March 5, 2014

Light Brigade

Not though the soldier knew someone had blundered.

Alfred Tennyson’s 1854 poem, “The Charge of the Light Brigade,” offers lines more recognized than this one above including “into the valley of death rode the six hundred,” and “theirs not to reason why, theirs but to do and die.”

One wonders about a marketplace that seems today to blunder after arbitrage opportunity despite risk.

Lord Tennyson memorialized an ill-fated British cavalry unit at the Battle of Balaclava in October 1854 during the Crimean War. A side note that history often overlooks is the Crimean War’s impact on clothing: Lord Cardigan commanded the British troops, and many Russian soldiers now occupying Crimea sport balaclavas, the ubiquitous choice in headgear for contemporary fighters wanting to make noise while avoiding recognition.

In the equity market, the mild Putin swale Monday in major measures speedily dissolved in festive cheer yesterday as “Ukrainian tensions eased.” I’m not sure what eased since there were more Russian troops in Ukraine yesterday than the day before, some 130,000 Russian soldiers were engaged in “scheduled” maneuvers, and the Russians just test-fired an intercontinental ballistic missile in Kazakhstan. Coincidences, I’m sure.

In market data Monday, we saw selling by bottom-up investors, sidelined indexes/ETFs, fast money trading at about the same pace as those investors exiting defensively, and lots of hedging.

Some of this makes sense. We’d expect rational people to be disturbed, thus selling some and hedging some. Vladimir Putin has a buffet spread before him. If he wants to walk his balaclava-clad comrades into Ukraine, or for that matter Poland, Slovakia (where Russian pipelines connect to Europe), Slovenia, the Czech Republic and other parts of eastern Europe, who’s going to stop him? Germany has about 60,000 troops, Russia, 600,000. Nobody’s got an army there except Russia.

But asset-allocation systems saw no risk. They weren’t sellers. Risk-analytics tools like Blackrock’s Aladdin built around macro data and fund flows and currencies and so on for $15 trillion of institutional assets have no fields labeled Crimea or Putin. Action in global currencies and commodities point green arrows at risk assets.

I realize this is a different sort of Market Structure Map than we generally pen. Our job is to inform and entertain on market-structure topics. Admit it, balaclava, while sinister-sounding, is sort of funny.

What’s informative is recognizing when the market disconnects from reality. Yes, Warren Buffett says to buy this geopolitical unrest. Yes, most pundits say markets lack any sign of risk. It seems surreal to me, as though shooting broke out in a city and the residents made popcorn and gathered to watch the fighting. Gunfire is dangerous. Dictators with big armies in a geopolitical vacuum aren’t looking to play tiddlywinks.

When a man with grand designs has all the guys, guns and balaclavas, and everybody thinks nothing is wrong, be wary. This may not be the valley of death. But we’re half a league on, half a league on.

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