26 Mar WHERE ARE WE GOING?
We are we going? Three months ago the global consensus view was growth. Three months later, the inverse. According to Bloomberg, since November the global universe of negative yielding debt has surged by 75% to approximately $10 trillion. The apex was around $12 trillion in early 2016.
Historically negative real yields equate with inflationary growth.
On the other hand, as widely noted the “traditional” yield curve between the 90 day Treasury and 10 year Treasury inverted. An inverted yield curve has a 100% correlation to a slowing economy but not all inverted yield curves produce a recession.
What gives?? Two diametrically opposite conclusions can be made…inflationary growth or a slowdown?
Last week I noted the abnormality between experience/education and passive investors. It appears that the lack of knowledge and experience is a benefit in the markets.
Typically the smartest and most astute money managers create hedge funds. Over the last three years hedge funds have been closing at a record pace. Bloomberg reported yesterday that 2018 hedge fund startups dropped to the lowest since 2000 while passive ETF creation surged to record.
Monetarily we are living in unprecedented times. We have never seen monetary easing so long, so broad, so big. We have never lived through an entire change in trading mechanics where technology is now involved in 95% of sovereign debt trades and 90% of equity trades. Are these algorithms correct or is the trade just so one sided and one dimensional that all heck is about break out?
The academics will proclaim liquidity in the financial markets is exceptional. JP Morgan writes the opposite stating “the drama in equities and Treasuries over the last six months is the result of extraordinary thin liquidity.”
JP Morgan writes “during the fourth quarter the firm’s measure of market depth based on S & P 500 e-mini futures dropped to less than one-third the average seen during other selloffs of the past decade.”
The bank further writes “the lack of liquidity explains how the market could go down and up so much on a relatively small change in positioning, especially since a small change in fundamentals since December and January.”
It is not uncommon for markets to overweight short runs of data and love to extrapolate into infinity but it appears today’s extrapolation is done in a liquidity vacuum, a vacuum that does appear via traditional volume benchmarks. In my view this is a dangerous environment.
Twenty years ago creating or investing in a hedge fund was the easy pathway to riches. Today it is passive no brainer ETFs. A major issue at hand is perhaps the false sense of complacency that historically ends in disappointment.
Commenting upon yesterday market activity, equities were quiet as the 10 year continued to rally, falling below a 2.38% yield for the first time since December 2017. For what it is worth department, two prominent JP Morgan quant analysts have diametrically opposite views as to the immediate direction of the market. The consistency is the lack of liquidity.
Last night the foreign markets were up. London was up 0.31%, Paris up 0.50% and Frankfurt up 0.08%. China was down 1.51%, Japan up 2.15% and Hang Sang up 0.15%.
The Dow should open nominally higher as longer term interest rates edge up narrowing the gap on the inversion. The 10-year is off 12/32 to yield 2.45%. Are we transitioning into yet another era where rising interest rates are equity positive? Wow! That would be an environment few would have suggested.