Morgan Stanley Goes Rogue, Is Bullish On Bonds Because Frankly, Consensus Is ‘Usually Wrong’
As you know, the ongoing debate about where 10Y yields are heading and about what the bond selloff presages for equities is, well, it’s ongoing.
And when I say “ongoing” I mean it’s devolved into a veritable obsession. Over the weekend, Goldman “stress tested” the economy for the impact of a rate shock that would theoretically drive 10Y yields to 4.5% by the end of the year. That note came a week (give or take) after they upped their year-end forecast for 10Y yields to 3.25%. Other banks have followed suit.
Part of Goldman’s stress test involved projecting a 20-25% decline in U.S. equities, a precipitous dive that would feed through to the real economy by way of tighter financial conditions.
One thing to note about this whole debate is that last year, consensus was also overwhelmingly bearish USTs and we all know how that turned out. So it’s at least worth considering whether everyone might be wrong.
“Pershing Gold Begins Preliminary Construction Activities at Relief Canyon”
…to start the guffaws and yoks. Seriously folks, what the blinking flip is a “preliminary construction activity”? Carrying some sacks of concrete over to a site? Putting the kettle on to make some tea before getting down to business? Putting on overalls? Ah wait, it’s this:
“On February 13, 2018, Ames Construction began initial land clearing in preparation for potential construction at Relief Canyon, including future heap leach pads, haul roads and waste rock storage facilities.”
We then get a photo of this preliminary construction activity and it turns out to be…
Divergent: It’s Dalio (And Asness) Versus Everyone Else as Money Flows to Europe Stocks (Fed Tightening As ECB Maintains Accommodating?)
Money is following to European stocks as jitters struck the US stock markets and The Federal Reserve continues to slowly normalize its monetary policy.
(Bloomberg) — Billionaire Ray Dalio has $18.45 billion in bets against Europe’s biggest stocks. Most of the rest of the investing world is headed in the other direction.
U.S. stocks lost $9.7 billion in investment so far this month while Eurozone shares have gained $3.2 billion, according to data compiled by Bloomberg. Peers of Dalio’s firm, Bridgewater Associates, are mostly wagering that Eurozone equities will rise.
“I’m surprised. That’s a big bet. Dalio and his team are very confident,” said Rick Herman, managing director of asset allocation who helps oversee about $30 billion at BB&T Institutional Investment Advisors Inc. “That’s definitely out of consensus. European stocks are cheaper, and they also have stronger earnings growth.”
Dalio has always marched to the beat of his own drummer, so his big short position, especially when other hedge funds are betting in the opposite direction, could be seen in that context.
For a market analyst there is an irresistible temptation to seek out one or more historical parallels to the current situation. The idea is that clues about what’s going to happen in the future can be found by looking at what happened following similar price action in the past. Sometimes this method works, sometimes it doesn’t.
Assuming that the decline from the January-2018 peak is a short-term correction that will run its course before the end March (my assumption since the correction’s beginning in late-January), the recent price action probably is akin to what happened in February-March of 2007. In late-February of 2007 the SPX had been grinding its way upward in relentless fashion for many months. The VIX was near an all-time low and there was no sign in the price action that anything untoward was about to happen, even though some cracks had begun to appear in the mortgage-financing and real-estate bubbles. Then, out of the blue, there was a 5% plunge in the SPX. On the following daily chart this plunge is labeled “Warning shot 1″.
This week the “Chart of the Week” is a rather peculiar indicator on inflation. The global inflation outlook has been gaining considerable interest as the global synchronized economic upturn gathers pace and central banks start to think about normalizing policy. Clearly some (e.g. the Fed) are more advanced on this than others (e.g. the BOJ and ECB). Inflation has become the baby elephant in the room while the big elephant in the room is still the global turning of the tides in monetary policy.
Anyway, on to the chart (which featured in a discussion on the outlook for the US Dollar Index). The dark blue line is a composite of terms from Google Search Trends designed to capture search interest in inflation (e.g. terms such as “higher inflation”, “why are prices so high”, “prices going up”, “inflation protected”, etc). The main point is that there seems to be a surge in interest in inflation, and that could be an harbinger of things to come.
If you had asked me a week ago what I thought the probability was that we’d resume the downtrend and take out the lows of early February, I would have probably said 80%. Last week’s action (augmented by this morning’s) takes that down to more like 20%. It seems that, once again, the BTFD crowd was right. It sucks.
Oddly, the big tumble early in this month took place on pretty much no distinguishable news, and the same can be said for the recent lift. Let’s face it, the Dow has gone up thousands of points in just a couple of weeks, and no one can point to any real reason why. It’s pretty much like the “V-dip” didn’t need to take place at all (except to wipe out the unfortunates who owned XIV).
Anyway, we seem to be back in the godawful up-half-a-percent-every-single-day mode that we had been in before all the excitement began, and if we cross above the blue horizontal below, then we’ll just grind out way into the “DMZ” (tinted green) leading up to all the overhead supply. Simply stated, for me, the market has become boring and nauseating once again.
The following is an excerpt from this week’s edition of Notes From the Rabbit Hole, NFTRH 488. For NFTRH bonds are not just an asset class ‘throw-in’ but instead are a key indicator set to the entire modern macro. Insofar as it may be time to use them for portfolio balance (I am currently long SHV, SHY, IEI & IEF), so much the better. Many could not wait to buy bonds during US ZIRP global NIRP operations, but today they pay better interest and have a contrarian edge with the entire herd bracing for a bear market.
A subscriber asks for comment on sentiment in 1-3 year bonds and what it would take for me to “issue an all out buy signal” on them. He is a new subscriber and has not been through the agony and torment of my frequent disclaimers on the subject of how I am just a lowly participant who would not issue all out buys, sells or anything else for others. :-(
What I would do however, is tell you what I am doing and last week to my recent buys in IEF (7-10yr) and IEI (3-7yr) I added SHY (1-3yr). The old saying goes “real men trade the long bond” and I guess I am not a real man because I don’t want to touch that far end (20+ years) of the curve at this time.
I mentioned in a Tweet on Friday that the low volume on Friday’s rally was a bit concerning. The study below is one I featured in the subscriber letter this weekend. It examined other times substantial rallies occurred during uptrends on very light volume.
Stats here suggest a downside edge. Perhaps not a huge edge, but in my view one that appears strong enough to warrant some consideration when establishing my short-term bias. So traders may want to keep this in mind as we begin a new week. I will also note that I ran the same test, but switched the volume requirement to “NOT the lightest in 20 days”. Of course there were many more instances. With volume not coming in extremely low, the average trade flipped to moderately positive across the board. This suggests the low volume is a factor.
We have been promising to get back to the topic of capital destruction, which we put on hiatus for the last several weeks to make our case that the interest rate remains in a falling trend. Today, we have a different way of looking at capital destruction.
Socialism is the system of seeking out and destroying capital. Redistribution means taking someone’s capital and handing it over as income to someone else. The rightful owner would steward and compound it, not consume it. But the recipient of unearned free goodies happily and uncaringly eats it up. Socialism is not sustainable. It inherits seed corn from a prior, happier system, and it lasts only as long as the seed corn.
There are different flavors of socialism. The 20th century witnessed an aggressive totalitarian form. Both communism and Naziism feature military occupation of domestic territory and conquest of foreign lands. Few people willingly feed whatever they have into the sausage grinder of State sacrificial collectivism. And so totalitarian socialism has armed thugs all over the streets, both open military and secret police. There are frequent killings, of those suspected of disloyalty or holding back small scraps. In their constant fear of uprising, they use disappearances, interrogations, and torture to root out the names of traitors to their bloody revolution.
The Shanghai Composite traded as high as 3,587 intraday on Monday, January 29th, a more than two-year high. This followed the S&P500’s all-time closing high (2,873) on the previous Friday. On February 9th, the Shanghai Composite traded as low as 3,063, a 14.6% decline from trading highs just nine sessions earlier. In U.S. trading on February 9th, the S&P500 posted an intraday low of 2,533, a 10.7% drop from January 26th highs. Based on Friday’s closing prices, the Shanghai Composite had recovered 43% of recent declines and the S&P500 70%.
Global equities markets demonstrated notably strong correlations during the recent selloff. Few markets, however, tracked U.S. trading closer than Chinese shares. From the Bubble analysis perspective, tight market correlations provide confirmation of the global Bubble thesis. It’s also not surprising that Chinese markets were keenly sensitive to the abrupt drop in U.S. stocks. The U.S. and China are dual linchpins to increasingly vulnerable global Bubble Dynamics. Moreover, intensifying fragilities in Chinese Credit – and finance more generally – ensure China is keenly sensitive to any indication of a faltering U.S. Bubble.