“We didn’t understand scientifically why glass is transparent until the twentieth century.”
The title of this morning’s Early Look is really the question I kept asking myself while I spent some time up at the lake in Canada last week. The question being whether or not anyone understands where this grand central-market-planning experiment is taking us…
There’s a great long-term learning metaphor in How We Got To Now about glass: “Roughly 26 million years ago, something happened over the sands of the Lybian Desert… Grains of silica melted and fused under an intense heat… The compounds of silicon dioxide that formed had a number of curious chemical traits.” (pg 13)
While the birth of modern glass didn’t happen until the 14th and 15th centuries in Venice, it wasn’t until the 20th that we came to understand the physical properties of one of the world’s most important innovations. “In a strange way, glass was trying to extend our vision of the universe from the very beginning, way before we were smart enough to notice.” (pg 43)
Back to the Global Macro Grind…
Longer-term, are central-market-planners smart enough to know what negative interest rates do to both economies and the banks trying to finance them? Shorter-term, are we dumb enough to think that what markets do on a weekly basis are signaling how this ultimately plays out? For the last year (intermediate-term), have we noticed anything about the #BeliefSystem breaking down?
On the longest of long-term questions, Janet Yellen said (under oath last month) that she hadn’t fully considered that keeping interest rate policy at 0% could be a bad thing. From a shorter-term perspective, you’re seeing the British burn their currency to new lows this morning, as the UK 10yr Yield plunges to 0.79%. Is it working?
After the 1st up week in the last 4, some global stock market cheer-leaders may think it has… but the real, volatility-adjusted absolute and relative returns for the last year have sided with the slower-for-longer, low-beta, safe-yield-chasing, camp of investors. Even in a broad based Equity Beta Chase, last week was no different:
- SP500 and Nasdaq were +3.2-3.3% on the week to +2.9% and -2.9% YTD, respectively
- EuroStoxx600 and DAX were +3.2% and +2.3% on the week to -9.2% and -9.0% YTD, respectively
- Nikkei (Japan) and Shanghai Comp were +4.9% and +2.7% on the week to -17.6% and -17.1% YTD, respectively
Whereas, both Long-term Sovereign Bonds and their equity market proxies did the following:
- US Treasury 10-year Yield dropped another -12 basis points on the week to 1.44% (down -83bps YTD)
- UK 10-year Yield crashed another -22 basis points on the week to 0.86% (down -110bps YTD)
- Germany’s 10yr Yield dropped back to negative, falling -8bps on the week to -0.13% (down -76bps YTD)
- Japan’s 10yr Yield fell another -8 basis points on the week to -0.25% (down -52bps YTD)
- Low Beta US Equities ramped another +3.7% on the week to +14.0% YTD
- High Yield US Equities added another +3.1% on the week to +7.4% YTD
- MSCI REITS Equity Index rose another +4.3% on the week to +11.5% YTD
- US listed Utilities (XLU) added another +3.7% on the week to +21.3% YTD
*for 5 and 6, that’s the mean performance of Top Quintile vs. Bottom Quintile SP500 Companies
In other words, if your view for the last year was that neither rate hikes nor rate cuts would do anything to stop economic gravity from slowing from its cycle peaks in Europe, Japan, and the USA, your long-duration bond and safe-equity-yield bet has absolutely crushed it.
Was it a longer-term cycle bet? Sure. A high-probability one that was measured and mapped by both incoming economic data and the macro market exposures that reflect upon them on a trending basis.
Is it something that central-market-planners expected? Of course not. That’s why I’m quite surprised that many of them still don’t understand that it’s negative rates themselves that are perpetuating the slow-down.
I certainly hope so. Even if it only took world markets until the 21st century to understand that while Gold has “no yield”, it loves to compete in the asset allocation space for assets that have priced in negative yields… that should work for our subscribers.
Unfortunately from a shorter-term perspective, now that it’s up +26.9% YTD at $1345, it’s signaling immediate-term TRADE overbought as consensus is chasing Gold with as much enthusiasm as a levered long hedge fund chasing the SP500 when it goes green.
Per the recent (weekly) CFTC Futures & Options (non-commercial) data, here’s what net positioning looks like in big macro positions relative to where they’ve been in the last year:
- SP500 (Index + Emini) +66,900 net LONG contracts = a 1YR z-score of +1.9x
- Gold +273,179 net LONG contracts = a 1YR z-score of +2.1x
- US Dollar +12,425 net LONG contracts = a 1YR z-score of -1.3x
In other words, Consensus Macro is still betting that the Fed devalues the Dollar and that both US Equity Beta and Gold (and Oil, Commodities, etc.) go higher on that.
What if they can’t? And/or…
What if they are starting to understand (like macro market participants are) that they shouldn’t? What if they are starting to realize that burning America’s currency, crashing her bond yields to all-time lows, and pancaking the yield curve is bad for banks that hired them?
They didn’t understand that Japanese and European Equities were glass houses until they threw negative rates at them either.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.33-1.55%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer