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Todd Harrison: A Look Ahead to Financial Markets in 2014


Drilling down on perceptions and realities.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

A New Year has begun on Wall Street, which means that individual performance slates have been wiped clean. The reaction to that news will vary; the bulls, having enjoyed a fifth straight year of prosperity, are sorry to see 2013 fade to black. The scattered and shattered bears, discredited anew after again missing the rising tide of liquidity, are ready to move on.

Before we dive into the forward path, I'll raise my hand and offer a mea culpa. In 23 years on the Street, thirteen of which sharing real-time scribes and vibes, I've had my fair share of ups and downs; times when I seemingly cracked the forward code of the market, and others when I've felt completely out of touch and humbled.

While the jury remains out on the final verdict of the historic measures implemented by the Federal Reserve and other global central banks, a snapshot of the year-over-year price action provides an absolute arbiter to those variant views. Through that lens, 2013 was a bittersweet year for yours truly; while there were personal and professional successes, my take on the tape was entirely too cautious.

I own that; in this business, you've got to take the good with the bad, turn mistakes into lessons, and adapt your style to the market. Although opportunities are made up easier than losses, I was too dogmatic in my approach and failed to sync my time horizon and risk profile. I believe the imbalances are cumulative still, but there was plenty of money to be made on the journey toward that destination.

Taking a Step Back

In my view, there have been three phases of illusion in the modern context of finance. The first was in 1971, when the US reserve currency was officially taken off the gold standard. The second was in early 2009, when FASB 157 (mark-to-market accounting standards) was relaxed. The third, and perhaps most profound, is the perceived omnipotence of Federal Reserve governance.

We've written extensively about Federal Reserve policies and the unintended consequences that will be, or have been, left in their wake. Thus far, the most poignant example has been the devolution of social mood and the attendant class bifurcation, although the financial decisions made by those with disposable income have been immune to such influences.

Policy bulls have taken their requisite victory laps, confident that their view has been, and will continue to be, validated by the equity rally. They maintain that central banks are driving free markets, as oxymoronic as that sounds, and when push comes to shove, they'll identify a way to write off, or otherwise shed, upward of $5 trillion of assets from the Fed's balance sheet.

Policy bears, who have been dead wrong to date, maintain that the story remains unfinished. In an interconnected finance-based global economy, there are only so many valves that can release steam: credit, currencies, and equities - and to a lesser extent, commodities, which may already be providing a valuable clue about what's on deck for stocks.

Putting One Foot in Front of the Other

A few weeks ago, we posed a few questions that will help define 2014. Among them,

  • Can the Federal Reserve hold the trillions of dollars of assets on its balance sheet until maturity -- and then simply write them off?
  • Will the Cannabis food chain stake claim as the secular growth story for the next decade?
  • Will China emerge as the downside catalyst, either through geopolitical discord, economic upheaval, or a seismic structural shift?

While predictions are akin to throwing spaghetti against the wall in our modern-day landscape, they do provide food for thought as we embark upon another year of flickering ticks, one that will validate some views and debunk others, creating and destroying wealth along the way.

I will leave you with two items to noodle; the first was shared last week by Morgan Stanley's (NYSE:MS) equity team on its stock loan, and I quote, "Our book set a high bar for the rest of the year in percentage and dollar terms, as shorts were added at a clip that was second only to the June 20th short day which itself was the largest in the dataset spanning five years post-financial crisis."

The second is a chart of the S&P (INDEXSP:.INX) dating back to when I started my career on Wall Street in 1991. You will note the patterns of booms and busts that repeatedly punished investors at the top and screwed savers at the bottom. The last thrust, through previous highs, was enough to once again push (or pull) the masses into the bull camp. If history repeats, or even rhymes, 2014 is shaping up to be another interesting year.


Twitter: @todd_harrison

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