“Do not toil to acquire wealthy; be discerning enough to desist. When your eyes light on it, it is gone, for suddenly it sprouts wings, flying like an eagle toward heaven.”
-Proverbs 23: 4 – 5
The chasing of wealth is certainly not a new thing. In fact, the verse from Proverbs above in some ways validates that FOMO is also not a new concept. In reality, “when your eyes light on it, it is gone” could aptly describe the crypto and SPAC manias of 2021.
The stock market over time has proven to be one of the best mechanisms for manifesting this chase of wealth beyond reasonable means. The process is pretty simple: a story is told, a company goes public, and sometimes the investor makes money . . . but more often than not the profits fly away to the heavens.
Interestingly, on May 18th, 1553 (so some 470 years ago today) one of the first businesses financed by selling stock to the public was launched. The Russia Company, or Muscovy Company as it was also called, was comprised of three ships – the Bona Speranza, the Edward Bonaventure, and Bona Confidentia. In its IPO the Russia Company raised 6,000 pounds from 200 investors at 25 pounds per share.
The stated objective of the company, as the name might suggests, was to seek “discoverie of new trades northe warde” in Russia. The boats would sail northward from Gravesend in England hoping to find riches in Russia. Expansion and growth into a new market with a massive TAM . . . sound familiar?
You can probably imagine how the story ends. The Russian Company ultimately wildly missed expectations, made no money for at least three decades, and most of its investors died without ever seeing a dividend. But hey, investing in the expansion of trade north into Russia was no doubt one hell of a story to tell your buds in the 16th century pubs of London!
The thing with stories and narratives, when they aren’t based on real data or facts, is they tend to shift, change, twist and ultimately disappoint. In the short run, these stories can, of course, be amplified. For as Gustave Le Bon famously said:
“A crowd is extraordinarily credulous and open to influence, it has no critical faculty… it thinks in images.”
Indeed.
Back to the Global Market Grind . . .
Yesterday, the market rallied hard on the story that the debt ceiling impasse will be solved ahead of X Day on June 1st. (The day the U.S. government runs out of money.) Ultimately, this may prove to be more than a story and the impasse may be solved and they can kicked down the proverbial road . . . but then what? Well, then we are back to economic reality.
Interestingly, through this whole debt ceiling debacle, the VIX has barely budged. It has basically been between 15 and 20 for the last month despite some legitimate concerns the U.S. could technically default. So, either equity risk (as measured by volatility) is missing something, or it has nailed that things will eventually get resolved.
On the other hand, the credit market is telling a slightly different story. In fact, as we highlight in the Chart of the Day, credit default swaps on U.S. Treasuries remain as elevated as we’ve ever seen. In fact, as of this morning CDS on 1-Year Treasuries remain north of 150bps, which is a level that surpasses what we saw during the previous debt ceiling showdown.
One reason for this divergence in market-based risk assessment is that equity risk could be getting it right that the debt ceiling impasse will be resolved, but then missing what comes after. As my colleague Josh Steiner has noted and is highlighted in a few interesting articles this morning, there will likely be a deluge of Treasury issuance on the horizon after the debt ceiling is extended. Specifically, in the short run the U.S. government will have to massively replenish its “coffers” as cash has been drained down.
Some estimates have this funding requirement at north of a $1 trillion dollars through the end of the third quarter, which may be the effective equivalent of hiking by another 25bps. The derivative impact here could be that liquidity is drained, for a time, from the banking system and short-term funding rates spike. Thus, the sustained heightened level of CDS on U.S. Treasuries makes sense when looking beyond the next couple of weeks.
We will of course know shortly how this all plays out, but don’t let a one, or two, day rip in equities suck you into believing all is fine.
Risk remains.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.69-3.91% (neutral)
UST 10yr Yield 3.33-3.60% (bearish)
UST 2yr Yield 3.85-4.21% (bullish)
High Yield (HYG) 73.76-74.81 (bearish)
SPX 4067-4167 (bearish)
NASDAQ 12,108-12,532 (bearish)
RUT 1 (bearish)
Tech (XLK) 148-155 (bearish)
Gold Miners (GDX) 32.18-36.30 (bullish)
Utilities (XLU) 66.19-69.73 (bullish)
Nikkei 28,862-30,611 (bullish)
VIX 16.36-20.63 (bullish)
USD 101.01-103.18 (bullish)
CAD/USD 0.734-0.748 (bearish)
Oil (WTI) 69.06-73.90 (bearish)
Oil (Brent) 72.90-77.96 (bearish)
Gold 1 (bullish)
Bitcoin 25,783-29,164 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
