Retail Army regroups and refocuses

In the past week, there’s been a significant rotation in retail investor preference. Last week’s inflow into FCX was 6.7 standard deviations above the 1-year average. A similar trend played out for Energy names with the combined buying of XOM and CVX at 2.6 standard deviations above the 1-year average.

Tulipmania started during a pandemic

Just saying……TS Lombard: “Bitcoin is only worth what somebody else will pay for it. In this sense, there are obvious parallels with previous financial bubbles, especially Tulipmania in 17th century Amsterdam. The

Dutch bubble, one of the most famous in history, also occurred during a global pandemic, a Plague that ravished early-modern Europe. While historical records are sketchy, it appears the Netherlands suffered a particularly severe outbreak of the disease between September and November 1636, which was just weeks before the price of tulips went “exponential” . One popular

narrative blames excitable Dutch merchants who had nothing better to do than sit around in taverns bidding up the price of exotic flowers (global trade was effectively in “lockdown”).

European yields pushing higher.

One of the interesting developments in recent months is that, for all the talk of higher inflation in the US, bond yields have barely moved - the US 10-year rate is still lower than it was in March. Conversely, the 10-year yields across the eurozone have generally been rising. Over the past month, moves have ranged from a rise of 18bp in Germany to an increase of 31bp in France. Italy’s is now above 1% again. All this means longer-term yields have been moving in Europe’s favor, which could weigh on the USD/support the euro.

The Fed is just a novice at this game

If you compare the size of the balance sheet of some central banks, especially Switzerland and Japan, the Fed’s balance sheet seems positively tiny. Mind you, the fiscal deficits are another matter.

Yields support the Euro

One of the interesting developments in recent months is that, for all the talk of higher inflation in the US, bond yields have barely moved - the US 10-year rate is still lower than it was in March. Conversely, the 10-year yields across the eurozone have generally been rising. Over the past month, moves have ranged from a rise of 18bp in Germany to an increase of 31bp in France. Italy’s is now above 1% again. All this means longer-term yields have been moving in Europe’s favor, which could weigh on the USD/support the euro.

From Macromarkets MacroMarketsDaily

Rising yields tilts the market towards value is a flawed theory

Check the argument here. Basically, Jesse is saying that this cannot be right because you can’t make money off the insight. It’s not obvious how GM is a relatively better buy than TSLA after interest rates have gone to 20%. Cash holdings do matter, but it’s not decisive.

Wrap

Basically, all the markets reversed their movement at the start of the week. Commodities regained their momentum (up), equities too, mega stocks led the charge. Bonds were relatively flat. The more inflation shows up in the data, the more the market ignores it. We’ve had thirteen years of participants being trained to buy the dip, and there are no bears of risk-on assets left. At some point the consensus will break, but while central banks and governments are running lose monetary and fiscal policies, it is unlikely to happen. To be fair, there is probably still a large output gap in most economies, so logically we can have a prolonged period of non-inflationary growth before we hit the buffers. In a world with an output gap that cannot be closed, MMT is a perfect prescription for policy decisions, pace David Stockman.

Thoughts

This article shows that a normal distribution of talent cannot explain the observed distribution of wealth in society, but a model based on luck can. I think this is a well known result of the sort of process that leads to a power law distribution. This link (pdf) explains it mathematically. Intuitively, it’s the tendency for wealth to ‘compound’ up.