Friday, July 31, 2020
Thursday, July 30, 2020
BIZD: ETF TRACKS INDEX OF BUSINESS DEVELOPMENT COMPANIES (BUYERS OF THE WORST CREDITS): Ytd: -30.4%, retraced <50% of BM decline...
LEVERAGED LOAN PRICE INDEX: Ytd: -5.3%, retraced >62% of BM decline…
PSP (Private Equity ETF): Ytd: -15.80%, retraced >62% of BM decline.
HYG: Ytd: -308 bps, retraced >76% of BM decline…
MUNI/TREASURY SPREAD: 122% of 10-yr treas, 61% wider vs equity mkt peak
HY SPREAD (1-day behind): 489 bps, 36% wider vs equity mkt peak
Ba SPREAD: 342 bps, 60% wider vs equity mkt peak
BB-BBB SPREAD: 168 bps, 95% wider vs equity mkt peak
CDS Inv Grade Index 70.37
PWA FIN’L STRESS INDEX -12.5
The wealth that is made by the financial players (and businesses and individuals) who are implementing carry trades is not real wealth of the sort that derives from an economy’s greater ability to produce better goods and services that the general population needs and desires. On the contrary, it causes financial asset prices to become hopelessly distorted, unhinged from the real economy, and therefore ends up misdirecting scarce capital into potentially unproductive uses. Over time, the economy will perform progressively more poorly, with income and wealth more and more concentrated in a few hands.
Nevertheless, it is also important to realize that the carry regime, as it progresses, fundamentally weakens the true power of central banks (and by extension governments). This may seem counterintuitive, but as with regulatory capture, central banks are themselves “captured” by carry. During the intensely deflationary carry crashes (such as occurred in 2008), they appear to have no option other than to increase moral hazard further, via even greater intervention and bailouts. In one of the various seemingly contradictory aspects of the carry regime, central bankers seem to have enormous power—their extraordinary power to create high-powered money, set short-term interest rates, and strongly influence financial markets with everything they say—but ultimately they themselves have little latitude to act. Central banks become merely the agents of carry. Their seeming immense power is, in reality, mostly illusory.
Wednesday, July 29, 2020
"...without question, you want to own things that are priced in dollars!
Now, of course U.S. stocks are priced in dollars, right? Right! And, sure, own some (we do), but be careful doing so when they're priced at 1999ish valuations (by several metrics) and the economy has the proverbial Mount Everest yet to climb.
And definitely own other things priced in dollars that aren't historically expensive."
"Our commodities exposure (DBA and DBB being brand new positions) now makes up roughly 20% of our core portfolio; and I suspect we'll be incrementally adding as things progress."
"You're about to experience, at least at the open, what I'll call a classic what-others-think-others-are-going-to-do rally.
The linked phrase above was the subtitle to my April 10 post; I recommend you read it (again?) when you have a chance. Here's a snippet:"My base case that stocks have yet to see the worst is entirely based on data and experience. My illustrating aplenty herein that bear market retracement rallies are the norm is meant to help our readers understand how incredibly risky it is to wade into this snap-back rally as if the bear market is already over. Which, by the way, would make it the shortest on record -- amid the worst economy on modern record! Just seems like a very far-fetched notion if you ask me..."Still my base case, by the way...In a nutshell -- in the short-run:"Keynes suggested circa a century ago that trading (as opposed to, I'll say, investing in) markets is not about assessing fundamentals, it's about what traders think other traders are going to do. And for the more savvy traders, it's about what they think other traders think other traders are going to do.""
"The next few weeks will be telling, as, per the latest news, a number of states are delaying, and or, reversing certain stages/aspects of their reopening plans.
Half of this week's improvement showed up in the commodity space. Which, coincidentally, is something we anticipated and, therefore, have begun to express in client portfolios.
I should tell you, however, that while rising commodity prices does show up as a positive in our macro index, our bullishness there has everything to do with the prospects for a weaker dollar going forward (and, ultimately, with regard to metals, the prospects for infrastructure spending), as opposed to the prospects for robust economic growth anytime soon."
"...in a world where the world's governments are willing to weaponize their equity markets against their respective economic woes, not to mention against each other, stock prices can remain detached from economic reality for what can seem like a very long time. History (those charts I alluded to), however, strongly suggests that the reattachment can be most painful..."From "The Most Bullish Chart for Stocks Right Now" on July 6:
"Now this one guys/gals is the most bullish chart of all for stocks for the remainder of 2020. And it's really incredible. It's the TGA (treasury general account). Think of it as the treasury's piggy bank. The amount you see there amounts to well over a trillion dollars (1.6 in total) of new borrowing (a trillion being the normal entire-year's budget deficit) that essentially wasn't needed to fund the government. They literally issued this debt just to hold onto the cash. So, why? This is an historic first! Well, as you know, or should know, I struggle with conspiracy theories, but this one is so blatant I can't help it. This is Mnuchin essentially assuring that no matter what, whether Congress passes more stimulus, and/or regardless of what the Fed does, he has the firepower to juice the markets during the critical months leading into you-know-what in November.
Yes, this is huge support for stocks, you can bet on it. However, betting big on stocks given everything else going on (and there's lots) is -- despite what I just wrote -- hugely risky. Stocks can still fall in the face of rampant stimulus, I've seen it... If not over the next few months, dear Lord, just wait till we reach the point when they're forced to let up, even modestly, on the life support for stocks:"
To add a little more to our messaging herein that the equity market is historically disconnected from economic reality these days, here's The Wall Street Journal's Nick Timiraos quoting from this week's banks' earnings calls:WFC: “Our view of the length and severity of the economic downturn has deteriorated considerably"
JPM: "The recessionary part of this you’re going to see down the road"
Citi: "The pandemic has a grip on the economy and it doesn’t seem likely to loosen..."
"The treasury will issue debt without restraint and the Fed will purchase it likewise, indefinitely.
Commodities -- gold especially -- are the most obvious trade under these circumstances. US equities stand to ultimately benefit as well, however -- and this will produce great anxiety for the Fed along the way (due to extreme global carry) -- with bouts of extreme volatility, given the unavoidable economic stagnation such a scenario creates, and the potential for huge political disruption -- regulation, taxation, etc. -- as growing income/wealth inequality continues unabated (exacerbated, in fact) going forward.
Foreign market equities, emerging markets in particular, stand to outperform the US markedly for several years to come; but -- while we anticipate adding there incrementally in the near-term -- we're going to let the COVID situation and the coming election play themselves out before we go there in a big way.
The immediate question for equity markets being, given the abysmal state of macro affairs, political risk, geopolitical risk and so on, will there be the 50+% correction that will reset valuations, etc., to the point I believe necessary for the US market to recapture any semblance of a “fundamentally” investable setup -- at all or anytime soon? Bottom line; that risk is there, which demands that we hedge our equity exposure against a major drawdown either until one occurs or until the risk abates…"
Tuesday, July 28, 2020
Monday, July 27, 2020
Saturday, July 25, 2020
"To really drive home for you the precariousness of current conditions from a purely asset performance standpoint, just two things you need to know: gold is up 23.5% on the year, and if you're willing to lock up your money for 10 years, the U.S. treasury will pay you 0.58% on it annually."
Friday, July 24, 2020
Thursday, July 23, 2020
Wednesday, July 22, 2020
Tuesday, July 21, 2020
Monday, July 20, 2020
Thursday, July 16, 2020
Wednesday, July 15, 2020
"Earnings season kicks off next week. There seems to be a bit of optimism (interestingly) around bank earnings. At first blush, given conditions, and interest rates, that's counter-intuitive. If indeed banks surprise to the upside, it'll virtually have to be about trading revenue and, as I've recently learned, the billions in fees they grabbed by underwriting those small business stimulus loans. Although a few, if not all, of the bigs say they're donating those to charity..."
Tuesday, July 14, 2020
Monday, July 13, 2020
Sunday, July 12, 2020
Friday, July 10, 2020
Thursday, July 9, 2020
Wednesday, July 8, 2020
This Week's Message: Never Share Your "Secrets", and Thoughts on Systems (economics and markets specifically) and on Galileo
Sitting here this afternoon I'm honestly feeling a bit numb after spending much of the morning working on a study I've assigned to myself on the rate-of-change dynamics in the price of a certain asset class and what they possibly say about future price movements in the stock market. I actually have about a century's worth of data to score, so it's a bit monotonous, and time consuming, but so far intriguing. Upon conclusion I'll likely highlight my findings herein. If they're indeed telling, well, then I won't be telling much about the study itself. For, if, say, you happen to discover a legitimate market signal beneath all of the noise, you never ever share it, as it'll only "work" as long as the crowd isn't using it.