should avoid confusing risk-asset-buying with calm.

Via Bloomberg,

Watching the markets playing out the latest version of what passes for investing these days, you have to wonder if traders have finally found religion. I don’t mean all those times we prayed with all our heart that a bad position would be saved. Or even, heaven forgive us, for something bad to happen which would be good for moi.

Rather, when all other analysis seems to have failed, there’s this curious yet understandable, belief that God will provide.

After all, what else sensibly explains the unceasing rewards from the accumulation of risky assets, despite serial reminders that all may not be as copacetic as the price levels insist is the case.

This is really just one manifestation of the more earthly, you can’t fight city hall. A twist in a post-vigilante world, which can’t bear not to believe that the authorities will deliver what our financial market investing thesis requires, while at the same time being utterly incompetent. Or worse. Tax cuts, structural reforms, peace and goodwill will inevitably be revealed as the true driver of these asset prices. How we get there, nobody knows.

Yet, be careful before you decide to dedicate your life to this religious path and conclude financial analysis is an archaic rite from a time before the great QE deluge. For in the highly unlikely event your personal deity does indeed follow the business section, it is far more important to remember that the Lord also works in mysterious ways.

It has been unarguably true pedal to the metal has been a great way to go. You know that’s true when people tell you, investing works best by not opening your account statements and being distracted. And in fact, pure risk trades have not only done great, they haven’t done anything wrong. Set the autopilot and enjoy your satellite radio. What’s not to like? And that’s been a very profitable point.

Models, by the way, are much better than humans at thriving in this type of environment. They love momentum and long-term stable correlation matrices. So then, what’s the bad news? I’ve no idea there is any for the moment. This isn’t one of those sell upon receipt of this pronouncement pieces. Except. Except, at this point in the economic cycle, it’s worth thinking long and hard why sovereign bond yields are this pathetically and worryingly low. This no longer looks like risk-parity trading but survival training.

Global growth is pretty good. Tapering and rate hikes are coming. And we aren’t in a world where endemically low growth and rates is a foreordained outcome, no matter who tries to peddle that story. But rates refuse to rise. And this goes way beyond the vagaries of the Phillips Curve, for which there are endless explanations.

This is the portfolio commingling of risk-asset buying to stay in business and bond-buying because, in reality, it’s impossible to ignore the front-page news. We get periodic episodes where one set of problems recedes from our consciousness as we move onto the next perceived crisis.

But receding isn’t at all the same thing as having been fixed. And it does add up with the cumulative risk eventually rising exponentially.

Equities will do their thing until one day they violate enough technical levels that they don’t force everyone to buy. That’s unlikely to happen today.

So everything is great, right? Not really.

Until bond yields start to move back from levels that scream calamity, don’t confuse risky-asset buying with comfort or contentment. This level of rates needs a lot more explanation than continuous monetary policy largesse.