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.


5. Gridlock in Washington looks worse than ever. Since the November 8 election, stocks have climbed more than 15 percent on the expectation of tax cuts and fiscal stimulus. Suddenly, it appears fewer objectives of the Trump administration will materialize than many had hoped for. Cucchiaro wonders what might happen if some actor in Washington makes a major policy blunder, instead of simply dithering. A policy blunder from Washington? But of course that could never happen.

6. A major cyber-attack on our infrastructure, electrical grid or financial system has become a larger risk. Hackers are getting more sophisticated and their ability wreak havoc is rising.

7. The profits recession of 2015 is over and corporate bottom-lines are throwing off record amounts of income. What if this is the last great quarter of corporate earnings for the current cycle, Cucchiaro posits. It’s hard not to notice that the market is punishing companies that miss earnings guidance this quarter while rallying significantly when a company reports a major surprise to the upside.

8. What about a bond market meltdown? After 35-year rally in bonds, interest rates remain near historic lows. Most major central banks are all trying to normalize on a synchronized basis; Cucchiaro thinks the 10-year Treasury should “logically” be close to 3 percent. Were rates to re-enter a normal range, bond yields would become more competitive versus dividends and PE multiples could contract.

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