VRA Investment Letter: Seasonality Points to Near-term Weakness. American Deleveraging. BAML Survey. Innovation “Creates" More Jobs.
/Good Friday morning. Next week commences the worst week of the year for the S&P 500 (since 1950, per Stock Traders Almanac). 2023 has featured the highest degree of “seasonality reliability” in recent memory, so we’ll see how the week plays out. With the Fed meeting next week and potential government shutdown on 9/30, not to mention ongoing geopolitical tensions and approaching “October-phobia”, there’s no shortage of things that could get the markets attention.
You sure wouldn’t have known about downside risks in yesterdays trading. Solid across the board, featuring internals that were among the best we’ve seen, post the end of July highs. Still, both the semis and tech underperformed the broad market. Not ideal. And yields are jumping again, with the 10 year back to 4.33% this AM. How sweet would it be to have a triple-top in 10 year yields, coinciding with next weeks Fed meeting?
Here are our two big tells, should the highs in yields be in place; The semis/tech (which respond almost immediately to a move lower in yields) along with gold bottoming from here and moving higher (led by the miners). We saw the miners lead gold higher yesterday…we want to see this become a trend.
We’ll also be watching what happens in Europe, most notably Germany, as yesterday the ECB announced a “dovish” .25% rate hike, which sent their bond yields lower and their bond prices higher. We look for strong correlations going forward between US and German yields, especially with the German economy in the toilet. Germany is the largest and most important economy in Europe and the ECB does what Germany wishes, almost exclusively. BTW, did you know that the debt to GDP ratio in Germany is just 60% vs 122% in the US? Should Germany ever need to stimulate their economy they’ll have zero problems doing just that.
No Stress in Debt Markets
As we’ve been pointing out, there is zero stress in the credit markets today. The biggest concern of investors today is no longer a recession taking place in the US, its the rise in bond yields. This is our biggest medium-long term black swan risk; sovereign credit risks (US/global) and the potential for rising debt defaults, from too-high bond yields and surging US/global govt debt levels.
But take a look at the chart below of HYG, the largest and most important high yield (junk bond) ETF.
Not only is HYG not melting down, as rates remain stubbornly high, but instead HYG is demonstrating highly bullish technical action.
Again, this is a tell…certainly with rates rising. If we were in danger of credit risks, we would see it in junk bonds first.
Below we see a relative strength chart of HYG to TLT (long term T-bonds). I find this chart remarkable. Again, even in the face of rising yields for govt debt, junk bonds are exhibiting uncanny strength, with significant outperformance to govt debt.
VRA Megatrends; Liquidity and Deleveraging; Powering the Roaring 2020’s
As Tyler and I outlined in our new book “The Big Bribe”, record amounts of US and global liquidity will continue to drive both the economy and markets higher for several years to come.
Key to this most significant macro-development is the massive amount of deleveraging that’s taken place in America, post the 2008 meltdown in housing and financial markets.
This subject is widely under-discussed in financial circles. Along with the ongoing financial engineering thats occurring global, these developments are at the root of the “Roaring 2020’s” underway today.
While we definitely live in “two Americas”, at the same time we also have all-time highs in: — Household net worth — Net equity in homes — Total home values — Credit scores for homeowners In addition, over the last 15 yrs, household debt has declined from 101% to 77% of GDP, falling by a quarter, while corporate debt to total corporate value sits at 50 yr lows.
The past 15 years have also witnessed a sharp decline in the amount of money Americans must set aside to service their debt. The household debt-servicing ratio has fallen steadily from 13.2% of disposable income in 2007 to 9.6% at the end of the first quarter of 2023.
VRA Bottom Line: Investors are inundated daily with news about how bad things are but there’s a reason we’re in a new bull market, one that we see powering ahead for years to come. Both the consumer and corporate America are in excellent shape, financially. But, as we’ve covered here often over my 20 years of the VRA, “fear sells”. I continue to believe there’s an ongoing PSYOP meant to keep investors out of the market, allowing the elites to add to their equity positions, in advance of the major move higher that’s directly ahead.
Observations from the BAML Monthly Fund Managers Survey
Along with Evercores monthly surveys, the BAML survey is the one to watch. BAML fund managers remain bearish, based on their global equity allocation, cash levels and their macro outlook. These levels of bearishness tend to coincide with market bottoms, historically.
Below we see that BAML fund managers are underweight global equities, neutral on US equities and overweight defensives.
Check out their positioning on REITS, tech and energy, where fund managers are effectively short, while also remembering that these same fund managers lose to the markets 9/10 years.
As contrarians, betting against this group of fund managers comes with a high-probability win rate.
As to China, 0% of respondents (>300 fund managers) expect growth out of China over the next 12 months. ZERO 0%.
Makes me want to get even more long KWEB (China Internet ETF).
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VRA Bottom Line: for as long as I can remember betting against these fund managers, certainly at the extremes, has been a high-probability repeating-pattern of investing success.
Most Americans Believe That AI Will Destroy Jobs
In the poll below we see that 75% believe that AI will decrease the number of total jobs over the next 10 years. I wonder why most Americans feel this way? Maybe its because that’s what the MSM has been filling our heads with.
But history paints a much different picture. From the days of the automobile industry replacing the horse and buggy industry (well before that, actually) innovation has always led to more job creation. Always.
Count us among the 6% that believe AI will create more jobs…one of the easiest calls ever, actually…as we covered in detail in “The Big Bribe”.
Until next time, thanks again for reading…
Kip
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