30 Nov 2021

This should blow your mind, the last year = more than 19yrs of inflows into the equity market. A cool out of the ordinary $1 trillion into the markets will clearly distort fair pricing and folks that is one of the main reasons we are enjoying record ATH equity markets in the midst of a pandemic.

To me you know you are swimming in a pool of cash when there are not enough investments for a company than buying their own shares. We just witnessed another new record on this metric.

I noticed with interest a Financial Times article saying that more than 50% of IPO companies that raised more than $1 billion this year are trading below their listing price.

Talking of artificially stimulated markets the Reserve Bank of Australia holds 50 – 60% of the government bond lines. There is currently a shortage of bonds in the market which banks and other large borrowers use to pledge as collateral. The RBA is lending around $3 billion a day compared to a few hundred million to alleviate some of the shortage. The RBA is purchasing $4 billion a week in federal and state government bonds, and is now buying more debt that the federal government is issuing. This is what you call price manipulation. Let us ponder for a moment the potential unintended consequences.

I commented yesterday about Friday’s 11% drop in Brent Crude. We were driving on Sunday and my wife said she needs to fill up her car I said wait prices are coming down, what a pity her tank cannot last a few more years. I didn’t realise the state of backwardation in the futures price curve. This means that prices going further out along the time curve are trading lower than the current price. Futures typically trade higher the further out you go to factor in interest rates. The shape of the curve suggests prices are expected to drop in the in the future. What is interesting to note is how the curve is flattening. I have tightened my Oil short that I entered on yesterdays bounce.

You looking for another reason why investors have been piling into the equity markets, well look no further than the real yield investors are getting on bonds. You have to go back to 1974 a time of high inflation to see how poorly bond investors were compensated for buying bonds after subtracting inflation.

When looking at the chart it really hits me how the current macro environment is really so difficult and why so many asset classes are experiencing nose bleed prices. I think the first chart of today’s letter is a great masthead for the “stocks only go up” mantra prevalent on social media.

Before I tackle the question of where the equity markets are heading in the near term I need to digest where all this money sitting in money markets is going to go. Yes $4 trillion dollars. I need to read John Hussman’s latest letters as he has an interesting accounting of “cash on the sidelines” as I recall he doesn’t believe its just sitting there, rather it is propping up other assets sometimes not in the most obvious way.

I am reading continued stories by estate agents from China’s growth cities like tech hub Shenzhen reporting a very weak property market with very few buyers as policymakers rein in excessive borrowing by developers and speculating investors.

Before you call me biased for data snooping with negative real rates going back to 1974. It’s true this is not un-chartered territory. Take a look at this chart going back 200yrs of US real interest rates. Great chart for some perspective. I guess what I take out of this is that while low nominal interest rates is quite unique, inflation is nothing new. History sure does like to repeat itself.

Against this backdrop I pulled out a chart of Bitcoin which I shared a few weeks ago. My call for a wave 5 new high is still very much on the cards according to my book. So the recent selloff in crypto may just prove to have been a great buy the dip opportunity. OMG if we go onto making new highs how will I cope with listening to the maximalists bragging that it was all so obvious.

Which brings me finally to the S&P500 and the equity markets. I knew yesterday and I think the next few days are going to be absolutely crucial in dictating the course of the markets for the next few months. We sold off hard on Friday and we bounced almost equally hard on Monday. The market is desperate to figure out whats next. VIX was up 50% on Friday and down 20% on Monday those are big moves which indicate the level of uncertainty. I closed half my shorts when the market opened Monday and I added them back at 4660 with a tight stop at the days highs.
Lets see how it plays out.

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