During the second half of an interview with MacroVoices host Erik Townsend, Fasanara Capital fund manager Francesco Filia explained how the trillions of dollars in post-crisis asset purchases by central banks have bred a dangerous trend-following mentality that ultimately undermines the stability of markets and leaves stocks and bonds vulnerable to a vicious reversal.
Passive, trend following funds – which account for the bulk of daily flows across financial markets – have only helped exacerbate the situation. But what’s worse is market strategists’ refusal to acknowledge how these flows, which create destabilizing feedback loops, tend to drive trading. Instead, sell-side ‘experts’ employ flimsy fake narratives ex post to explain trading activity. These narratives are often accepted without question or criticism by financial reporters at CNBC, the Wall Street Journal, Bloomberg…the list goes on.
While it’s much easier for strategists and traders to latch on to the narrative of the day during interviews and conversations with clients, Filia posits that both professional and retail investors are ignoring these fundamental trends at their own peril.
There was a moment in the market a couple of years ago where, whenever we saw bad data, the market was rallying, because they were expecting more monetary printing and more interventionism from the side of central banks.
A little bit later, when rates were falling because of deflation, the narrative was chasing yields. So the narrative was not that there is deflation, therefore there will be a recession, therefore there will be a deflationary bust. The narrative was that there will be a deflationary boom. So the narrative was chase yields. So go into bonds even if the yields are low (whenever there is some yields left), go into equity to get some yield, and so make equities more expensive.
This post was published at Zero Hedge on Nov 26, 2017.