It's always a healthy endeavor to challenge your own views about the market and anything else that you have a belief about. After all, nobody can know with certainty what the future holds for the market and so to have an unwavering view is the wrong approach. It's quite often the case market pundits/gurus take a particular view on the market and dig in their heels no matter what, even when the market had made a complete and utter fool of them. Pride, ego, dogma all get in the way. To change their view and admit being wrong would be an act of weakness according to them. I've said this before, fuck pride and check your ego at the door. The market is not an exact science yet I've seen people act as if they cracked the code. Sometimes you will find a guru get a hot hand and for a period of times he/she looks like a genius only for them to go from genius to goat. This is why you should never take anyone's view's as gospel, no matter how right they have been in the past and why you have to own your own view. I do my best to synthesize my views by gathering objective info that has had predictive power, reading commentaries from people who have a good track record and by using experience/intuition. I've done this long enough to know that there are times when adjustments need to be made to my outlook or an outright 180 degree pivot i.e. an admission of being wrong.
I've been stating here for a while that I believe a bullish resolution will ultimately result here mainly due to evidence that indicates that investors in general have been primarily bearish/skeptical in the face of a prolonged market rally - this has been the primary thesis of my general bullishness during the entire bull market since 2009. The few times when complacency started creeping in, the market would eventually have a notable correction turning complacency back to fear/skepticism thus allowing the bull market to resume. But what if we are at a point where the economic fundamentals take such a turn for the worse that it would override the bullish implications of bearish sentiment? This is what happened in 2008. Bearish sentiment didn't matter because the fundamentals were so bad, mind you, 2008 was a 1 in 100 year type storm. In a bear market when economic fundamentals are deteriorating, bearish sentiment is only natural and therefore loses contrarian implications until it reaches great extremes. The same can be said about bullish sentiment in a bull market.
Right now the economic fundamentals in the US are still generally good. There has been a lot of hysteria about the yield curve predicting an immanent recession but there has been no material signs of weakness in the hard data that would suggest one. Earnings are still growing and initial claims for unemployment insurance are trending flat/down for the past 12 months. If you look at previous recessions you will notice that claims had been creeping higher for the preceding 12 months or so. So, as scary as the markets and headlines can be, it's critical to be as objective as possible. Can the yield curve be suggesting that we will soon see notable deterioration in the economy? It sure can, but more supporting evidence needs to be seen and as I stated in prior posts, the fact that everyone is making such a big deal about the yield curve suggests to me that it won't be as effective in the recession call this time, much like how I remember in 2001 everyone jumping for joy when the Fed cut rates by 50 bps because history showed that the market would be higher in 12 months. But I would be lying if I said that I have no concerns about the yield curve. I do. It has to be respected but I would have to think that the thirst for positive yield around the globe must be distorting the message of the bond market to some notable degree however.
What really bothers me in the antics of Trump. When he bragged about the stock market making new record highs, that was quite cringe worthy. I actually agree with his stance on China and his criticism of the Fed but the manner in which he expresses his opinions are quite classless to say the least. He seems to be going off the rails with his constant bashing of people and media on twitter which makes me think that one day he could somehow cause a black swan (orange swan?) type of event.This is something that lots of people feared from the 1st day he took office. However, let's always remember this...despite Trump's hard line stance on China and the Fed you would have to assume he doesn't want to sabotage himself with elections taking place next year. I get the sense that all of these brutal twitter tactics could be just a front/posturing. He will end up softening his stance and get a trade deal done sooner rather than later I would suspect. Trump watches the stock market and uses it as leverage. He tends to announce higher tariffs when the stock market is near a high and then tries to sooth the market after it has come down. Ultimately, he wants a higher stock market and strong economy come election time next year. Trump could very will turn out to be an evil genius or utter buffoon which I'm sure lots of people already think the latter applies.
September has the potential to be turning point in the market with the FOMC meeting mid month and scheduled US China trade talks. Let's keep an eye on expectations for these. If people are too hopeful, we would probably see another downleg to this correction if there's anything short of a decisive rate cut and dovish stance by the Fed and/or meaningful progress on trade talks.
Tuesday, August 27, 2019
Monday, August 19, 2019
The most telegraphed recession? I wouldn't bet on it!
Recently the 2 and 10 year US government treasury yield curve spread became inverted creating all kinds of hysteria and fears about a recession, compounding the negative sentiment created by the trade war fears. Here are some headlines that appeared last Wednesday in the Globe and Mail.
"Inverted yield curve rattles investors wary of dying stock bull market"
"US Treasury bond curve inverts for first time since 2007 in recession warning"
"Countdown to recession: What an inverted yield curve means"
"Buying this dip is a losing proposition at this stage of the market cycle"
These headlines tell you the wall of worry is very much alive and well. If a US recession is immanent it would be the most telegraphed recession of all time! We know that Mr. Market doesn't make things this obvious. As per the motto of this blog which has held true over and over again, Mr. Market makes fools of the majority. The reason why is because the market is all knowing of whatever the consensus expectation is and hence it gets priced in accordingly. All it takes is a little bit of news that goes contrary to the consensus and it will send the market sharply in the opposite direction. Furthermore, whenever there is a such a widely held concern/fear, you can bet that government authorities are well aware of it and will get motivated to take action to counter it in this post 2008 world. We are now hearing talks that European authorities are mulling over increased spending plans which is causing futures to surge as I type this. There is also hopes that Powell will hint at accelerated rate cuts in the Jackson hole meeting this week.
Could these hopes of Stimulus and Jackson hole be premature? Yes, but it just goes to show you that all it takes is a little bit of positive news in this environment of entrenched negative sentiment to trigger a strong upside move in the market.
A good analogy to describe the market would be this. If you know you're going to get punched in the head, you will put your guard up to protect yourself. You would still feel the punch but the force of it will be blunted and you won't get knocked out - that is the equivalent of what's been happening to the market recently with the trade ware and interest rate hysteria. These concerns have been well known and well feared all year which is why the market has only corrected and not cratered every time there is a flare up of these fears. Investors/traders have had their guard up the entire year for the most part. The punches that knock you out are the ones you don't see coming.
Ultimately, I expect a bullish resolution to this but as I've said many times, the ST is always difficult to navigate because you never know what the headlines are going to be when you wake up in the morning or if fickle traders will flip flop from being too negative to too positive. Chasing the market to either the upside or downside has been a disaster for traders during this corrective phase.
Let's talk about bonds again....as I type this, the consensus view is that low US bond yields are not only justified but a bargain because rates are negative in Europe and Japan. This view is coming AFTER when bonds have had one the biggest rallies in years and are extremely overbought on multiple time frames! It reminds me of the global synchronized growth consensus of stocks in early 2018 at a time AFTER the market was extremely overbought on multiple time frames....we all know how that played out. The question I have for the bond bulls is this....where the fuck were you a year ago when bond prices were much lower? Oh wait...you were telling everyone to avoid bonds like the plague because the fed was raising rates! You were telling people that bond prices were overvalued and that the 10 year yield was heading to 4-5%. You were telling people who owned balanced portfolios that they need to look for an alternatives for the traditional fixed income part of their portfolio.
Right now expectations for bonds are very high at a time in which they are very overbought, not to mention having received a ton of inflows, again, just like with stocks coming into 2018. This makes bonds ripe for a classic rug pull from Mr. Market. At the very least, it warrants one to not make any new purchases of bonds. In my view bonds are in a position that is vulnerable to a strong reversal of its primary trend the moment there are signs of economic and inflation upturns. I would expect that a year from now we will see bond prices notably lower and hence yields notably higher than they are now.
"Inverted yield curve rattles investors wary of dying stock bull market"
"US Treasury bond curve inverts for first time since 2007 in recession warning"
"Countdown to recession: What an inverted yield curve means"
"Buying this dip is a losing proposition at this stage of the market cycle"
These headlines tell you the wall of worry is very much alive and well. If a US recession is immanent it would be the most telegraphed recession of all time! We know that Mr. Market doesn't make things this obvious. As per the motto of this blog which has held true over and over again, Mr. Market makes fools of the majority. The reason why is because the market is all knowing of whatever the consensus expectation is and hence it gets priced in accordingly. All it takes is a little bit of news that goes contrary to the consensus and it will send the market sharply in the opposite direction. Furthermore, whenever there is a such a widely held concern/fear, you can bet that government authorities are well aware of it and will get motivated to take action to counter it in this post 2008 world. We are now hearing talks that European authorities are mulling over increased spending plans which is causing futures to surge as I type this. There is also hopes that Powell will hint at accelerated rate cuts in the Jackson hole meeting this week.
Could these hopes of Stimulus and Jackson hole be premature? Yes, but it just goes to show you that all it takes is a little bit of positive news in this environment of entrenched negative sentiment to trigger a strong upside move in the market.
A good analogy to describe the market would be this. If you know you're going to get punched in the head, you will put your guard up to protect yourself. You would still feel the punch but the force of it will be blunted and you won't get knocked out - that is the equivalent of what's been happening to the market recently with the trade ware and interest rate hysteria. These concerns have been well known and well feared all year which is why the market has only corrected and not cratered every time there is a flare up of these fears. Investors/traders have had their guard up the entire year for the most part. The punches that knock you out are the ones you don't see coming.
Ultimately, I expect a bullish resolution to this but as I've said many times, the ST is always difficult to navigate because you never know what the headlines are going to be when you wake up in the morning or if fickle traders will flip flop from being too negative to too positive. Chasing the market to either the upside or downside has been a disaster for traders during this corrective phase.
Let's talk about bonds again....as I type this, the consensus view is that low US bond yields are not only justified but a bargain because rates are negative in Europe and Japan. This view is coming AFTER when bonds have had one the biggest rallies in years and are extremely overbought on multiple time frames! It reminds me of the global synchronized growth consensus of stocks in early 2018 at a time AFTER the market was extremely overbought on multiple time frames....we all know how that played out. The question I have for the bond bulls is this....where the fuck were you a year ago when bond prices were much lower? Oh wait...you were telling everyone to avoid bonds like the plague because the fed was raising rates! You were telling people that bond prices were overvalued and that the 10 year yield was heading to 4-5%. You were telling people who owned balanced portfolios that they need to look for an alternatives for the traditional fixed income part of their portfolio.
Right now expectations for bonds are very high at a time in which they are very overbought, not to mention having received a ton of inflows, again, just like with stocks coming into 2018. This makes bonds ripe for a classic rug pull from Mr. Market. At the very least, it warrants one to not make any new purchases of bonds. In my view bonds are in a position that is vulnerable to a strong reversal of its primary trend the moment there are signs of economic and inflation upturns. I would expect that a year from now we will see bond prices notably lower and hence yields notably higher than they are now.
Tuesday, August 6, 2019
Is the trade war a fugazi?
Since my last post markets climbed to hit new all time highs before suffering a sharp but relatively shallow correction. When the market was at its all time high there was little celebration with the exception of Trump on twitter. Equity fund flows continued to be generally negative/flat. There was a bit of complacency in the put/call ratios and some measures of sentiment like Investor's Intelligence and AAII sentiment did perk up a bit but no signs of the type of high complacency we saw in early 2018 which ultimately led to a 20% drop in the stock market.
Let's look at what triggered this correction. It was once again Trump induced via a slapping of additional tariffs on China. It's arguable as to the exact impact of the "trade war" but from what I can see it's going to end up being a fugazi, i.e. a red herring, i.e. it's not going to matter much when all is said and done. Ask yourself what has been the main drivers of the US economy? Trade with China would have to rank low on the list. This bull market has not been driven by US consumers buying cheap goods from China nor will it ever be.
Look back to what caused US recessions in the past - they were home grown issues that were at the heart of the US economy. They were credit crunches mainly due to housing downturns with an notable exception in 2000 which was due to a tech boom gone bust. In 2015/2016 when the energy sector had a major downturn, that was a good example of something that could have caused a recession since it was a notable sector in the US economy, but it didn't because it turned out not to be a large enough sector to infect the broader economy plus lower energy prices was a boon for consumers and non-energy businesses. It seems highly unlikely to me that any fallout from Chinese trade wars would be large enough to derail the US economy because it simply is not large enough to matter. What it does do is create angst, uncertainty and hesitancy which results in these types of corrections. This trade war may delay capital spending to some degree but I doubt it will be material enough to matter.
Throughout these past 10 years we have seen all sorts of worries/problems that made everyone fret. For instance in 2010 it was PIGS, in 2011 it was Moody's downgrade of US government debt, in 2013 it was the taper tantrum, in 2015/2016 it was energy. Ultimately, none of these things mattered much because they were not material enough to derail growth in the US economy.
Remember all the worries last year about the $4 trillion corporate refinancing tsunami that was to set to hit starting 2019? Well, thanks to plummeting bond yields, corporations and consumers are be able to refinance at quite favorable terms...and they can thank the pessimists for that! Higher interest rates were a headwind in 2018 and they are now a tailwind in 2019.
So far this recent drop in the market appears to be wiping out the green shoots of complacency that I mentioned previously. Put/call ratios are soaring and the VIX has notably spiked. Let's see how AAII sentiment turns out this week. History suggest AAII bulls will be running for cover. It's always difficult to pinpoint the ST direction of the market but so far this has the look and feel of a correction, not something nastier.
A few comments about bonds. They are currently at the most overbought level since July 2017 if you look at how far below the 10 year yield is from its 200 DMA (33% below!). At the very least this suggests bond yields should be close to a medium term bottom and maybe even a long term bottom. Sentiment and fund flows for bonds also confirm this. A year ago everyone hated bonds and there were no "experts" recommending investors buy them as the expectation was for higher interest rates. Now everyone seems to think that US bonds are a bargain even with the 10 year at sub 2% because of the $14 trillion in negative yielding bonds out there. Always remember the motto of this blog...I will be looking to buy puts on TLT soon.
Let's look at what triggered this correction. It was once again Trump induced via a slapping of additional tariffs on China. It's arguable as to the exact impact of the "trade war" but from what I can see it's going to end up being a fugazi, i.e. a red herring, i.e. it's not going to matter much when all is said and done. Ask yourself what has been the main drivers of the US economy? Trade with China would have to rank low on the list. This bull market has not been driven by US consumers buying cheap goods from China nor will it ever be.
Look back to what caused US recessions in the past - they were home grown issues that were at the heart of the US economy. They were credit crunches mainly due to housing downturns with an notable exception in 2000 which was due to a tech boom gone bust. In 2015/2016 when the energy sector had a major downturn, that was a good example of something that could have caused a recession since it was a notable sector in the US economy, but it didn't because it turned out not to be a large enough sector to infect the broader economy plus lower energy prices was a boon for consumers and non-energy businesses. It seems highly unlikely to me that any fallout from Chinese trade wars would be large enough to derail the US economy because it simply is not large enough to matter. What it does do is create angst, uncertainty and hesitancy which results in these types of corrections. This trade war may delay capital spending to some degree but I doubt it will be material enough to matter.
Throughout these past 10 years we have seen all sorts of worries/problems that made everyone fret. For instance in 2010 it was PIGS, in 2011 it was Moody's downgrade of US government debt, in 2013 it was the taper tantrum, in 2015/2016 it was energy. Ultimately, none of these things mattered much because they were not material enough to derail growth in the US economy.
Remember all the worries last year about the $4 trillion corporate refinancing tsunami that was to set to hit starting 2019? Well, thanks to plummeting bond yields, corporations and consumers are be able to refinance at quite favorable terms...and they can thank the pessimists for that! Higher interest rates were a headwind in 2018 and they are now a tailwind in 2019.
So far this recent drop in the market appears to be wiping out the green shoots of complacency that I mentioned previously. Put/call ratios are soaring and the VIX has notably spiked. Let's see how AAII sentiment turns out this week. History suggest AAII bulls will be running for cover. It's always difficult to pinpoint the ST direction of the market but so far this has the look and feel of a correction, not something nastier.
A few comments about bonds. They are currently at the most overbought level since July 2017 if you look at how far below the 10 year yield is from its 200 DMA (33% below!). At the very least this suggests bond yields should be close to a medium term bottom and maybe even a long term bottom. Sentiment and fund flows for bonds also confirm this. A year ago everyone hated bonds and there were no "experts" recommending investors buy them as the expectation was for higher interest rates. Now everyone seems to think that US bonds are a bargain even with the 10 year at sub 2% because of the $14 trillion in negative yielding bonds out there. Always remember the motto of this blog...I will be looking to buy puts on TLT soon.
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