She’s gunna blow! Yield harpoon aims at tech bubble

Millennials beware! You about to learn what markets are actually about. Stocks don’t only go up. Especially tech stocks. Sometimes they go down and a long way too. Let’s kick this discussion off with some charts. DXY continues its recent strength:

US dollar index (DXY)

US dollar index (DXY)

The Australian dollar was weak against all developed market currencies as risk struggled:

Australian dollar versus EUR

Australian dollar versus EUR

But it remains strong against emerging market forex:

Australian dollar versus emerging markets

Australian dollar versus emerging markets

Big miners were still strong:

BHP, RIO, VALE, AAM

BHP, RIO, VALE, AAL

Emerging markets stocks look very toppy indeed to me:

Emerging market stocks

Emerging market stocks

Even junk bonds are showing a little (tiny!) stress:

High yield bonds EM and US

High yield bonds EM and US

The problem is yields which keep on rising in the US:

US Treasury yields

US Treasury yields

Which always threatens growth stocks. In particular, on this occasion, the great stay at home COVID winners of 2020, tech:

A looks at the daily Nasdaq chart shows that it is has a right shoulder in place in a head-and-shoulders top, now sitting right on the critical support neckline:

Nasdaq technicals

Nasdaq technicals

Literally, one more day of rising yields, and this thing is going to break into a free fall. Let’s face it, it should. High-beta valuations are silly

Stock market valuations

Stock market valuations

High-beta stocks

High-beta stocks

It’s driven by a flood of new retail money, just as the Dot Bomb was. Armed with stimulus cheques and the indestructibility of youth:

New retail investors

New retail investors

New retail investors are kids

New retail investors are kids

Stocks and stimulus cheques

Stocks and stimulus cheques

Do they understand factor rotation?

Yields rise, stocks fall

Yields rise, stocks fall

There is one possible short-term save ahead. The Fed might flip to Operation Twist III tomorrow:

  • It would sell short-dated Treasury holdings and reinvest those at longer durations.
  • This lifts short-term rates while suppressing the long-end of the curve.
  • This helps protect US fixed mortgage rates which are mostly attached to the 30-year yield.

That might save high-beta stocks for one more round at the casino. But, the belly of the curve would probably still sell and that’s still going to hit high-valuation growth, especially tech.

It was circumstances very similar to this that got me interested in markets and macro over twenty years ago. Back then I was the deer in the headlights.

A whole new generation may be about to learn the hard way.

David Llewellyn-Smith

Comments

  1. DingwallMEMBER

    The Fed wont be able to help themselves. They should not step in but the market is the economy apparently

  2. This will take some explaining but I think you will agree
    There is no use pretending that there’s hope for you and me

    Like a harpoon
    Like a harpoon in my chart

    • Very good

      Been re-listening to their breakout. Memories of good times, like the 1996 hottest 100, man those first two songs.

      • Good ol’ Jeb. Ah, so many memories Swampy!
        Just had a review of 1996 hottest 100 list. All solid gold. How good were The Fauves.
        Coppertone by Fini Scad is a track I can’t find on Spotify. Used to have it on CD. I digress.

        • Mining BoganMEMBER

          Saw Jebediah with You Am I. Quite good, a lot of energy. Then Tim Rogers came out, told us to thank the kids then cut loose. Poor Jebediah got forgotten in the madness.

          • Saw them as an intro to Reef. And I think the Black Crowes @ Hifi. Epic.

            Maybe Pushover (!) and Offshore (!).

            How good was Offshore, until the puritannical locals got it shut down. Front row of mosh atop friends shoulders with Henry Rollins crouching for the Illumination intro. Good times.

            I’ve got that Hottest 100 on CD, can shoot you a copy on USB if you like.

  3. United States …

    U.S. mortgage rates jump by most in nearly a year: MBA … Reuters

    https://www.reuters.com/article/usa-economy-mortgages/u-s-mortgage-rates-jump-by-most-in-nearly-a-year-mba-idUSN9N2HQ05G?edition-redirect=uk

    (Reuters) – U.S. mortgage rates jumped by the most in nearly a year last week to their highest level since July on the heels of a surge in Treasury bond yields, which are moving up on expectations of an economic rebound in the months ahead as coronavirus vaccines reach a larger share of Americans.

    The contract rate on a 30-year fixed-rate mortgage, the most popular U.S. home loan, rose by 0.15 percentage point to 3.23% in the week ended Feb. 26, the Mortgage Bankers Association said on Wednesday.

    That was the largest weekly increase since last March and marks the fourth straight weekly rise in borrowing costs. With the increase, mortgage rates have risen 0.37 percentage point from their record low of 2.86% early this year. … read more via hyperlink above …

  4. Christopher Reeve

    So – real estate in the US is booming like Australia – what happens if there is a sudden large spike in mortgage rates on high house prices ? Will the US start another round of global contagion ?

    And will central banks be able to “rescue” banks and economies with massive stimulus ?

    The last crash was brought about by fears of massive debt – will fears of inflation and rate rises spark the next wave ?

  5. I’m interested to see which analogy plays out. Nifty 50 bubble, dot com whatever. With the huge amount of passive and levered passive which contain a high amount of tech and the need to keep yields low, will it be different this time? sure makes sense to sell tech and the reason why I don’t own any etf’s with a huge weighting on growth. But my point is, with that much money sloshing around, will it continue to go into passive and prevent a dot com or nifty 50 as yields stay low?

  6. I remember you talking about your trial by fire when you were here in Perth during the launch of Nucleus Wealth. I’ve never been “all in” and wiped out by a crash, but remember the damage to and slow recovery of my super during the GFC and I hope that’s as bad as I ever have to wear it.

  7. The FNG.MEMBER

    Are lithium and graphite miners considered to be tech?

    Is tech AfterPay? I assume Myfiziq is, which I think is a BS app, why would people sub to this service? Don’t you have a mirror? I’ll tell you youre fat without the sub. Lumen is a real service. Or like Douugh, sub to a service that tells you you’re broke? Wow thanks AI.

  8. Inflation, infrastructure & commodities

    Last night was more confirmation of the rotation into metals and infrastructure.

    I think the US 10 year will be 2% mid year

    Tesla will be cut in half by mid year. Lot of tech with no earnings going to zero or close to it.