Juggling Dynamite

Cash levels remain low as markets move into liquidation mode, and selling has been broad-based. While it’s typical for corporate bond prices to fall with equities, government bonds typically attract capital as it moves away from less principal-secure securities.

So far, despite equity losses, non-commercial traders have persisted with inflation bets and remain net-long large-cap stocks while net short government bonds. Treasury bonds have declined on the now hysterical expectation of seven policy rate hikes in 2022. The US 10-year Treasury yield at 2.04 is significantly above its long-term support at 1.51%, and the case for a government bond rebound has rarely been stronger. Lance Armstrong explains in the segment below.

With rising interest rates and inflation fears, there have been negative attitudes about owning Bonds. With a debt- and leveraged-economy, with low economic output, bonds have certainly been under pressure. A look at the TLT EFT as a proxy for bonder performance history, we can see that bonds have been oversold. With prices on the decline, and yields on the rise as the Fed fights inflation, this is a perfect time to buy as a risk-off hedge for portfolios. There will be more volatility in equities this year, and money flows are expected to go from risky stocks to safe-haven bonds, which history bears out. This is why we believe bonds will be among the better performing assets in portfolios. Here is a direct video link.

Risk markets are rallying this morning on stories that Putin may be stepping back his aggression in Ukraine. But, lest we forget, Ukraine is a side story. The main plot for financial markets is the tidal wave of fiscal and monetary liquidity that is now receding globally.

As Hedgeye’s Keith McCullough put it yesterday:  “The free money’s gone, the crap that consumers bought has gone down, and their favorite stocks are going down.”

The Economist offers an insightful big picture overview this week in What would happen if financial markets crashed?:

Today America’s financial system looks nothing like it did before the crashes of 2001 and 2008, yet lately there have been some familiar signs of froth and fear on Wall Street: wild trading days on no real news, sudden price swings and a queasy feeling among many investors that they have overdosed on techno-optimism. Having soared in 2021, shares on Wall Street had their worst January since 2009, falling by 5.3%. The prices of assets favoured by retail investors, like tech stocks, cryptocurrencies and shares in electric-car makers, have plunged. The once-giddy mood on r/wallstreetbets, a forum for digital day-traders, is now mournful.

It is tempting to think that the January sell-off was exactly what was needed, purging the stock market of its speculative excesses. But America’s new-look financial system is still loaded with risks. Asset prices are high: the last time shares were so pricey relative to long-run profits was before the slumps of 1929 and 2001, and the extra return for owning risky bonds is near its lowest level for a quarter of a century. Many portfolios have loaded up on “long-duration” assets that yield profits only in the distant future. And central banks are raising interest rates to tame inflation.

Canadians living at the financial edge may be pushed to the brink when the taxman comes calling, according to a new study from licensed insolvency trustee Hoyes, Michalos & Associates Inc (report available here).

According to the firm’s annual Joe Debtor study, tax obligations returned as the primary driver of consumer insolvencies in 2021 as the pandemic strained household balance sheets, and the insolvency experts believe there’s more pain ahead as the world returns to a more normal state.

“We believe that this increase in tax insolvencies is the tip of the iceberg,” the firm said in a release, forecasting that stronger action from the Canada Revenue Agency (CRA), an end to interest relief on COVID tax obligations, and the upcoming tax filing deadline will lead to an increase in insolvencies.  Here is a direct video link.