Tuesday, 30 March 2021 / Published in Analysis

As we have said many times over the past several months, while the market as a whole is not in bubble territory, many parts of the market are. In particular, the technology sector is as expensive as I have ever seen.

In fact, one of my worries has been that when the technology sector did correct, it might bring down the entire market. The good news is that this has not happened, and the market overall is holding up.

This in my mind means two things. The first is that the bull market is still intact. The second is that the rotation we have been seeing over the past several months seems to be enough (at least for now) to prevent a general market correction, even as many of the high-flying technology names correct or do nothing.

Also, the fact that the high PE and High Price/Sales stocks are correcting , should also bring down the market multiple over the next few quarters, which is a good thing.

This in turn should be good for active managed portfolios and less for passive portfolios or passive investment instruments.

Finally, this also means the liquidity wave we have been riding since the beginning of the pandemic is alive and well, but investors have to change strategy and find new winners.

Like the old wall street saying goes, never fight the Fed or never fight the central bank as I say. And with the Fed still purchasing 120 billion in assets every month, this liquidity wave is still alive and well.

Thursday, 11 March 2021 / Published in Analysis

A short while ago I questioned if 2021 might be a sell the COVID 19 vaccine news trade. I said it probably won’t, because central banks will keep pumping liquidity. However, a new twist is now unfolding, and that is higher bond yields.  

For example, 10-year US government bonds yields have risen to 1.5%, and the 30-year yield is now at around 2.20%, with most yields in other major markets also increasing.  

In my mind, irrespective if inflation comes back, as most think it will, I find it hard to believe that the long end of sovereign debt can increase by a lot without central banks intervening. This because the interest cost to governments will rise substantially, something that will make an already bad fiscal situation much worse.  

So, the question is, can central banks bring down long dated bonds if they want to? The answer is yes, and I think they will do just that at some point. But the even more important question is, how might markets react to such a development? The answer is we don’t really know, because on the one hand we will have inflation and higher growth because of a COVID vaccine, but yields will not be reflecting such a reality, as they have in the past. 

My guess is that if markets start correcting, central banks will communicate that they will start buying longer dated bonds to keep yields down to avoid markets correcting by much. But the truth is we don’t know how markets will react to such a reality, irrespective of what central banks say and do. But until we see price action to the contrary, we have to keep trusting an old Wall Street saying that says never fight the Fed, or generally speaking, never fight Central Banks.  

For example, 10-year US government bonds yields have risen to 1.5%, and the 30-year yield is now at around 2.20%, with most yields in other major markets also increasing.  

In my mind, irrespective if inflation comes back, as most think it will, I find it hard to believe that the long end of sovereign debt can increase by a lot without central banks intervening. This because the interest cost to governments will rise substantially, something that will make an already bad fiscal situation much worse.  

So, the question is, can central banks bring down long dated bonds if they want to? The answer is yes, and I think they will do just that at some point. But the even more important question is, how might markets react to such a development? The answer is we don’t really know, because on the one hand we will have inflation and higher growth because of a COVID vaccine, but yields will not be reflecting such a reality, as they have in the past. 

My guess is that if markets start correcting, central banks will communicate that they will start buying longer dated bonds to keep yields down to avoid markets correcting by much. But the truth is we don’t know how markets will react to such a reality, irrespective of what central banks say and do. But until we see price action to the contrary, we have to keep trusting an old Wall Street saying that says never fight the Fed, or generally speaking, never fight Central Banks.