The Central Bank Put Is a Long Way Down for This Hedge Fund Bearby
Recent signals imply policy makers less likely to step in
Support possible if stocks slump 20-30% in 2016, Jen says
Global equities, off to their worst start to a year ever, are still a long way from levels where losses will prompt action from central banks, says Stephen Jen, the co-founder of London-based hedge fund SLJ Macro Partners.
While the so-called “central bank put” remains an important force in markets, recent signals from authorities in the U.S., Japan and Europe suggest a higher threshold before they’ll provide relief, he says. Adjusting to that new reality is the main reason cited by the former International Monetary Fund economist for the $6.6 trillion wiped off the value of worldwide stocks in 2016.
Unprecedented easing helped send global equities up 156 percent from March 2009 through May, even as growth in some of the biggest economies sputtered and company earnings plateaued. Now, with the Federal Reserve lifting interest rates for the first time in almost a decade and officials in Japan and Europe disappointing some asset managers with recent policy decisions, Jen says investors must face the current turmoil alone.
“Equity markets had been fueled by this confidence in these central bank puts, and if the puts are further away, then we have a problem,” Jen, 49, said in a phone interview. “This is why people are in fear and this was why equities fell in the first place, because they realized there was no policy support nearby.”
Jen says losses of 20 percent to 30 percent on stocks in 2016 may provoke a response from policy makers, while adding it’s hard to pin an exact number on it. Through Tuesday, benchmark gauges in the U.S., Europe and Japan were down at least 8 percent as concern about China’s market turmoil and the rout in oil drives a flight out of risky assets.
For Jen, a native of Taiwan who predicted the 1997 Asian crisis as an exchange-rate strategist at Morgan Stanley, the Bank of Japan kicked off the adjustment period for investors in October. Governor Haruhiko Kuroda refrained from more easing in a decision that economists viewed as a close call.
Then at the European Central Bank’s meeting in December, President Mario Draghi announced measures that fell short of what some investors envisioned. The same month, the Fed implemented its promised interest rate hike and forecast four more for 2016.
The recent actions have “doused the perception that the Federal Reserve was omnipotent. That the ECB, especially Draghi, was omnipotent. And that Colonel Kuroda at the BOJ was also going to be omnipotent,” said Jen. “That image has been tarnished.”
Fed Chair Janet Yellen is now less tethered to the whims of the stock market and will be inclined to avoid backtracking on the tightening cycle as long as U.S. economic data stays strong, Jen says. A gauge of U.S. equity volatility is up 43 percent in 2016 and rallies in stocks are getting shakier, with the S&P 500’s average decline from its intraday high more than doubling from last year.
Jen said he is bearish on equities and bullish on the dollar, expecting it to do well against all currencies except the yen. He said the dollar-yen pair has “very substantial downside risks this year.”
So far those bets are paying off. The yen has surged to a one-year high against the greenback, while a gauge of the dollar compiled by Bloomberg is trading at the highest level in more than a decade as investors seek havens from the rout in oil and equities. The IMF cut its world growth outlook this week as plunging crude prices hobble Mideast producers, while the rising dollar curbs U.S. prospects.
“In the past year, people said that bad news equals good news, but now we have the exact reversal,” said Jen. “ The central banks, especially the Fed, are no longer in the position to provide extraordinary monetary liquidity -- incrementally more, not just maintaining the stock -- to continue to propel equity prices higher.”