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The two-deviation shelter — and the year it took to empty out

Episode

The extreme

The shelter has a rent, and the rent is a piece of information. At the end of 2011, domestic capital was paying dearly to sleep soundly: the queue for assets that yield without depending on the economy — regulated utilities, real estate funds — pushed their relative prices to more than two deviations above their own average. Paying two deviations for safety is the way money has of saying it prefers the certainty of a little to the hope of a lot. The house's two thermometers, which had been screaming in opposite directions, stopped screaming — but the distrust did not leave the building; it merely changed floors. In numbers: the Utilities/IBOV ratio from 1.36 to 2.24 of deviation, the largest move of the month; the IFIX/IBOV from 0.56 to 1.14; the Perene Risk Index easing from 86.0 to 60.5 and the intermarket rising from 23.23 to 30.22. Selic at 11.0% a year, the dollar at R$1.84.

What happened next

Anyone who read the retreat of the extremes as the end of defense paid to find out. In March 2012, the trench was dug in broad daylight: the Utilities/IBOV ratio rose from 2.07 to 3.21 — three deviations above the average — and the intermarket sank to 14.08, the deepest risk_off of the period. In June, the shelter only changed address: the money ran to commodities measured in reais (Commodities (R$)/IBOV from 1.29 to 2.42), with the dollar at an anomalous R$2.049. Only in December 2012 did the tenants move out: Financials/IBOV jumped 1.69 of deviation, Utilities/IBOV pulled back to -0.49, and the Perene Risk Index returned to optimism, at 78.6. The emptying out took a full year.

What did not happen

December's narrowing was not reconciliation. The thermometers stopped diverging, but the rift widened again in March — the intermarket fell from 30.22 to 14.08 while the domestic regime stayed in risk_on. The expensive shelter also did not mean a ceiling: there was one more deviation left to climb. And the falling rate did not call capital back to the cycle: the Selic was cut from 11.0% to 7.25% over the course of 2012, and even so the money preferred commodities and defensives for three more quarters. It never got cheap; it only changed tenants.

The honest verdict

The reading of expensive defense got the regime right, not the calendar. Two deviations paid for shelter signaled real discomfort — but discomfort that deepened before it gave way. The safety premium is legitimate information; it just isn't a clock. When the queue for the shelter is long, it tends to grow longer before it disappears.

Continue reading: When every defensive fills up · The defensives lose their tenants · When fear stopped paying rent →

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Characters: Structure (intermarket) · Flow (risk appetite) · Mood · Dollar · Cyclicals × defensives