15 Sep ONE COULD NOT HAVE ENVISIONED 2020
One could not have envisioned 2020. Many are now recognizing the massive amount of monies that are concentrated in a few names, perhaps the result that every trade other than indexing has imploded including the “fail safe” Treasury carry trade that collapsed in late March that almost destroyed all financial markets resulting in unprecedented Fed action.
Incredibly Apple is now larger than every stock market in the world bar the US, China and Japan. Wow!
According to Bloomberg Tesla has raised more money in 2020 than the entire equity issuance by the oil industry during the past three years. Tesla has also raised more money in 2020 than all its prior offerings over the last decade.
All must remember 2016 was the biggest equity issuance on record for the E & P sector when oil plunged below $30/barrel with the greatest minds on Wall Street believing that such was an aberration.
For the first time, oil is now the smallest component in the S & P 500. The capitalization of Tesla is almost 2.5 times larger than Exxon.
In my view, and as noted above, perhaps the most significant event of 2020 was the implosion of the Treasury carry trade. Simplistically speaking massive sums of borrowed monies were used to profit from tiny price discrepancies between futures and the underlaying cash Treasury. The implosion of this trade was discussed at length in March and was the reason why the Fed indicated it would inject an unprecedented $5 trillion into the bond market on or about March 16.
March 2020 was Long Term Capital Management (LTCM) on steroids.
Fast forward to today. The carry trade has fallen into hibernation, threatening the liquidity of the world’s largest debt market just when liquidity may be needed most. Monday a Bloomberg headline read “A Vanishing Treasuries Trade Pose Threat to Largest Debt Market as $1 trillion in liquidity has evaporated.”
How will this unfold?
Historically the bond market dictates the direction of the stock market.
Today is the commencement of a two-day FOMC meeting. As widely discussed the Fed has changed monetary policy, permitting inflation to run over its 2% speed limit for a period of time. The issue at hand is how high and how long? No one knows.
It is widely documented the massive discrepancy between value and growth, a discrepancy based on several indicators is at record proportions. Value investors have been crushed.
Change is the only constant. I can argue the change from growth to value (aka contrarian) will happen when the inflationary implications of negative real interest rates and an unprecedented 25% surge in money supply come to fruition, a view that is also shared by several bond market luminaries.
Commenting on yesterday’s market activity, equities gained on merger activity and signs of progress towards a vaccine.
Last night the foreign markets were up. London was up 1.04% ,Paris up 0.50% and Frankfurt up 0.33%. China was up 0.51%, Japan down 0.44% and Hang Sang up 0.38%.
The Dow should open moderately higher on European and Chinese data indicating the economic recovery is gaining traction. The 10-year is off 2/32 to yield 0.68%.