This is so predictable it makes my eyes roll when I see it. So we get a little bit of bad news and everyone and everything is freaking out again.
Dollar/Euro cross- bananas
Dollar/Yen cross- insane
Gold- soaring
Utilities- through the roof
The Ark floats. Any questions?
The logic is very binary, almost too clean. No Fed hikes equals weaker dollar, equals higher gold, equals flight for yield, since rates won’t be going higher. This also means that banks will not get enjoy a better yield curve, especially with poor economic conditions, a double whammy for those fuckers.
Goldman and others are down more than 3% for the day.
The other prevailing trend is record low yields for German bunds. Let’s not even mention Swiss yields, which are now negative up to 20 years out.
All of this leads me to one simple conclusion, one that I’ve held since late 2015. The negative yield phenomenon is feeding on itself. It’s the deflationary vortex I always warned about. Because of this reality in both Europe and Japan, U.S. bonds are incredibly undervalued, leaving a great arbitrage trade to be had in bonds v bunds. Why buy a 30 yr bund for 0.75% when you can get a bond at 2.6%? Is the bund safer, saddled with Greece, Portugal, Spain, Italy etc? I don’t think so. The bond markets aren’t trading naturally. It’s the creation of money, out of thin air, and the monetization of debt, that is causing yields to crash. It reminds me of this painting by Goyo of Saturn devouring his son.
Sure, some stocks will do well. Look at AVGO and AMBA today. It’s very possible that the easy money environment will continue to permit stocks to trade higher, based off some expectation. The downside is complete disaster, of course. None of what you see on your screens is real. The fiction of markets has been perverted by central banks. Should the debt bubble pop, forget about the stock market. You’ll all need to figure out how to buy food.
But as long as the charade continues and things plod along, yields will continue to press lower and the bond-bund arbitrage will continue to look more and more attractive, which is why I am long TLT with 25% of my assets until the yield curve inverts.
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Nicely done!
Looks like the rally is over and reality is back in vogue. TLT leading.(monster move) and overpriced digital video providers are being repriced to fundamentals.
Yes, the S&P is down an entire 7 points and change. Horror of horrors.
Hello Frog,
Back in Jan/Feb it seemed that stocks would never rebound. Since April it has seemed that another such drawdown is impossible. Just some food for thought.
Sincerely,
A Fellow Trump Supporter
I’m a Bernie supporter.
When something seems impossible, that doesn’t necessarily mean it will happen. Only perma-contrarians believe that.
I am watching the bond market, that’s where the big money sets the trend. Of course, this is probably a premature call as TLT was reacting more to the fact that the economy isn’t doing well so the FED won’t raise in June.
And, of course, the economy not doing well isn’t as important to equity prices as cheap FED money is.
We’re back to “bad news for the economy = good news for stocks”
I wish I knew when things really unravel and get beyond the point of no return.
Excellent analysis and it paints the Fed as actors on a theatrical stage selling science fiction as non fiction.
except that you’re only look at nominal yield. In real terms, the bund might actually be a better value or at least within the margin of error. Also this not an arbitrage because of the currency risk. If you hedge the currency with swaps the arbitrage is zero.
Truth is this is capitulation for bonds and i’m surprised you can’t see it.