Category Macro / Economy

Yield Curve: Recession Dead Ahead

2-year bond yields are cratering. Rarely - if ever - have we seen them fall 150 basis points in just three weeks. This signals the bond market sees aggressively rate cuts from the Fed this year. But what would cause this? A recession? Some kind of credit crisis? I can tell you it won't be because inflation is back to the Fed's target of 2%. What's more, the yield curve has steepened sharply. This isn't good... and if history is any guide... a recession is likely within 12 months.

Idiosyncratic or Systemic?

Do you believe the current banking 'crisis' is idiosyncratic or systemic? The short answer is it's still far too early to know. Hopefully it's more of the former and less the latter. Because if it's the latter, that's a problem. Last week's issues will become multiplicative (vs additive). 2008 was a global systemic banking crisis.... this is not 2008. At least not yet...

Markets Suffer Worst Week for 2023

Markets are in a state of panic. A small regional bank - Silicon Valley Bank - suffered a bank run this week. Over $42B was withdrawn in the space of just two days. What happened? On the surface it looks like very poor risk management - where SVB was effectively forced to sell long-term bonds which were underwater. Call it a margin call. Their interest rate risk was not adequately hedged. More details will come out in the coming days... however this sell off is taking the entire sector down with it. Is it warranted?

Soft Landing Hopes

Markets have been largely range trading for 17 consecutive weeks. For example, the S&P 500 appears caught between 3800 and 4200. And I think it's easy to explain: there are valid cases for both the bullish and bearish case. Equally however, there is also no compelling argument to suggest markets are set to explode higher or crash. This market requires patience. What's more, you cannot afford to be too aggressive betting on either outcome.

Market Refuses to Believe the Fed

The S&P 500 is optimistic on three things (a) avoiding a recession; (b) rapidly falling inflation; and (c) two rate cuts before the end of the year. And the market could be right. However, I think it's optimistic. What's more, they are choosing to fight the Fed.

Bear Market Rally? Or Something More?

About 100 of the 500 S&P companies have reported Q4 2022 earnings. TL;DR is they are 'average' at best. Most have barely met already lowered expectations. What's more, forward guidance is weak. However, the bulls are betting on inflation continuing to plunge forcing the Fed to cut rates later in the year. I'm not yet prepared to support that thesis... with services inflation still running at 5.2%. There are some signs things are improving.

Remain Wary of Permabears

Jeremy Grantham is a well known permabear. This week - he called for a possible 50% correction. Sure... it's probable we see something in the realm of 20%... but 50%? I decided to look at Grantham's track record against the S&P 500 over 25 years. Guess what - he has woefully underperformed the market. Hardly surprising. Beware of doomsday 'crash callers' like Grantham... and he is not alone. They are dangerous.

Thinking Through Both the Bull & Bear Case

Are you a bull or a bear? That answer will largely depend on your timeframe. However, there are solid arguments for both the bull and bear case in the near term (next 12 months). This post looks at each and why I still lean bearish in the near-term. However, I will treat any meaningful dip (eg 10%) as a buying opportunity.

Is Bad News finally Bad News?

Soft landing? That's the market consensus. I am not buying it. For example, retail data for December was horrible - it's third straight month of declines. Are US consumers tapped out? Their savings rates are now at all time lows? Keep your eye on credit quality - how is that looking?

Fed Gets Green Light… Market Thinks Otherwise

The market ripped higher on news of a softer-than-expected wage inflation report. But haven't we seen this script before? Markets have a recent history of front-running the Fed... only to be bitterly disappointed. From my lens, nothing in this print changes the script for the Fed. And markets are not set up to hear that...