Juggling Dynamite

From their January 2021 peak, economically-sensitive small-cap stocks are down about 19%.  The NASDAQ is -17% from last November, and the average drawdown is 23% so far.  The S&P 500 has fallen just over 10%.  Canada’s TSX has held up better to date (-3.8% from November high) on its massive overweight in late-cycle favourites–financials (32%) and fossil fuels (13%).  This, too, shall pass.

As shown below, courtesy of Macro-ops and Bank of America, these bets were also notoriously misplaced at commodity price peaks in 2006, 2011 and 2018, before prices tumbled and demand and inflation bulls finally capitulated.

Inflation-protected-treasury bond flows (TIPS) have been retreating hard this month, as shown below courtesy of ISABELNET.com.

Those who think that the rapid stock rebound from March 2020 was typical are in for some tough schooling.  As shown below in my partner Cory Venable’s chart of the S&P 500 during the 2000 to 2003 bear market, counter-trend rebounds are par for the course, but buying early dips is a time-worn path to pain and suffering.  Patience and cash reap their rewards in due course.  Experience and price discipline always matter, in the end.

One of the world’s most famous fund managers says Wall Street is a “super bubble” waiting to burst and a “terrible lust” for profits will bring investors undone.

Jeremy Grantham is the co-founder of GMO, which claims to  have predicted the Japanese crash of 1989, the Dotcom bust of 2000 and the global financial crisis of 2008. He’s now warning of another similar crash in asset prices, with speculative tech stocks first in the firing line. Here is a direct video link.

Growth and inflation are in retreat, stocks are tumbling, corporate debt spreads are leaping, and yield curves are flattening with the economically clairvoyant U.S 10 and 2-year spread .38 today, from an optimistic 1.59% peak in March 2021.  This is not about Ukraine.  This is a ‘free-money’ debt-enabled consumption and gambling frenzy that’s ending with central banks out of time still pumping cash and holding policy rates at zero.  Now they are expected to hike aggressively—two words:  bonne chance.

This discussion from February 3 offers some data-rich counterpoints to the multiple-hike consensus view.

The Fed’s bark will not turn to bite, and we provide a framework on how to make money by betting against the multiple rate hikes now being widely discounted across all asset classes.  Here is a direct video link.