Over the weekend, I did some pumpkin carving. I carved a scary face on the front, and a scary word on the back.
I’m a massive loser, so when trying to think of the scariest word, I made a joke which couldn’t have fallen any flatter. I said I was going to write ‘inflation’, because it’s so damn scary.
No one laughed, in fact no one even got it.
The next stage of the joke from my perspective was going to tell people they should all be terrified of it, and explain why. Free financial advice with your fearful fright, what’s not to like?
Anyway, didn’t happen, lost motivation after doing the face, and no one thought it was funny or relevant, just weird, so I let it go.
But unlike my closest friends, you, my dear readers, get me. Right?
Anyway I’ve found a fantastic chart which will shake you to your bones and make you quake in fear, so I’m going to put it as the crescendo to a big chart fest.
I don’t very often do this, but surveying the markets there are a number of interesting trends developing.
So today will be a broad overview of where the markets stand, looking at stocks, bonds, oil, crypto, the US election, and more, with the aforementioned scary chart to finish off.
I’ll start with one long boring paragraph about the US election, for which I apologise.
It looks likely that Biden will win, and while we can say ‘so did Hilary’, the odds look more convincing this time. If he does, it’s broadly viewed as bad for FAANGs, good for new energy stocks, bad for bonds (rising yields, falling prices), and broadly good for economic growth as the Democrats will spendspendspend. This will hinder the tech/growth trade as the real economy gets more attention, and the FAANGs become likelier to be taxed more heavily and face anti-trust action.
Phew, it’s over.
Source: The Market Ear
Meanwhile, this week saw a nice spurt from ‘value’, which has lagged behind growth for over a decade. It’s only small, and the main interesting point is that these value rallies, small though they are, seem to be coming with increasing regularity.
The interesting question here is about contagion – if (when) the FAANG-boosted US tech growth bubble collapses under its own weight, will broader equity markets fall too, or will it be a rotation where value sees positive returns.
Or will value simply fall less and then do better in the rebound? It’s one to watch very closely, regime changes usually happen in bear markets so we really need to be switched on when it comes.
Growth vs value:
Next up, the curious case of the asset in the night time.
Few things trade 24/7, but bitcoin is one of them.
And it’s doing well, and diverging from stock markets slightly.
This is crucial, as a common argument is that bitcoin is just a leveraged bet on risk, essentially.
Purists would argue that it functions outside of or apart from the mainstream financial markets and so could possibly offer a diversifier, an anti-correlated asset.
It broke through £10,000 per BTC over the weekend, after a sustained rally over the past few weeks.
What’s important to notice is that it’s still 30% or so below its highs of 2017, but it’s a much more stable run this time.
In dollar terms, bitcoin only traded for more than $10,000 for two months in the madness of 2017, reaching $20,000 in the process.
Now though, after crossing the $10,000 threshold once more (in late June, 2020), it has sustained its position above that level for four months, and moved steadily higher too.
This bull market is better supported and more sustainable than the last, it would seem:
At 84%, Bitcoin’s YTD return is still the best of any major asset, shown here (in black) against Amazon, Apple, the Nasdaq, lumber (for laughs – it’s the big spike which crashed in Sept), gold, the S&P, the Nikkei and the FTSE, respectively. Can you afford to ignore it any longer?
Moving on, many are seeing reasons for an end of year melt up. What’s the case for it?
Source: The Market Ear
Average performance of the S&P 500 in closely contested election years:
Source: The Market Ear
Finally, annual seasonal averages for the S&P suggest November and December are good months to invest:
Source: The Market Ear
I don’t know much about all this kind of thing, but I found it interesting so it’s made it in, but I won’t go on about it.
Moving on instead to oil and gas quickly before the grand finale, it’s interesting to note that after a tough year, natural gas prices are surging once more, while oil has been flat since the rally ended in June. Natural gas is set to be a key fuel in the energy transition.
As our very own Eoin Treacy often says, ‘ranges are breakouts waiting to happen’. It’ll be worth watching oil closely. Two paths offer themselves as clear options – second wave/lockdown effects force demand down again, causing another short-term oil price collapse.
Or, supply and capital spending cuts by oil companies lead to massive undersupply as the global economy recovers returns to growth in the next year or two, causing significantly higher oil prices.
With oil and gas majors at multi-decade lows, trading on single figure PE ratios and offering double digit yields in a world where bonds won’t give you more than a percent or two, they must be worth some of our attention. But careful selection is crucial, in an industry that we know better than anyone in undergoing deep and wide-ranging transitions.
To finish, here we have it, the inflation argument in brief. If I were skilled enough to draw a chart on the back of a pumpkin, the last chart here would be the one. It’s a thriller.
US 10Y Treasury Bond Yields have been in decline for decades, occurring in tandem with an outrageously powerful (and over extended?!) bull market in bond prices. (Remember, yields down = prices up).
Long term yields (since WW2):
The regime has been: Volcker got control of inflation with very high interest rates. Since then, rates have been cut aggressively during periods of crisis (‘01, ‘08, ‘20) and not brought back up fast enough in the good times. Hence multi-decade falling rates and falling inflation. This has driven both bonds and stocks to extraordinary levels, as falling rates make other assets seem relatively more attractive.
Relatively being the key word.
However, bond yields, from such low levels, have recently risen 60% in just a few months, and look perhaps to have formed a solid base and rebounded.
Very short term, up 60% since Aug 4:
Is this the first signs of inflation fears? If people expect inflation, then they will sell their bonds because 0.5% doesn’t look very attractive unless you expect prices of things to go down.
Bonds are in some kind of mad bull market. As you can see from the long-term chart, yields have been falling aka prices of bonds have been rising for nigh on fifty years.
Buy the bloody dip or what.
Could that be about to change though, and with it the falling inflation regime that has lasted since 1980s? Here’s a basket of agricultural commodities, ranked by 3-month % change:
While 2008 saw central banks printing money to buy financial assets (which, shock, have gone up in value for 12 years straight), these goods affect the shopping baskets of real people. This will filter into CPI consumer inflation, which is the key difference this time round.
And this chart shows the same basket of agricultural commodities (in white) against the US 10y bond yield (orange), would suggest that, at least in the short term, inflation in agricultural commodities is driving bond yields higher on inflation fears, and that there’s plenty more to go in the coming months:
Source: Alex Manzara on Twitter
The key thing is the way all of these themes link together.
America is tech, America is growth, while the UK is commodities and banks.
The low rate regime has flattered the former, as low rates mean low yields which make stocks offering growth seem more attractive, while low rates harm banks (clearly) and stagnant economic growth has hit commodities.
Rising inflation changes everything.
If you want to be scared of anything this Halloween, be scared of inflation.
Editor, Exponential Energy Fortunes.
PS Also, this was my real effort, for what it’s worth…