Tale of the Tape: Aug 4th 2020 marked lowest 10-year US Treasury yield (0.5%) in history of republic; past 2 years yield jumped 300bps to peak at 3.5% June 14th; regime change in 2020s = higher inflation, higher yields, lower returns, but “recession shock” has allowed 10-year yield to drop to 2.7% (Chart 3) = oxygen for bear market rally.
The Price is Right: from lows June 16th long duration assets up big…biotech 33%, China tech 31%, Bitcoin 29%, homebuilders 20%, validation of bond rally; but other big lead indicator = oil and Brent yet to break $100/b & give all-clear on “peak yield” theme.
Weekly Flows: $27.0bn to cash, $5.6bn to equities (1st inflow in 6 weeks), $3.6bn to bonds (largest since Mar’22), $0.9bn from gold.
Flows to Know: biggest inflow to HY bonds in 21 mos ($4.8bn); biggest outflow from TIPS in 3 mos ($1.4bn); largest inflow to US stocks in 6 wks ($9.5bn); largest outflow from tech in 9 wks ($0.2bn); outflows from resources slowing ($1.7bn – Charts 14-17).
BofA Private Clients: $2.9tn AUM…62.3% stocks, 18.7% bonds, 11.9% cash; private clients v big buyers bonds past 4-wks (Chart 13); ETF flows…buying defensives (staples, utilities, and low-vol), selling cyclicals (materials, consumer, financials) past month.
BofA Bull & Bear Indicator: remains at 0, max bearish, stuck at 0 since June 15th.
Dove at First Sight: “inflation shock”…check, “rates shock”…check, “recession shock”… check; and 24-hours after abandoning “forward guidance”/embracing “data dependence” US enters “technical recession”; since catalyst for bear market was repricing of interest rates (took SPX from 4800 to 3800), yields now falling & equities rallying makes sense; we remain of view this is a bear rally, would fade SPX >4200, and true lows SPX <3600.
Lemons…Lemonade: too early to reposition for “Fed pivot” bull trade but as it approaches in next 6-9 months…long-duration Treasuries (obvs), HY bonds (where risk deployed first), small cap/real assets (2020s inflation), EM assets (dollar debasement), industrials (infrastructure), Asian consumer (reopening), and at lows best strategy humiliated “60-40” strategy, are trades that work.
Bears are the worst people to listen to at the lows: just as bulls are the worst to listen to at the highs; still optimism that “Fed done by Thanksgiving = lows are in” premature…
• inflation remains v high everywhere (see Germany – Chart 4), inflation a big political problem (see Biden job approval ratings – Chart 5),
• neutral Fed funds (3%-ish) by definition not a “tight” Fed funds; de minimis Quantitative Tightening thus far (Fed has barely sold $1 of every $100 bonds it bought past 2½ years – $5tn),
• big stock rally SPX >4400 unlikely to encourage Fed pause/cut given Wall St (6X US GDP – Chart 6) drives Main St,
• EM has led global tightening cycle and still tightening (though developed market central banks now hiking more aggressively – Chart 7)
• 1967, 1973, 1980, 1998…examples of premature Fed easing that caused inflation, required policy reversal & recessions to correct (Chart 8).
PIVOT: we’ll get there but not enough PIVOT catalysts thus far…
• Payroll: payrolls <100k, initial unemployment claims >300k,
• Inflation: headline & core CPI prints of 0-0.2% (would still leave headline >6%, core >4% year-end – Chart 9),
• Volatility: VIX >50, /MOVE >150, HY spreads >600bps,
• Oil: WTI <$80/barrel,
• Treasuries: yield curve inverts into recession, but always “bull steepens” as recession begins (Chart 10).
Catalysts for final bear move: higher-than-expected inflation, fresh geopolitical policy mistakes/ new highs in oil, European stagflation/energy crisis, US/EM/EU credit events, contraction of housing prices (activity weakening v sharply – Charts 11-12) causes deeper recession than expected next 12 months (housing bubble has been global…US, UK, Canada, Australia, New Zealand, Sweden, Germany…and of course China).
Still the most sensible take I’m reading anywhere…
But, let’s not forget that positioning in the mad market often holds sway for irrational periods of time. The Market Ear:
Let’s make it worse and be very one-sided and only focus on the positives to really challenge the consensus bearish view. Time for a thread of only bullish observations
Ok, sentiment analysis is not God’s gift to investing and trading but it is for sure an input in the overall analysis. And it does not support an outright max short right now….
Global net flows see most positive 2 days in a while, but hardly extreme. Eq L/S funds only up ~1% MTD vs. global equities +6%, hurt by low nets and negative alpha spreads as their shorts outperformed
Despite a large amount of short covering seemingly already having taken place, Morgan Stanley’s PB Strategic Content Team notes that several metrics show that the short base is hardly cleaned up. The 30-day build in new net shorts in S&P 500 futures is at 9% of open interest, which is 2 z-scores more short than 1Y averages (although that’s off of the recent peak of 14%, 3.1 1Y zScore). And in cash, although single-name + ETF shorts were covered in +2 zScore magnitude over the last week, short interest as a % of market cap is still in the 94th 1Y %ile. (Morgan Stanley)
One of the strongest conviction calls over the past few months has been that the “E” was wrong and that consensus numbers had to come down. After more than 50% of S&P500 reporting it seems like sell-side analysts were not delusional…..Since the beginning of the earnings season, 2Q22E EPS has been revised up 1.6%,and FY22E EPS has been revised down with small -0.6% (+9% y/y) and FY23E EPS has been revised down -1.2% to $246.33 (+9% y/y).
This is playing pout big time (from Monday): Systematics have made a “silent” come back, but things could get much more dynamic should we squeeze even higher. Recall what GS wrote on Monday:
Skew over the next 1 month: FLAT = $41B to buy / DOWN BIG -$15B to sell / UP BIG +$162 BILLION TO BUY
Don’t forget extremely poor liquidity tends to work both ways….
The computer and model driven crowd has experienced huge agony and p/l pain during this latest market squeeze. They have all been running extremely light equity longs. Good luck to those that have had to chase longs in this poor liquidity environment. Mission impossible…
DB
DB
Mb Fund is still very underweight equities, accumulating bonds, and very overweight cash tilted to USDs. We await the fulsome global recession.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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