13 Mar A MIXED DAY
Equities were mixed yesterday as the NASDAQ led by the technologies advanced and the Dow fell. Equity volume was muted. Treasury yields were relatively lower and oil rose after Saudi Arabia announced even deeper cuts and Venezuela is all but a failed state.
There is near unanimity that Treasury yields will continue to fall, inflation remains benign and the economy will continue to weaken. Most believe the current growth spurt was nothing other than an outlier and the economy will soon return back to its new normal growth rate of 1.2%.
I must write from 2011-2016 most economists were projecting a 4% growth rate because of fiscal spending. As history states, the economy expanded at less than half this rate, confounding most.
Speaking of unexpected results, there was yet another story discussing the failure of risk parity trades and other “low risk” strategies, stating the current advance is perhaps the most concentrated in history focused in the largest capitalized technology/social media stocks, an environment that is dangerous at best.
The vision I have describing today’s environment is a hamster wheel rapidly spinning, a wheel that is severely wobbling on its supports, about to break off from these supports and spin down the road.
Risk parity models imploded because of the popularity of such trades. Is the hamster wheel rolling down the road symbolic to the eventual breakdown of the current trade of chasing a few names in a desperate attempt to generate returns? Yes.
As noted above, there is near unanimity in the financial press that Treasury yields will continue to fall. What happens if the inverse occurs as was the case in February and December 2018, amplified by the massive amount of investment grade rated debt that must be refunded, debt that was largely raised to fund stock buybacks and increased dividends?
Rising rates could be the catalyst that causes the hamster wheel to break free from its supports.
What will happen today?
Last night the foreign markets were mixed. London was up 0.07%, Paris up 0.41% and Frankfurt up 0.04%. China was down 1.09%, Japan down 0.99% and Hang Sang down 0.39%.
The Dow should open flat awaiting the latest clues on the strength of the global economy and the next major Brexit vote. Oil is again higher, trading at the greatest price in over 16 weeks. The 10-year is off 6/32 to yield 2.63%.