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Central Bank boots on the ground!

Updated: Oct 31, 2023

So, there really are some reasons to be positive here and for those willing or able to trade here there is a lot of Alpha in gyrating Mkts on offer ( see below) this despite the headlines and reports in the real world likely pointing to a peaking in the next 10days (hopefully!)

On MKTS, as it’s very clear now that central banks are being asked to do “national service” vs the general population, and they are promising to buy the bonds of failing firms or print bank notes that will be "helicoptered" to a grateful population at no cost. The conclusion is that bondholders will eventually pay for this long lunch.

I agree with Chris Wood of G&F that one “big picture” point that institutional and retail investors everywhere should now be thinking about is whether all this dramatically ramped up government interventionism, and the resulting ever greater merging of monetary and fiscal policy in the context of ballooning fiscal deficits, marks the beginning of the end of the bull market in US Treasury bonds in place since 1981.

If then Fed will not contemplate negative rates, this means that the long-term risk-reward ratio of owning Treasury bonds is no longer interesting. It also means that the risk parity trade, and all the machines and related geek programmers operating these machines, are at severe risk of becoming redundant; so where do all those assets go?!

“Clearly in a world where central banks successfully suppress government bond yields by fiat, equities should outperform dramatically in relative terms. They will also outperform in a world where G7 central banks lose credibility and so lose control of the bond market. But in the latter case equities will do much better in nominal than in real terms.

Gold has rallied in recent days in response to the dramatic US policy announcements. ( THIS IS AN interesting POINT) Still one problem as regards owning gold that investors should be aware of is that a gold price, which successfully breaks out above the previous 2011 high of US$1921/oz, is a market signal that the G7 central banks are losing control of the game.

For that reason these central banks will not want to see that price move happen. The recent rally in equities has not and should not surprise and a classic crash pattern would be for the S&P500 to rally up to 30% off the recent bottom which would suggest a target of 2,850 or 15% above the current level. Likely then a possible retest of the previous low of 2,192 on the S&P500.

A couple of other good observations; it is not just China which has been outperforming of late but also Asian equities in general. While US equities can recover relative ground in any bounce, the problem for the US equity asset class is that it began the downturn so overvalued at a record high valuation to sales. The other problem is that the leveraged share buyback game has ended for now, which also means an end to the “phony earnings growth“ it produced; how does a BUY-back impaired mkt perform?!

The leaders of the bull market in the US of the past ten years and more, namely the FANG stocks, should surely see their competitive market positioned further strengthened by the current shut down as the world learns to both work and live remotely. The same point applies obviously in the Chinese internet sector.

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