Juggling Dynamite

After broad selling last week, the risk trade is bouncing.  Most stocks are now trading below recent highs and not just the most sketchy ‘meme’ names.  As shown below, courtesy of Mac10, beneath the hood, just 43% of even the widely considered ‘conservative’ Dow 30 components (red line) are above their 200-day moving averages. In comparison, the Dow index (in black) remains less than 2% beneath its November high.

At the same time, S&P futures net speculative long positions (lower panel) are back at highs not seen since December 2018 before the Fed announced its fourth rate hike of that year to 2.50%–and the last hike since.  As stocks dumped and the economy slowed into 2019, the Fed was back to cutting rates by August that year.

The five most expensive FAANG stocks continue to levitate the NASDAQ to concentration risk levels beyond the Dow (which only has Apple).  As shown below from my partner Cory Venable, the market capitalization (price x shares) of the NASDAQ 100 remains near a record ratio of the Dow Jones Index–a distortion only seen once before at the fleeting tech top March 2000.

The euphoria of this cycle is much broader and more extreme than the 2000 dot.com-led bubble–by far.  As shown below, courtesy of Real Investment Advice and ISABELNET.com, the S&P 500 Index price is an ominous 61% above its exponential growth trend since 1900, a line under which stock prices have dipped below and laboured for years after previous (and lesser) bubble’s burst.   This time won’t be different.

All’s well that ends well–and for the masses who have bought in, this cycle won’t end well.  As Jeremy Grantham has wisely observed from his decades of building billions:  “sooner or later, you will have made money to have sidestepped the bubble phase.” Believe it or not.

Richard Bookstaber offers some useful insight into present financial conditions and behaviours in this segment.

On this episode, we speak with Richard Bookstaber, a veteran of numerous firms, having done risk management at Bridgewater, the University of California, and elsewhere. He’s also the author of the book A Demon Of Our Own Design, which prophetically warned about financial system fragilities in the run-up to the Great Financial Crisis. He’s currently the co-founder of Fabric, which provides risk management technology to the financial industry, and he spoke with us about where he sees the biggest risks right now.  Here is a direct audio link.

The fact that long Treasuries have kicked the pants off the S&P 500 in total returns over the past 40 years is one of the best-kept secrets in finance.  Indeed, looking for a publicly available chart that reveals this is like searching for a needle in a haystack.  But then, a so-called investment sector that profits from encouraging the masses to click, borrow, trade and gamble with corporate securities and derivatives have no interest in spreading the truth about investment returns.

Still, math is math, and those with access to the correct historical data and enlightenment can see it.  In September 2019, Gary Shilling offered a rare public reveal explaining why he was bullish on long-term bonds.  The article included the chart below, which graphs the total return of the 25-year zero-coupon Treasury bond since 1981 (in red) versus the S&P 500 total return (in black) beginning in 1982 (at the start of the longest and strongest secular bull market in history).  Here we can see that a dollar invested in the long bond grew to about $32,000 while a dollar invested in the S&P 500 grew to about $6,000.

Total returns always assume that every dollar of income is reinvested as received.  So, in real life, any income or principal withdrawn by the owner or paying investment fees will reduce realized compound returns over time.

Extending from the chart above, Treasuries continued to outperform stocks dramatically from July 2019 to August 2020.  Stocks had a better short-term gain from late 2020 to last month, but Treasury’s have retaken the lead since.   With stocks presently the most over-valued, over-hyped and over-allocated in history, Treasury returns are due to run leaps and bounds ahead of equities once more.  It is a tragedy that so few people understand these basic facts.