I really appreciate your work and the analysis you publish. I know that you are not allowed to give financial advice, but for ordinary people without deep economic knowledge, you could give advice on where to invest in which assets. Is it wiser to hold cash, gold..?
In 2021 I invested some savings in the Crypto market and suffered heavy losses. What would you suggest? Do I sell at a loss because the markets are supposed to go down and wait for a new opportunity? Thanks for your reply. BR
You can see how my long-term ETF only portfolio is positioned today to have an idea: I am very very underweight any risk assets (including Bitcoin), I don't own gold and I own a bunch of USD cash.
Hi Alf, I understand you are long 10Y treasury bonds. Why does the yield continue up? I thought it should go the opposite way. Is it QT related? thank you for your work and contribution. /R
I personally wouldn't advise selling crypto now. The time to sell was six or eight months ago, not today. In fact crypto is approaching the point where I'll be looking to buy in myself. I wrote a short piece about it
The Tl;Dr is that crypto is already down an awful lot. Could Bitcoin nuke down to $12k from here? Sure. But maybe it doesn't. The markets are getting offly wobbly and if the Fed pivots unexpectedly I would expect crypto rally fast and hard. You might miss the best entry. I'm hoping to stock up heavy at $1,050 on ETH and ultra overweight heavy at $700 (if we get there).
I think the better approach for you might just be to hold your crypto for now, and then when the bull market does return, however long that takes, be sure to take profits this time!
Thanks for the reply and suggestion. I agree that I should sell at the end of 2021 or the beginning of 2022. The greed for the market to make another leg up was sinful. BR
Bill Fleckenstein - this is not 2008. 2008 was subprime banks with razor thin capital which caused credit implosion followed by equity vanishing over night and growing contagion
Hey Alf. Firstly, thanks for all your hard work. It's really appreciated. I'm an amateur in economics but I know a bit about statistics.
I note that you (and lots of other analysts) talk a lot about year-on-year metrics. Given that we are recovering from an enormous global event with significant governement intervention (both lockdowns and money creation), do you worry that the figures from 2020 and 21 contain too much statistical noise to draw any meaningful conclusion? And given that we're "post black swan" and not in a normal boom/bust cycle, isn't there a danger in mapping existing cyclical doctines onto current trends? The optimist in me hopes that the spike in M2 money creation will work it's way through and we go back to more a more normal monetary policy (i.e. pre QE).
Can someone help me understand one thing? In Alf's "How Did Asset Classes Perform In Late 2000 / Early 2001" chart, it shows higher rates on bonds in the Aug 2000 - Mar 2001 period versus the Aug 2000 - Dec 2000 period. Doesn't the increase in rates mean that bond values fell over this period?
I think you're right, the big difference is that the Fed lost credibility and will remain persistent. The challenge will be how to scale into that. Maybe you could write about your process, how you put in a position?
- by end 2000, the fed has already stopped hiking for a few months. And with weakening growth, market likely already started to price in a looser monetary policy which began by early 2001. So it makes sense for the 10yr treasury to do well in 4Q2000-1H2001. However, in the current situation, the fed is still on a rate hike path, at least until Dec 2022. And once they pause, the pause is likely to last for at least 6mths for the sake of their own credibility. As such, it feels a bit early for the treasury market to price in a looser monetary policy;
- also, back in 2000-01, both the policy rate and the 10yr rates are so much higher than CPI that there are room for them to cut/fall materially. In the current situation, both fed fund rate and 10yr US treasury yield are still significantly lower than the 8% CPI. One can easily see the CPI falling to 3-4% by mid 2023. But that's another 6-9mths away. It's hard to see how the 10yr rate will start falling over the next few months.
I'm guessing for you to be long US 10yr rate, is it fair to say you are really betting on something big/systemic breaking (most likely liquidity-driven) that would cause the fed to alter course suddenly, and involve a cut in fed funds rate by 2Q22. Given the system leverage that you have pointed out, that is definitely a possibility, like what the UK central bank did last week. But I do wonder how big does the "thing" that breaks need to be in order for them to suddenly change course, given they have their credibility on the line?
Correct about the Fed, but the forward markets are already pricing that in (and hence the 10y Treasury yields as well).
As nominal growth materially weakens and brings down the labor market while the prospects for lower CPI prints become more realistic, it might be bonds become attractive.
Thanks for the reply. The drop in 5yr breakeven rates from 3% in Mar/Apr to currently ~2.2% does suggest materially lower CPI prints should be expected sometime in the next few months, which would be supportive of the long treasury call.
Great analysis but I disagree with the conclusion that bonds will necessarily outperform stocks.
Everyone is looking at stocks for a Lehman moment but I think that the Lehman moment could actually be induced by the bonds market as happened in 2008.
Even sovereign bonds will not be a shelter. Everybody is talking about the bond yields spread of Italy but take a look at the yields in Poland exploding to emerging markets levels of 7-8%.
Inflation in Netherlands, a country with own natural gas production and reserves, has hit 17%.
To reign in inflation, bond yields will have to shoot up.
Lagarde is sitting on her hands while weighing whether to loosen or tighten and the Euro is becoming toilet paper. After his government mandate ends in Italy, Draghi will be called back to the ECB and he will have no choice but to tighten to save the Euro once again.
Italian sovereign debt will not be the issue everyone is hoping it will be, as the new government is Putin-friendly. The real risk is in Germany, where industry will see shutdowns this winter, but that's just a mere distraction from the real risk, which is a collapse of its banking and finance sector.
Can someone help me understand why utilities would rise by such an amount. I understand the historical data but why was that the case? What were the variables at play to get to that return so we can do our weighted probability analysis for each factor based on today’s data.
Seriously can't thank you enough! Man, I constantly look forward to these weekly write ups. These are concise and well written and the way you explain the relevance to y(our) 😉 portfolio is incredible. Have you considered being a professor? Because i'd show up!
Fantastic analysis. I'm not even religious and I feel like thanking you for doing God's work.
This must be the best comment I have ever received :)
Thanks for always adding value to us God bless u
Thank you!
Hi Alfonso.
I really appreciate your work and the analysis you publish. I know that you are not allowed to give financial advice, but for ordinary people without deep economic knowledge, you could give advice on where to invest in which assets. Is it wiser to hold cash, gold..?
In 2021 I invested some savings in the Crypto market and suffered heavy losses. What would you suggest? Do I sell at a loss because the markets are supposed to go down and wait for a new opportunity? Thanks for your reply. BR
Hi, thank you!
You can see how my long-term ETF only portfolio is positioned today to have an idea: I am very very underweight any risk assets (including Bitcoin), I don't own gold and I own a bunch of USD cash.
Hi Alf, I understand you are long 10Y treasury bonds. Why does the yield continue up? I thought it should go the opposite way. Is it QT related? thank you for your work and contribution. /R
I personally wouldn't advise selling crypto now. The time to sell was six or eight months ago, not today. In fact crypto is approaching the point where I'll be looking to buy in myself. I wrote a short piece about it
https://theunhedgedcapitalist.substack.com/p/if-the-markets-nuke-down-this-is
The Tl;Dr is that crypto is already down an awful lot. Could Bitcoin nuke down to $12k from here? Sure. But maybe it doesn't. The markets are getting offly wobbly and if the Fed pivots unexpectedly I would expect crypto rally fast and hard. You might miss the best entry. I'm hoping to stock up heavy at $1,050 on ETH and ultra overweight heavy at $700 (if we get there).
I think the better approach for you might just be to hold your crypto for now, and then when the bull market does return, however long that takes, be sure to take profits this time!
Thanks for the reply and suggestion. I agree that I should sell at the end of 2021 or the beginning of 2022. The greed for the market to make another leg up was sinful. BR
So easy to be taken in my greed. Also the fact that this crypto cycle was truncated compared to other cycles. Everyone thought it had further to go
"find some shelter in bonds and bond proxies." - do you consider REITs and BDCs as bond proxies in this context?
Nope, especially REITS.
The real estate market will have to go through some correction first.
Alf comment?
https://m.youtube.com/watch?v=wR6FUcZTzh8 your comments?
Bill Fleckenstein - this is not 2008. 2008 was subprime banks with razor thin capital which caused credit implosion followed by equity vanishing over night and growing contagion
Banks are much better positioned than 2007, agreed.
In my experience Fleck is a perma-bear. Not that he's not correct! But it is just a bit of information that's worth keeping in the back of your mind.
Excellent as always - very helpful and thank you.
Welcome!
Hi, really appreciate your writings. I have learned a lot thanks to you :)
I have a question regarding real rates which you often refer to. I was just wondering how you calculate these, or which tickers in Bloomberg you use?
Best regards,
Hi, thanks!
The best way to calculate real yields is to use OIS swaps and subtract inflation expectations with the same tenor of the swap.
For every jurisdiction there is a different set of tickers, of course.
European bonds are crushed, slowly time to buy it?
Much appreciate your work 🙇♂️
They are attractive but I am trying to be patient :)
thanks, will keep reading your posts to catch a singal :D
Hey Alf. Firstly, thanks for all your hard work. It's really appreciated. I'm an amateur in economics but I know a bit about statistics.
I note that you (and lots of other analysts) talk a lot about year-on-year metrics. Given that we are recovering from an enormous global event with significant governement intervention (both lockdowns and money creation), do you worry that the figures from 2020 and 21 contain too much statistical noise to draw any meaningful conclusion? And given that we're "post black swan" and not in a normal boom/bust cycle, isn't there a danger in mapping existing cyclical doctines onto current trends? The optimist in me hopes that the spike in M2 money creation will work it's way through and we go back to more a more normal monetary policy (i.e. pre QE).
It's a very fair point, and that's why you see me doing 3m or 6m moving averages a lot too :)
Can someone help me understand one thing? In Alf's "How Did Asset Classes Perform In Late 2000 / Early 2001" chart, it shows higher rates on bonds in the Aug 2000 - Mar 2001 period versus the Aug 2000 - Dec 2000 period. Doesn't the increase in rates mean that bond values fell over this period?
Those are total return performance of bond futures.
Positive performance = lower bond yields
I think you're right, the big difference is that the Fed lost credibility and will remain persistent. The challenge will be how to scale into that. Maybe you could write about your process, how you put in a position?
Thank you for the great analysis!
Hi, and thanks!
If you read back on TMC, you'll find a lot of comments on how I go about sizing and putting positions on
Thanks for the analysis. A few observations:
- by end 2000, the fed has already stopped hiking for a few months. And with weakening growth, market likely already started to price in a looser monetary policy which began by early 2001. So it makes sense for the 10yr treasury to do well in 4Q2000-1H2001. However, in the current situation, the fed is still on a rate hike path, at least until Dec 2022. And once they pause, the pause is likely to last for at least 6mths for the sake of their own credibility. As such, it feels a bit early for the treasury market to price in a looser monetary policy;
- also, back in 2000-01, both the policy rate and the 10yr rates are so much higher than CPI that there are room for them to cut/fall materially. In the current situation, both fed fund rate and 10yr US treasury yield are still significantly lower than the 8% CPI. One can easily see the CPI falling to 3-4% by mid 2023. But that's another 6-9mths away. It's hard to see how the 10yr rate will start falling over the next few months.
I'm guessing for you to be long US 10yr rate, is it fair to say you are really betting on something big/systemic breaking (most likely liquidity-driven) that would cause the fed to alter course suddenly, and involve a cut in fed funds rate by 2Q22. Given the system leverage that you have pointed out, that is definitely a possibility, like what the UK central bank did last week. But I do wonder how big does the "thing" that breaks need to be in order for them to suddenly change course, given they have their credibility on the line?
Thank you again for all your work. It's awesome!
Great comments!
Correct about the Fed, but the forward markets are already pricing that in (and hence the 10y Treasury yields as well).
As nominal growth materially weakens and brings down the labor market while the prospects for lower CPI prints become more realistic, it might be bonds become attractive.
Thanks for the reply. The drop in 5yr breakeven rates from 3% in Mar/Apr to currently ~2.2% does suggest materially lower CPI prints should be expected sometime in the next few months, which would be supportive of the long treasury call.
Great analysis but I disagree with the conclusion that bonds will necessarily outperform stocks.
Everyone is looking at stocks for a Lehman moment but I think that the Lehman moment could actually be induced by the bonds market as happened in 2008.
Even sovereign bonds will not be a shelter. Everybody is talking about the bond yields spread of Italy but take a look at the yields in Poland exploding to emerging markets levels of 7-8%.
Inflation in Netherlands, a country with own natural gas production and reserves, has hit 17%.
To reign in inflation, bond yields will have to shoot up.
Lagarde is sitting on her hands while weighing whether to loosen or tighten and the Euro is becoming toilet paper. After his government mandate ends in Italy, Draghi will be called back to the ECB and he will have no choice but to tighten to save the Euro once again.
Italian sovereign debt will not be the issue everyone is hoping it will be, as the new government is Putin-friendly. The real risk is in Germany, where industry will see shutdowns this winter, but that's just a mere distraction from the real risk, which is a collapse of its banking and finance sector.
Thanks for the insightful comment!
I would also like to point out that for some reason, smart money is shorting BNP Paribas at a massive scale.
Great Alf!
Thanks, Simon!
Can someone help me understand why utilities would rise by such an amount. I understand the historical data but why was that the case? What were the variables at play to get to that return so we can do our weighted probability analysis for each factor based on today’s data.
Good question - utilities are considered to be bond proxies so if bonds perform, utilities have a positive beta to that performance.
On top of that, they are (generally) not very subject to cyclical earnings growth/slowdown, so the EPS decline shouldn't affect them much.
Today ofc there are many more variables, including the energy issue.
Seriously can't thank you enough! Man, I constantly look forward to these weekly write ups. These are concise and well written and the way you explain the relevance to y(our) 😉 portfolio is incredible. Have you considered being a professor? Because i'd show up!
I teach some courses at a couple of Universities, and I am honored you'd want me to a Professor! :)