By Sasha Naryshkine, Byron Lotter and Michael Treherne
Friday was an off day for the US markets, and if you want to know why it impacts global markets so much, then you should take a very quick look at this page:  National wealth. Total wealth in the US, as per the first quarter was a whopping 81.8 trillion Dollars, Japan is in second place at 28.4 trillion (although this is an old measure), if you add up Germany and France, those two European countries are collectively one third of the Japanese and the Americans combined. Obviously on a per capita basis it is a little more equal, France and the USA are similar to one another, Germany and Japan are nearly equal. Japan and the USA (445 million) have combined populations less than the entire European Union (combined 505 million), but far greater than France and Germany together (144 million).
As such, having more rich people with bigger capital markets leads to more liquidity for global markets, when the US or Japan are closed for the day, the rest of global markets will suffer as a result. Of course there are all sorts of participants in capital markets, we have tried to point out many times that all of their agendas are the same, they want to make money. Some have five whole seconds as the time frames (milli seconds even), some have five decades. Unfortunately in this market if your way of making money is very short term in nature, the problems arise when there is a distinct lack of volatility. The S&P 500 has made 24 new highs this year, but is up less than 7 percent. Which is great for those who have been in one direction and staying long (thanks Harry and Niall) but completely awful, almost crippling for certain trading types.
For instance, this graph has been the topic of lots of conversation recently, no, loads of conversation recently. This is a screen grab taken from Google Finance for  Volatility in the S&P 500. We are not only trading near 52 week lows, but we are also trading near multi year lows in Volatility.
The important part of that five year graph is the last bit, the three big spikes is when everyone made serious money (and lost no doubt) and now there is very little volatility, possibly because there is a whole lot more stability and certainty in markets. Of course volatility returns, there will always be times that are more uncertain than the present. Even though to some it hardly feels like it, it does not feel settled with northern Iraq in a state of turmoil, the Ukrainian conflict still a reality. For all of that we have companies that are a whole lot more settled and the visibility for earnings is better.
The last cog in all of this is that financial institutions have been blamed by lawmakers as the people responsible for the last crisis (law makers failed to point out their short comings, obviously), which has lead to greater regulatory overreach. Which has translated into lower risk taking by financial institutions and as such their profitability has fallen. Lower profits from in particular trading arms of the financial institutions have lead to less chances of super profits, translate that to lower remuneration too. It is not surprising to hear many people from financial institutions describing capital markets solid performance as puzzling to them, in large part (and this is an opinion only) because their personal circumstances and what they can see around them is not as profitable as before.
I prefer to listen to what the businesses say about their businesses, for me that is more insightful. Don’t get me wrong, many risk takers have been well rewarded through this time, there have been a multitude of smart hedgies (largely independent) who have done astonishingly well, there are Bridgewater (Ray Dalio) and Paulson & Co. (John Paulson), Quantum (George Soros), as well as Baupost (Seth Klarman) and Appaloosa (David Tepper) that continue to profit hugely from selected bets. Their relative size to the markets overall makes them able to do this, perhaps this is going to be the very best thing about the last financial crisis, the fact that many talented people in our industry will be forced to go it alone because of the larger institutions adversity to risk. That would be a good thing!
This article was originally published on Vestact.co.za
