By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
As I surf the financial markets on Wall Street to new highs, my thoughts are haunted by the ghosts of Jim Morrison, lead singer of the Doors (Abwaab?), icon of the Sixties, who I visit when I am in Paris even now in the garden of stones the French call Père Lachaise. Jim’s memoir reminds of this incredible bull market in New York – “nobody gets out of here alive”. The Big Grizzly is going to implode the trillion dollar daisy chain of hot money that defines my life. As Mickey Rouke tells Kim Basinger in 9½ Weeks, a movie I saw filmed from my Greenwich Village pad in Manhattan, “I make money with money, some would call it arbitrage”. Not true in my case. One, I lose money from trading money sometimes, much to the irritation of my own Bahrain born, ethnic Afghan Kim Bassinger named after the last Shah’s consort Farah. Two, what I do is definitely not arbitrage but a game of leveraged three dimensional chess, trading volatility, risk assets and global equities. Yet the auguries do not seem right, people are strange when you are a stranger, come on baby light my fire (margin to equity ratio) and, as Jim predicted, nobody will get out of here alive. RIP Jim. Centuries from now, the world will remember you in the same league as Homer and Mozart, Byron and Joyce.
The markets, like life, are lived forward but only understood backward. So why this money making melt up since September and the S&P 500 up 25% YTD? Four reasons. One, Xi/Trump have resumed their bromance or a phase one trade deal. Yet does this mean the US-China economic/technology Cold War is over? Absolutely not. If you think nirvana awaits the world’s two top superpowers, you probably believe Prince Andrew was really at Pizza Express with Beatrice enjoying his white truffles and Chianti.
Two, the Iranian/Houthi attack on Abqaiq and Khurais did not escalate into another hot war in the Gulf. Yet does that mean the geopolitical convulsions of the Middle East are over. Try to buy petrol in Beirut, stroll in the Green Zone in Baghdad or avoid hairy situations (literally) in Mullah Diesel’s takeover of Islamabad. The game of nations is suffused with sorrow.
Three, the Federal Reserve has panicked and cut interest rates thrice at the July, September and October FOMC’s. Yet Alan Greenspan did three rate cuts in the autumn of 1998 after Asia went into financial majnooni (nuts) mode and the NASDAQ doubled in 1999, only to meltdown in 2000. Mark Twain said history rhymes, not repeats. So do parabolic equities bubbles and this one will pop in 2020.
Four, loony tunes valuations are now rejected by the IPO market, a proxy for Wall Street animal spirits. The Uber IPO is down almost 40% from its $45 debut, exactly as I predicted in successive articles in AMEinfo, the UK Property Chronicles and my syndicate newspaper partners. Mr. Market rejected the valuation of WeWorks and Saudi Aramco. The risk signal lights have not turned from green to red yet but they have turned amber and I live my life in the second derivative, as a Macro Manchild in the Promised Land and amber gives me khouf that greed is now overbought and fear comes next. When the macro lights turn amber, its time to bailout while the parachute is still intact.
Five, I was sipping coffee and waiting for an imperious Gallic Garçon (a French Abu Shebab) to bring me my crepe suzette at a café on Boule Mich in the Latin Quarter. I had just flown in from JFK and the date was June 6, 1989. Will the Middle Kingdom do another Tiananmen Square massacre in Hong Kong? Will the world and the US Congress remain silent if this happens? How will the markets react?
Six, the S&P 500 trades at 19.6 times operating earnings as I write. But my little bunnies from the Beltway tell me that Senator Elizabeth Warren of the People’s Republic of Massachusetts – will be the 45th President of the United States. Mr. Market is insane if he does not price in the probability of a progressive Dem landslide in the November 2020 election.
Yet Wall Street, the City and the DIFC are full of my fellow MBA’s – masters of bubbleology and Amnesia, a truly useless degree. I got mine from the same place that gave the world Donald Trump, Mike Milken and Mudit Jain (grandson of SP Jain and my bro since 1988) – Wharton.
I learnt the hard way in life it is more important to know what Sigmund Freud says about death wishes, what Ali Khameini screams about Great Satans than what Jay Powell says about interest rates. So as I scribbled in my article “The coming global financial crash” in the UAE financial press in January 1st, 2007, I was really thinking about Axl Rose of Guns N’ Roses. Nothing lasts forever. We both know hearts (risk appetites) can change. Its hard to hold a candle in the cold November rain.
So how did I end my premature premonition of financial Armageddon at the height of the bubble madness in January 2007? Hello, darkness my old friend (liquidity), you are gonna disappear on me once again as the music stops from emerging markets equity time bombs to structured note minefields, $25 million leveraged Emirates Hills McMansions to JLT brick and mortar “bargains” and thousands of iconic but empty golf course villas. Will the dark alleys of the world create another monetary tsunami in 2020, as happened in 1998, 2001, 2006, 2008, 2011 and 2015? Yes, my crystal ball is already shuddering and threatens to explode.
I remember my grandfather smoking his pipe and telling me stories about his friends from 1940’s Bombay – maharajas, merchant princes and even my horse breeder wicked uncles who survived the millennium, so we met as adults just before the end – and once wearily telling me. “There are none so blind as those who refuse to see”.
This is exactly where we are in global markets, mindlessly following the hoofbeats of the herds, goosed up with high octane leverage, chest beating hype, hefla and hip hip horray! As in 1998, three desperate rate cuts have averted a recession but spawned an epic bubble where my tribe of Wall Street blind men just refuse to see. In Big Tech, I see spasms of buying panic, irrational exuberance on an exponential, even comical scale. Money talks but in Mister Softy or Apple or Disney, money shouts at a decibel count that blows investors eardrums all over the world. I remember the S&P 500 index bottomed at 666 (ever watched The Omen movie? I did – this 666 thing is scary) – it is now 3200. Rastaman vibrations? Definitely not positive.
This was the mother of all bull markets. It survived Greece, Cyprus, US budget ceiling battles, China’s yuan devaluation, the Crimean war, the Syrian killing fields, the terrorist bloodletting in Mount Sinjar, Paris, Nice, Brussels, Kabul, Islamabad Marriott, Westminster Bridge/Borough Market, Manchester and Bombay. But will it survive the election of Pocahontas. Nobody gets out of a dying bull alive. So I hate the advise of my homie New York philosopher poets 50 cent and Snoop Dogg. I don’t know what you heard about me, this bull ain’t gonna get a dollar out of me, no Cadillac or perms you cant see, cos I am a bubble hating B-E-A-R you see LOL!