Pro Perspectives 10/3/22

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October 3, 2022

If you're a hedge fund, or trader, and you're leveraged 10, 20, 50, 100 times, avoiding corrections or trend changes is critical to your survival.

Getting it wrong, can mean your portfolio blows up and maybe goes to zero. That's the mentality the media is speaking to, and frankly much of Wall Street, when addressing any market decline.

The bottom line: 99.9% of investors aren’t leveraged and shouldn't be overly concerned with U.S. stock market declines, other than saying to themselves: “Do I have cash I can put to work at these cheaper prices? And, where should I put that cash to work?”

So, for the average investor, dips are an opportunity to buy stocks at a discount.

On that note, Warren Buffett has made a career out of "being greedy, while others are fearful."

And there is certainly a lot of fear in the air.

With that, Buffett's successor, Greg Abel, was in buying Berkshire Hathaway shares last Thursday. He bought 168 shares, at an average price of around $406,000 a share. That's over $68 million worth of stock.

Based on Forbes' estimate of Abel's wealth, that's about 15% of his net worth.

This purchase came the day after the Bank of England intervened to calm the UK bond market.

If we look back through history, major turning points in markets have often been the result of some form of intervention (i.e. policy action or adjustment).

For the vulnerable government bond market, the action taken by the BOE has done the trick, thus far.

Yields on 10-year UK gilts are down 65 basis points from Wednesday's high, back under 4%.

U.S. yields are down 38 basis points. And here's a look at what has been the most imminently dangerous major global government bond market, Italian yields (down 73 basis points from Wednesday's high) …

This calming in the global sovereign debt markets has translated into higher stocks. Today we get another very strong reversal in stocks, after making new lows on the year (and another technical reversal signal signal, this time in S&P 500 futures, Dow futures and Nasdaq futures).

That said, let's get back to the overhang of "fear" in markets…

There were rumors going around all weekend that a major global bank was on the verge of failing. It's Credit Suisse. And the CEO wrote a memo to staff on Friday, assuring the liquidity and strong capital base of the bank — although they are restructuring. Still, the market has been placing bets on its failure, and another "Lehman moment" for the world — where the failure of a major global trading bank can quickly result in a freeze of global credit.

Keep in mind, the effects of the global financial crisis have left a bias in market participants. They see crashes everywhere. And they have for the past fourteen years.

And while the fundamentals may justify the view, at times, there is a big difference between now (into perpetuity) and 2008.

The difference: There is no question what central banks can and will do.

To avert disaster in the global financial crisis, they ripped up the rule books. There are no longer rules of engagement for central banks. They will do "whatever it takes" to maintain financial stability, and to manufacture their desired outcome. This comes with one very important condition: The "no rules" era of central banking requires coordination of the major global central banks. And they are coordinating.