Records Fall Like Leaves
1,175 words – a 4 minute read.
Another ATH for the S&P, # 55 ytd, while Bitcoin makes a new high as BITO takes the stage. TIP auctions see record demand as various commodities hit decade long highs on a regular basis. Inflation breakevens hit levels not seen in a decade while demand for China Govt debt in USD is 6x oversubscribed.
Its almost like pick your record, there are so many, falling so fast that the analogy of Fall leaves falling from the sky seems pretty apt (at least to this New Englander for whom Fall is the favorite season).
What does it all mean though? I think that’s what we as investors need to ponder – what does it mean? Should one sell into the (reignited) Crypto craze? What’s driving ATHs in the S&P – it isn’t tech so… could it be Value making its move? This broad commodity breakout – isn’t it a flash in the pan – aren’t we digitizing everything – how will Commodities fit into the Metaverse?
And what about those inflation breakevens with the 5 yr. suggesting 2.9% inflation over the period & the 10 yr. suggesting 2.6% average inflation for the coming decade? Is that a good or a bad thing? The media slant certainly seems to suggest it’s a bad thing – the worst inflation expectations in a decade at least.
First of all, toss all the decade long analogies – we don’t want the coming decade to be like the last low growth, low inflation, post GFC decade. In fact, a little inflation could go a long way to setting up a more robust growth path, stimulating cap ex and productivity booms, improving wages, reducing inequality etc. etc.
Some inflation – like 3% instead of 1-2% is arguably a good thing and we as investors should welcome it. Its way better than 1% inflation or deflation and way better than sustained 5-6% inflation. As long as Central Banks can keep their nerve and not spike rates we should all be fine.
Worryingly, the Fed Funds Futures suggest the Fed may fail to do that and instead start hiking as soon as tapering as done – with the August FFF rate at .3% suggesting the near certainty of a rate hike. I disagree and expect the Fed to maintain its stated separation between taper end and rate liftoff. That suggests an impending rally in short duration and further weakness at the long end.
Gold seems the odd man out as inflation worries spike, Bitcoin takes the mantle as the modern way to hedge and gold just…. sits there. Together with its buddy Silver, it just sits there, missing out completely on the broad Commodity complex party. Seems like an opportunity to me.
One area not hitting records is the USD as it continues to chop around the DXY 93-94 level.I expect the dollar to roll over as Taper begins, providing another leg up for the commodity complex.
What about the SPY’s latest ATH? It just reinforces the “pothole” market analogy I wrote about some months ago – temporary pullbacks dot the timeline, soon to be forgotten as the market marches higher, fueled by its twin engines: Growth and Value.
The real point is this: IUSV, the US Value ETF, just hit its own new 52 week high. Yes the rotation from Growth to Value is well under way & there is a long way to go. Long duration growth stocks (the low growth, low inflation winners) remain the most expensive EVER vs the broad market.
Tech is one area that is unlikely to hit new highs any time soon. Our buddy Callum at Top Down Charts notes that on a sector neutral PE basis the US has never been more expensive vs ROW. We remain OW the ROW.
The two other rotations noted in last month’s “Transition Time” piece have also begun – from liquidity to earnings driven markets and from UST bull to bear market. JPM is just out with its first Q3 EPS read and its solid with top and bottom line growth BTE across Europe, Japan and the US. Top line beats (+13%,11%, 8% in US, EU and Japan) are important for all those margin fear mongers… inflation allows for pricing power. Hard to see big stock market weakness with double digit EPS growth.
With the 10 yr. UST bond flirting with Spring highs around 1.7% one wonders how long it will take to break 2% and the long, long , long downtrend line stretching from 1981 to 2021. Invesco came out with its rate outlook recently and penciled in a 2.2% 10 yr. UST yield a yr. from now. That seems about right to me. We remain deeply underweight Bonds.
Speaking of bonds did you note the surge in demand this week for China’s $4B USD Govt bond sale? I mean, China’s a mess right? Property market implosion, weak growth, energy shortages, stay away right?
Wrong! At least that’s what 6x oversubscribed says to me with yields just a smidgen over UST rates. And have you noticed the action in CHY? Given the news flow, one would think its been hammered, maybe not as bad as Brazil’s Real (now that’s a hammering – off 6 of last 7 weeks) but hammered. Here again the reality is different – the Yuan has been up 4 weeks in a row and is at a 5 month high vs the USD. Our flagship Global Multi Asset (GMA) Model is long both China equity (up on weak Q3 GDP data) and China debt (CBON approaching new 52 week H).
No recent record breaking in Japan but it is worth noting that its October preliminary PMIs finally climbed back above 50 for the 1st time since April. For those long Japanese equity (as we are) this is a very good sign as lockdowns end and the cyclical recovery picks up. Australia’s PMIs also broke back above 50 – 1st time since June. The Asian reopening sets the stage for 2022’s synchronized global expansion.
Looking forward BofA ‘s famed FMS notes that growth expectations have turned negative for the first time since April 2020 while cash levels have been raised to 15 month highs. Seems like a good set up for continued moves higher. As an old Morgan Stanley guy it pains me to say this but I am with Goldman who just called for a melt up into YE as systematic funds go long, seasonality improves and buybacks come into play. GS notes that Nov & Dec are the two biggest months for stock buybacks and expect the coming two months to fit the pattern.
Ahead lies COP26, the Fed’s upcoming taper announcement and potential passage of the dual track Biden infrastructure plans, which, even if pared down but passed, will mark an important milestone showing that US can still get (some) things done.
There is so much more to cover but it will have to wait till next week and our Monthly.
TGIF, enjoy the weekend!