With few exceptions, equities in recent months have advanced at a pace so smooth some might call it glacial. It’s certainly enough to lull one into contentment if not complacency.
No one knows when the calm will end, but nothing lasts forever. What could go wrong? We checked in with 3EDGE president and chief investment officer Steve Cucchiaro, an MIT-educated, world-class sailor who sold his previous firm, Windhaven, to Schwab Investment Management for $160 million in 2009 and who will be speaking at Financial Advisor magazine's Inside Alternatives conference in Denver on October 24. He shared a few ideas with FA:
1. Momentum is a principal reason why equities keep hitting new highs. There is little of the froth that characterized the tech bubble of 1999 and 2000, but the market continues to draw cash from the public, including many folks who were slow to appreciate this bull market in its early phases from 2009 through 2012 and don’t like missing the march onward and upward. Could this shift to momentum turn into a parabolic melt-up? If so, it could set the scenario for a black swan correction, Cucchiaro said.
2. A record amount of money is shorting the primary volatility index, the VIX. That has contributed to the pervasive calm, Cucchiaro noted. What would happen if some event were to change this environment? There likely would be a ton of short-covering in the VIX, which could turn a minor correction into a major one.
3. Kim Jung Un has been shooting off missiles in North Korea without consequence. Cucchiaro observed the U.S. is conducting special exercises in Guam and China is fortifying its borders. He didn’t say it, but this writer has heard the U.S. military is seriously preparing for a major strike against the hermit nation’s nuclear facilities. Oftentimes, conflicts arise from mistakes, misperceptions and misunderstandings. Given that the North Korean regime appears completely irrational, who knows what could happen. What if they “tried to take out our satellites?” Cucchiaro asked. People don’t even want to think about it.
4. Increasing tension between Iran and Saudi Arabia threatens to destabilize more than the Middle East. Russia increasingly is siding with Iran. Moreover, Russia’s oil-dependent economy is suffering from sanctions and low petroleum prices. Engaging in more mischief in the region could improve their economy while they elevate their position as a major player and retaliate for western sanctions.