Monday, January 10, 2022

Morning Note: I'm a Skeptic

Macro expert Grant Williams and hedge fund manager Erik Townsend sat down last week and discussed the present state of global and market affairs.

This from Williams will sound familiar to clients and long-time readers:  emphasis mine...

"I think the piece of the puzzle that perhaps a lot of people missed was that the market just wouldn't care about anything but liquidity. They wouldn't care about valuations, they would come to mean nothing to people, and that they would be happy to pay crazy multiples for things with either no profits or no chance of making profits for the foreseeable future.

And I think that's the part that was really hard to foresee ahead of times, because you know, that stuff has always mattered. And let's face it, regardless of any kind of suspension of that belief for the time being, we all know that it does matter. If you're buying the shares in a company, you're buying those future cash flows, and if they're negative, at some point, that is not going to work out.

Now, while the vast majority of market participants have the belief that either the Fed has their back, or there's going to be ample liquidity, low rates forever, and a bunch of people forced into putting money into the market as a place to get any kind of return that they can't get the bond market, then, you know, look, it can be sustained, and it has been sustained.

The problem with that, as you've pointed out, and numerous guests on your show have pointed out, is that you're just creating a bigger and bigger problem that will have to be faced on the day when all of this suddenly matters again.

And, you know, it could be rising rates that make it matter, which is why the return of inflation is such a big problem. It could be some kind of collective awakening that makes people realize that they've paid the wrong price for all kinds of different things. Who knows? It could be something that none of us have thought of and generally that's the way these things tend to work out.

But I agree it's amazing where we've gotten to and if you look at how we closed 2021. You know, there's this idea that markets are closing on or around the highs, it's going to make new highs. If you look at some of the data, which is pretty extraordinary, you take away the top performing stocks from these markets, the NASDAQ for example, the average distance from the 52-week high of all stocks in the NASDAQ is 40%. 40% below the 52-week high while the index is just three and a half percent below the 52-week high.

You go through all of these, you go through the S&P and the average stock is almost 12% below its 52 week high, the market closed at or within half a percent of its high.

These are strange divergences that have been covered up by a small group of stocks which have priced in the sensitive buyers because they've been shoved into just about every ETF you can possibly think of. And you know, at some point you sound like a broken record saying this because we don't know when that point will be but financial sanity and financial gravity will return at some point.

Yes (nevertheless), as we continue to preach, there are unique opportunities embedded in the current setup. And while those are indeed to be exploited, diversification, and, in our view, a smart, active hedging strategy is an absolute must given the present precariousness of the equity market... 

With Japanese markets on holiday, the rest of the Asian markets we track leaned green overnight, with 9 (of 15) closing higher. 

Europe's red nearly across the board this morning, with all but 3 of the bourses we follow trading lower as I type.

US major averages are getting hammered to start the week: Dow down 494 points (1.36%), SP500 down 1.73%, SP500 Equal Weight down 1.43%, Nasdaq 100 down 2.34%, Nasdaq Comp down 2.39%, Russell 2000 down 1.72%.

The VIX sits at 22.14, up 18.02%.

Oil futures are down 0.82%, gold's down 0.04%, silver's up 0.29%, copper futures are down 1.85% and the ag complex is down 1.16%.

The 10-year treasury is down (yield up) and the dollar is up 0.44%.

Led by AT&T, Silver and Indian equities -- but dragged by MP (rare earth miner), ALB (lithium miner), carbon credits, AMD (chip maker) and solar stocks -- our core allocation is down 0.81% to start the session.

The Fed, in particular, has done a masterful job convincing the masses of untutored investors that market, and economic, cycles can be effectively muted by the printing of money and the suppression of interest rates every time financial winter threatens. Well, I'm a skeptic...

From Strauss and Howe's The Fourth Turning:

"More recently, the West began using technology to flatten the very physical evidence of natural cycles. With artificial light, we believe we defeat the sleep-wake cycle; with climate control, the seasonal cycle; with refrigeration, the agricultural cycle; and with high-tech medicine, the rest-recovery cycle.
"Triumphal linearism has shaped the very style of Western and (especially) American civilization. Before, when cyclical time reigned, people valued patience, ritual, the relatedness of parts to the whole, and the healing power of time-within-nature. Today, we value haste, iconoclasm, the disintegration of the whole into parts, and the power of time-outside-nature."

Have a great day!

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